Upwork:Quarterly Results/2022 Q4

Return to: Upwork | Earnings Season

Results

		Y/y growth
Revenue	$161.4 million	18%
Non-GAAP EPS	0.04	-180%

Q4 & FQ 2022 Shareholder letter

Earnings call transcript

Key highlights

"This behavior is consistent with our experience in past uncertain macroeconomic environments, in which we have typically seen companies moving through a sequence of phases. In the first phase, companies will reduce their costs and freeze hiring budgets as they grapple with uncertainty or the onset of macroeconomic weakness. This is when we may see a headwind from customers reducing overall budgets. As they move into the second phase, companies realign their cost structures in a more efficient manner and start to redeploy resources to solutions such as Upwork, where they have confidence they can deliver the best returns. This is when we have typically shifted from seeing a headwind to a tailwind. In the final phase, as the economy shows definitive signs of improvement, companies ramp up budgets and seek to aggressively hire, characteristically turning to our solution more than others because of the speed and flexibility we offer. This is when our momentum gathers further. Today we see many of our customers are in Dear Shareholders the first phase, realigning their budgets, with some moving into the second phase. Although this dynamic is creating near-term headwinds in our numbers, we have our eyes on the opportunity ahead of us. We are taking proactive steps to position Upwork for the full benefit the second and third phases"

Key insights to look for

Key insights to look for

Insight	Weight	Remarks
Growth outlook for the next years	9	This is the most important insight overall. Does management expect Upwork to keep growing? If yes at which pace? Will it be more than 16%? Analysts expect 720Million or 17% Revenue growth in 2023. --> Miss on Guidance. 690-705Million The company expects the revenue for Q1 to grow by 12% yer-over-year and revenue for 2023 to grow by 13% year-over-year. Generally, the business is expected to be flat (-2.5% .. -0.5%) quarter-over-quarter in 2023 due to macro headwinds.The company's revenue has never grown by less than 17% in the past.
New category full time hiring.	8	Can they attack Deel? How large are expectations and the market potentail? Upwork's goal at the moment is to make its current clients to start hiring full-time. Additionally, they don't expect end-to-end full-time solutions to start being a tailwind to its business in 2023. The management noted that it's early to tell the impact of full-time hiring. However, past data indicates that their new offerings have always gotten strong reception.
Data: Revenue of last quarter	7	How did the Revenue develop in the last quarter? How is the business going overall? Revenue for the fourth quarter grew by 18% versus 16% expected.
CFO	6-7	Did Upwork find a new CFO? No mention of the CFO
Data: Active clients	6	How are active clients developing? First time that the number of active clients declined sequentially. Active clients declined to 814,000 from 818,00 in Q3. The management attributes the decline to strong past quarters.
Internal Problems	6	More signs of internal problems? The company said that it is making progress in addressing the sales issues seen in the second half of 2022. The company also reorganised the business to ensure accountability, ownership and independence of decisions.
Impact of AI	6	How will the rise in AI affect Upwork's business? They are confident that AI will bring a huge gain to the platform. Hayden Brown said search for AI related services on the site grew by 3,900% in the last 4 months alone. Similarly, AI job posts grew by 1, 400% in the last couple of months.
Data: EPS	5	How is EPS developing? Do they keep costs under control? (Note: A slight beat or miss does not matter a lot) Costs management is doing well. GAAP gross margin grew from 74% in Q3 to 75% in Q4.
Internal development and innovation	5	How are they executing and innovating? The company continues innovating
Success of brand advertising	5	Are they finally able to strengthen their brand? Brand marketing is paying off. Unaided awareness grew by 30%. Interestingly, unaided awareness among large businesses grew by 140%. Additionally, ad recall, which measures the impact of brand campaign messaging sequentially grew by 45% among large businesses. As a result, the company will reduce brand working media spend by approximately 12% in 2023 compared to 2022.
Data: Take rate	5	How is the take rate developing? A lower take rate (while having higher revenue) is better Take rate is growing. It grew from 15.4% in Q3 to 15.7% in Q4.
Data: Enterprise clients	4	How are enterprise clients developing New enterprise clients declined by 19% year-over-year due to more pronounced sales cycles brought by macro headwind. However, enterprise revenue grew by 22% year-over-year to $12.8 million.
Transaction losses	4	Is this problem solved? It stood at 6% last quarter. It seems the measures put in place to curb transaction losses are paying off. Transaction losses declined to 4% from 6% in the third quarter.
Impact of Ukraine war on its business	3	Any last effects to be seen from the Ukraine war? Ukraine war continues to be an headwind to the business. However, the management did not quantify Ukraine war impact on its Q4 results.

Expectations

Full sheet

Management Guidance

The management is guiding for a deceleration in revenue growth rate from the third quarter 2022 (23.80%) to the fourth quarter 2022(16.06%) due to the softening of seasonal and macroeconomic conditions. Additionally, the fourth quarter revenue growth rate is expected to be lower year-over-year due to a strong quarter in 2021 as a result of Covid tailwinds.

Key metrics	Lower Bound	Mid-point	Upper Bound	Q4 2021	Mid-point y/y growth(%)
Revenue in $ million	158	159	160	136.86	16.18%
Non-GAAP basic and diluted loss per share	-0.01	-0.02	-0.03	-0.05	-60.00%

Yahoo Finance analysts estimates

Yahoo Finance analysts expect Upwork to beat its mid-point revenue guidance. However, they expect the company to miss its earnings guidance by 20%. According to Seeking Alpha, in the last two years, Upwork has beaten EPS estimate and revenue estimate 88% and 100% of the time, respectively.

Key Metrics	Average estimates	y/y growth (%)
Revenue	159.25	16.36%
Non-GAAP EPS	-0.03	-40.00%

Recent developments

February 13, 2023, Upwork Expands to Support Full-Time Hiring

Upwork has come up with end-to-end features aimed at facilitating finding, vetting, hiring, and paying full-time global talent. The company is likely following in the footsteps of Deel as summarized here:Upwork Versus Deel Full-time hiring

January 18, 2023, Upwork Unveils Most In-Demand Skills for Independent Professionals in 2023

• Upwork's study reveals that sales & business development (54%), data entry (47%), accounting (45%), and 3D animation (44%) are the skills that had the highest year-over-year growth rate in 2022 within their categories.

December 13, 2022, Upwork Study Finds 60 Million Americans Freelancing in 2022

• Upwork's study found that 60 million Americans performed freelance work in the past 12 months, representing 39% of the entire U.S. workforce(up from 36% in 2021).

December 23, 2022, US Businesses Shift to Contract Workers

• LinkedIn data indicates that US businesses are increasingly hiring contract workers as recession fears grow. Contract job positions posted on the platform between May and November 2022 rose by 26% compared to the same period in 2021.

Analysis of Jobs posted on Upwork Platform as at February 11, 2023

• Open jobs from clients with 1-9 previous hires expanded from 39,072 jobs on October 1 2022 to 46,465 on December 2023 marking an expansion of 18.9% in the quarter. It is standing at 43,512 (+11.3%) as of February 11. In the same period open jobs from clients with 10+ hires expanded from 66,113 to 77,931 (+17.8%) and is now standing at 71,535. (+8.2%). Open jobs from clients with no previous hires expanded from 58,183 to 79,010 (35.8%) and is now standing at 84,564. (+45%)
• Jobs posted on Upwork platform holds steady. As of February 11, 2023, the number of jobs posted on the platform were 199, 612. That may not be the highest recorded which has been 204,769 open jobs on January 7 2023, but still considerably more than the 163,369 at the beginning of Q4 2022.
• Contract-to-hire jobs stood at 47,014 as of February 11, 2023. This is higher than the 31,527 recorded on November 19, 2022 (when we started tracking it). This shows that the full-time hiring features which were recently launched by the company is getting the attention of clients.
• Number of jobs that have no hires(new clients) is growing. At the beginning of Q4 2022, it were 58,183. As of February 11, 2023 , it stood at 84,564. Also, they account for the largest number of jobs posted(when compared to 1-9 jobs posted and 10+ hires), around 40%. This may imply that the company's marketing is paying off. It could also mean that the new clients are not satisfied with the applicants and are taking long to hire.
• The need for intermediate-skilled talent is growing rapidly. Number of intermediate jobs grew from 87,464 at the beginning of Q4 2022 to 109,069(+25%) as at February 11, 2023. This is followed by expert jobs, which grew from 54,895 at the beginning of Q4 to 65,716(+20%) as at February 11, 2023. Entry level jobs grew from 20,990 to 24,716(+18%) This may imply that high value clients are increasingly using the site.
• As usual, majority of Open Jobs are temporary jobs(those with project length of less than one month), accounting for around 40%.

Analyst Opinions

• On February 13, Piper Sandler analyst Matt Farrell kept an Overweight rating on Upwork but did not change the price target after the company announced it was venturing into full-time rating. The analyst said, "The product further solidifies the company's position as one of the leaders in the world's work marketplace, with no other major player in the space offering the end-to-end capabilities across the work gamut." He added that the new product unlocks a new total addressable market for the company.
• On January 6, Piper Sandler analyst Matt Farrell lowered Upwork's price target from $20 to $15 and kept overweight rating. He said, "While uncertainty still exists and we certainly aren't out of the woods, we feel the uncertainty is more of a 'known-known' relative to this time last year."
• On December 13, Citi analyst Ronald Josey initiated coverage of Upwork with a Neutral rating and $14 price target. His core thesis across the internet sector continues to revolve around growing engagement via newer products and services. He favors companies "that are leaders in their respective categories, are innovative, and deliver improving margins and profitability."

Opinions

Further Opinions e.g. from Seeking Alpha or Youtube. Including Source and main/ most important arguments.

• Upwork is evolving more and more into an enterprise platform. However, sales cycles are elongating due to recessionary fears.

Main Product Updates

• On February 14, the company redesigned its client dashboard to enhance work management flow.
• Added new generative AI job category in February 10.
• Effective January 18, freelancers can buy unlimited connects. Prior, freelancers were limited to 200 connects while agencies were limited to 400 connects per month.
• Starting January 17, freelancers and clients can start recording Zoom meetings right in Messages
• The other product updates are mainly aimed at improving user experience.

Steps checked

Analyst Opinions

• Checked for recent opinions of analysts covering Upwork. There is only one current analyst opinion covering Upwork's full-time hiring product.

Inputs from Management

• Searched for CEO, CMO and CFO recent commentaries both in YouTube and Google. I couldn't find any.

Management Changes

• Searched for recent news on Upwork CFO. No mention of who will replace Jeff MCcomb.

Advertising Success

• I searched both Google and YouTube.I couldn't find anything indicating that Upwork brand marketing is seeing success.

Revenue and EPS expectations

• Looked up if Upwork is likely to beat its revenue and EPS expectations and the answer is yes.

Competitor Expectations and Results

Fiverr:Quarterly Results/2022 Q4