Market Newsdesk

XP Inc. Reports 4Q20 Financial Results

SÃO PAULO, Brazil–(BUSINESS WIRE)–
XP Inc. (NASDAQ:XP) (“XP” or the “Company”), a leading tech-enabled platform and a trusted pioneer in providing low-fee financial products and services in Brazil, today reported its financial results for the fourth quarter of 2020 and for the year ended December 31, 2020.

To our shareholders:

The events of 2020 were certainly demanding for all of us around the world. Faced with a pandemic of unimaginable proportions, we collectively became more resilient, supportive, flexible and aware that nothing can be taken for granted. Amid the catastrophic health crisis and the reality of quarantine, we reflected and reviewed the way we relate to our family, work, routine and old habits. After many challenges, we remain confident that better days are ahead.

2020 marked XP Inc.’s first as a publicly traded company, which presented new challenges in internal and external communications, governance and strategy. We have, undeniably become a better and more prepared company for the future since our IPO in December 2019.

I am convinced that our culture, which I consider our greatest asset and a key long-term competitive advantage, has been tested, strengthened and, without a doubt, was the main factor in successfully navigating this turbulent period and driving robust growth.

I want to reinforce our values that we believe will allow all our employees to help transform the financial markets in Brazil and improve peoples’ lives over time:

Dream Big – to continue to believe in “impossible” projects and build the bridges to make them possible.

Open Mind – to never forget that there are no absolute truths, that mistakes are part of the journey and that great ideas and projects often come from where and when you least expect them.

Entrepreneurial Spirit – to turn employees into owners of the company, with responsibilities to maintain the company’s competitive and ethical standards, and free from hierarchical limitations.

After 2020, I am convinced that the result of our values in practice is greater than the sum of the three separate parts, and I would like to share some concrete examples of how we have evolved during the year.

Almost twelve months ago, at the beginning of the crisis, we experienced an unprecedented increase in trading volumes across our platforms. This allowed us to solve operational bottlenecks and anticipate investments in technology to guarantee the availability and robustness of services for our customers. We are proud of the improvements we have achieved in a short period of time, which have resulted in expanded capacity to manage new levels of demand. Even more remarkable is the fact that the entire team working on this has been working from home and, therefore, with a greater need for creativity, intensity and strong communication.

We have also made significant progress on our ESG initiatives, accelerated by the pandemic that severely impacted the most disadvantaged part of the population in our country. We created the “Juntos Transformamos” movement, with the goal of delivering food and medical equipment quickly and effectively to the people who need it most, serving approximately 500,000 people thus far. Going forward, we are committed to leading by example and seeking to leave a better country for future generations. We created our ESG board and will strive to become an ESG reference, generating relevant and long-term impacts on society. Rest assured that this will be a recurring theme in our communications and one of our key priorities for years to come.

Additionally, during 2020 we learned new ways to work as a team without necessarily being together physically. As a result, the XP Anywhere concept was born – permanent adoption of the flexible work model – as well as the Villa XP project, a sustainable and innovative space for XP employees, partners and clients. These initiatives will provide a better quality of life for our employees and their families, avoiding traffic and large displacements, allowing them to live outside large corporate centers and consequently enhancing commitment and performance. Also, we improved our ability to attract talent in Brazil and around the world and significantly lower our cost structure, which will drive significant benefits in terms of efficiency and long-term profitability.

Throughout last year, we experienced significant digital acceleration. In this context, we revisited our long-term strategic planning and the pace with which we intend to address new markets and target new customers. The expected launches of our digital bank and credit card business, along with our recently available collateralized loan products, will enhance customer experience and drive expanded relationships.

In terms of operating and financial results, we had the best year in our history. We generated gross revenue of R$8.7 billion, an increase of 58% Y-o-Y. Our Adjusted Net Income totaled R$2.3 billion, an increase of 111% Y-o-Y. Despite our accelerated growth, it is important to highlight the size of the market opportunity across the Brazilian financial system. The total revenue pool across the Brazilian financial system represents over R$770 billion, which today equates to almost 90 times the size of XP Inc.’s revenue. Our existing footprint currently addresses roughly 20% of total financial revenue in Brazil. Our plans include TAM expansion throughout our journey, always focused on maintaining our asset-light business model and leveraging the evolution of the capital markets as a lever for growth.

As we have always done throughout our history, we have grown our company by connecting dots and picking low-hanging fruits, with a focus on profitability, execution and the experience of our clients, adding new businesses gradually and consistently. It is always important to remember that back in 2008 we were a brokerage firm that offered only one product (stocks) for only one customer profile (individuals). Since then, we have built a dynamic ecosystem in terms of products and experiences encompassing multiple agents. We remain in the early stages of our journey, and we believe the growth we have achieved so far will be surpassed by what is yet to come.

Finally, I would like to thank all market participants for the partnership and interactions throughout our first year as a listed company and reinforce my commitment and that of my partners to drive long-term value for shareholders. We are more motivated and energized than ever to build a legacy, inspire our country and contribute to the development of the Brazilian financial system across verticals.

Guilherme Benchimol, CEO

Highlights

4Q20 KPIs

• TOTAL AUC: R$660 Billion (+61% YoY)
• ACTIVE CLIENTS: 2.8 million (+63% YoY)
• NPS: 71
• GROSS REVENUE: R$2.6 Billion (+41% YoY)
• ADJUSTED EBITDA: R$891 Million (+42% YoY)
• ADJUSTED NET INCOME: R$721 Million (+73% YoY)

2020 KPIs

• GROSS REVENUE: R$8.7 Billion (+58% YoY)
• ADJUSTED EBITDA: R$2.9 Billion (35.8% Margin)
• ADJUSTED NET INCOME: R$2.3 Billion (27.8% Margin)

Key Business Metrics

		4Q20		4Q19		YoY		3Q20		QoQ		FY20		FY19		YoY
Operating and Financial Metrics (unaudited)
AUC (in R$ bn)		660		409		61%		563		17%		660		409		61%
Active clients (in ‘000s)		2,777		1,702		63%		2,645		5%		2,777		1,702		63%
Retail – gross total revenues (in R$ mn)		1,844		1,155		60%		1,698		9%		6,271		3,676		71%
Institutional – gross total revenues (in R$ mn)		307		306		0%		239		28%		1,210		802		51%
Issuer Services – gross total revenues (in R$ mn)		323		221		46%		169		91%		688		507		36%
Digital Content – gross total revenues (in R$ mn)		25		30		-15%		32		-20%		130		112		16%
Other – gross total revenues (in R$ mn)		71		111		-36%		107		-34%		413		420		-2%
Company Financial Metrics
Gross revenue (in R$ mn)		2,570		1,823		41%		2,245		14%		8,711		5,518		58%
Net Revenue (in R$ mn)		2,395		1,691		42%		2,101		14%		8,152		5,128		59%
Gross Profit (in R$ mn)		1,559		1,204		29%		1,395		12%		5,451		3,522		55%
Gross Margin		65.1%		71.2%		-612 bps		66.4%		-132 bps		66.9%		68.7%		-181 bps
Adjusted EBITDA1 (in R$ mn)		891		627		42%		727		23%		2,918		1,679		74%
Adjusted EBITDA margin		37.2%		37.1%		11 bps		34.6%		258 bps		35.8%		32.7%		305 bps
Adjusted Net Income1 (in R$ mn)		721		417		73%		570		26%		2,270		1,074		111%
Adjusted Net Margin		30.1%		24.6%		544 bps		27.1%		294 bps		27.8%		20.9%		691 bps
¹ See appendix for a reconciliation of Adjusted Net Income and Adjusted EBITDA.

Operational Performance

Assets Under Custody (in R$ billions)

Total AUC reached R$660 billion on December 31, up 61% year-over-year and 17% quarter-over-quarter. Year-over-year growth was driven by R$198 billion of net inflows and R$53 billion of market appreciation. Despite last year’s uncertainty and market volatility, XP delivered solid AUC growth, while continuing to strengthen brand recognition among Brazilian investors.

Net Inflows (in R$ billions)

Adjusted Net Inflow totaled R$37 billion in 4Q20, stable relative to 3Q20. The average monthly Net Inflow, adjusted for extraordinary equity inflows/outflows, was R$12.7 billion in 2H20, up17% from R$10.8 billion in 1H20. For 4Q20, flows were strong across all channels and brands, led by the Private segment reflecting ongoing cross-selling opportunities across XP’s ecosystem.

Active Clients (in 000’s)

Active clients grew 63% and 5% in 4Q20 vs 4Q19 and 3Q20, respectively. In 2020, client growth was strong across channels, with XP Direct outpacing the IFA channel, and Rico accelerating in 4Q20 following the elimination of brokerage fees in September.

Retail Equity DARTs¹ (million trades)

¹Daily Average Revenue Trades, including Stocks, REITs, Options and Futures

Retail DARTs have held strong since 2Q20 with 2.6 million daily average trades in 4Q20 despite a typical seasonal slowdown in December due to the holiday season. Retail DARTs at Rico reached a record level in 4Q20 following the implementation of zero brokerage fees in September.

Collateralized Credit Portfolio (in R$ millions)

Our Credit portfolio reached R$3.9 billion of assets as of December 31, 2020, which represented 0.6% of our total AUC. Demand was driven by both individuals and SMB clients, boosted by XP’s AUC growth and the Government’s decision to charge zero IOF (Tax on Financial Operations) on loans granted over the last two weeks of the year.

The average duration of our credit book was 3.2 years, with a 90-day Non-Performing Loan (NPL) ratio of 0.0% at year-end. Furthermore, we highlight the asset-light nature of our loan book, which currently represents R$721 million of Risk-Weighted Assets and requires minimum regulatory capital of just R$58 million.

The fact that most of our credit portfolio is collateralized minimizes capital needs for growth. Our book is mainly funded by the issuance of Structured Notes (COEs) and Deposits, which are distributed to clients on our platform.

Net Promoter Score (NPS)

Our NPS, a widely known survey methodology used to measure customer satisfaction, increased to 71 in December 2020. Maintaining a high NPS score is a priority for XP since our business model is built around the client experience. The NPS calculation as of a given date reflects the average scores in the prior six months.

Total Gross Revenue (in R$ millions)

Total Gross Revenue increased 41% from R$1.8 billion in 4Q19 to R$2.6 billion in 4Q20. For the year, gross revenue expanded 58% to R$8.7 billion in 2020 from R$5.5 billion in 2019. The increase was mainly driven by strong growth in the Retail business, which contributed 92% and 81% of the growth in 4Q20 and 2020, respectively.

Retail

Retail Revenue (in R$ millions)

4Q20 vs 4Q19

Retail revenue grew 60% from R$1.2 billion in 4Q19 to R$1.8 billion in 4Q20. The main growth drivers included, in order of contribution: (1) Equities and Futures, reflecting resilient trading volumes and growing participation of retail investors at B3; (2) Financial Products, represented by Structured Notes (COE) and equity-linked derivatives; and (3) Fixed Income.

In 4Q20, Retail-related revenues represented 75% of consolidated Net Income from Financial Instruments, as per the Accounting Income Statement, and were composed of Derivatives with Retail Clients, Fixed Income secondary transactions, and Floating, among others.

2020 vs 2019

Retail revenue totaled R$6.3 billion in 2020, a 71% increase compared to 2019, and contributing 81% of total revenue growth, mainly driven by platform growth, both in AUC and Active Clients. For 2020, Equities and Futures, Financial Products, and Fixed Income were also the main growth drivers, in order of contribution.

LTM Take Rate (LTM Retail Revenue / Average AUC)

4Q20 take rate (for the last twelve months) remained stable compared to 4Q19. Despite the strong growth in AUC during the period, higher Equities and Futures’ trading volumes and rising distribution of Financial Products and securities through Capital Markets worked as an offset.

Note: LTM Take Rate (LTM Retail Revenue / Average AUC). Average AUC = (Sum of AUC from beginning of period and each quarter end in a given year, being 5 data points in one year)/5

Institutional

Institutional Revenue (in R$ millions)

4Q20 vs 4Q19

Institutional gross revenue remained stable in 4Q20, since 4Q19 had strong performance fees from funds, which offset a higher equity trading volume in 4Q20.

In 4Q20, Institutional revenue accounted for 16% of consolidated Net Income from Financial Instruments, as per the Accounting Income Statement, and was composed mostly of Fixed Income secondary transactions and Derivatives, among others.

2020 vs 2019

Compared to 2019, Institutional revenue grew 51%, from R$802 million to R$1.2 billion, driven by market activity benefiting both fixed income and equity trading volume.

Issuer Services

Issuer Services Revenue (in R$ millions)

4Q20 vs 4Q19

Issuer Services revenue expanded 46% year-over-year from R$221 million in 4Q19 to R$323 million in 4Q20. This increase was driven by (1) Equity Capital Markets (ECM), with 11 executed deals vs 8 in 4Q19, and (2) our Debt Capital Markets (DCM) division, with participation in 55 deals vs 51 in 4Q19.

2020 vs 2019

Issuer Services revenue grew 36% year-over-year, from R$507 million in 2019 to R$688 million in 2020, despite modest activity in 2Q20 due to overall market conditions. The increase was mainly attributable to (1) Equity Capital Markets (ECM), with 32 executed deals vs 13 in 2019 and (2) and Debt Capital Markets (DCM) division, with 147 deals vs 145 in 2019.

In 2020, XP Investment Banking was a protagonist in capital markets, ranked #1 in the distribution of (1) Fixed Income & Hybrid products (consolidated), (2) REITs distribution, and (3) in CRA (agribusiness certificate of receivable), participating in 25%, 56%, and 46% of total deals, respectively.

Digital Content and Other

Digital Content Revenue

Gross revenue totaled R$25 million in 4Q20, down 15% from R$30 million in 4Q19. When looking at full-year figures, Digital content had a solid year, growing revenues 16% over 2019. 4Q20 was impacted mostly by the absence of in-person events and courses compared to the same period of last year.

Other Revenue

4Q20 vs 4Q19

Other revenue decreased 36% in 4Q20 vs. 4Q19, from R$111 million to R$71 million, primarily driven by a lower average Selic rate.

In 4Q20, other revenue accounted for 9% of consolidated Net Income from Financial Instruments, as per the Accounting Income Statement, composed mostly of interest on adjusted gross cash and a small portion related to our treasury’s asset liability management.

2020 vs 2019

Other revenue remained stable for the full-year comparison, impacted by a lower average Selic rate, offset by an increase in the average adjusted gross cash balance during the year.

COGS

COGS (in R$ millions) and Gross Margin

4Q20 vs 4Q19

COGS rose 72% from R$487 million in 4Q19 to R$836 million in 4Q20, reducing gross margin from 71.2% to 65.1%, driven by an (i) 306 bps compression caused by long-term incentive plans to our IFAs, from which 182 bps are related to share-based compensation; and (ii) 259 bps from product mix.

2020 vs 2019

For the year, COGS rose 68%, from R$1.6 billion to R$2.7 billion, driven by the increase in revenues from our IFA Network and active clients. Gross profit margin decreased 181 bps, also affected by the investments made in the IFA network in the second half of 2020.

SG&A Expenses

SG&A Expense (ex-Share-Based Compensation) (in R$ millions)

4Q20 vs 4Q19

SG&A expenses (excluding share-based compensation) totaled R$717 million in 4Q20, up 20% from R$599 million in 4Q19. Expenses, as a percentage of net revenue, decreased, even though we are significantly growing our headcount (over 50% year-over-year) and being consistently developing our product offering and client experience to address an even greater addressable market. The efficiency gain in SG&A was allowed by past investments in technology and our highly scalable platform business model.

2020 vs 2019

SG&A expenses (excluding share-based compensation) for the full-year of 2020 totaled R$2.6 billion, an increase of 44% over R$1.8 billion from 2019. The efficiency gain, as mentioned above, is mostly related to our highly scalable business model, even considering investments to jump into a greater addressable market.

Share-Based Compensation (in R$ millions)

In December 2019, we implemented our new partnership model, according to which existing or new partners may be entitled to share-based compensation based on cultural fit and individual performance, consisting of restricted stock units and performance share units. Expenses related to this model were significantly higher in 2020. As of December 2020, there was a total of 13,899,648 outstanding shares, or approximately 50% of the total dilution planned and approved during IPO, on December 19.

In 2020, we have anticipated a significant part of the approved dilution, and, for this reason, this increase should not be repeated at the same pace in new grants. We expect to use the approved dilution as originally planned: within five years counting from IPO. A portion of Share-Based Compensation is related to IFAs and allocated in COGS.

Adjusted EBITDA

Adjusted EBITDA¹ (in R$ millions) and Margin

¹ See appendix for a reconciliation of Adjusted EBITDA.

4Q20 vs 4Q19

Adjusted EBITDA grew 42%, from R$627 million to R$891 million. The growth was driven by (1) strong growth in Retail Revenue and (2) operating leverage in SG&A. Both were partially offset by higher COGS, impacted by investments made in our IFA Network.

2020 vs 2019

Compared to 2019, Adjusted EBITDA expanded 74%, from R$1.7 billion to R$2.9 billion. Despite (1) growing our number of employees 50% year-over-year, (2) investing in new business (such as credit cards and digital bank), and (3) investing in our IFA Network, adjusted EBITDA Margin expanded from 32.7% to 35.8%. The margin expansion reflects the benefits of our operating leverage and technology investments made in the past, which provided scalability for the company.

Adjusted Net Income

Adjusted Net Income¹ (in R$ millions) and Margin

4Q20 vs 4Q19

Adjusted Net Income grew 73%, from R$417 million to R$721 million, driven by (1) strong performance of the Retail business and (2) a lower effective tax rate, as a result of our post-IPO corporate structure. Our adjusted net income margin expanded by 544 bps in 4Q20.

2020 vs 2019

In 2020, Adjusted Net Income grew 111% vs 2019 and reached R$2.3 billion. The adjusted net margin expanded from 20.9% in 2019 to 27.8% in 2020, up 691 bps, reflecting: (1) strong growth in Retail Revenue, which was mainly driven by Equity, Derivatives, Financial Products and Fixed Income, (2) a lower effective tax rate; and (3) operating leverage in SG&A.

¹ See appendix for a reconciliation of Adjusted Net Income.

Guidance

We have revised our 3-5 year adjusted net margin guidance, from previous 18-22% range to 24-30%.

Cash flow (in R$ millions)

		4Q20		3Q20		FY20		FY19
Cash Flow Data
Income before income tax		663		632		2,421		1,544
Adjustments to reconcile income before income tax		229		128		564		206
Income tax paid		(97)		(126)		(519)		(403)
Contingencies paid		(1)		(0)		(2)		(3)
Interest paid		(9)		(44)		(71)		(28)
Changes in working capital assets and liabilities		830		(720)		565		122
Adjusted net cash flow (used in) from operating activities		1,615		(129)		2,959		1,437
Net cash flow (used in) from securities, repos, derivatives and banking activities		(959)		1,119		(1,448)		(5,251)
Net cash flows from operating activities		656		990		1,511		(3,814)
Net cash flows from investing activities		(202)		(302)		(582)		(161)
Net cash flows from financing activities		1,390		(478)		789		4,234

Net Cash Flow Used in Operating Activities

Our net cash flow used in Operating activities represented by Adjusted net cash flow (used in) from operating activities (which in management’s view is a more useful metric to track the intrinsic cash flow generation of the business) increased to R$1.6 billion for 4Q20 from negative R$129 million in 3Q20, and increased from R$1.4 billion in 2019 to R$3.0 billion in 2020 driven by:

• Higher balance of securities and derivatives that we hold in the ordinary course of our business as a Retail investment distribution platform and as an Institutional broker-dealer (concerning the sale of fixed income securities and structured notes);
• Our strategy to allocate excess cash and cash equivalents from treasury funds, from Floating Balances and private pension balances to securities and other financial assets. These balances may fluctuate substantially from quarter to quarter and were the key drivers to the net cash flow from operating activities figures;
• Increases in our banking activities from loan operations, deposits mainly derived from time deposits, structured operations certificates (COE) and other financial liabilities which include financial bills as a result of our expected growth in new financial services verticals.
• Growth of our omnichannel distribution network through our network of IFA partners;
• Our income before tax of R$892 million in 4Q20 and R$3.0 billion in 2020 combined with non-cash expenses consisting primarily of (i) share-based plan of R$154 million in 4Q20 and R$233 million in 2020 (ii) depreciation and amortization of R$37 million in 4Q20 and R$143 million in 2020, (iii) Losses on impairment and write-off of property, equipment, intangible assets and leases of R$11 million in 4Q20 and R$73 million in 2020. The total amount of adjustments to reconcile income before income taxes for 4Q20 was R$229 million and R$564 million for 2020.

Net Cash Flow Used in Investing Activities

Our net cash used in investing activities decreased from R$302 million in 3Q20 to R$202 million in 4Q20 and increased from R$161 million in 2019 to R$582 million in 2020, primarily affected by:

• Our acquisitions of FinTech’s investments in associates and joint ventures of R$290 million in 2020;
• the investment in intangible assets, mostly IT infrastructure and capitalized software development which increased from R$35 million in 3Q20 to R$66 million in 4Q20 and from R$89 million in 2019 to R$145 million in 2020.

Net Cash Provided by Financing Activities

Our net cash flows from financing activities increased from negative R$478 million in 3Q20 to R$1.4 billion in 4Q20 and decreased from R$4.2 billion in 2019 to R$789 million in 2020, primarily due to:

• R$1.4 billion related to proceeds from the issuance of shares related to our primary offering in 4Q20;
• R$400 million related to principal payments of the first series of non-convertible debentures in 3Q20;
• R$66 million related to a partial repurchase of the second series of non-convertible debentures in 2Q20;
• R$4.5 billion related to the initial public offering proceeds in 2019 and;
• R$22 million in 4Q20, R$78 million in 3Q20, R$153 million in 2020 and R$123 million in 2019 related to Payments of borrowings and lease liabilities.

Floating Balance and Adjusted Gross Financial Assets (in R$ millions)

Floating Balance (=net uninvested clients’ deposits)		4Q20		3Q20
Assets		(1,052)		(1,484)
(-) Securities trading and intermediation		(1,052)		(1,484)
Liabilities		20,303		15,160
(+) Securities trading and intermediation		20,303		15,160
(=) Floating Balance		19,252		13,676

Adjusted Gross Financial Assets		4Q20		3Q20
Assets		90,518		83,061
(+) Cash		1,955		642
(+) Securities – Fair value through profit or loss		49,590		38,702
(+) Securities – Fair value through other comprehensive income		19,039		9,589
(+) Securities – Evaluated at amortized cost		1,829		1,366
(+) Derivative financial instruments		7,559		13,149
(+) Securities purchased under agreements to resell		6,627		18,244
(+) Loans		3,918		1,369
Liabilities		(60,484)		(61,514)
(-) Securities loaned		(2,237)		(1,112)
(-) Derivative financial instruments		(7,819)		(12,730)
(-) Securities sold under repurchase agreements		(31,839)		(35,254)
(-) Private Pension Liabilities		(13,388)		(9,649)
(-) Deposits		(3,022)		(1,627)
(-) Structured Operations		(2,178)		(1,142)
(-) Floating Balance		(19,252)		(13,676)
(=) Adjusted Gross Financial Assets		10,782		7,871

We present Adjusted Gross Financial Assets because we believe this metric captures the liquidity that is, in fact, available to us, net of the portion of liquidity that is related to our Floating Balance (and therefore attributable to clients). We calculate Adjusted Gross Financial Assets as the sum of (1) Cash and Financial Assets (comprised of Cash plus Securities – Fair value through profit or loss, plus Securities – Fair value through other comprehensive income, plus Securities – Evaluated at amortized cost, plus Derivative financial instruments, plus Securities (purchased under agreements to resell), plus Loans, less (2) Financial Liabilities (comprised of the sum of Securities loaned, Derivative financial instruments, Securities sold under repurchase agreements and Private pension liabilities), Deposits, Structured Operation Certificates (COE) and (3) less Floating Balance.

It is a measure that we track internally daily, and it more intuitively reflects the effect of the operational profits we generate and the variations between working capital assets and liabilities (cash flows from operating activities), investments in fixed and intangible assets (cash flows from investing activities) and inflows and outflows related to equity and debt securities in our capital structure (cash flows from financing activities).

Our management treats all securities and financial instrument assets, net of financial instrument liabilities, as balances that compose our total liquidity, with subline items (such as, for example, “securities at fair value through profit and loss” and “securities at fair value through other comprehensive income”) expected to fluctuate substantially from quarter to quarter as our treasury manages and allocates our total liquidity to the most suitable financial instruments.

Other Information

Web Meeting

The Company will host a webcast to discuss its 4Q20 financial results on Tuesday, February 23, 2021, at 5:00 pm ET (7:00 pm BRT). To participate in the earnings webcast please subscribe at 4Q20 Earnings Web Meeting. The replay will be available on XP’s investor relations website at https://investors.xpinc.com/.

Important Disclosure

IN REVIEWING THE INFORMATION CONTAINED IN THIS RELEASE, YOU ARE AGREEING TO ABIDE BY THE TERMS OF THIS DISCLAIMER. THIS INFORMATION IS BEING MADE AVAILABLE TO EACH RECIPIENT SOLELY FOR ITS INFORMATION AND IS SUBJECT TO AMENDMENT.

This release is prepared by XP Inc. (the “Company,” “we” or “our”), is solely for informational purposes. This release does not constitute a prospectus and does not constitute an offer to sell or the solicitation of an offer to buy any securities. In addition, this document and any materials distributed in connection with this release are not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would require any registration or licensing within such jurisdiction.

This release was prepared by the Company. Neither the Company nor any of its affiliates, officers, employees or agents, make any representation or warranty, express or implied, in relation to the fairness, reasonableness, adequacy, accuracy or completeness of the information, statements or opinions, whichever their source, contained in this release or any oral information provided in connection herewith, or any data it generates and accept no responsibility, obligation or liability (whether direct or indirect, in contract, tort or otherwise) in relation to any of such information. The information and opinions contained in this release are provided as at the date of this release, are subject to change without notice and do not purport to contain all information that may be required to evaluate the Company. The information in this release is in draft form and has not been independently verified. The Company and its affiliates, officers, employees and agents expressly disclaim any and all liability which may be based on this release and any errors therein or omissions therefrom. Neither the Company nor any of its affiliates, officers, employees or agents makes any representation or warranty, express or implied, as to the achievement or reasonableness of future projections, management targets, estimates, prospects or returns, if any.

The information contained in this release does not purport to be comprehensive and has not been subject to any independent audit or review. Certain of the financial information as of and for the periods ended December 31, 2019, 2018 and 2017 has been derived from audited financial statements and all other financial information has been derived from unaudited interim financial statements. A significant portion of the information contained in this release is based on estimates or expectations of the Company, and there can be no assurance that these estimates or expectations are or will prove to be accurate. The Company’s internal estimates have not been verified by an external expert, and the Company cannot guarantee that a third party using different methods to assemble, analyze or compute market information and data would obtain or generate the same results.

Statements in the release, including those regarding the possible or assumed future or other performance of the Company or its industry or other trend projections, constitute forward-looking statements. These statements are generally identified by the use of words such as “anticipate,” “believe,” “could,” “expect,” “should,” “plan,” “intend,” “estimate” and “potential,” among others. By their nature, forward-looking statements are necessarily subject to a high degree of uncertainty and involve known and unknown risks, uncertainties, assumptions and other factors because they relate to events and depend on circumstances that will occur in the future whether or not outside the control of the Company. Such factors may cause actual results, performance or developments to differ materially from those expressed or implied by such forward-looking statements and there can be no assurance that such forward-looking statements will prove to be correct. These risks and uncertainties include factors relating to: (1) general economic, financial, political, demographic and business conditions in Brazil, as well as any other countries we may serve in the future and their impact on our business; (2) fluctuations in interest, inflation and exchange rates in Brazil and any other countries we may serve in the future; (3) competition in the financial services industry; (4) our ability to implement our business strategy; (5) our ability to adapt to the rapid pace of technological changes in the financial services industry; (6) the reliability, performance, functionality and quality of our products and services and the investment performance of investment funds managed by third parties or by our asset managers; (7) the availability of government authorizations on terms and conditions and within periods acceptable to us; (8) our ability to continue attracting and retaining new appropriately-skilled employees; (9) our capitalization and level of indebtedness; (10) the interests of our controlling shareholders; (11) changes in government regulations applicable to the financial services industry in Brazil and elsewhere; (12) our ability to compete and conduct our business in the future; (13) the success of operating initiatives, including advertising and promotional efforts and new product, service and concept development by us and our competitors; (14) changes in consumer demands regarding financial products, customer experience related to investments and technological advances, and our ability to innovate to respond to such changes; (15) changes in labor, distribution and other operating costs; (16) our compliance with, and changes to, government laws, regulations and tax matters that currently apply to us; (17) other factors that may affect our financial condition, liquidity and results of operations. Accordingly, you should not place undue reliance on forward-looking statements. The forward-looking statements included herein speak only as at the date of this release and the Company does not undertake any obligation to update these forward-looking statements. Past performance does not guarantee or predict future performance. Moreover, the Company and its affiliates, officers, employees and agents do not undertake any obligation to review, update or confirm expectations or estimates or to release any revisions to any forward-looking statements to reflect events that occur or circumstances that arise in relation to the content of the release. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented and we do not intend to update any of these forward-looking statements.

Market data and industry information used throughout this release are based on management’s knowledge of the industry and the good faith estimates of management. The Company also relied, to the extent available, upon management’s review of industry surveys and publications and other publicly available information prepared by a number of third-party sources. All of the market data and industry information used in this release involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. Although the Company believes that these sources are reliable, there can be no assurance as to the accuracy or completeness of this information, and the Company has not independently verified this information.

The contents hereof should not be construed as investment, legal, tax or other advice and you should consult your own advisers as to legal, business, tax and other related matters concerning an investment in the Company. The Company is not acting on your behalf and does not regard you as a customer or a client. It will not be responsible to you for providing protections afforded to clients or for advising you on the relevant transaction.

This release includes our Floating Balance, Adjusted Gross Financial Assets, Adjusted EBITDA and Adjustments to Reported Net Income, which are non-GAAP financial information. We believe that such information is meaningful and useful in understanding the activities and business metrics of the Company’s operations. We also believe that these non-GAAP financial measures reflect an additional way of viewing aspects of the Company’s business that, when viewed with our International Financial Reporting Standards (“IFRS”) results, as issued by the International Accounting Standards Board, provide a more complete understanding of factors and trends affecting the Company’s business. Further, investors regularly rely on non-GAAP financial measures to assess operating performance and such measures may highlight trends in the Company’s business that may not otherwise be apparent when relying on financial measures calculated in accordance with IFRS. We also believe that certain non-GAAP financial measures are frequently used by securities analysts, investors and other interested parties in the evaluation of public companies in the Company’s industry, many of which present these measures when reporting their results. The non-GAAP financial information is presented for informational purposes and to enhance understanding of the IFRS financial statements. The non-GAAP measures should be considered in addition to results prepared in accordance with IFRS, but not as a substitute for, or superior to, IFRS results. As other companies may determine or calculate this non-GAAP financial information differently, the usefulness of these measures for comparative purposes is limited. A reconciliation of such non-GAAP financial measures to the nearest GAAP measure is included in this release.

For purposes of this release:

“Active Clients” means the total number of retail clients served through our XP Investimentos, Rico, Clear, XP Investments and XP Private (Europe) brands, with an AUC above R$100.00 or that have transacted at least once in the last thirty days. For purposes of calculating this metric, if a client holds an account in more than one of the aforementioned entities, such client will be counted as one “active client” for each such account. For example, if a client holds an account in each of XP Investimentos and Rico, such client will count as two “active clients” for purposes of this metric.

“Assets Under Custody (AUC)” means the market value of all client assets invested through XP’s platform and that is related to reported Retail Revenue, including equities, fixed income securities, mutual funds (including those managed by XP Gestão de Recursos Ltda., XP Advisory Gestão de Recursos Ltda. and XP Vista Asset Management Ltda., as well as by third-party asset managers), pension funds (including those from XP Vida e Previdência S.A., as well as by third-party insurance companies), exchange traded funds, COEs (Structured Notes), REITs, and uninvested cash balances (Floating Balances), among others. Although AUC includes custody from Corporate Clients that generate Retail Revenue, it does not include custody from institutional clients (asset managers, pension funds and insurance companies).

Rounding

We have made rounding adjustments to some of the figures included in this annual report. Accordingly, numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that preceded them.

Unaudited Managerial Income Statement (in R$ millions)

		4Q20		4Q19		YoY		3Q20		QoQ		FY20		FY19		YoY
Managerial Income Statement
Total Gross Revenue		2,570		1,823		41%		2,245		14%		8,711		5,518		58%
Retail		1,844		1,155		60%		1,698		9%		6,271		3,676		71%
Institutional		307		306		0%		239		28%		1,210		802		51%
Issuer Services		323		221		46%		169		91%		688		507		36%
Digital Content		25		30		-15%		32		-20%		130		112		16%
Other		71		111		-36%		107		-34%		413		420		-2%
Net Revenue		2,395		1,691		42%		2,101		14%		8,152		5,128		59%
COGS		(836)		(487)		72%		(706)		18%		(2,701)		(1,606)		68%
As a % of Net Revenue		(34.9%)		(28.8%)		-6.1 p.p		(33.6%)		-1.3 p.p		(33.1%)		(31.3%)		-1.8 p.p
Gross Profit		1,559		1,204		29%		1,395		12%		5,451		3,522		55%
Gross Margin		65.1%		71.2%		-6.1 p.p		66.4%		-1.3 p.p		66.9%		68.7%		-1.8 p.p
SG&A		(717)		(599)		20%		(669)		7%		(2,584)		(1,794)		44%
Share Based Compensation1		(136)		(8)		1714%		(44)		207%		(250)		(8)		3225%
EBITDA		705		598		18%		681		4%		2,616		1,720		52%
EBITDA Margin		29.4%		35.3%		-5.9 p.p		32.4%		-3.0 p.p		32.1%		33.5%		-1.4 p.p
Adjusted EBITDA		891		627		42%		727		23%		2,918		1,679		74%
Adjusted EBITDA Margin		37.2%		37.1%		0.1 p.p		34.6%		2.6 p.p		35.8%		32.7%		3.0 p.p
D&A		(37)		(29)		30%		(36)		3%		(143)		(92)		56%
EBIT		668		569		17%		645		4%		2,473		1,629		52%
Interest expense on debt		(6)		(22)		-71%		(12)		-46%		(53)		(84)		-38%
Share of profit or (loss) in joint ventures and associates		1		–		n.a.		(1)		n.a.		1		–		n.a.
EBT		663		547		21%		632		5%		2,421		1,544		57%
Income tax expense		(60)		(157)		-61%		(91)		-34%		(340)		(455)		-25%
Effective Tax Rate		(9.1%)		(28.7%)		19.5 p.p		(14.4%)		5.3 p.p		(14.0%)		(29.4%)		15.4 p.p
Net Income		602		390		54%		541		11%		2,081		1,089		91%
Net Margin		25.2%		23.1%		2.1 p.p		25.8%		-0.6 p.p		25.5%		21.2%		4.3 p.p
Non Recurring Items		118		27		343%		29		309%		189		(16)		-1305%
Adjusted Net Income		721		417		73%		570		26%		2,270		1,074		111%
Adjusted Net Margin		30.1%		24.6%		5.4 p.p		27.1%		2.9 p.p		27.8%		20.9%		6.91 p.p
¹ A portion of total Share-Based Compensation is related to IFAs and allocated in COGS

Accounting Income Statement (in R$ millions)

		4Q20		4Q19		YoY		3Q20		QoQ		FY20		FY19		YoY
Accounting Income Statement
Net revenue from services rendered		1,523		1,255		21%		1,278		19%		5,016		3,596		40%
Brokerage commission		545		352		55%		548		-1%		2,140		1,288		66%
Securities placement		508		462		10%		388		31%		1,430		1,155		24%
Management fees		415		444		-6%		274		51%		1,224		1,035		18%
Insurance brokerage fee		39		37		4%		18		118%		113		106		6%
Educational services		23		23		-1%		25		-11%		118		98		21%
Other services		143		63		129%		155		-8%		478		275		73%
Taxes and contributions on services		(148)		(125)		18%		(131)		13%		(486)		(362)		34%
Net income from financial instruments at amortized cost and at fair value through other comprehensive income		(115)		(4)		n.a.		190		n.a.		188		200		-6%
Net income from financial instruments at fair value through profit or loss		987		441		124%		633		56%		2,947		1,332		121%
Total revenue and income		2,395		1,691		42%		2,101		14%		8,152		5,128		59%
Expected credit losses		(17)		(3)		463%		(10)		82%		(56)		(9)		490%
Operating costs		(819)		(484)		69%		(696)		18%		(2,645)		(1,597)		66%
Selling expenses		(41)		(73)		-44%		(38)		6%		(135)		(155)		-13%
Administrative expenses		(936)		(597)		57%		(810)		16%		(3,014)		(1,891)		59%
Other operating revenues (expenses), net		86		35		146%		98		-12%		171		153		12%
Interest expense on debt		(6)		(22)		-71%		(12)		-46%		(53)		(84)		-38%
Share of profit or (loss) in joint ventures and associates		1		–		n.a.		(1)		n.a.		1		–		n.a.
Income before income tax		663		547		21%		632		5%		2,421		1,544		57%
Income tax expense		(60)		(157)		-61%		(91)		-34%		(340)		(455)		-25%
Effective tax rate		(9.1%)		(28.7%)		19.6 p.p		(14.4%)		5.3 p.p		(14.0%)		(29.4%)		15.4 p.p
Net income for the period		602		390		54%		541		11%		2,081		1,089		91%

Balance Sheet (in R$ millions)

		2020		2019
Assets
Cash		1,955		110
Financial assets		90,191		41,889
Fair value through profit or loss		57,149		26,528
Securities		49,590		22,443
Derivative financial instruments		7,559		4,085
Fair value through other comprehensive income		19,039		2,616
Securities		19,039		2,616
Evaluated at amortized cost		14,002		12,744
Securities		1,829		2,267
Securities purchased under agreements to resell		6,627		9,490
Securities trading and intermediation		1,052		505
Accounts receivable		506		462
Loan Operations		3,918		0
Other financial assets		70		20
Other assets		1,761		644
Recoverable taxes		128		243
Rights-of-use assets		183		227
Prepaid expenses		1,394		90
Other		57		83
Deferred tax assets		505		285
Investments in associates and joint ventures		700		–
Property and equipment		204		142
Intangible assets		714		553
Total Assets		96,029		43,623
		2020		2019
Liabilities
Financial liabilities		70,601		31,842
Fair value through profit or loss		10,057		5,251
Securities		2,237		2,022
Derivative financial instruments		7,819		3,229
Evaluated at amortized cost		60,544		26,591
Securities sold under repurchase agreements		31,839		15,638
Securities trading and intermediation		20,303		9,115
Deposits		3,022		70
Structured operations certificates		2,178		19
Accounts payables		860		267
Borrowings and lease liabilities		493		637
Debentures		335		835
Other financial liabilities		1,514		9
Other liabilities		14,522		4,620
Social and statutory obligations		667		493
Taxes and social security obligations		436		345
Private pension liabilities		13,388		3,759
Provisions and contingent liabilities		20		15
Other		11		7
Deferred tax liabilities		8		5
Total Liabilities		85,132		36,467
Equity attributable to owners of the Parent company		10,895		7,153
Issued capital		0		0
Capital reserve		10,664		6,943
Other comprehensive income		231		210
Retained earnings		–		–
Non-controlling interest		3		3
Total equity		10,898		7,156
Total liabilities and equity		96,029		43,623

Adjusted EBITDA (in R$ millions)

		4Q20		4Q19		YoY		3Q20		QoQ		FY20		FY19		YoY
EBITDA		705		598		18%		681		4%		2,616		1,720		52%
(+) Stock Based Compensation		180		8		n.a.		44		305%		293		8		n.a.
(+) Offering expenses		6		22		-73%		2		216%		8		22		-65%
(-) Tax claim recognition (2010-2020)		–		–		n.a.		–		n.a.		–		(71)		-100%
Adj. EBITDA		891		627		42%		727		23%		2,918		1,679		74%

Adjusted Net Income (in R$ millions)

		4Q20		4Q19		YoY		3Q20		QoQ		FY20		FY19		YoY
Net Income		602		390		54%		541		11%		2,081		1,089		91%
(+) Stock Based Compensation		180		8		n.a.		44		305%		293		8		n.a.
(+) Offering expenses		6		22		-73%		2		216%		8		22		-65%
(-) Tax claim recognition (2010-2020)		–		–		n.a.		–		n.a.		–		(71)		-100%
(+/-) Taxes		(68)		(3)		n.a.		(18)		283%		(113)		25		n.a.
Adj. Net Income		721		417		73%		570		26%		2,270		1,074		111%

 

View source version on businesswire.com: https://www.businesswire.com/news/home/20210223006055/en/

Investor Relations Team

André Martins

Antonio Guimarães

Natali Pimenta

[email protected]

KEYWORDS: South America Brazil

INDUSTRY KEYWORDS: Software Technology Professional Services Finance

MEDIA:

Posted on February 23, 2021 4:09 pm

Upwork Reports Fourth Quarter and Full Year 2020 Financial Results

• Fourth quarter 2020 revenue grew 32% year-over-year to $106.2 million
  • Marketplace revenue grew 34% to $96.9 million
• Full year 2020 revenue grew 24% year-over-year to $373.6 million
  • Marketplace revenue grew 26% to $338.2 million
• Gross margin expanded two percentage points year-over-year to 73% in the fourth quarter and one percentage point to 72% for full year 2020

SANTA CLARA, Calif., Feb. 23, 2021 (GLOBE NEWSWIRE) — Upwork Inc. (Nasdaq: UPWK), the world’s largest work marketplace that connects businesses with independent talent, as measured by gross services volume (“GSV”), today announced its fourth quarter and full year 2020 financial results.

“2020 was a watershed year for Upwork. In the fourth quarter, we achieved our highest year-over-year growth since going public,” said Hayden Brown, President and Chief Executive Officer of Upwork. “Nearly a year into the pandemic, organizations are embracing remote work to unleash the potential of a global workforce of independent talent that gives them the agility, skills and efficiency they need. Our results demonstrate that we are optimally positioned to capture the exciting opportunity ahead by serving customers as the world’s work marketplace.”

Fourth Quarter 2020 Financial Results

• GSV increased by 33% year-over-year to $727.7 million
• Revenue grew 32% year-over-year to $106.2 million
• Marketplace revenue grew 34% year-over-year to $96.9 million
• Marketplace take rate was 13.5%, up from 13.3% a year ago
• Gross margin expanded two percentage points year-over-year to 73%
• Net income was $0.9 million, or $0.01 per share, compared to a net loss of $5.5 million, or $(0.05) per share, in the fourth quarter of 2019
• Non-GAAP net income was $7.8 million, or $0.06 per share, compared to non-GAAP net income of $3.4 million, or $0.03 per share, in the fourth quarter of 2019
• Adjusted EBITDA, a non-GAAP financial measure, was $9.6 million compared to $3.5 million in the fourth quarter of 2019

Full Year 2020 Financial Results

• GSV increased by 21% year-over-year to $2.5 billion
• Revenue grew 24% to $373.6 million
• Marketplace revenue grew 26% to $338.2 million
• Marketplace take rate was 13.6%, up from 13.1% a year ago
• Gross margin expanded one percentage point year-over-year to 72%
• Net loss was $22.9 million, or $(0.19) per share, compared to a net loss of $16.7 million, or $(0.15) per share, in the prior year
• Non-GAAP net income was $6.1 million, or $0.05 per share, compared to non-GAAP net income of $5.5 million, or $0.05 per share, for full year 2019
• Adjusted EBITDA was $14.0 million compared to $7.4 million in the prior year

Note: Reported figures are rounded; unless otherwise noted, comparisons of the fourth quarter of 2020 are to the fourth quarter of 2019 and comparisons for the full year 2020 are to the full year 2019. All financial measures are GAAP unless cited as non-GAAP. Certain operating metrics used here, including “GSV” and “marketplace take rate,” are defined in our most recently filed Quarterly Report on Form 10-Q and will also be set forth in our Annual Report on Form 10-K for the year ended December 31, 2020 when filed.

A reconciliation of GAAP to non-GAAP financial measures has been provided at the end of this press release. An explanation of these measures is also included below under the heading “Non-GAAP Financial Measures.”

Guidance

The guidance we are providing today factors in the expected impacts of the COVID-19 pandemic that are available to us as of today.

As of February 23, 2021, Upwork is providing the following guidance for its first quarter and full year 2021:

For the first quarter of 2021, Upwork expects to report:

• Revenue in the range of $107 million to $109 million
• Adjusted EBITDA in the range of $2 million to $3 million
• Weighted average shares outstanding in the range of 126 million to 128 million

For the full year 2021, Upwork expects to report:

• Revenue in the range of $460 million to $470 million
• Adjusted EBITDA in the range of $12 million to $16 million
• Weighted average shares outstanding in the range of 130 million to 134 million

Fourth Quarter and Full Year 2020 Financial Results Conference Call and Webcast

Upwork will host a conference call today at 2 p.m. Pacific Time/5 p.m. Eastern Time to discuss the company’s fourth quarter and full year 2020 financial results. An audio webcast archive will be available following the live event for approximately one year at investors.upwork.com. The prepared remarks corresponding to the information reviewed on today’s conference call will also be available on our Investor Relations website, once the call has concluded.

We use our investor relations website (investors.upwork.com), our Twitter handle (twitter.com/Upwork) and Hayden Brown’s Twitter handle (twitter.com/hydnbrwn) and LinkedIn profile (linkedin.com/in/haydenlbrown) as a means of disseminating or providing notification of, among other things, news or announcements regarding our business or financial performance, investor events, press releases and earnings releases and as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. The content of our websites and information that we may post on or provide to online and social media channels, including those mentioned above, and information that can be accessed through our websites or these online and social media channels are not incorporated by reference into this press release or in any report or document we file with the SEC, and any references to our websites or these online and social media channels are intended to be inactive textual references only.

Safe Harbor Statement

This press release includes forward-looking statements, which are statements other than statements of historical facts, and statements in the future tense. These statements include, but are not limited to, statements regarding the future performance of Upwork and its market opportunity, including expected financial results for the first quarter and full year of 2021, expectations regarding the impact of the COVID-19 pandemic on our business and industry, and expectations for capturing market share and regarding the changing landscape of work, as well as statements regarding our planned investments to support growth. Accordingly, actual results could differ materially or such uncertainties could cause adverse effects on our results. Forward-looking statements are based upon various estimates and assumptions, as well as information known to Upwork as of the date of this press release, and are subject to risks and uncertainties, including but not limited to: the impact and duration of the COVID-19 pandemic on our business and global economic conditions; the impact, severity and duration of safety measures put in place to mitigate the impact of the COVID-19 pandemic; our ability to attract and retain a community of freelancers and clients; our limited operating history under our current business strategy and pricing model; our focus on the long-term and our investments in sustainable, profitable growth; our ability to develop and release new products and services, and develop and release successful enhancements, features, and modifications to our existing products and services; the impact of new and existing laws and regulations; our ability to generate revenue from our marketplace offerings and the effects of fluctuations in our level of client spend retention; our ability to develop, maintain, and enhance our brand and reputation cost-effectively; competition; challenges to contractor classification or employment status of freelancers on our work marketplace; the possibility that the market for freelancers and the services they offer will develop more slowly than we expect; user circumvention of our work marketplace; our ability to sell to large enterprise, global account, and mid-market clients; the success of our investments in our enterprise sales organization and our related marketing efforts, and expectations for the ability for enterprise sales to drive incremental revenue and GSV growth; changes in the amount and mix of services facilitated through our work marketplace from period to period; changes in our level of investment in sales and marketing, research and development, and general and administrative expenses, and our hiring plans for sales personnel; the market for information technology; future changes to our pricing model; payment and fraud risks; security breaches; privacy; litigation and related costs; changes in management; and other general market, political, economic, and business conditions. Actual results could differ materially from those predicted or implied, and reported results should not be considered as an indication of future performance. Additionally, these forward-looking statements, particularly our guidance, involve risks, uncertainties and assumptions, including those related to the impacts of the COVID-19 pandemic on our clients’ spending decisions. Significant variation from the assumptions underlying our forward-looking statements could cause our actual results to vary, and the impact could be significant.

Additional risks and uncertainties that could affect our financial results are included under the caption “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our most recent Annual Report on Form 10-K and subsequent quarterly reports on Form 10-Q, which are available on the Investor Relations page of our website at investors.upwork.com and on the SEC website at www.sec.gov. Additional information will also be set forth in our Annual Report on Form 10-K for the year ended December 31, 2020 when filed. All forward-looking statements contained herein are based on information available to us as of the date hereof, and we do not assume any obligation to update these statements as a result of new information or future events.

Undue reliance should not be placed on the forward-looking statements in this press release. These statements are based on information available to Upwork on the date hereof, and Upwork assumes no obligation to update such statements.

Non-GAAP Financial Measures

To supplement our condensed consolidated financial statements, which are prepared in accordance with GAAP, we present non-GAAP cost of revenue (and as a percentage of revenue), non-GAAP gross profit (and as a percentage of revenue), non-GAAP operating expenses (total and each line item, and total and each non-GAAP operating expense item as a percentage of revenue), non-GAAP income (loss) from operations (and as a percentage of revenue), non-GAAP net income (loss) (and as a percentage of revenue and on a per share basis), and adjusted EBITDA in this press release. Our use of non-GAAP financial measures has limitations as an analytical tool, and these measures should not be considered in isolation or as a substitute for analysis of financial results as reported under GAAP.

We use these non-GAAP financial measures in conjunction with financial measures prepared in accordance with GAAP for planning purposes, including in the preparation of our annual operating budget, as a measure of our core operating results and the effectiveness of our business strategy, and in evaluating our financial performance. These measures provide consistency and comparability with past financial performance, facilitate period-to-period comparisons of core operating results, and also facilitate comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP results. In addition, adjusted EBITDA is widely used by investors and securities analysts to measure a company’s operating performance. We exclude the following items from one or more of our non-GAAP financial measures: stock-based compensation expense (non-cash expense calculated by companies using a variety of valuation methodologies and subjective assumptions), depreciation and amortization (non-cash expense), interest expense, other (income) expense, net, income tax (benefit) provision, and, if applicable, other non-cash transactions.

Investors are cautioned that there are material limitations associated with the use of non-GAAP financial measures as an analytical tool. In particular, (1) stock-based compensation expense has recently been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy, (2) although depreciation and amortization expense are non-cash charges, the assets subject to depreciation and amortization may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements, and (3) adjusted EBITDA does not reflect: (a) changes in, or cash requirements for, our working capital needs; (b) interest expense, or the cash requirements necessary to service interest or principal payments on our debt, which reduces cash available to us; (c) tax payments that may represent a reduction in cash available to us; or (d) expense from our common stock warrant issued to the Tides Foundation, which is recurring and will be reflected in our financial results for the foreseeable future. The non-GAAP measures we use may be different from non-GAAP financial measures used by other companies, limiting their usefulness for comparison purposes. We compensate for these limitations by providing specific information regarding the GAAP items excluded from these non-GAAP financial measures. A reconciliation of these non-GAAP measures has been provided in the financial statement tables included in this press release and investors are encouraged to review the reconciliation.

About Upwork

Upwork is the world’s largest work marketplace that connects businesses with independent talent, as measured by GSV. We serve everyone from one-person startups to 30% of the Fortune 100 with a powerful, trust-driven platform that enables companies and freelancers to work together in new ways that unlock their potential. Our talent community earned over $2.3 billion on Upwork in 2020 across more than 10,000 skills, including website & app development, creative & design, customer support, finance & accounting, consulting, and operations. Learn more at www.upwork.com and join us on LinkedIn, Twitter, and Facebook.

Upwork is a registered trademark of Upwork Inc. All other product and brand names may be trademarks or registered trademarks of their respective owners.

UPWORK INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except for per share data)

(Unaudited)

	Three Months Ended  December 31,										Twelve Months Ended  December 31,
	2020					2019					2020					2019
Revenue
Marketplace	$	96,866				$	72,189				$	338,152				$	268,284
Managed services	9,287					8,099					35,476					32,278
Total revenue	106,153					80,288					373,628					300,562
Cost of revenue	28,778					22,937					104,267					88,144
Gross profit	77,375					57,351					269,361					212,418
Operating expenses
Research and development	22,743					16,322					83,471					64,027
Sales and marketing	34,530					25,572					133,225					95,891
General and administrative	18,545					21,134					71,518					67,327
Provision for transaction losses	901					1,199					3,555					3,905
Total operating expenses	76,719					64,227					291,769					231,150
Income (loss) from operations	656					(6,876		)			(22,408		)			(18,732		)
Interest expense	138					259					778					1,306
Other income, net	(500		)			(1,634		)			(469		)			(3,407		)
Income (loss) before income taxes	1,018					(5,501		)			(22,717		)			(16,631		)
Income tax provision	(93		)			—					(150		)			(28		)
Net income (loss)	$	925				$	(5,501	)			$	(22,867	)			$	(16,659	)
Net income (loss) per share, basic and diluted	$	0.01				$	(0.05	)			$	(0.19	)			$	(0.15	)
Weighted-average shares used to compute net income (loss) per share, basic and diluted	123,398					112,690					118,699					109,815

UPWORK INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

	As of December 31,
	2020					2019
ASSETS
Current assets:
Cash and cash equivalents	$	94,081				$	48,392
Marketable securities	75,570					85,481
Funds held in escrow, including funds in transit	135,042					108,721
Trade and client receivables, net	47,018					30,156
Prepaid expenses and other current assets	9,090					7,885
Total current assets	360,801					280,635
Property and equipment, net	28,139					21,454
Goodwill	118,219					118,219
Intangible assets, net	667					3,335
Operating lease asset	19,729					21,908
Other assets, noncurrent	1,672					829
Total assets	$	529,227				$	446,380
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	6,455				$	652
Escrow funds payable	135,042					108,721
Debt, current	7,581					7,584
Accrued expenses and other current liabilities	32,868					18,342
Deferred revenue	16,801					13,799
Total current liabilities	198,747					149,098
Debt, noncurrent	3,142					10,699
Operating lease liability, noncurrent	20,506					21,186
Other liabilities, noncurrent	7,522					5,973
Total liabilities	229,917					186,956
Stockholders’ equity:
Common stock	12					11
Additional paid-in capital	494,122					431,370
Accumulated deficit	(194,824		)			(171,957		)
Total stockholders’ equity	299,310					259,424
Total liabilities and stockholders’ equity	$	529,227				$	446,380

UPWORK INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three Months Ended  December 31,										Twelve Months Ended  December 31,
	2020					2019					2020					2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	925				$	(5,501	)			$	(22,867	)			$	(16,659	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Provision for transaction losses	265					1,040					2,919					3,118
Depreciation and amortization	2,728					2,163					10,172					6,661
Amortization of debt issuance costs	18					13					61					52
Amortization of discount on purchases of marketable securities	(9		)			(210		)			(320		)			(1,158		)
Amortization of operating lease asset	933					886					3,860					3,945
Tides Foundation common stock warrant expense	186					272					750					711
Stock-based compensation expense	5,981					7,940					25,508					18,798
Loss on disposal of fixed assets	44					14					44					14
Changes in operating assets and liabilities:
Trade and client receivables	(7,510		)			(3,815		)			(20,000		)			(10,918		)
Prepaid expenses and other assets	(914		)			(662		)			(1,198		)			(2,069		)
Operating lease liability	(431		)			(473		)			(1,851		)			(1,453		)
Accounts payable	735					(2,154		)			5,822					(1,457		)
Accrued expenses and other liabilities	4,990					(4,016		)			15,438					(2,957		)
Deferred revenue	1,012					3,560					4,027					4,430
Net cash provided by (used in) operating activities	8,953					(943		)			22,365					1,058
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities	(37,066		)			(36,836		)			(107,281		)			(168,786		)
Proceeds from maturities of marketable securities	28,500					12,000					117,500					84,500
Purchases of property and equipment	(110		)			(522		)			(6,320		)			(10,752		)
Internal-use software and platform development costs	(2,478		)			(1,832		)			(8,045		)			(5,886		)
Net cash used in investing activities	(11,154		)			(27,190		)			(4,146		)			(100,924		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in escrow funds payable	6,912					(5,872		)			26,321					10,535
Proceeds from exercises of stock options and common stock warrant	7,685					4,181					31,028					18,155
Proceeds from borrowings on debt	—					—					18,000					50,000
Repayment of debt	(1,892		)			(1,893		)			(25,621		)			(55,679		)
Proceeds from employee stock purchase plan	2,252					2,814					4,913					6,391
Net cash provided by (used in) financing activities	14,957					(770		)			54,641					29,402
NET CHANGE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH	12,756					(28,903		)			72,860					(70,464		)
Cash, cash equivalents, and restricted cash—beginning of period	219,707					188,506					159,603					230,067
Cash, cash equivalents, and restricted cash—end of period	$	232,463				$	159,603				$	232,463				$	159,603

The below table reconciles cash, cash equivalents, and restricted cash as reported in the condensed consolidated balance sheets to the total of the same amounts shown in the condensed consolidated statements of cash flows as of December 31, 2020 and 2019 (in thousands):

	As of December 31,
	2020				2019
Cash and cash equivalents	$	94,081			$	48,392
Restricted cash	3,340				2,490
Funds held in escrow, including funds in transit	135,042				108,721
Total cash, cash equivalents, and restricted cash as shown in the consolidated statement of cash flows	$	232,463			$	159,603

UPWORK INC.

COST OF REVENUE AND GROSS MARGIN

(In thousands)

(Unaudited)

	Three Months Ended December 31,														Twelve Months Ended December 31,
	2020				2019				Change						2020				2019				Change
Cost of revenue	$	28,778			$	22,937			$	5,841		25	%		$	104,267			$	88,144			$	16,123		18	%
Components of cost of revenue:
Costs of freelancer services to deliver managed services	7,377				6,620				757			11	%		28,703				26,763				1,940			7	%
Other components of cost of revenue	21,401				16,317				5,084			31	%		75,564				61,381				14,183			23	%
Total gross margin	73		%		71		%								72		%		71		%

UPWORK INC.

RECONCILIATION OF GAAP TO NON-GAAP RESULTS

(In thousands, except for per share data)

(Unaudited)

	Three Months Ended  December 31,										Twelve Months Ended  December 31,
	2020					2019					2020					2019
GAAP Net Income (Loss)	$	925				$	(5,501	)			$	(22,867	)			$	(16,659	)
Add back (deduct):
Stock-based compensation	5,981					7,940					25,508					18,798
Depreciation and amortization	2,728					2,163					10,172					6,661
Interest expense	138					259					778					1,306
Other income, net	(500		)			(1,634		)			(469		)			(3,407		)
Provision for income tax	93					—					150					28
Tides Foundation common stock warrant expense	186					272					750					711
Non-GAAP Adjusted EBITDA	$	9,551				$	3,499				$	14,022				$	7,438
Cost of Revenue Reconciliation:
Cost of revenue, GAAP	$	28,778				$	22,937				$	104,267				$	88,144
Stock-based compensation	(200		)			(130		)			(779		)			(456		)
Cost of revenue, Non-GAAP	$	28,578				$	22,807				$	103,488				$	87,688
% of revenue, GAAP	27			%		29			%		28			%		29			%
% of revenue, Non-GAAP	27			%		28			%		28			%		29			%
Gross Profit Reconciliation:
Gross profit, GAAP	$	77,375				$	57,351				$	269,361				$	212,418
Stock-based compensation	200					130					779					456
Gross profit, Non-GAAP	$	77,575				$	57,481				$	270,140				$	212,874
% of revenue, GAAP	73			%		71			%		72			%		71			%
% of revenue, Non-GAAP	73			%		72			%		72			%		71			%
Operating Expenses Reconciliation:
Research and development, GAAP	$	22,743				$	16,322				$	83,471				$	64,027
Stock-based compensation	(2,497		)			(1,902		)			(9,783		)			(6,471		)
Research and development, Non-GAAP	$	20,246				$	14,420				$	73,688				$	57,556
% of revenue, GAAP	21			%		20			%		22			%		21			%
% of revenue, Non-GAAP	19			%		18			%		20			%		19			%
Sales and marketing, GAAP	$	34,530				$	25,572				$	133,225				$	95,891
Stock-based compensation	(988		)			(749		)			(4,440		)			(2,609		)
Sales and marketing, Non-GAAP	$	33,542				$	24,823				$	128,785				$	93,282
% of revenue, GAAP	33			%		32			%		36			%		32			%
% of revenue, Non-GAAP	32			%		31			%		34			%		31			%
General and administrative, GAAP	$	18,545				$	21,134				$	71,518				$	67,327
Stock-based compensation	(2,296		)			(5,159		)			(10,506		)			(9,262		)
Amortization of intangible assets	(667		)			(667		)			(2,668		)			(2,668		)
Tides Foundation common stock warrant expense	(186		)			(272		)			(750		)			(711		)
General and administrative, Non-GAAP	$	15,396				$	15,036				$	57,594				$	54,686
% of revenue, GAAP	17			%		26			%		19			%		22			%
% of revenue, Non-GAAP	15			%		19			%		15			%		18			%
Income (Loss) from Operations Reconciliation:
Income (loss) from operations, GAAP	$	656				$	(6,876	)			$	(22,408	)			$	(18,732	)
Stock-based compensation	5,981					7,940					25,508					18,798
Amortization of intangible assets	667					667					2,668					2,668
Tides Foundation common stock warrant expense	186					272					750					711
Income from operations, Non-GAAP	$	7,490				$	2,003				$	6,518				$	3,445
% of revenue, GAAP	1			%		-9			%		-6			%		-6			%
% of revenue, Non-GAAP	7			%		2			%		2			%		1			%
Net Income (Loss) Reconciliation:
Net income (loss), GAAP	$	925				$	(5,501	)			$	(22,867	)			$	(16,659	)
Stock-based compensation	5,981					7,940					25,508					18,798
Amortization of intangible assets	667					667					2,668					2,668
Tides Foundation common stock warrant expense	186					272					750					711
Net income, Non-GAAP	$	7,759				$	3,378				$	6,059				$	5,518
% of revenue, GAAP	1			%		-7			%		-6			%		-6			%
% of revenue, Non-GAAP	7			%		4			%		2			%		2			%
Net Income (Loss) per Share Reconciliation:
Weighted-average shares outstanding	123,398					112,690					118,699					109,815
Net income (loss) per share, GAAP	$	0.01				$	(0.05	)			$	(0.19	)			$	(0.15	)
Net income per share, Non-GAAP	$	0.06				$	0.03				$	0.05				$	0.05

Contact:

Investor Relations
[email protected]