Business context and reporting period
Upwork, Inc. operates an online marketplace connecting businesses with independent professionals, alongside a managed-services offering. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2020, compared with the corresponding 2019 periods. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial and operating performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $87.5 | $73.8 | $170.7 | $142.3 |
| Gross profit / margin | $62.1 / 71% | $52.2 / 71% | $121.8 / 71% | $99.5 / 70% |
| Operating loss | $(11.0) | $(2.9) | $(20.0) | $(8.2) |
| Net loss | $(11.0) | $(2.5) | $(21.0) | $(7.6) |
| Adjusted EBITDA, non-GAAP | $(1.2) | $1.2 | $(2.2) | $2.0 |
- Q2 revenue increased 19%; first-half revenue increased 20%. Marketplace revenue, 90% of total, grew 19% in Q2 and 21% in the first half. Managed-services revenue grew 13% and 9%, respectively.
- Q2 GSV was $582 million, up 12%; first-half GSV was $1.14 billion, up 14%. Marketplace take rate rose to 13.7% from 12.9% in Q2, partly reflecting new clients billing at higher tiered freelancer fee rates and slower GSV growth than marketplace revenue.
- Core clients reached 133,300, up 15% year over year; client spend retention was 100%, down from 105%. Management attributed the retention decline in part to pandemic-related client spending contraction and earlier marketplace trends.
- Operating expenses rose faster than revenue: Q2 research and development increased 31%, sales and marketing 41%, and general and administrative 22%. Q2 operating and net losses widened; net loss per share was $0.09 versus $0.02.
- For the six months, operating cash flow was positive $6.7 million versus negative $27.8 million in 2019. Management attributed the improvement partly to non-cash charges and working-capital movements, including higher accounts payable and accrued liabilities; receivables timing also affected the comparison.
- Cash and cash equivalents were $76.8 million and marketable securities $69.6 million at June 30, totaling $146.4 million before considering escrow balances. Funds held in escrow, including funds in transit, were $129.6 million and matched by escrow funds payable; they are not ordinary available liquidity. The cash-flow statement’s $209.0 million ending cash, cash equivalents and restricted cash includes escrow and restricted cash.
- Debt was $14.5 million, down from $18.3 million at year-end 2019; weighted-average interest rate was 4.99%. Current debt was $7.6 million. The company was compliant with loan covenants and reported an adjusted quick-ratio covenant of 1.75.
Changes, outlook, risks and unusual items
Management said COVID-19 had not materially adversely affected first-half financial results, but client spend contraction slowed GSV and revenue growth, particularly among small and medium-sized businesses. These trends stabilized in the second half of Q2. At the same time, the shift toward remote work and company initiatives accelerated client acquisition. The longer-term effects remained uncertain.
- No formal revenue or earnings guidance was provided. Management expected to add about 4,000 core clients per quarter in coming quarters, while cautioning that pandemic effects may become more apparent in early 2021.
- Management expected gross margin to remain consistent through 2020, including costs from an AWS data-center migration planned for Q4; hosting costs were expected to rise temporarily during the migration, with potential savings after completion. It expected research and development, sales and marketing, and general and administrative costs to increase in absolute dollars.
- Sales and marketing investment rose substantially, including brand advertising and expansion of the enterprise sales team. A February 2020 organizational restructuring incurred $1.6 million of costs, paid during the first half.
- Due to pandemic uncertainty, the company drew $18 million on its revolving credit line in March and April and repaid it in full in May. The revolving facility was scheduled to mature in September 2020; term loans mature in 2022.
- Management believed available cash, marketable securities, operating cash flows when generated, and borrowing availability would meet working-capital needs for at least 12 months. Risks include further pandemic-related demand weakness, client payment delays, increased fraud or transaction losses, fee promotions reducing revenue, and potential additional funding needs.
- Other risks include contractor-classification and regulatory changes, competition, user circumvention of the platform, payment-provider reliance, data security and privacy, and possible office lease-asset impairment if space is reduced. No material pending legal proceedings were reported.
- Management reported that disclosure controls were effective and that a previously disclosed material weakness in internal control over financial reporting had been remediated. The CFO resigned and a successor was appointed effective August 4, 2020, after quarter-end.
Important facts for investors to verify
- Whether client spend, retention, GSV growth and revenue growth recover or weaken further as the pandemic and economic conditions evolve.
- Whether increased sales, marketing and product investment produces durable growth and a path toward profitability, given the widening GAAP losses and higher stock-based compensation.
- Liquidity available after excluding escrow funds, the status and terms of the revolving facility following its September 2020 maturity, and continued compliance with debt covenants.
- Execution and costs of the planned AWS migration, and any resulting service disruption or gross-margin impact.
- Potential effects of worker-classification rules, privacy regulation, client payment problems and other contingencies on operating results and cash flows.