Upwork, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Upwork operates an online marketplace connecting businesses with independent professionals, alongside a managed-services offering. Unless noted otherwise, amounts below are in U.S. dollars.
Financial and operating performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $74.3M (+18%) | $62.7M | $143.2M (+17%) | $121.9M |
| Marketplace revenue | $66.2M (+19%) | $55.5M | $127.1M (+18%) | $107.4M |
| Managed-services revenue | $8.1M (+11%) | $7.2M | $16.1M (+11%) | $14.5M |
| Gross profit / gross margin | $52.7M / 71% | $42.2M / 67% | $100.5M / 70% | $81.8M / 67% |
| Operating income (loss) | $(2.5)M | $0.3M | $(7.3)M | $(5.7)M |
| Net income (loss) | $(2.0)M | $(0.4)M | $(6.8)M | $(7.2)M |
| Adjusted EBITDA, non-GAAP | $1.6M | $3.3M | $2.8M | $0.3M |
Q2 GSV increased 20% to $518.8M; first-half GSV increased 21% to $1.006B. Core clients rose 21% year over year to 115,700. Client spend retention was 105%, compared with 106% a year earlier. Marketplace revenue represented 89% of revenue in both periods. Basic and diluted loss per share was $0.02 for Q2 and $0.06 for the first half.
Q2 operating expenses increased 32% to $55.1M, led by sales and marketing, up 49% to $24.5M, including increased national advertising and enterprise sales investment. Research and development rose 23% to $15.7M and general and administrative expense rose 26% to $14.1M. Lower transaction-loss provisions partly offset these increases.
Cash flow, liquidity and debt
- First-half operating cash flow was $(27.8)M, versus $10.4M provided in 2018. The principal working-capital driver was a $30.3M increase in receivables; management noted that quarter-end fell on a Sunday, affecting cash and receivables timing.
- Investing cash flow was $(71.2)M, mainly reflecting purchases of marketable securities, capital spending and software development, partly offset by security sales. Financing cash flow was $37.0M, including a $25.0M revolving-credit draw, later repaid in July.
- At June 30, cash and cash equivalents were $67.1M and marketable securities were $62.4M, or $129.5M combined. Funds held in escrow of $118.3M had an equal payable and are not equivalent to freely available cash.
- Total debt carrying value was $47.0M: $22.1M under term loans and $25.0M on the revolver. The revolver was repaid in July. The company reported compliance with loan covenants; $32.6M of debt was classified current at quarter-end.
- Management said available cash, marketable securities, operating cash flow when generated, and borrowing availability should meet working-capital needs for at least 12 months. Operating lease commitments were $40.5M, net of tenant improvement allowances, in the contractual-obligations table.
Changes, outlook and risks
- Revenue growth was driven principally by marketplace activity and GSV, which management attributed largely to more core clients and investments in marketing and product development. Managed-services growth was slower, and management expected that trend to continue.
- Management expects research and development, sales and marketing, and general and administrative expense to rise in absolute dollars. It also anticipates additional public-company compliance costs, including as Upwork ceases to qualify as an emerging growth company at year-end 2019. No specific revenue or earnings guidance is provided in the filing.
- Management identified a material weakness in internal control over financial reporting; disclosure controls and procedures were deemed ineffective as of June 30. Remediation, including hiring and additional period-end controls, was ongoing and had not yet been validated over sustained reporting cycles.
- Upwork planned to adopt ASC 606 in Q4 2019 using the modified retrospective method. It expected tiered freelancer-fee discounts to defer revenue, but had not determined the adjustment amount. Adoption of the new lease standard was expected to materially increase reported lease assets and liabilities.
- Key risks include user and client retention, intense competition, worker-classification and payment regulation, fraud and cybersecurity, reliance on payment and cloud-service providers, and continued losses. One client contributed more than 10% of revenue in the first half and in each of 2018 and 2017. The filing reported no material pending legal proceedings or claims.
Investor verification priorities
- Assess whether GSV and core-client growth translate into durable revenue and whether client spend retention stabilizes.
- Track receivables, operating cash flow, escrow funding needs, and whether the July revolver repayment is sustained without further borrowing.
- Monitor spending growth, operating losses, and the drivers of the Q2 decline in adjusted EBITDA; consider this non-GAAP measure alongside GAAP results.
- Confirm the timing and quantified impact of ASC 606 adoption and the lease-accounting transition.
- Follow remediation and independent testing of the material weakness, and evaluate the revenue concentration in the client representing more than 10%.