Upwork, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are against Q1 2020 unless otherwise noted. Upwork operates an online marketplace connecting businesses with independent talent, alongside a smaller managed-services offering. The unaudited interim statements are prepared under U.S. GAAP.
Key financial and operating metrics
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Revenue | $113.6 million | $83.2 million; up 37% |
| Marketplace revenue | $104.7 million | $74.8 million; up 40% |
| Managed-services revenue | $8.9 million | $8.4 million; up 6% |
| Gross profit / gross margin | $83.2 million / 73% | $59.7 million / 72% |
| Operating loss | $7.7 million | $9.1 million |
| Net loss | $7.8 million; $0.06 per share | $10.0 million; $0.09 per share |
| Adjusted EBITDA (non-GAAP) | $6.9 million | $(1.0) million |
| Gross Services Volume (GSV) | $786.8 million | $559.5 million; up 41% |
| Marketplace take rate | 13.5% | 13.6% |
| Core clients | 152,400 | 128,800; up 18% |
| Client spend retention | 106% | 102% |
Gross profit grew 39%, ahead of revenue growth, while gross margin expanded by one percentage point. Operating expenses rose to $90.9 million from $68.8 million. Stock-based compensation was $11.2 million, versus $5.5 million a year earlier; it includes $2.5 million related to the CEO’s performance-based stock option award.
Cash flow, balance sheet and debt
- Operating cash flow was positive $1.9 million, compared with negative $1.7 million. Investing cash flow was positive $7.7 million, principally reflecting net maturities of marketable securities; financing cash flow was positive $27.1 million.
- Cash, cash equivalents and marketable securities totaled $169.8 million at March 31, 2021, compared with $169.7 million at December 31, 2020. Cash and cash equivalents were $104.3 million; marketable securities were $65.5 million.
- Cash-flow-statement cash, cash equivalents and restricted cash totaled $269.1 million, including $161.4 million of escrow funds and $3.3 million of restricted cash. Escrow assets are matched by an escrow-payable liability and should not be treated as freely available operating liquidity.
- Total debt carrying value was $8.8 million, down from $10.7 million at year-end; $7.6 million was current. The term loans mature in 2022, and borrowings carry variable interest rates. The company reported compliance with its loan covenants.
- Management stated existing liquidity, operating cash flow when generated, and borrowing availability should be sufficient for working capital needs for at least the next 12 months. The filing does not provide a specific revenue or earnings forecast.
Material changes and management commentary
- Revenue growth was driven primarily by marketplace activity: marketplace revenue rose 40%, with GSV up 41%. Management attributed growth to new and existing client spend, marketing and brand-awareness efforts, product investment, and the shift toward remote work, partly associated with COVID-19.
- Marketplace revenue increased to 92% of total revenue from 90%; managed services grew more slowly, and management expects that relative trend to continue as it prioritizes marketplace usage and spend.
- Sales and marketing expense increased 29%, research and development 38%, and general and administrative expense 32%. Management expects these expense categories, as well as cost of revenue, to rise in absolute dollars as the company invests in growth, product development, marketing, personnel and infrastructure.
- Q1 operating cash flow improvement included substantial noncash charges and was offset by working-capital outflows, including a $5.6 million increase in trade and client receivables. Financing cash flow included a $26.4 million increase in escrow funds payable, so reported cash generation was materially affected by escrow timing and should not be read as recurring operating cash generation.
Outlook, risks and unusual items
- In April 2021, Upwork agreed to sublease its former Santa Clara headquarters. Required landlord and master-lessor consents had not been obtained as of the filing. If completed, the arrangement could result in a $7–$8 million impairment charge in Q2 2021; other office closures or subleases could create additional charges.
- The company expected increased hosting costs during its planned AWS data-center migration, which it intended to substantially complete in Q2 2021, and from disaster-recovery protocols.
- Management cautioned that COVID-19-related benefits to remote-work demand, client acquisition, spend and retention may not persist as restrictions ease. The pandemic and macroeconomic conditions could also reduce client spending, delay payments, increase fraud or transaction losses, or disrupt partners.
- Key risks include user retention and marketplace circumvention; competition and the effectiveness of marketing and sales investments; payment processing, fraud and escrow funding; cybersecurity and service availability; international regulatory and tax obligations; and legal uncertainty concerning freelancer classification and employment status.
- The company reported no material pending legal proceedings or material accrued contingency losses. It had $1.0 million of outstanding letters of credit, collateralized by restricted cash. Its loan agreement requires an adjusted quick ratio of 1.75 and restricts certain actions, including dividends.
- Management reported disclosure controls and procedures were effective as of March 31, 2021, and no material changes to internal control over financial reporting occurred during the quarter. The filing notes a previously identified material weakness was remediated in Q2 2020.
Important facts for investors to verify
- Whether GSV, core-client growth and 106% client spend retention continue after pandemic-related remote-work effects fade, and how those trends translate into revenue and take rate.
- Whether rising marketing, research and development, personnel and stock-compensation costs support durable margin improvement; adjusted EBITDA excludes significant recurring stock-based compensation.
- Whether the Santa Clara sublease receives required consents, and the timing and amount of any Q2 impairment or other office-related charges.
- Underlying operating cash generation after separating escrow-related movements, receivable changes and other working-capital effects.
- Debt repayment and covenant headroom, including the effect of variable interest rates and the approaching 2022 maturities.
- Potential changes in client demand, payment and fraud losses, and worker-classification, privacy, tax or other regulatory exposure.