Upwork, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. Upwork operates an online marketplace connecting businesses with independent professionals, plus a managed-services offering. Financial statements are unaudited.
Financial and operating performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $68.9 million | $59.2 million | +16% |
| Marketplace revenue | $60.9 million | $52.0 million | +17% |
| Managed-services revenue | $8.0 million | $7.3 million | +10% |
| Gross profit / margin | $47.8 million / 69% | $39.6 million / 67% | Margin +2 percentage points |
| Operating loss | $4.8 million | $6.0 million | Loss narrowed |
| Net loss | $4.7 million | $6.8 million | Loss narrowed |
| Adjusted EBITDA (non-GAAP) | $1.2 million | $(3.1) million | Turned positive |
| Operating cash flow | $(29.4) million | $5.0 million | Decreased |
Marketplace revenue was 88% of total revenue in both periods. Gross services volume (GSV) rose 21% to $486.9 million. Core clients increased 22% to 111,000, and client spend retention was 107%, versus 103% a year earlier. Management attributed marketplace growth primarily to more core clients and higher client spend retention, alongside sales, marketing, and product investments.
Operating expenses were $52.6 million, up 15%. Research and development rose 17% to $15.8 million, sales and marketing rose 4% to $20.5 million, and general and administrative expense rose 40% to $15.7 million. Transaction-loss provision fell 50% to $0.6 million, which management attributed to improved collections and reduced fraud. Stock-based compensation increased to $4.3 million from $1.9 million.
Cash, liquidity, debt, and commitments
At March 31, 2019, cash and cash equivalents were $49.2 million, marketable securities were $72.0 million, and funds held in escrow, including funds in transit, were $120.1 million, with an equal escrow payable. Cash plus marketable securities totaled $121.2 million. Cash and cash equivalents had been $129.1 million at December 31, 2018; much of the decrease reflects purchases of short-term marketable securities.
Operating cash outflow was primarily associated with a $26.4 million increase in trade and client receivables. Management said quarter-end fell on a Sunday, increasing escrow funding needs and affecting cash flows. Investing cash outflow was $76.3 million, principally $71.7 million invested in marketable securities. Financing provided $25.8 million, including a $25.0 million revolving-credit draw used for escrow funding. The draw was repaid in April 2019.
Debt carrying value was $48.9 million at quarter-end, representing $24.0 million in term loans and a $25.0 million revolver borrowing, net of debt costs. The revolver limit is $25.0 million, subject to borrowing conditions; term loans mature in 2022 and the revolver in 2020. The company reported compliance with loan covenants. In March, the lender amendment raised the adjusted quick ratio covenant threshold to 1.75:1 and eliminated the minimum EBITDA covenant. Management stated existing liquidity, operating cash flows when generated, and available borrowing capacity should meet working-capital needs for at least 12 months.
Contractual obligations totaled $90.4 million, comprising $41.4 million of lease payments and $49.0 million of debt principal. The filing also describes a new Santa Clara headquarters lease, office leases in San Francisco and Chicago, and $0.3 million of accelerated depreciation related to vacated Chicago space.
Changes, outlook, risks, and unusual items
- Growth and mix: GSV and marketplace revenue grew faster than total revenue; managed-services growth was slower. Management expected that slower managed-services growth trend to continue.
- Profitability and spending: Net loss narrowed and adjusted EBITDA improved, but the company remained GAAP-loss-making. Management expected research and development, sales and marketing, and general and administrative costs to rise in absolute dollars, including public-company compliance costs. No numerical revenue or earnings guidance is provided in the filing text.
- Accounting change: Upwork planned to adopt ASC 606 in Q4 2019 using the modified retrospective method. It identified the tiered freelancer-fee discounts as a potential “material right,” but had not determined the adjustment amount; other adoption impacts were still under review.
- Controls: Management concluded disclosure controls and procedures were not effective at March 31, 2019 because of a previously disclosed material weakness in financial reporting controls. Remediation—including additional accounting staff and closing-process controls—was ongoing and had not yet been validated over a sustained period.
- Concentration and business risks: One client contributed more than 10% of revenue in Q1 2019 and in each of 2017 and 2018; the client is not identified in the provided filing text. Disclosed risks include user retention and competition, freelancer classification, payment and escrow regulation, fraud, data security, international operations, and economic conditions.
- Contingencies and subsequent events: Upwork reported no material pending legal proceedings or claims at quarter-end. It disclosed indemnification obligations, including certain enterprise worker-classification and intellectual-property claims, whose maximum potential loss could not be determined. In April, a warrant was exercised, resulting in 333,685 net shares issued; the $25.0 million revolver draw was also repaid.
Important facts for investors to verify
- Whether receivables growth and quarter-end escrow timing explain the operating cash outflow, and whether collections normalize in subsequent quarters.
- Progress in converting GSV, client growth, and retention into marketplace revenue, gross profit, and sustained GAAP profitability.
- Post-quarter debt balances, revolver availability, covenant headroom, and liquidity after repayment of the $25.0 million draw.
- The status and effectiveness of remediation for the material weakness and the implications of ineffective disclosure controls.
- The eventual ASC 606 transition adjustment, particularly the effect of tiered freelancer-fee discounts.
- The identity and ongoing revenue contribution of the client exceeding 10%, and any change in that concentration.
- Exposure to lease commitments, worker-classification and escrow regulation, and indemnification or other contingent claims.