Upwork, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with the three months ended March 31, 2022, unless otherwise noted. Upwork operates an online marketplace connecting businesses with independent talent.
Financial and operating performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $160.9 million | $141.3 million | +14% |
| Gross profit / margin | $120.4 million / 75% | $103.4 million / 73% | Margin +2 percentage points |
| Operating loss | $(25.0) million | $(23.7) million | Loss widened |
| Net income (loss) | $17.2 million | $(24.7) million | Turned profitable |
| Adjusted EBITDA | $(2.9) million | $(0.4) million | Loss widened |
| GSV | $1.003 billion | $1.001 billion | Flat |
| Operating cash flow | $(8.7) million | $(11.5) million | Cash use decreased |
Marketplace revenue rose 14% to $148.1 million; managed services revenue increased 7% to $12.8 million. Marketplace take rate increased to 14.9% from 13.1%. Active clients were 827,000, up 4%, and GSV per active client was $4,967, up 5%.
Operating expenses rose to $145.5 million from $127.1 million. The provision for transaction losses increased 215% to $6.7 million, attributed to fraud-protection fees, bad debt, fraud, and chargebacks. Stock-based compensation was $19.9 million, versus $16.7 million.
Reported net income included $44.1 million of other income, principally a $38.9 million gain on early debt extinguishment and higher interest income. The filing reports basic EPS of $0.13 and diluted EPS of $(0.15); diluted EPS reflects the filing’s treatment of the convertible notes and extinguishment gain in its diluted-share calculation. Adjusted EBITDA excludes the debt gain and was negative.
Liquidity, cash flow and debt
- At March 31, cash and cash equivalents were $102.0 million and marketable securities were $407.6 million, totaling $509.6 million, compared with $686.6 million at December 31, 2022.
- Operating cash use was $8.7 million. Investing activities provided $152.1 million, largely from marketable-security maturities and sales; financing activities used $152.0 million, mainly for debt repurchases. Cash, cash equivalents and restricted cash declined $8.6 million, to $286.6 million; this measure includes escrow funds.
- In March, Upwork repurchased $214.0 million principal amount of its 0.25% convertible notes for $170.8 million cash. $361.0 million principal remained outstanding at quarter-end (carrying value $354.7 million), due August 2026. The company expects $2.7 million annual interest expense and repayment of principal at maturity if the notes are not otherwise converted, repurchased or redeemed.
- Management stated existing cash, marketable securities and operating cash flow in periods when generated should fund requirements for at least the next 12 months. Operating cash flow was negative in the quarter.
Material changes, outlook and risks
- Management attributed revenue growth primarily to client-fee changes following the April 2022 launch of Client Marketplace; GSV was essentially flat. Challenging macroeconomic conditions also affected results.
- Beginning in May 2023, talent fees on qualifying new and existing contracts were to shift from the 5%–20% tiered structure to a flat 10%; existing contracts at 5% retain that rate through year-end 2023. A client contract initiation fee of up to $4.95 began April 26. Management expects these changes to increase marketplace revenue and take rate during 2023 and positively affect gross margin.
- On May 3, 2023, Upwork announced a workforce reduction of approximately 15% of full-time employees, largely in sales, and other cost reductions. It expects approximately $4.0 million of primarily severance and benefit charges in Q2 2023, and expects cost-saving measures to benefit full-year adjusted EBITDA. Management expects sales and marketing expense to rise temporarily in Q2 and then decline through the second half of 2023. No specific revenue or earnings guidance is provided in the supplied filing text.
- Key risks include macroeconomic weakness and uncertain client demand, competition, changes to pricing and offerings, fraud and payment losses, user circumvention, privacy and cybersecurity incidents, contractor-classification and other regulatory uncertainty, and dependence on payment and cloud-service providers. Management reported no material pending legal proceedings or claims and no material contingency accruals.
Important facts for investors to verify
- Whether GSV and client activity stabilize, and whether the higher take rate from pricing changes persists without harming user retention or spend.
- Whether rising fraud, chargebacks and bad debt remain elevated and how they affect transaction-loss expense.
- Whether cost reductions improve adjusted EBITDA as expected, including the effects of workforce changes and the Q2 restructuring charge.
- Liquidity after the $170.8 million debt repurchase, ongoing negative operating cash flow, and the plan for the remaining $361.0 million principal due in 2026.
- The composition and sustainability of reported net income: Q1 profit was materially affected by the one-time debt-extinguishment gain, while adjusted EBITDA remained negative.