UPWK - Upwork

[cameronfen]

Anyone looking at Upwork?  The are a market leader in a growing industry where people who need tasks done (mostly things like writing code or graphic design) can hire people to complete these tasks.  It's a two sided markerplace and IMO the correct way to measure (not yet profitble) marketplaces are through gross profit multiples (because the two ways of gerenating revenue is through counting the entire sale of product as revenue a la much of amazon's ecommerce or just the fee that a company makes).  Trades at a relatively reasonable 7.5x EV/Gross Profit, 5.5x Q3 anualized.  Traded down because they only guided to 18% YoY growth for Q4.  A company like Ebay is trading at 4.25x EV/ttm GP and is growing at 4 % a year is profitable and large but not the market leader and not taking share.  They have a long runway for growth as they are the market leader and the whole gig economy thing is how the labor force is trending. There was a VIC writeup about this too, but couldn't find it. 

[Spekulatius]

After reading up on this a bit and going through the CC, my own impression is the near term results very likely  will look quite negative with costs outrunning the revenue gains.

For example, they want to increase their sales force from 65 to 90 people in a short period of time (Q4), which is a ~40% increase roughly. I don’t think their revenue growth will ramp like that, especially since they move some of their best sales people on to management positions, which raises some flags on its own.

 

They talk about strong unit economics, but with most companies equate means contribution margin = profit in their metrics (apparently ) , even though it really misses out on a lot of costs.

 

Anyways, I see some attractiveness in their business model, but I would tend to wait how the big sales push works out, my guess is that it won’t look great for the next 6 month at least, but I could well be wrong.

 

Last not least, If we get a downturn, I expect their business to get hit very hard, - third party contracting is one of the first things to get scaled back.

 

 

[Broeb22]

I saw someone's analysis (probably Stratechery) that resonated with me talking about why Uber and Lyft's model may not be as profitable as some think. I forget the buzzword they used, but basically because the network effects do not work towards infinity (there are only a certain amount of drivers that can be on the platform until it becomes uneconomical) and because most drivers are not exclusive to one service, Uber and Lyft could be in a long-term back and forth struggle for drivers and riders.

 

Ultimately, I think rational pricing will prevail so some profit can be earned but who knows how long that takes?

 

I guess I would draw some parallels between that model of the Uber-Lyft model and Upwork, Fiverr, and the dozens of other services that contract out labor.

[cameronfen]

After reading up on this a bit and going through the CC, my own impression is the near term results very likely  will look quite negative with costs outrunning the revenue gains.

For example, they want to increase their sales force from 65 to 90 people in a short period of time (Q4), which is a ~40% increase roughly. I don’t think their revenue growth will ramp like that, especially since they move some of their best sales people on to management positions, which raises some flags on its own.

 

They talk about strong unit economics, but with most companies equate means contribution margin = profit in their metrics (apparently ) , even though it really misses out on a lot of costs.

 

Anyways, I see some attractiveness in their business model, but I would tend to wait how the big sales push works out, my guess is that it won’t look great for the next 6 month at least, but I could well be wrong.

 

Last not least, If we get a downturn, I expect their business to get hit very hard, - third party contracting is one of the first things to get scaled back.

 

I appreciate the response and will think about your points.  Just out of curiosity why is moving salespeople to management positions a red flag if you are expanding a sales force? 

 

I can talk a bit about other points.  I don’t know if you used upwork or a competitor, but the target employee and the target hiring firm is much different than say a Robert Half, it’s more like an Uber for gig jobs (although the company is trying to transition away).  Typically it’s a small business with a couple people that needs someone to do something that’s pretty mission critical, like they want an online presence and need someone to design a website.  I don’t know the exact numbers but I bet (and saw somewhere something like this)  programming and graphic design (which is majority focused on web design) is at least 60% of revenue share.  This is also the low cost operator if you need to some programming done but can’t find enough work for a full time employee.  A better comparison imo is to infosys or wipro than a Robert Half as a majority revenue comes from workers who are programmers that live in developing countries.  It’s ability to withstand a recession was also documented in this press release in 2010 (which is as far back as I could find: https://www.upwork.com/press/2010/12/08/elance-2010-year-in-review-offers-online-employment-trends-and-glimpses-at-future-of-work/

 

As far as profitability, I agree that management targets overly optimistic metrics that don’t reflect the true value of the business, but that is not different then 95% of SaaS companies.  As far as profitability is concerned, upwork charges the lowest fees in order to take the largest share of the market which is what you want at this point.  While fiver is growing faster, upwork increase in revenue YoY is greater than fiverr, but growth rate is slower because it has a much larger base.  At this point Upwork has negative churn, and so expanding the sales force is what you want to be doing in this case, although it might cause short term pain.  The company has 100+m cash which is enough to cover its losses for the foreseeable future.  As far as profitability is concerned, other companies have higher take rates suggesting room to raise prices.  Additionally about 70% of opex is R&D and Sales/Marketing and the company scales that up with gross profit suggesting that not only is the company investing for the future, but can also reduce these expenses to achieve profitability when necessary.

[cameronfen]

I saw someone's analysis (probably Stratechery) that resonated with me talking about why Uber and Lyft's model may not be as profitable as some think. I forget the buzzword they used, but basically because the network effects do not work towards infinity (there are only a certain amount of drivers that can be on the platform until it becomes uneconomical) and because most drivers are not exclusive to one service, Uber and Lyft could be in a long-term back and forth struggle for drivers and riders.

 

Ultimately, I think rational pricing will prevail so some profit can be earned but who knows how long that takes?

 

I guess I would draw some parallels between that model of the Uber-Lyft model and Upwork, Fiverr, and the dozens of other services that contract out labor.

 

Yes I read that too.  Asymptotic network effects.  Don’t remember where.  Certainly applies here but the asymptote is much higher.  In Uber’s case everyone wants the same thing: a taxi.  Thus it really doesn’t matter if my there are 10 cars around or 5.  However in a market place model though it is far less likely that there are people that exactly fulfill the requirements I have: ie I might want a tensorflow developer with expertise in chat bots that charges less the 20 an hour and you might want a graphic designer who has experience with Wordpress and photoshop.  In this case there are benefits until every kind of “taxi cab” approaches the asymptote, not just the one. 

[cameronfen]

Thinking about the negatives that the two of you suggested.  Here are issues that y’all brought up, in a way that makes sense to me. 

 

1. Problems with the network effect: while I think Uber has both local network effects (I only care about more drivers near where so live) and local asymptotic benefits, upwork has global network effects and local (in the sense of job type) asymptotic benefits, which means that local entrants can’t really succeed unless they have some advantage in some very specific job type.  This could be something like making all programmers on your site take a coding test which some firms do.  Global entrants probably can’t succeed at all.  However, there are other players at scale like Fiverr, before Upwork could be large enough to deter general competitor entrants and nothing stops both freelancers and companies to advertise on both sites. I think this is a problem, but I do think the inherent network effects are better than Uber, but clearly not as good as Facebook (but even that now has some issues).  The two sided market angle is not something to bet the farm on.  It’s a nice advantage that deters entrants in some specific ways.

 

2. Competing against incumbents: I think the big problem with Uber was it was competing against incumbent taxi companies that weren’t earning much money to begin with and Uber didn’t have a huge cost or other advantage especially when the price of medallions collapsed.  This doesn’t effect Upwork’s current business model, but one reason they are increasing sales force is that they are trying to compete with enterprises which have a huge industry devoted to temp workers staffing.  While they may be able to offer something slightly different than Wipro or Infosys (more ad-hoc, more breath, maybe cheaper) this strikes me as management betting a lot on something that is not so easy money.  Honestly they have the metrics that obviously I don’t see, and since this is land grab phase and the company is likely decently profitable when they exit growth phase, I’m happy to see management go after this opportunity..  It could fail, but the TAM is large and they have a unique angle to bring to the table.  Is it maybe an idea that was concocted to reaccelerate lagging growth?  Maybe, but it’s a not terrible idea. 

[Spekulatius]

My impression after the reading the CC transcript is that this is a business that’s growing ~20% annually, while the expenses are likely to grow ~40% near term (due to the 40% increase in sales force). That’s not a winning recipe for a good stock performance in the near term and it is the likely why the stock has sold off.

 

Moving senior salespeople to management means  that these sales people won’t contribute to the bottom line near term, possibly aggravate the problem above. Obviously, the company feels they need to do this, maybe to retain talent or to develop the organization or a combination there off, however it sound to me that the concerns they some analysts have been expressing are well founded.

 

Based on above, I feel that the stock has a substantial risk of showing worse metrics in the next 6 month and possibly longer and while the stock price may reflect that, I think there a high chance that we see substantial downside.

 

Obviously, if you believe they the current plan makes sense then this is a great opportunity to get into a very reasonable valued SAAS business. I am skeptical and see a lot of SAAS companies putting their foot on the gas pedal in terms of expenses and if revenues don’t follow the expenses in short order, we will see a lot of flameouts in this sector.

[cameronfen]

^ to tell you the truth I’m not I’m not so hot on managements expansion into enterprise as mentioned above.  However if this thing can compound revenue at 15% for the foreseeable future which it has a decent shot of doing a short term hiccup will not be too bad.  I also don’t think the average investor who holds Upwork cares about somewhat higher losses if revenue growth follows, but some of those investors did leave after the reduced guidance. 

 

On the other hand after this reminded me of care.com I think likely that is the better investment (but still in dillegence phase) and I don’t want to carry a large exposure to both as they are basically the same investment strategy.  I wasn’t aware of failed expansion track record of SaaS companies and this feels like management reaching for growth.  Core business has been slowing down despite the large TAM.  The question is will it slow more than the current high trend/lower 20% growth.  I think the answer probably should be viewed in the affirmative in expectation based on the attempt to reach for growth.  I think based on your suggestion of near term factors it might be wise to hold off until I get more visibility while I hopefully scale into care.com as diligence is completed.  Thanks for the pushback that sharpened my thinking. 

[Broeb22]

I definitely think the business provides value by reducing search costs significantly for anyone needing ad hoc work done. Having used services like this multiple times, I shudder to think about the time it would take me to find a graphic designer locally, let alone one from another country at the lower prices you can find on these sites.

 

And from the perspective of the worker, how else are you going to leverage your skills from a developing country to do work for someone in a developed country? These types of sites are great for side income or potentially building one’s portfolio of work to then interview for a full-time job.

 

One concern with these types of gig sites is how the site ensures it gets paid for the work it acts as an intermediary for? There is no incentive for the worker or the person posting a project to stay on the site after they find someone good. If I find someone great (call her Sarah) from South Africa for a certain job I need done quarterly, I could pay her less and avoid the fee from Upwork and she still nets the same amount. Yes, if you’re looking for new clients, the platform is the best place to go, but once you have them, is it still?

 

 

[Jurgis]

One concern with these types of gig sites is how the site ensures it gets paid for the work it acts as an intermediary for? There is no incentive for the worker or the person posting a project to stay on the site after they find someone good. If I find someone great (call her Sarah) from South Africa for a certain job I need done quarterly, I could pay her less and avoid the fee from Upwork and she still nets the same amount. Yes, if you’re looking for new clients, the platform is the best place to go, but once you have them, is it still?

 

Yeah, my relatives tried building similar business and they've struggled with this issue. They did not get to the scale of UPWK ;), so it's possible that UPWK is doing fine with just some slippage on this.

 

A company that I worked for also was using contractors. They usually started contracting them through an agency, but then quite often went direct after some time. And the agency could not (and did not) do much. I guess the agency also just worked with such slippage.

[cameronfen]

One concern with these types of gig sites is how the site ensures it gets paid for the work it acts as an intermediary for? There is no incentive for the worker or the person posting a project to stay on the site after they find someone good. If I find someone great (call her Sarah) from South Africa for a certain job I need done quarterly, I could pay her less and avoid the fee from Upwork and she still nets the same amount. Yes, if you’re looking for new clients, the platform is the best place to go, but once you have them, is it still?

 

Yeah, my relatives tried building similar business and they've struggled with this issue. They did not get to the scale of UPWK ;), so it's possible that UPWK is doing fine with just some slippage on this.

 

A company that I worked for also was using contractors. They usually started contracting them through an agency, but then quite often went direct after some time. And the agency could not (and did not) do much. I guess the agency also just worked with such slippage.

 

I agree with this.  The one thing these middlemen do is they ensure that if the job gets done the person gets paid and if they shirk they don't get the money as they will hold payment in escrow if directed. 

[Casey]

Price has dropped considerably over the last year.

 

Having used the website as a customer, its actually noticeably slow and non-performant at times. But, I'm also still a customer.

 

For some comparison, Care.com was bought for ~2.5x revenue in a worse industry with worse growth. Upwork is like 4x revenue right now and has actual growth. Very little earnings but are positive.

 

I don't know what to make of the new CEO. Has a biz analyst and M&A background in different software companies (most recently ODesk -> Upwork).

 

The story right now is that they'd like to grow sales team and go after enterprise clients, which they are already doing, and it is working well in small doses. Those clients have revenue retention of 1.2x vs around 1 for smaller customers.

 

Overall I think that's an interesting opportunity, but you end up looking like a different business afterwards. Platform/marketplace vs technology-enabled staffing company. If they actually get the enterprise stuff right I guess that can go pretty well. But I don't have confidence that they get the product/tech right or that enough of these enterprise companies will go for that model.

 

I guess the expansion rate is a positive sign for the business accounts they have signed up. But it seems like they're being forced to go that way by lack of a good-looking alternative in the growth of smaller, self-serve accounts.

 

Any thoughts on how enterprise push will go?

[Jurgis]

IAC should just buy this, install good management, ..., profit.

 

Someone talk to Barry.

[invest0r]

Feeling good about UPWK right now, especially comp with FVRR.

 

Fiver seemed to sail right through Covid and it seems like Upwork may too.

https://s23.q4cdn.com/749308338/files/doc_downloads/2020/Letter-to-Shareholders-Apr-8-2019.pdf

 

My view of the effect of Covid on these businesses:

Contractors are much cheaper than full time hires. Lots of layoffs boost the quality of contractors as well, while employers still need quality work to be performed. It's probably a wash against declines in spending - however, I think is a long term net positive as freelance quality improves and employers grow more cost conscious. These platforms are great to get things done. I spend $30k/year across them (95% Upwk, 5% FVRR).

 

UPWK vs. FVRR

Upwork seems like a stronger franchise and a more durable platform. Retention of 102% at Upwork vs. Fiver at ~65% after year 1 corroborate this.

 

EV/S

UPWK:  2.4x

FVRR: 8.1x

 

EV/GP (OP's metric)

UPWK: 3.4x

FVRR: 10.2x

 

Spend on marketing as % of sales

UPWK: 32%

FVRR: 59%

 

Spend on marketing as % of GMS/GMV

UPWK: 5%

FVRR: 16%

 

Similar growth rates (UPWK 15%, FVRR low 20%s maybe, but coalescing) and arguably the same end market exposure. Upwork has $2.1bn GMV vs. Fiver at $401mn. Upwork has a large component of managed services (11% of revenue) that should be fairly sticky. Both have similarly healthy cash positions.

 

FVRR has is a large take rate (26.7%) vs. Upwork at 13.1%. This flows very positively to gross profit. Still, UPWK has 2.5x more gross profit at a 17% cheaper EV.