Upwork, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing was dated March 7, 2019. Upwork operates a global online marketplace connecting businesses with freelancers, alongside a smaller managed-services business. Its common stock began trading publicly in October 2018.
Financial performance
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total revenue | $253.4 million | $202.6 million |
| Marketplace revenue | $223.8 million | $178.0 million |
| Managed-services revenue | $29.5 million | $24.5 million |
| Gross profit / margin | $171.9 million / 68% | $137.1 million / 68% |
| Operating loss | $11.7 million | $3.1 million |
| Net loss | $19.9 million | $4.1 million |
| Adjusted EBITDA | $3.8 million | $7.9 million |
| Operating cash flow | $13.7 million provided | $4.0 million used |
For Q4 2018, revenue was $67.3 million, up from $54.8 million in Q4 2017. Gross profit was $46.5 million, or 69% of revenue. Operating loss was $2.7 million and net loss was $5.4 million, compared with a $5.2 million net loss in Q4 2017.
FY 2018 GSV was $1.76 billion, up 28%; core clients rose 22% to 105,500, and client spend retention improved to 108% from 99%. Marketplace revenue grew 26%, while managed-services revenue grew 20%. Sales and marketing expense increased 38% to $73.0 million, and R&D increased 22% to $55.5 million.
Liquidity, debt, and capital
At year-end, cash and cash equivalents were $129.1 million, working capital was $128.3 million, and debt principal was $24.0 million ($23.9 million net carrying value). Cash increased by $107.5 million during the year, primarily reflecting the IPO. The company reported $98.2 million of escrow funds held and an equal payable; these are user funds, not freely available operating cash. Management said existing cash, operating cash flow when generated, and available borrowing capacity should meet working-capital needs for at least 12 months.
Upwork completed its October 2018 IPO at $15 per share, receiving $109.4 million after underwriting discounts and commissions and approximately $103.1 million after offering expenses. Approximately $10 million of IPO proceeds repaid debt. The loan agreement is secured by substantially all assets other than intellectual property and escrow assets, includes financial covenants, and was in compliance at year-end.
Changes, outlook, and notable items
- Revenue grew 25%, but net loss widened materially and adjusted EBITDA declined 52%, reflecting increased investment and higher other expense.
- FY 2018 other expense included approximately $6.1 million from remeasurement of a preferred-stock warrant before its conversion at the IPO; the filing says this expense will not recur.
- Management expects cost of revenue, R&D, sales and marketing, and general and administrative expense to rise in absolute dollars as the company invests in growth and public-company requirements. The filing provides no specific revenue or earnings guidance.
- Management expects marketplace revenue growth to continue to outpace managed-services growth. It cited investments in client acquisition, brand awareness, and product features as contributors to 2018 growth.
- The company disclosed a material weakness in financial-reporting controls, related to accounting expertise and period-end controls. Remediation was ongoing, and management concluded disclosure controls were ineffective as of December 31, 2018.
- Key risks include competition, user retention and platform circumvention, freelancer classification and employment regulation, payment/fraud and escrow regulation, cybersecurity and privacy, international operations, and reliance on third-party providers including AWS. One client accounted for more than 10% of revenue in both 2018 and 2017.
- The company had a history of net losses and an accumulated deficit of $143.5 million. It also reported federal tax-loss carryforwards of $172.3 million, subject to expiration and potential ownership-change limitations, and a full valuation allowance against deferred tax assets.
Important facts for investors to verify
- Whether client growth and 108% spend retention persist, and whether GSV growth converts into marketplace revenue and sustainable profitability.
- How sales, marketing, and product investment affect future margins, cash generation, and adjusted EBITDA.
- Progress and independent validation of remediation of the material weakness; note that the auditor’s opinion on the financial statements was unqualified, but controls were reported ineffective.
- Debt covenant headroom, repayment schedule, variable-rate exposure, and cash available after excluding escrow funds.
- The extent of client concentration and any changes in the significant customer relationship.
- The effects of worker-classification, privacy, tax, and payment-regulation changes, as well as cybersecurity, fraud, and platform-outage risks.