Upwork, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Upwork operates a global work marketplace connecting businesses with independent talent, alongside a smaller managed-services business. Amounts below are in U.S. dollars; financial statement figures are unaudited.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $96.7 million | $78.0 million | $267.5 million | $220.3 million |
| Gross profit | $70.2 million | $55.5 million | $192.0 million | $155.1 million |
| Gross margin | 72.5% | 71.2% | 71.8% | 70.4% |
| Operating loss | $3.0 million | $3.7 million | $23.1 million | $11.9 million |
| Net loss | $2.7 million | $3.5 million | $23.8 million | $11.2 million |
| Adjusted EBITDA (non-GAAP) | $6.7 million | $2.0 million | $4.5 million | $3.9 million |
- Q3 revenue rose 24%; nine-month revenue rose 21%. Marketplace revenue, about 90% of total, increased 26% in Q3 and 23% for the nine months. Managed-services revenue grew 7% and 8%, respectively.
- Q3 GSV was $654.5 million, up 23%; nine-month GSV was $1.80 billion, up 17%. Marketplace take rate was 13.6% in both 2020 periods, versus 13.3% in Q3 2019 and 13.0% for the 2019 nine-month period. Core clients increased 15% year over year to 138,900.
- Client spend retention was 100%, down from 104% a year earlier. Management attributed pressure partly to client spending contraction during the pandemic and changes in client and freelancer mix.
- Operating expenses rose faster than revenue for the nine months, led by sales and marketing, up 40%, and research and development, up 27%. Stock-based compensation was $19.5 million for the nine months, versus $10.9 million.
- Nine-month operating cash flow was positive $13.4 million, compared with $2.0 million a year earlier. Cash, cash equivalents and marketable securities totaled $155.5 million at quarter-end; this excludes $128.1 million held in escrow, which is matched by escrow funds payable.
- Debt was $12.6 million, down from $18.3 million at December 31, 2019. The company reported compliance with its loan covenants. The revolving credit line permits borrowings up to $25 million, subject to customary conditions.
- Total assets were $501.6 million and stockholders’ equity was $281.6 million at September 30, 2020. The filing reported no material legal proceedings or claims.
Material changes, outlook and risks
- Management said the pandemic initially slowed GSV and revenue growth and reduced spend by some clients, particularly small and medium-sized businesses. Trends stabilized late in Q2 and improved in Q3 as remote-work demand and new-client acquisition increased. The company said the pandemic had not materially adversely affected financial results through the first three quarters, but its future impact remained uncertain.
- Management expected to add approximately 5,000 core clients per quarter in coming quarters, while cautioning that results could vary. It expected gross margin to remain generally consistent through 2020, partly reflecting temporary costs from migrating AWS data centers, planned for completion in Q1 2021. Management also expected several operating expense categories to increase in absolute dollars.
- The company stated that existing cash, marketable securities, operating cash flow when generated, and available borrowing capacity should meet working-capital needs for at least 12 months. It cautioned that additional financing could be needed and might dilute shareholders or impose further debt obligations.
- In August, Upwork amended its loan agreement, extending the revolving line’s maturity to September 2022 and removing a formula-based borrowing restriction. Term loans remain secured by liens on substantially all assets, subject to stated exclusions, and the agreement requires an adjusted quick ratio of 1.75.
- After quarter-end, Upwork disclosed that it had decided not to commit sales and other resources to the Upwork Business offering for new clients; it said it would serve those clients through other offerings. The filing also reported a November 2020 reduction of approximately one-third of sales employees.
- Management identified possible office lease-asset impairment if it closes or subleases offices. Other significant risks include pandemic-related client spend and payment disruptions, freelancer and client retention, competition, worker-classification and other regulatory changes, fraud and payment losses, security and privacy incidents, and reliance on third-party payment providers and AWS.
- The company reported completing remediation of a previously disclosed material weakness in internal control over financial reporting during Q2 2020; management concluded disclosure controls were effective as of September 30, 2020.
Key facts for investors to verify
- Whether Q3 acceleration in GSV, marketplace revenue and client acquisition persists, and how client spend retention develops.
- Whether higher sales, marketing, R&D and stock-based compensation spending converts into durable revenue growth and improved GAAP profitability; adjusted EBITDA is non-GAAP and excludes significant recurring stock-based compensation.
- How pandemic conditions affect client budgets, payment collection, transaction losses, escrow funding needs and the potential for demand to weaken as remote-work patterns change.
- Available revolver capacity and liquidity after accounting for debt service, lease commitments and escrow requirements; reported cash and marketable securities should not be confused with escrow funds.
- The execution and cost of the planned AWS migration, and any office closures, subleases or resulting impairment charges.
- The operational and financial effects of the Upwork Business decision and sales-force reduction disclosed after the quarter ended.