Upwork(UPWK) - 2022 Q3 - Quarterly Report

PART I—FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents Upwork Inc.'s unaudited condensed consolidated financial statements for the periods ended September 30, 2022, including balance sheets, operations, and cash flows Condensed Consolidated Balance Sheets Balance Sheet Data (in thousands) | Balance Sheet Data (In thousands) | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total Assets | $1,079,226 | $1,081,061 | | Total Current Assets | $929,702 | $929,653 | | Cash and cash equivalents | $156,423 | $187,205 | | Marketable securities | $519,383 | $497,566 | | Total Liabilities | $836,643 | $821,544 | | Total Current Liabilities | $252,011 | $233,634 | | Debt, noncurrent | $563,520 | $561,299 | | Total Stockholders' Equity | $242,583 | $259,517 | Condensed Consolidated Statements of Operations and Comprehensive Loss Income Statement Data (in thousands) | Income Statement Data (In thousands) | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $158,641 | $128,141 | $456,876 | $365,941 | | Gross Profit | $118,171 | $93,208 | $337,633 | $267,484 | | Loss from Operations | ($25,442) | ($8,317) | ($72,142) | ($32,409) | | Net Loss | ($24,827) | ($9,311) | ($73,385) | ($33,684) | | Net Loss Per Share (basic and diluted) | ($0.19) | ($0.07) | ($0.56) | ($0.27) | Condensed Consolidated Statements of Cash Flows Cash Flow Data (in thousands) | Cash Flow Data (In thousands) | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | ($1,896) | $23,284 | | Net cash used in investing activities | ($32,433) | ($26,114) | | Net cash provided by financing activities | $12,950 | $546,975 | | Net change in cash, cash equivalents, and restricted cash | ($21,379) | $544,145 | Notes to Condensed Consolidated Financial Statements - The company operates a work marketplace connecting businesses (clients) with independent talent. The financial statements are prepared under U.S. GAAP and should be read with the Annual Report on Form 10-K for the year ended December 31, 2021[22][24] - In March 2022, the company suspended business operations in Russia and Belarus due to the invasion of Ukraine, requiring contracts to be wound down by May 1, 2022. The financial impact was not material for the reported period, but future impact is uncertain[30][31] - As of September 30, 2022, the company had approximately $32.7 million of remaining performance obligations, primarily related to unexercised material rights from tiered service fees. About $24.9 million is expected to be recognized as revenue over the next 12 months[35] - In August 2021, the company issued $575.0 million of 0.25% convertible senior notes due 2026. The net proceeds were approximately $560.1 million after deducting issuance costs. The company also entered into capped call transactions to reduce potential dilution[59][66][68] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, including a 24% revenue increase in Q3 2022, the impact of the new Client Marketplace offering, and macroeconomic challenges Key Financial and Operational Metrics Metric (in thousands, except percentages) | Metric (in thousands, except %) | Q3 2022 | Q3 2021 | % Change | | :--- | :--- | :--- | :--- | | GSV | $1,027,325 | $903,989 | 14% | | Marketplace Revenue | $145,143 | $117,783 | 23% | | Marketplace Take Rate | 14.3% | 13.2% | 1.1% | | Net Loss | ($24,827) | ($9,311) | (167)% | | Adjusted EBITDA | ($2,868) | $8,216 | (135)% | - Active clients increased by 9% to 818,000 as of September 30, 2022, compared to the prior year. GSV per active client grew by 13% to $4,958[79] - In April 2022, the company launched its new Client Marketplace offering, simplifying the pricing model by eliminating monthly fees and introducing a 5% client marketplace fee (or 3% via ACH). This change increased revenue and take rate but also led to some reduction in client spend and a sequential decrease in GSV[77][83] Results of Operations Revenue Comparison (in thousands) | Revenue Type | Q3 2022 | Q3 2021 | % Change | | :--- | :--- | :--- | :--- | | Marketplace | $145,143 | $117,783 | 23% | | Managed Services | $13,498 | $10,358 | 30% | | Total Revenue | $158,641 | $128,141 | 24% | - Marketplace revenue growth was driven by a 9% increase in active clients and a 13% increase in GSV per active client. The new Client Marketplace offering, launched in April 2022, also contributed to higher revenue and an increased marketplace take rate of 14.3% in Q3 2022 vs. 13.2% in Q3 2021[103][105] Operating Expenses Comparison (in thousands) | Expense Category | Q3 2022 | Q3 2021 | % Change | | :--- | :--- | :--- | :--- | | Cost of Revenue | $40,470 | $34,933 | 16% | | Research and Development | $38,898 | $30,873 | 26% | | Sales and Marketing | $63,171 | $43,192 | 46% | | General and Administrative | $31,407 | $26,083 | 20% | | Provision for Transaction Losses | $10,137 | $1,377 | 636% | - Sales and marketing expenses increased by 46% YoY in Q3 2022, primarily due to a $13.0 million increase in marketing and brand awareness campaigns and a $6.8 million increase in personnel-related costs[114] - Provision for transaction losses increased significantly, primarily due to increased instances of fraud, higher chargeback losses, and a $2.7 million reserve for a single Upwork Enterprise client's failure to pay[119] Liquidity and Capital Resources - Principal sources of liquidity are cash, cash equivalents, and marketable securities. As of September 30, 2022, the company had $156.4 million in cash and cash equivalents and $519.4 million in marketable securities[122] Cash Flow Summary (Nine Months Ended Sep 30, in thousands) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash from operating activities | ($1,896) | $23,284 | | Net cash from investing activities | ($32,433) | ($26,114) | | Net cash from financing activities | $12,950 | $546,975 | - Net cash used in operating activities for the nine months ended Sep 30, 2022 was $1.9 million, a significant decrease from the $23.3 million provided in the same period of 2021. This was primarily due to a higher net loss and an increase in trade and client receivables[133][134] - The company has $575.0 million in aggregate principal amount of 0.25% convertible senior notes due 2026, issued in August 2021[128][129] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks, primarily from interest rate fluctuations and foreign currency exchange rates - The primary market risks are interest rate and foreign currency exchange rate fluctuations[144] - Interest rate risk is considered low as cash equivalents have short maturities and the $575.0 million in convertible notes have a fixed interest rate[145] - Foreign currency risk exists as clients can pay in various non-USD currencies. The company uses forward contracts to mitigate this risk, and the impact to date has been insignificant[146] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of September 30, 2022 - The CEO and CFO concluded that as of September 30, 2022, the company's disclosure controls and procedures were effective[147] - No changes occurred during the quarter ended September 30, 2022, that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[148] PART II—OTHER INFORMATION Item 1. Legal Proceedings The company reports that it is not a party to any material pending legal proceedings - Upwork is not currently a party to any material pending legal proceedings[149] Item 1A. Risk Factors This section details significant risks to Upwork's business, including user attraction and retention, payment and fraud, competition, geopolitical events, and regulatory challenges Risks Related to Business Operations, Execution, and Growth - The company's growth is highly dependent on its ability to attract and retain both clients and talent. Competition for users is high, and geopolitical events, such as the suspension of business in Russia and Belarus, can impede access to talent pools[153][154] - The company faces significant payment and fraud risks, including sophisticated methods used by bad actors. For the three and nine months ended September 30, 2022, provision for transaction losses increased due to higher instances of fraud and chargeback losses[166][159] - The company's recent growth, partly driven by the COVID-19 pandemic's shift to remote work, may not be sustainable. Year-over-year growth rates for active clients and GSV have decelerated since Q2 2021[163][156] Risks Related to Our Industry, Offerings, and Services - The company faces intense competition from online and offline platforms, traditional staffing firms, and large internet companies like LinkedIn and Google, which have greater resources[210][211] - A substantial portion of services on the marketplace are IT-related. A decline in this market, or a shortage of IT talent in key regions (e.g., Ukraine), could adversely affect the business. Approximately 25% of client spend in the web, mobile, and software development category in 2021 was derived from the region impacted by the Russia-Ukraine war[223] - The business is dependent on third-party services, particularly AWS for hosting. Any disruption from AWS could significantly harm operations, and the company may not be able to easily switch providers[235] Risks Related to Legal and Regulatory Matters - The company faces significant risk related to the classification of talent as independent contractors. Changes in laws, such as California's AB 5, or adverse legal determinations could result in tax liabilities, penalties, and reputational harm[252][254] - The company is subject to complex and evolving data privacy laws globally, such as GDPR and CCPA. Non-compliance could lead to significant fines, litigation, and damage to its reputation[258][259] - As a licensed internet escrow agent in California, the company is subject to regulations from the DFPI. Changes in laws or interpretations regarding money transmission could require additional licenses in other jurisdictions, leading to increased compliance costs[262][263] Risks Related to Finance, Accounting, and Tax Matters - The company has a history of net losses, with a net loss of $73.4 million for the nine months ended September 30, 2022, and an accumulated deficit of $324.4 million. Profitability is not guaranteed as operating expenses are expected to increase[287] - Quarterly operating results are subject to fluctuation due to factors like macroeconomic conditions, seasonality, changes in pricing models, and user spending patterns. A quarter-over-quarter decline in GSV was observed in Q3 2022[290][175] - The applicability of sales, use, and other indirect taxes (like digital service taxes) is uncertain and evolving. An adverse interpretation or new legislation could result in significant tax liabilities and administrative costs[299] Risks Related to Our Convertible Senior Notes - The company's $575.0 million of convertible notes could limit cash flow for operations, increase vulnerability to adverse economic conditions, and potentially dilute existing stockholders upon conversion[322][324] - The capped call transactions entered into in connection with the notes are intended to reduce potential dilution, but hedging activities by the option counterparties could cause volatility in the company's common stock price[325][326] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities during the period - None[331] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including the Transition and Separation Agreement for the CFO, certifications from the CEO and CFO, and Inline XBRL data files - Key exhibits filed include a Transition and Separation Agreement with CFO Jeff McCombs, CEO/CFO certifications pursuant to Sarbanes-Oxley Sections 302 and 906, and XBRL data files[334]