Upwork, Inc. — Q1 2020 Form 10-Q
Business context and reporting period. Unaudited results for the three months ended March 31, 2020, compared with Q1 2019. Upwork operates an online marketplace connecting businesses with independent professionals, alongside a managed-services offering.
Financial and operating performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $83.2 million | $68.5 million | +21% |
| Marketplace revenue | $74.8 million | $60.5 million | +24% |
| Managed-services revenue | $8.4 million | $8.0 million | +5% |
| Gross profit / margin | $59.7 million / 71.8% | $47.4 million / 69.1% | Margin +2.7 percentage points |
| Operating loss | $9.1 million | $5.3 million | Loss increased |
| Net loss | $10.0 million | $5.2 million | Loss increased |
| Adjusted EBITDA | $(1.0) million | $0.8 million | Declined |
| Operating cash flow | $(1.7) million | $(29.4) million | Lower cash outflow |
Net loss per share was $0.09, versus $0.05 in Q1 2019. Adjusted EBITDA is a non-GAAP measure; the company reported that excluding $1.6 million of organizational-change costs, Q1 2020 adjusted EBITDA would have been positive $0.6 million.
Gross services volume (GSV) rose 15% to $559.5 million. Marketplace take rate increased to 13.6% from 12.6%; core clients increased to 128,800 from 110,600, while client spend retention declined to 102% from 107%.
Liquidity, debt, and cash flows
At March 31, 2020, cash and cash equivalents were $65.6 million and marketable securities were $79.7 million. These totaled $145.3 million, excluding $123.6 million of funds held in escrow for users. Total debt was $31.4 million, including a $15.0 million revolving-credit draw in March; the company drew another $3.0 million in April. The revolving line matures in September 2020, and borrowing availability is subject to conditions and an accounts-receivable borrowing base. The company reported covenant compliance at quarter-end.
Financing activities provided $31.1 million, principally from escrow-fund movements and net debt borrowings. Investing activities provided $2.9 million, mainly because marketable-security maturities exceeded purchases. The company said existing liquidity and borrowing availability were expected to cover working-capital needs for at least 12 months.
Material changes, outlook, and risks
- Revenue growth was led by marketplace revenue; marketplace revenue represented 90% of total revenue. Sales and marketing expense rose 50%, reflecting higher advertising and personnel costs, while research and development expense increased 22%.
- COVID-19 had no material adverse effect on Q1 financial results overall, but Upwork began seeing lower GSV from the second week of March. Management estimated this reduced year-over-year revenue growth by about one percentage point. It expected Q2 revenue to be below what it had anticipated at the beginning of 2020; no specific revenue guidance was provided.
- Management cited uncertainty around client demand, particularly among small and medium-sized businesses, payment delays, transaction losses, platform circumvention, and possible fee reductions or promotions. More freelancers were applying to the platform, increasing the existing freelancer surplus.
- Employees were working remotely. Management planned to continue investing in marketing and sales and expected cost of revenue to rise with platform growth. An AWS data-center migration was expected to create temporary hosting costs; management anticipated gross margin would remain broadly consistent through 2020.
- The company incurred $1.6 million of costs from February organizational changes. It also drew on its credit line in response to pandemic-related uncertainty.
- Disclosure controls and procedures were deemed ineffective because of a previously reported material weakness in internal control over financial reporting. Remediation was ongoing, with management expecting completion during 2020. The filing reported no material pending legal proceedings or claims at March 31.
Important facts for investors to verify
- Whether COVID-19-related demand and client payment trends materially affect GSV, revenue, transaction losses, and cash generation after Q1.
- Whether client spend retention stabilizes near management’s stated expected long-term range of 98%–100%, and whether core-client growth continues.
- Available liquidity and compliance with the borrowing base and adjusted quick-ratio covenant, particularly given the September 2020 revolver maturity and additional April draw.
- Progress and completion of the internal-control remediation plan, including whether controls are validated as effective.
- Whether sales and marketing investment, the AWS migration, and organizational changes produce the intended growth and cost outcomes.