Upwork, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Upwork operates an online marketplace connecting businesses with independent talent. Financial statements are unaudited.
Financial and operating performance
| Metric | Q3 2021 | Q3 2020 | First nine months 2021 | First nine months 2020 |
|---|---|---|---|---|
| Revenue | $128.1 million | $96.7 million | $365.9 million | $267.5 million |
| Gross profit / gross margin | $93.2 million / 73% | $70.2 million / 73% | $267.5 million / 73% | $192.0 million / 72% |
| Operating loss | $8.3 million | $3.0 million | $32.4 million | $23.1 million |
| Net loss | $9.3 million | $2.7 million | $33.7 million | $23.8 million |
| Adjusted EBITDA | $8.2 million | $6.7 million | $22.4 million | $4.5 million |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $23.3 million | $13.4 million |
- Q3 revenue rose 32% year over year; revenue for the first nine months rose 37%. Marketplace revenue increased 34% and 40%, respectively, while managed services revenue increased 19% and 11%.
- GSV grew 38% in Q3 and 43% for the nine-month period. At September 30, active clients were 752,000, up 25%; GSV per active client was $4,375, up 12%.
- Marketplace take rate eased to 13.2% in Q3 and 13.3% year to date, from 13.6% in each 2020 comparison. Management cited higher spend from mature client cohorts using freelancers subject to lower tiered fees, and fewer purchases of Connects and memberships after more free Connects were issued.
- Operating expenses grew faster than revenue in several areas: Q3 research and development rose 48%, sales and marketing 29%, and general and administrative 45%. Higher personnel and stock-based compensation, marketing investment, and the year-to-date office impairment contributed. Q3 stock-based compensation was $13.9 million versus $6.9 million.
- Adjusted EBITDA is a non-GAAP measure. Its reconciliation adds back stock compensation, among other items; stock-based compensation is a significant recurring expense, so the measure should not be viewed as a substitute for GAAP results.
Liquidity, debt, and cash flows
- At September 30, cash and cash equivalents were $600.1 million and marketable securities were $96.8 million, compared with $94.1 million and $75.6 million, respectively, at December 31, 2020. Cash, cash equivalents, and restricted cash totaled $776.6 million, including $172.7 million of escrow funds that are matched by an escrow liability and are not freely available for general use.
- Net cash provided by operating activities for the first nine months was $23.3 million. Investing activities used $26.1 million, principally reflecting net purchases of marketable securities; financing activities provided $547.0 million, primarily from the convertible-note offering.
- In August, Upwork issued $575.0 million of 0.25% senior unsecured convertible notes due 2026, generating approximately $560.1 million net proceeds after issuance costs. It spent $49.4 million on capped calls intended to reduce dilution or certain cash settlement exposure, subject to a $92.74 initial cap price. The initial conversion price is approximately $66.08 per share.
- Upwork repaid and terminated its prior term-loan and revolving-credit facility in August. The balance sheet reported $560.6 million of noncurrent debt, net of unamortized issuance costs; principal outstanding on the Notes was $575.0 million. Management said existing cash, securities, and operating cash flow when generated should fund working capital needs for at least 12 months.
Management outlook, risks, and unusual items
- Management expects continued investment in product development, marketing and brand awareness, sales, and corporate infrastructure. It expected to increase brand marketing beginning in Q4 2021 and expand the sales team toward the end of Q4. It also expected cost of revenue and R&D expense to rise in absolute dollars; transaction-loss provision was expected to approximate 1% of revenue. No specific revenue or earnings guidance is provided in the filing text.
- A $7.4 million impairment charge was recorded in the first nine months, primarily related to subleasing the former Santa Clara headquarters after the shift to a flexible-work model. Rent payments under the sub-sublease begin January 2022; Upwork remains obligated under its original lease through October 2028. Management said other office closures or subleases could cause further impairment charges.
- COVID-19 accelerated remote-work adoption and supported recent growth, but management cautioned that acquisition, spend, and growth could slow as the pandemic subsides; seasonality may also become more pronounced. Other key risks include competition, user retention and marketplace circumvention, payment and fraud exposure, cybersecurity and service interruptions, international and tax regulation, and worker-classification challenges.
- The filing reports no material pending legal proceedings and no material accrued contingency liabilities. Management concluded disclosure controls were effective as of September 30, 2021 and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether strong GSV, active-client, and revenue growth persists as pandemic-driven remote-work tailwinds and comparisons change, and whether lower take rate continues.
- How spending on marketing, product development, and sales converts into durable growth and improved GAAP profitability, considering rising operating expenses and recurring stock compensation.
- Use of the convertible-note proceeds, potential dilution or cash settlement exposure, and the capped calls’ effectiveness and counterparty risk.
- Potential additional office impairment or lease costs, and the distinction between unrestricted liquidity and escrow funds held for users.
- Exposure to freelancer classification, payment/fraud, cybersecurity, regulatory, and macroeconomic risks, including possible changes in user demand after COVID-19.