Upwork

See also: Investment Ideas | Upwork:Sources | Upwork:Position Changes | Upwork:Discord | Upwork:Sheet | Upwork: Impact of AI |Upwork: Analysis of Freelancer Success Badges| Upwork: Hourly Earnings of Freelancers | Upwork: Enterprise Clients | Upwork: Conferences |Upwork: Jobs posted in the Platform | Upwork: Seniority Level of Freelancers | Upwork: Summary of Old Reports/ Conference Calls | Upwork: Summary of SEC Fillings |Upwork:Management | Upwork: Product Developments

Quarterly Results

All quarterly results: Upwork:Quarterly_Results

Next quarterly results: Upwork:Quarterly_Results/2022_Q4 2023 February 15 22:00 UTC+1

Bullish and Bearish Case for Upwork

Timeframe	Weight	Bull	Remark
Shortterm	7	Full-Time Hiring	The New EOR offerings seem compelling and could prove to be a short term catalyzator
	5	Recession Reciliency	Upworks businessmodel could prove to be relatively resilient during a recession and profit from a recovery afterwards
	5	Sound Financial Position	Upworks financial position is sound. Nothing to worry at this front.
Longterm	10	Enormous Market Potential	Upwork is tackling an enormous market. We see a very strong revenue growth opportunity.
	8	Online Credibility for Freelancers	Strong lock-in effects for freelancers as credibility is build on Upwork
	4	Improvements in Seo

Timeframe	Bear	Weight	Remark
Shortterm	Price Pressure for Freelancers price down GSV	7	In it's Q1 2023 Earnings Call Upwork mentioned that they Plattform is ultimately demand constrained and they are seeing competition of freelancers which drives down prices and GSV. That has a positive effect on the attractiveness of the platform for costumers and increase demand but has a short term negative impact.
Longterm	AI can replace simply jobs	8	Credible long term treat. Upwork continues to claim they are seeing no impact though are reducing the amount of freelancers they employ themselves and see cost saving potentials e.g. in the area of costumer support. That's a mismatch of messaging.
	Unexperienced CEO	8	I usually like to invest in founders or proven managers. Having an unexperienced non founder as CEO is a risk. She is reponsible for hiring mistakes e.g. the hiring of the new fired CFO or GM of Sales.

Bullish	Bearish
Its financial position is sound	Upwork is not profitable yet
The freelance industry is growing	Upwork is seeing a deceleration in GSV and active clients growth rate
Upwork will likely benefit from the upcoming recession	Competition from LinkedIn Service Marketplace
Its GSV and number of active clients is growing	Internal problems
Jobs posted on Upwork platform holds steady despite tech layoffs	CEO is not the founder
Upwork client retention rate is expected to remain strong
Strong moat
Upwork will see strong growth if its brand marketing awareness pays off
Gen Z and Millenials are attracted to freelance work
U.S is aging

Overview of the Company

Upwork is one of the largest companies that connects freelancers and clients. It was formed in 2013 through a merger between oDesk and Elance. However, it was in 2015 that Elance-oDesk rebranded to Upwork. Upwork went public in 2018, raising $187 million at around $1.5 billion valuation. Its initial founders who include Odysseas Tsatalos, Stratis Karamanlakis, Beerud Sheth, Sanjay Noronha, and Srini Anumolu are no longer with the company. As of December 2021, Upwork had 650 employees. Throughout 2021, the company also employed 1,800 freelancers to perform internal duties. The company is headquartered in California, United States.

The marketplace posts over 10,000 skills and more than 90 job categories, engaging in over 3 million jobs annually. A recent Upwork press release indicates that there are over 2 million freelancers on the platform. Its client base constitutes primarily small and medium businesses(SMBs). In fact, Upwork generated more than 80% of its gross service volume(GSV) from SMBs in Q1 2021. During the BOFA conference held on June 6, 2023, Hayden Brown mentioned that the ratio of SMBs GSV to enterprise clients GSV is 80%:20%. At the end of Q3 2022, Upwork had 818,000 active clients and over 300 enterprise clients. Some of its clients include Microsoft, Genesys, Godaddy, Corel, Coty, etc.

https://investors.upwork.com/static-files/c737834a-5f46-46d9-8388-2857a82dbee8Sheet

The United States is an important market for Upwork in terms of clients and freelancers. In Q3 2022, Upwork derived 74.45% of its client revenue from the United States. Similarly, 26.28% of its freelance revenue in the same period was obtained from the same country. India and the Philippines are other markets that account for the largest portion of its freelance revenue. Upwork derived 13.79% and 12.14% of its freelance revenue from the two countries, respectively.

Upwork mainly serves tech clients. According to its 2021 report, about 75% of its largest clients were tech, while the remainder were non-tech. Also, freelancers providing skills in computer programming, IT, business consulting, and marketing accounted for 53% of all freelancers in the marketplace in 2021. This was an increase from 50% in 2020.

Upwork Business Model

Upwork enables clients to post a job in its Talent Marketplace. A freelancer can then bid for such jobs using connects. Upwork offers freelancers free connects each month. Basic account freelancers get 10 free connects, while Freelance Plus freelancers get an additional 70 connects. However, freelancers will have to purchase more connects at $0.15 per connect once depleted. Usually, connects used are refunded if the freelancer gets a chance to be interviewed by the client. Sometimes, the client invites a freelancer to send a proposal for a job posted. In this case, the freelancer won't pay for the proposal. Once clients hire a freelancer, they pay a processing fee. This is usually 5%, but some US clients who are eligible for ACH bank transfers pay 3%. Upwork also imposes a fee on the earnings made by a freelancer. The fee is based on a three-tier model. That is, payments between $0-$500 from a client attract a fee of 20%, while earnings between $500.01-$10,000 attracts a fee of 10%. Once a client's payment exceeds $10,000.01, the freelancer only pays 5%. It's important to note that the job expires after 30 days if the client doesn't take any action on it.

Upwork Sheet

Upwork contracts are of four types: hourly, fixed-priced, project catalog and consultations. For hourly contracts, the minimum hourly rate is $3.00, while for fixed-priced contracts, the minimum rate is $5.00. Hourly contracts account for the largest portion of jobs posted on the platform. According to our latest tracking of jobs posted on the platform shown below, Upwork hourly jobs account for around 61% of the total number of jobs on the site. Project catalog and consultations contracts are described in the next section.

The company's revenue is broken down into two, Marketplace revenue and Managed Services revenue, as described below.

1. Marketplace revenue

The company generates marketplace revenue through services such as Project Catalog, Talent Scout, Client Marketplace plan, and Upwork Enterprise. This is the largest source of revenue for Upwork. For instance, in Q3 2022, the marketplace constituted 91.77% of its total revenue. Below is a brief description of each of these services.

a. Project Catalog

Project Catalog enables freelancers to sell their services directly to clients. Upwork reviews each project catalog to ensure they don't affect the quality of the platform. When clients need certain services, they search and browse through the various Project Catalogs. They can also send messages to the owner, and if they are contented that the catalog is what they are looking for, they can make a purchase. Upwork will then deduct the 5-20% fee from the freelancer's earnings.

b. Talent Scout

Upwork has specialized recruiters who identify the right talent for the client. By using Talent Scout, the client removes hiring guesswork and reduces the time it takes to hire a freelancer. Talent Scout is similar to staffing agencies except that it lowers markup costs by up to 75%. Examples of Upwork's clients that use Talent Scout are Microsoft, PGA, Automattic, and WordPress.

c. Client Marketplace Plan

The Client Marketplace Plan came into effect in April 2022. It replaced the old marketplace plan where clients were supposed to make a monthly subscription to use the platform. Client MarketPlace Plan combined the Upwork Basic and Upwork Plus subscriptions into a single plan with a fixed percentage fee described above. As such, all clients now have access to most features that were only available to Upwork Plus clients.

d. Upwork Enterprise

As the name suggests, Upwork Enterprise is designed for Enterprise clients. It enables these clients to access the top 1% of Upwork freelancers. The service also has features such as talent onboarding and payroll tools.

2. Managed Services revenue

Upwork also acts as a staffing firm. It contracts freelancers to complete jobs for certain clients and pays them on their behalf. Once the task is completed, the client pays Upwork. In Q3 2022, managed services revenue accounted for 8.23% of its total revenue.

Take rate

https://investors.upwork.com/static-files/5463bf46-5aea-4c23-b61b-c3f37b4467e3

The fee that Upwork derives from marketplace and managed service users makes up the take rate. Upwork's take rate has been growing since Q2 2022 when the company introduced a new pricing structure for clients. According to the former CFO Jeff McCombs, the new pricing structure boosted the take rate in Q2 and Q3 of 2022. However, going forward, the take rate will benefit from the enterprise segment which has a higher take rate and is growing faster than the non-enterprise segment. The take rate will also rise due to project catalog and talent scout which also have a higher take rate. Enteprise segment has a take rate of 10% while project catalog and talent scout are likely to have a take rate of 20% as those using it are mostly new users. Given that clients are not obligated to use the enterprise tools, project catalog or talent scout, we believe that the rising take rate will not make the site less appealing.

https://seekingalpha.com/article/4447421-upwork-perfectly-priced-reflecting-slowing-revenue-growth

Upwork Client Cohort

See also: Upwork: Summary of SEC Fillings

• Since 2016, Upwork has seen growth in spend from new client cohort.

• The 2020 cohort saw rapid acceleration in spend, probably due to the Covid pandemic which resulted in an increase demand for Upwork talent.

Year	Spend from new client cohort in $ million	Year-over-year growth
2022	507.6	-6%
2021	537.9	32%
2020	407.9	37%
2019	298.8
2018	Higher than 2017
2017	237.9	7%
2016	222.4
2015	Lower than 2014 due to Elance migration
2014	210.4

Business Model Developments

March 16, 2023. Upwork abolished freelance reducing-tier fee of 20/10/5%. As such, effective May 3, 2023, the freelancer service fees will be 10% for all new contracts regardless of contract value. The company said that "Contracts that already qualify for a 5% freelancer service fee will continue at 5% through the end of 2023." The new pricing will not affect Upwork Payroll, Any Hire, Direct Contracts, Bring Your Own (BYO), Enterprise Clients, and Talent Scout.

Upwork also introduced contract initiation fee. Effective April 26, 2023, Upwork will charge clients on its Marketplace and Project Catalog a one-time contract initiation fee of $4.95 per contract on new contracts. This is in addition to 5% (or discounted 3% for US eligible clients) transaction fee.

Upwork Market

See also: Upwork Market

Marketshare

According to a 2020 research report by Khaveen Investments, the market share controlled by major freelance companies is still small. This means that platforms that put up measures to capture additional market share can do so easily. The report indicated that Upwork is a global market leader with a 9% market share. However, it is followed closely by TopTal and Fiverr, which controlled 8% and 5% market share, respectively.

Active clients

Upwork define active clients as those clients that had spend activity during the 12 months preceding the date of measurement.

Active freelancers

See also: Upwork: Seniority Level of Freelancers

Description what classified as active client.

Jobs open

An open job that has not been modified by the client for 30 days. If inactive it will be closed automatically after that period of time.

Upwork shows up early on Google Search

Marketposition & Marketing

Seo: Upwork recently appeared very high on one search result in a good ad format (Non-paid). This could mean that they are making progress with their seo. Given the large amount of offerings on their website both Upwork and Fiverr could have considerably Seo potential.

Upwork Management

See also: Upwork:Management

A brief summary of Upwork management characteristics and our assessment will be published here.

Competition

Main article: Upwork:Competition

Shorter Description of Upworks Competition.

Upwork Culture

Main article: Upwork:Culture

Shorter Description of Upworks Culture. Maybe 5-6 Sentences?

Why Invest in Upwork?

Below are the reasons why we have invested in Upwork.

1. Its financial position is sound

Upwork's financial position looks good. As of September 30, 2022, it had a cash balance of $678 million. This is offset by a debt of $564 million, which is expected to mature in 2026. If the company were to pay its debt today, it would be left with $114 million to grow its business. However, the fact that its debt-to-equity ratio is 2x calls for regular monitoring of its financial position.

Changes in Financial Position

March 22, 2023. Upwork purchases $196.8 million of its 0.25% Convertible Senior Notes due 2026. The repurchase price(approximately $157 million) payable by the Company will be in cash. The company said that the price "will be based in part on the daily volume-weighted average price per share of the Company’s common stock over a two consecutive trading day measurement period beginning on, and including, March 22, 2023." As such, approximately $378.2 million principal amount of the Notes will remain outstanding.

2. The freelance industry is growing

One of the reasons why we have invested in Upwork is because the world is switching to remote jobs. For instance, the global freelance market is projected to have a compound annual growth rate(GAGR) of 15.3% between 2021 and 2025. As such, the industry is expected to reach $6.7 billion by 2025. A recent research report by Upwork indicates that the share of US professionals who freelanced in 2022 increased to 39% or 60 million from 36% in 2021.

3. Its main KPIs are growing

https://investors.upwork.com/static-files/b5ef19da-22d6-4701-a36b-aa86cb398a6b#:~:text=Our%20overall%20take%20rate%20in,quarter%20of%20the%20prior%20year.page.12

https://investors.upwork.com/static-files/b5ef19da-22d6-4701-a36b-aa86cb398a6b#:~:text=Our%20overall%20take%20rate%20in,quarter%20of%20the%20prior%20year.page.12

Both the Gross Services Volume(GSV) and Active Clients are growing. GSV and Active Clients grew by 14% and 9% in Q3 2022, respectively. Even though these represent a deceleration from previous quarters, this is expected since the company is coming off the pandemic period, which was associated with high demand for its marketplace. Of great significance is growth in its number of high-value clients. The number of clients spending over $100,000 per year in the trailing 12 months grew by 32% during the quarter. This indicates that there is increasing adoption of the marketplace by big companies.

4. Upwork will likely benefit from the upcoming recession

With rising borrowing costs, companies will lay off full-time employees and likely hire freelancers. The freelance workforce will enable them to save up to 50% of employee costs. A recent report by LinkedIn indicates that US companies are increasingly hiring freelancers as recession fears grow. According to the report, there was an increase in contract job positions posted on the site between May and November 202 by 26% compared to the same period in 2021. On the other hand, full-time roles posted on the site only grew by 6% during the same period.

During Q4 2022 earnings release, Hayden Brown gave three phases that the company normally encounter during a recession or high inflationary environment. They include:

(a) Clients reevaluating budgets. At the onset of a recession of high inflationary environment, businesses cut costs and freeze hiring. This is when Upwork notices reduced spending on its platform. According to Hayden, its is clients are currently in this phase.

(b) Clients turn to upwork to cut costs. This is when businesses start realigning their cost structures to the most efficient areas and redeploy their resources to platforms such as Upwork, where they stand to get maximum benefit.

(c)Clients using upwork to reaccelerate growth at the end of a recession.As recessionary environment diminishes, businesses start hiring aggressively in an effort to accelerate growth. They will choose platforms such as Upwork to drive this agenda due to its flexibility and fast hiring.

When we go back to 2020 recessionary environment brought by Covid-19 pandemic, we notice that Hayden Browns statement above holds true. During Q2 2020, Upwork revenue grew by 17%, the worst in history. However, revenue growth rate started picking up in Q3 henceforth. In fact, Upwork emerged as one of the biggest beneficiaries of covid 19 pandemic, with its revenue growing by 35% in 2021.

5. Jobs posted on Upwork platform holds steady

TrueUp indicates that there have been 237,209 tech layoffs in 2022. However, our analysis indicates that the jobs posted on the Upwork platform have held steady, as shown by the chart on the right. In fact, as of 24th December 2022, the Upwork platform recorded the highest number of jobs posted on the site since we began tracking it in July 2022.

6. Long-term freelance-client relationships

Upwork's reducing tier fee discourages the freelancer-client relationship from moving out of the platform or to other platforms. This is not true for other freelance marketplaces such as Fiverr and Freelancer.

7. Its products give it a strong moat

Upwork has great products which enable it to withstand competition from other freelance platforms. For instance, its hourly tracker attracts corporate clients who want to shift to remote work. Fiverr and LinkedIn do not have this feature; hence they cannot compete with Upwork for such clients. Upwork has also introduced a project catalog similar to Fiverr's "gigs" feature. Therefore, clients looking for freelancers to sell them short-term gigs can choose Upwork instead of Fiverr. Upwork's payment protection service also gives it a hedge against the LinkedIn Marketplace.

8. Upwork will see strong growth if its brand marketing awareness pays off

https://upwork.gcs-web.com/static-files/11fe6ce1-8c50-40e5-9f4e-2710de4e27c8page.108

Upwork has been relying on organic distribution, such as word of mouth, unpaid search, and free referrals, to drive traffic to its site. According to its September 2020 investor presentation, 80% of its users were acquired organically. However, Upwork has been growing performance marketing rapidly to win the inorganic users, as shown by the chart below. In May 2021, it launched a series of brand anthems aimed at capturing 90% or more of companies and business leaders unaware of the platform. So far, Upwork has spent $83 million in brand marketing alone. This investment has been used to launch a series of brand anthems that will be aired on US TVs, Radios, out-of-home(OOH), social, digital, Podcasts, pre-roll and native channels. If this brand marketing works, Upwork will be able to attract more clients, enabling it to unlock its $1.3 trillion market opportunity. Upwork is hopeful that its brand awareness will pay off, as its CEO, Hayden Brown, said during the Q3 2022 investor conference," But next year, we will see that EBITDA profitability even in the context of achieving our brand goals around awareness."

9. Young and energetic employees are attracted to freelancing

There is a growing trend toward freelance work among young Americans. For instance, Millennials and Gen Z have been ranked as the generations with the highest number of freelancers compared to other generations. A recent report by Upwork indicates that 43% of Gen Z and 46% of Millenial professionals did freelance jobs in 2022 compared to 35% and 27% of Gen X and Boomers, respectively. The desire to work as a freelancer among the younger generations has been contributed heavily by the rise in influencer-style jobs. The number of young workers freelancing is expected to rise as the US Bureau of Labor Statistics project that Gen Z will account for a third of the US labor force by 2030. As more young and energetic workers choose to freelance, more companies will go remote, and this is a huge gain for freelance platforms such as Upwork.

10. Aging Population in U.S

According to the U.S Census Bureau, America's population is aging. Between 2010 and 2019, the non-working-age population rose by 13.1 million or 12.9%. On the other hand, working-age population rose by 6.4 million or 3.1%. A look into the country's dependancy ratio also suggests that the country is aging. In 2010, the dependancy ratio was 49. By 2019, that number had risen to 53.7.

Upwork Red Flags

The following are the main factors affecting our investment thesis on Upwork.

1. Internal Problems

We observed some problems within the company in the third quarter of 2022. It started when Upwork announced that its CFO Jeff McCombs would leave the company at the end of the 2022 financial year. Even though the announcement did not say he was fired, CEO Hayden Brown's words suggest so. She said, "Jeff and I both agree that now is the right time for a transition, as Upwork continues innovating, evangelizing, and scaling the world's work marketplace." If that is not enough to point out internal problems within the company, Hayden Brown said during the third quarter of the 2022 conference call that one of the reasons they did not meet the client's sign-up target was email migration issues which affected the sales process. Nevertheless, internal problems within the company showcased themselves during the conference call when the call kept being lost. Even though Upwork promised to address the email issue, we feel that the CFO transition presents a risk as the new CFO may find it hard to work with the team.

Sources: Upwork Shareholder letters

We are also concerned that Upwork's transaction losses are rising. Unlike in 2021, where transaction losses were mostly flat at 1%, Upwork's transaction losses stood at 6% of total revenue at the end of Q3 2022. This implies that the measures put in place by the company to combat fraud and chargebacks may not be running as expected. To reduce these losses, Upwork entered into a partnership with a third-party detection vendor. However, the management does not expect to see the impact of the partnership soon.

2. Upwork is not profitable yet

https://seekingalpha.com/article/4546517-upwork-decent-execution-slight-premium-valuation

Even though its revenue is growing, it has yet to be profit positive. However, analysts believe that if the revenue keeps growing at an average of 15% annually, Upwork will be able to achieve profitability in 2024. This is possible considering that Upwork's revenue grew at an average of 25.84% between 2019 and 2021. Part of the reason why Upwork has yet to achieve profitability is its huge operating expenses. For instance, in Q2 2022, Upwork spent 84% of its revenue on operating expenses. Sales and marketing expenses alone accounted for 40% of its revenue.

Analyst Expectations

The average analyst expectation is 720.22Million revenue in 2023 which implied a 17% (double check) growth rate over 2022 revenue.