Upwork, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed March 2, 2020. This is an annual report, not a standalone quarterly filing. Amounts below are in U.S. dollars.
Business context
Upwork operates an online marketplace connecting businesses with independent professionals, plus a managed-services business. Its platform facilitated $2.1 billion of gross services volume (GSV) in 2019. The company said it was prioritizing marketplace growth and investing in enterprise sales, marketing, product development, and operations. Marketplace revenue accounted for 89% of FY 2019 revenue.
Key financial results
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Total revenue | $300.6 million | $253.4 million | +19% |
| Marketplace revenue | $268.3 million | $223.8 million | +20% |
| Managed-services revenue | $32.3 million | $29.5 million | +9% |
| Gross profit / margin | $212.4 million / 71% | $171.9 million / 68% | Margin +3 percentage points |
| Operating loss | $18.7 million | $11.7 million | Loss widened |
| Net loss | $16.7 million | $19.9 million | Loss narrowed |
| Adjusted EBITDA | $7.4 million | $3.8 million | +95% |
| Operating cash flow | $1.1 million | $13.7 million | Lower |
GSV rose 19% to $2.087 billion, core clients increased 18% to 124,400, and marketplace take rate was 13.1% versus 13.0%. Client spend retention declined to 102% from 108%.
Q4 2019: Revenue was $80.3 million versus $67.3 million in Q4 2018. Gross profit was $57.4 million (71% margin); operating loss was $6.9 million and net loss was $5.5 million, compared with a $5.4 million net loss in Q4 2018.
Liquidity, debt, and cash flows
At year-end, cash and cash equivalents were $48.4 million and marketable securities were $85.5 million, or $133.9 million combined. Working capital was $131.5 million. Funds held in escrow, including funds in transit, were $108.7 million and are matched by escrow liabilities; they should not be treated as freely available operating cash.
Debt was $18.3 million, down from $23.9 million net carrying value in 2018; no revolving-credit borrowings were outstanding at year-end. The company reported compliance with loan covenants. Net cash used in investing activities was $100.9 million, primarily reflecting purchases of marketable securities, capitalized software, and property and equipment. Net cash provided by financing activities was $29.4 million, including option exercises and employee stock-plan proceeds, partly offset by debt repayments.
Material changes, outlook, and notable items
- Sales and marketing expense increased 31% to $95.9 million, and general and administrative expense increased 36% to $67.3 million. The company cited advertising, enterprise-sales hiring, public-company costs, and additional finance and accounting staffing.
- Management attributed the decline in client spend retention from its 2018 peak partly to stabilization of freelancer hourly rates after the U.S.-to-U.S. marketplace launch. It expected long-run retention to range from 98% to 100% and anticipated adding roughly 4,000–5,000 core clients per quarter, subject to variation.
- Management expected marketplace revenue growth in Q1 2020 to be stronger than Q1 2019, with relatively weaker year-over-year growth in Q2–Q4 and broadly consistent sequential growth during 2020. It expected gross-margin improvement to continue, but at a slower pace, partly due to an AWS data-center migration in the first half of 2020.
- Topic 606 adoption reduced FY 2019 reported revenue by $2.1 million versus the amount without adoption and resulted in an $11.8 million opening reduction to accumulated deficit. Prior-year figures were not restated, so reported comparisons are not fully on the same accounting basis.
- The company remained loss-making and said it expected continued investment and net losses for the foreseeable future. Adjusted EBITDA is a non-GAAP measure and excludes, among other items, recurring stock-based compensation.
- Management and the auditor concluded internal control over financial reporting was ineffective at year-end due to an unremediated material weakness in accounting staffing and period-end reporting controls. The auditor nevertheless gave an unqualified opinion on the financial statements. Management expected remediation during 2020.
- There were no material pending legal proceedings disclosed. Principal risks include competition, user retention and platform circumvention, worker-classification and privacy regulation, fraud and cybersecurity, reliance on AWS and payment partners, and economic conditions. The filing also cited the coronavirus outbreak as a potential risk; its effects were uncertain as of the filing date.
Important facts for investors to verify
- How client spend retention and GSV develop, especially as the company pursues larger enterprise clients and reported retention moves toward management’s expected range.
- Whether enterprise-sales and marketing investment can sustain growth without continuing to widen operating losses or suppress operating cash flow.
- Progress in remediating the material weakness and whether subsequent reporting cycles demonstrate effective financial controls.
- The effect of Topic 606’s material-right estimates and revenue deferrals on reported revenue, comparability, and future recognition.
- Available liquidity after excluding escrow funds, debt and covenant requirements, and the timing and cost of the AWS migration.