Upwork, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unaudited results are compared with the corresponding 2020 periods. Upwork operates a marketplace connecting businesses with independent talent.
Key financial and operating metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $124.2 million | $87.5 million | $237.8 million | $170.7 million |
| Gross profit | $91.1 million | $62.1 million | $174.3 million | $121.8 million |
| Gross margin | 73% | 71% | 73% | 71% |
| Operating loss | $16.4 million | $11.0 million | $24.1 million | $20.0 million |
| Net loss | $16.5 million | $11.0 million | $24.4 million | $21.0 million |
| Adjusted EBITDA | $7.3 million | $(1.2) million | $14.2 million | $(2.2) million |
| GSV | $875.8 million | $582.0 million | $1,662.6 million | $1,141.4 million |
- Q2 total revenue increased 42%; marketplace revenue rose 46% to $114.5 million, while managed services revenue grew 7% to $9.7 million.
- Marketplace take rate was 13.2% in Q2 and 13.3% for the first half, down from 13.7% and 13.6%, respectively, in 2020.
- Active clients increased 27% to 725,000; GSV per active client increased 8% to $4,198. Core clients grew 21% to 162,000 and client spend retention was 114%. The company said it will stop reporting core clients and client spend retention after this filing and report active clients and GSV per active client instead.
- Operating expenses rose faster than revenue in Q2: research and development increased 37%, sales and marketing 33%, and general and administrative 89%. The latter included a $7.4 million office-related impairment charge.
Cash, liquidity, and debt
- At June 30, cash and cash equivalents were $131.4 million and marketable securities were $41.0 million, versus $94.1 million and $75.6 million at December 31, 2020. Funds held in escrow, including funds in transit, were $165.1 million and are matched by an escrow-funds-payable liability; they are not unrestricted liquidity.
- For the six months, operating cash flow was $2.4 million, down from $6.7 million. Receivables increased $16.8 million, a principal working-capital outflow. Investing cash flow was $30.6 million, primarily reflecting maturities of marketable securities; financing cash flow was $34.7 million, including a $30.0 million increase in escrow funds payable.
- Debt was $7.0 million at June 30, down from $10.8 million at year-end; no revolving-line borrowings were outstanding. The $25 million revolving facility is subject to conditions. The company reported covenant compliance. Term loans mature in 2022 and are secured by substantially all assets other than specified exclusions.
- Management said existing cash, securities, operating cash flow when generated, and available borrowing capacity should meet working-capital needs for at least 12 months. It noted that additional capital could be needed if these sources prove insufficient.
Changes, outlook, and notable items
- Growth reflected strong client acquisition and higher marketplace activity. Management linked growth in part to strategic marketing and product investment and to accelerated adoption of remote work during the pandemic.
- Management expects marketplace take-rate pressures to continue in the near term, citing higher spend from newer client cohorts at lower tiered freelancer-fee rates and increased free Connects issued to freelancers. It expects managed services revenue to grow more slowly than marketplace revenue as it focuses on marketplace offerings.
- The company expects cost of revenue, research and development, and general and administrative expense to increase in absolute dollars as the business grows and investments continue. It planned to increase brand-marketing investment in the second half of 2021. No specific quantitative revenue, earnings, or cash-flow guidance is provided in the filing.
- After adopting a flexible work model, Upwork sub-subleased its former Santa Clara headquarters. It recorded a $7.4 million impairment in Q2 and warned that closing or subleasing other offices could cause further charges. The company remains responsible for its original lease obligation, which runs through October 2028; sublease rent of approximately $0.1 million per month begins in January 2022.
- Stock-based compensation was $13.5 million in Q2 and $24.8 million for the first half, versus $7.1 million and $12.7 million in 2020. The filing includes CEO options tied to service and share-price targets, with $23.5 million of unrecognized compensation cost at quarter-end.
- COVID-19 remains an uncertainty: remote-work adoption supported demand, but management cautioned that growth could slow as restrictions ease, alongside risks from economic conditions, seasonality, user spending, and client payment delays.
- The company reported no material pending legal proceedings or material accrued contingencies. It identified risks including user acquisition and retention, competition, fraud and payment processing, cybersecurity and platform reliability, worker classification, privacy and tax regulation, and dependence on third-party payment partners and AWS.
- Disclosure controls and procedures were assessed as effective as of June 30, 2021; no material change in internal control over financial reporting was reported during the quarter.
Most important facts for investors to verify
- Whether rapid GSV and revenue growth persists as pandemic-related demand and comparisons normalize, and whether increased marketing spend generates durable client acquisition.
- Whether marketplace take-rate declines continue and how they affect revenue growth relative to GSV.
- Whether operating expenses, particularly stock compensation, marketing, and corporate costs, allow progress toward GAAP profitability; Upwork remained loss-making.
- Whether operating cash generation improves, especially as receivables and escrow funding needs change.
- Potential further office impairment charges and the continuing lease obligations associated with the former headquarters and other office space.
- Debt repayment and covenant compliance through the 2022 loan maturities, as well as the availability of liquidity for operating and escrow requirements.
- Developments in COVID-19 demand, worker-classification regulation, payment/fraud exposure, cybersecurity, and reliance on external service providers.