Upwork, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; financial statements are unaudited. Upwork operates an online marketplace connecting businesses with independent talent.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue | $168.6 million | $156.9 million | $329.5 million | $298.2 million |
| Gross profit / margin | $127.7 million / 76% | $116.0 million / 74% | $248.2 million / 75% | $219.5 million / 74% |
| Operating income (loss) | ($6.1 million) | ($23.0 million) | ($31.2 million) | ($46.7 million) |
| Net income (loss) | ($4.0 million) | ($23.8 million) | $13.2 million | ($48.6 million) |
| Adjusted EBITDA, non-GAAP | $14.4 million | ($1.9 million) | $11.4 million | ($2.3 million) |
Q2 revenue grew 7%; marketplace revenue rose 9% to $156.6 million, while managed-services revenue fell 5% to $12.0 million. First-half revenue increased 10%. Gross margin improved, principally reflecting pricing and marketplace fee changes. Research and development expense rose 21% in Q2, while sales and marketing fell 7% and general and administrative expense fell 13%.
GSV was approximately $1.04 billion in Q2, down 1%, and approximately $2.04 billion for the first half, essentially flat year over year. Active clients increased 2% to 822,000, and GSV per active client rose 2% to $4,987. Marketplace take rate rose to 15.3% in Q2 from 14.0%.
Cash flow, debt and liquidity
- First-half operating cash flow was negative $4.4 million, versus negative $11.9 million a year earlier. Investing activities provided $196.9 million, and financing activities used $151.6 million. Cash, cash equivalents and restricted cash increased $40.9 million.
- At June 30, cash and cash equivalents were $154.1 million and marketable securities were $362.6 million. Current assets were $780.0 million and current liabilities $254.7 million; funds held in escrow of $177.7 million were matched by escrow funds payable.
- In March, Upwork repurchased $214.0 million principal amount of its 0.25% convertible notes for $170.8 million cash and recorded a $38.9 million gain on extinguishment. $361.0 million principal remained outstanding, due August 2026. The first-half net income included this gain; without it, reported profitability would be materially different.
Material changes, outlook and risks
- In May, Upwork replaced the talent marketplace’s tiered service fee with a flat 10% for new contracts and contracts previously subject to a 20% fee; existing 5% contracts retain that rate through 2023. It also introduced a client contract initiation fee of up to $4.95 and increased the Connects needed to bid on projects. Management said these changes supported marketplace revenue and take rate, but their longer-term effect on user activity and retention is uncertain.
- Management expects marketplace revenue and take rate to increase through the remainder of 2023, pricing changes to continue supporting gross margin, and sales and marketing expense to decrease. Research and development expense is expected to rise in absolute dollars. Management believes existing cash, marketable securities and operating cash flow, when generated, will cover requirements for at least 12 months.
- Upwork reduced its workforce in May by approximately 15% of full-time employees, largely in sales, and reduced a smaller percentage of independent team members. It also cut brand marketing, vendor spending and other non-personnel costs. Management expects these measures to benefit full-year adjusted EBITDA.
- Key risks include flat GSV and uncertain macroeconomic demand, competition and user circumvention, fraud and payment losses, effects of pricing changes, contractor-classification and other regulatory exposure, cybersecurity and platform disruptions, and dependence on payment partners. Management also noted possible office-space impairment charges if it closes or subleases certain offices. No material pending legal proceedings or material contingency accruals were reported.
Important facts for investors to verify
- How marketplace fee changes affect GSV, client and talent retention, and take rate in subsequent quarters.
- Whether adjusted EBITDA improvement translates into sustained GAAP profitability and positive operating cash flow, given the debt-extinguishment gain and stock-based compensation.
- Cash and marketable securities available for operations after accounting for escrow obligations, and plans for the $361.0 million notes due in 2026.
- Execution and costs of the workforce reductions and other savings, including any office-related impairment charges.
- Developments in transaction losses, client receivables, worker-classification regulation, fraud, and cybersecurity risks.