Upwork:Quarterly Results/2023 Q1

Return to: Earnings Season:2023 Q1 / Upwork / Upwork: Quarterly Results

Results

• Revenue came in $160.9 million(+14%), at the top of management guidance and above analysts estimate ($ 158.99 million or growth of 12.52% year-over-year).
• Management lowered 2023 revenue guidance to between $655-$670 million(growth of 4% year-over-year at the midpoint) from $690-$705 million(growth of 14.1% year-over-year at the mid-point) given in March and below analysts estimate for it to grow 12.9% year-over-year.
• Management gave Q2 guidance of between $161 million - $164 million (growth of 3.6% year-over-year at the midpoint), below analysts expectations of $171.3 million or growth of 9.2% year-over-year.
• Management increased its adjusted EBITDA guidance for 2023 to $36-$40 million from $15-$20 million previously given.
• Active clients increased 4% y/y to 827 million and 1.6% Q/Q.
• Non-GAAP EPS came in $(0.01) versus $(0.07) estimate.
• Provision for transaction losses was flat sequentially but increased from 2% to 4% of total revenue in the first quarter of 2023.

Earnings Call Insights

Here are the main insights from the earnings call;

Macro Environment

• Enterprise clients reducing their spend or maintaining it at the same level has contributed more than half reduction in their outlook.
• Their smaller clients are proving resilient. (Note by Aron: Given that more than 80% of Upwork's GSV comes from SMBs, it means that the probability of guidance being lowered is low?).
• U.S clients have continued to be stronger than EU clients. (Note by Aron: This is good considering that more than 70% of Upwork's revenue comes from U.S clients.)
• Removed in their guidance outlook the expectation for the second half of the year to be stronger, which is normally the case in a non-macro impacted year.
• Expects a shift in the second half of the year versus Q2, "because of the dynamics around a lot of our pricing changes and the lagging effects relative to last year in Q3 and Q4."

Cost Cuts

• Reduced workforce by 137 roles or 15% of total full-time employees.
• They are pausing brand marketing investment indefinitely. The company said, "Our team has done a phenomenal job increasing our unaided brand awareness, and our brand campaign is resonating with customers. However, in the current macroeconomic environment, we do not have enough visibility into exactly when we will see brand awareness translate into client conversion to continue prioritizing the investment at this time."
• Reducing brand working media spend by more than $22 million in the second half of 2023, representing a 94% reduction from prio guidance.

Generative AI

• The average weekly number of search queries related to generative AI in Q1 rose 1,000% year-over-year.
• The average number of weekly job posts related to generative AI rose more than 600% year-over-year.
• Hayden Brown likes that companies like IBM are now thinking of new ways of working(using AI) as it opens a window to discuss with them how Upwork can help them.
• Data Science and Analytics job postings grew 33%, year-over-year and 22% sequentially.
• Hayden noted that writing jobs(which is expected to be impacted by AI) is very small category for them today.
• Hayden also said that they are not seeing any negative impact of AI today.
• Hayden noted that 85% of their GSV today comes from longer complex projects and jobs on the platform; hence AI will augment instead of displacing them.
• Hayden said that AI does not factor into their 2023 outlook because they don't expect an impact from it.
• They are looking for ways they can incorporate AI into their internal processes,particularly on customer suport.

Fee Structure Change

• Take rate expansion in 2023 is expected to be at the same level as last year.
• Hayden Brown said that by the time freelancers reach the 5% talent fee, their relationships would have probably reached a natural endpoint.
• Hayden said that their data going back to 2016 indicates that the 10% flat fee will drive more demand in the platform, hence the new fee structure is a positive change for the platform in the long-term.

Expenses

• On R&D, they are not adding more products but driving their adoption and improving their quality.
• AI also features in their R&D
• On sales, they are shifting focus into the most high value and high performing areas of their portfolio.

Full-time Hiring

• They are seeing very positive adoption.
• They are excited to continue persuing it.
• Hayden noted that it's too early to tell its impacts.

Assessments

Moritz quarterly assessment

Here is my take on the quarter: (4.May 2023)

Results looked very ugly at first glance with the significantly lowered FY guidance. More than half of the decrease can be attributed though to lowered expectations for enterprise sales as the sales team was heavily reduced and it's head publicly fired. That makes the reduced guidance less bad as they are basically investing less and are getting less revenue in return.

Similarly their brand advertising spent was slashed but Upwork claims material year-over-year gains to top-of-funnel efficiency from performance advertising. That makes sense in my opinion as performance marketing (esp. Instagram and Tiktok) likely offers higher ROIs in the age of ai and i was never a huge fan of Upworks brand awareness campaign.

As @Aron~Bluesky highlighted out to me the most important insight is that 85% of Upworks GSV is related to longer and complex projects which are harder to automate. Looking at our open jobs tracking (1) i deemed it implausible at first given the large number of jobs with a short duration but in the end GSV is not about the quantity of open jobs but the spent per job. So i think their claims are logical and give some confidence.

Talking about GSV: Hayden Brown talked about the fact that Upwork is demand constrained and they are seeing wage pressures as a large international platform. We could therefore see GSV headwinds in the short to medium term in my opinion. Indeed Upwork management was surprised about the weaker GSV per client as other metrics like volume and activity tracked well. Our job tracking matched the activity seen by management but failed to produced GSV insights for us. In that regard we have to think about additional data points to measure that could give us insights. In the longterm increased competitiveness provides value for clients and should lead to even larger client adoption which in term attracts more freelancers. I could therefore see strong flywheel adoption dynamics over the next 10+ years.

Overall Upwork feels a bit like a startup to me with experimental processes and a lot of things not working out yet. I think it's probably the right move to go back to the drawing board and refine the sales and brand marketing playbooks before heavily investing on those fronts, but we should be aware about the unmature nature of the business. I am not sure if i like the way Hayden Brown is publicly firing people especially as she has been the one who recruited or promoted them in the first place and we can only hope that she grows into the CEO position fast enough and her new key hires are indeed good. That said i think everyone needs time to adopt and her latest decisions like to scale back on unsuccessful attempts in the current macro environment or the early stage launch of the full-time hiring offering seem to be correct and her new hires promising. Increasing EBITDA drastically provides an important buffer in case things go south from here.

In Summary i believe that given the large TAM opportunity ahead i think Upwork offers the highest level of medium to longterm upside of all our portfolio companies with risks coming from the immature state of the business, risks with leadership and lacking visibility into e.g. macro impacts. I therefore think we should drastically increase our focus on Upwork to do everything we can to increase our visibility. This will serve as well in terms of spotting problems and taming my optimism if necessary or enables us to increase our position either at current $8 price levels which i deem very attractive or being ready in case the stock drops again at those crazy $5-6 price levels.

Key Items to examine

• Revenue growth.
• Earnings per share(EPS)
• Active clients
• Impact of AI on the business.
• New pricing.
• Impact of full-time hiring on the platform.
• Macroeconomic trends.
• New CFO.
• Transaction losses
• Impact of brand marketing

Earnings Estimates

Management Guidance and Analysts Estimate

Q1 2023

• Upwork's Q1 guidance reflects the macroeconomic and related trends that they are observing.
• In the last two years, Upwork has beaten EPS estimates 88% of the time and has beaten revenue estimates 100% of the time.

	Management Guidance						Analysts Estimate
Key Items	Lower Point	Y/Y Growth	Mid point	Y/Y Growth	Upper point	Y/Y Growth	Consensus Estimate	Y/Y Growth
Revenue	$157 million	11.11%	$158.5 million	12.17%	$160 million	13.23%	$ 158.99 million	12.52%
Adjusted EBITDA	-$11 million		-$9.5 million		-$8 million
Basic EPS	-$0.03	0%	-0.045	50%	-$0.06	100%	-$0.07	133.33%
Brand media investment	$15 million

Q2 2023 Analysts Estimate

Key Items	Q2	Y/Y
Revenue	$171.3 million	9.2%
EPS	$0.02

Full year 2023

• The company expects to be adjusted EBITDA profitable in 2023.

	Management Guidance						Analysts Estimate
Key Items	Lower Point	Y/Y Growth	Mid point	Y/Y Growth	Upper point	Y/Y Growth	Consensus Estimate	Y/Y Growth
Revenue	$690 million	11.65%	$697.5 million	12.86%	$705 million	14.1%	$698.31 million	12.9%
Adjusted EBITDA	$15 million		-$9.5 million		$20 million
Non-GAAP diluted EPS	$0.11				$0.15		$0.11
Brand media investment

Recent Developments

• Sunita Solao will join Upwork as chief people officer (CPO) [1]
• Upwork appoints Erica Gessert as chief financial officer (CFO) [2]
• Upwork purchases $196.8 million of its notes due 2026 [3]
• Upwork introduces new pricing structure [4]

Insights from Jobs posted on Upwork Platform

• Jobs posted on the platform were mostly steady at 200k in Q1.
• Contract-to-hire roles rose from 46k to 56k during the quarter.
• Jobs from clients that have 10+ hires have been growing steadily between January 21 to April 1 (growth of 13%) indicating that the industry may be picking up.

Insights from Competitors

CGI Group

CGI is one of the largest IT and business consulting services firms in the world with 88,500 employees and C$12.1billion of revenue as of 2021.

On IT Spend

CGI survey of 1,750 executives from government and corporate agencies finds that:

• Clients main focus now is prioritizing investments and returns.
• Given the rising pressure on profitability, several clients "indicated their willingness to outsource the portion of their IT landscape as a managed service over the next three years."
• Over half of exucitives interviewed said they plan "to sustain or increase their overall IT services spending over the next year."
• 84% of clients said they are still having difficulty hiring IT talents.

On AI

When asked during the recent earnings call whether the growing AI momentum will make clients to pause projects as they assess its potential, CGI GROUP CEO George Schindler said, " I don't have a crystal ball. But I don't see it slowing anything. Our view is that in general, technologies like generative AI simply make experts more productive. It doesn't make the layperson an expert. So I don't think you're going to see that that necessarily slowing. " He added that they recently survey their clients and two-thirds said they "are either investigating or doing a proof-of-concepts on AI and yet you see that that has an impact of anything." On the other hand, "about 20% are not doing anything at all, and about 15% are actually suggesting they are in some level of implementation of AI."

"So I think people are moving into this rather cautiously," He said.

ASGN Incorporated

ASGN Incorporated is also one of the largest IT and professional service providers. It had $1.1 billion revenue in 2022.

On IT Spend

• During the Q1 2023 earnings call, its CEO said that IT demand is still high. "And I think that speaks to kind of the continued tightness in the labor pool around mission-critical IT set skill set and that they’re still in demand," he said.
• Theodore also noted that companies continue to spend on IT related services."While clients are scrutinizing spend, they’re continuing to invest in IT projects that are critical for their businesses," he said.

Other Insights

Bullish

• Impact of AI on the industry seems to be a tailwind at the moment.
• There is an uptick in new business formations in U. S. New business formations increased 4.5% M/M in March to 451,752.Around 80% of Upwork's GSV is generated from small and medium-sized businesses (employers with a headcount of less than 100).

Bearish

• There is a pullback on tech freelance jobs. Freelancer.com Q1 2023 report indicates that Software development jobs declined by 34.4% Q/Q to 1,311 from 2,001.Similarly, Programming jobs declined by 20.9% Q/Q to 4,665.
• There is a pullback on remote hiring.

Impact of AI

See: Upwork: Impact of AI

Analysts Commentaries

BTIG Analysts

• They said Upwork's new freelance fee will boost its take rate but will be an headwind to its GSV.
• They estimated the blended talent service fee was 7-8% in 2022, with the take rate within just the talent marketplace likely a bit below the corporate average.
• "While take rate should come up nicely, these changes will also likely create GSV headwinds as they introduce new frictions into the marketplace," noted the analysts "We believe the next few months could be especially choppy as freelancers who are displeased enough to leave the Upwork marketplace might try to reduce their activity while Upwork will not be getting the benefit of the higher fees," they pointed out.
• They said that the new changes is incorporated in Upwork's FY2022 guidance given last month.

Results

Here is a summary of Fiverr results.

• Revenue grew 1.5% year-over-year to $88 million, above analysts estimate of $87.66 million(+1.15% y/y) and management mid-point guidance of $88.5 million(+0.92% y/y).
• Active buyers grew 0.3% y/y to 4.3 million. "Our y/y active buyer growth benefited from high levels of new buyers coming to the platform offset by reductions from large cohorts that are in their stabilization period," Shareholder letter noted
• Adjusted EBITDA was 11.3 million above management's mid-point guidance of $9.75 million.
• Fiverr narrowed its revenue guidance for 2023 to $355.0 - $365.0 million from $350.0 - $365.0 million prior.
• It also narrowed its adjusted EBITDA guidance for 2023 to $48.0 - $56.0 million from $45.0 - $55.0 million.
• Fiverr expects the Q2 2023 revenue to grow by 4%-6% y/y to $88.0 - $90.0 million.
• Fiverr is positive on AI.

• The company sees stabilization in cohort dynamics.

"We continue to see stabilized cohort dynamics as anticipated at the beginning of the year, and new buyer acquisition continues to be robust with strengthened efficiency, " the statement pointed out.

"All cohorts performed in line with our expectations from the beginning of the year. While their spending level moderated compared to a year ago, the trends have been stable for the past few months."

"We continue to see growth in high-value spenders on our marketplace and their strong retention and spending patterns continue to strengthen our overall cohort behavior. Among those who spend over $10K+ in 2022, we saw the vast majority of them remain very active in the first quarter of 2023 despite the challenging macro conditions."

Summary of Earnings Call

Fiverr Q1 2023 earnings call mainly centred on AI and macro situation. Below is a summary of the call;

Generative AI

• Haven't seen AI impact the business.
• Categories they opened to address AI-related jobs are booming.
• They are seeing increasing need for human skills deployed to implement AI technologies.
• Don't expect AI to displace human talent in the long-run.
• Believe Fiverr will benefit from AI technologies to improve their product experience.
• Believe AI brings a step function to addressable their market.
• They will continue investing in widening the catalog around AI services.
• Micha Kaufman notes that sellers who have better grasp and better usage of AI are going to outcompete those who don't.
• Kaufman adds that "it's very hard to understand what categories or how categories might be influenced."
• Kaufman added that he expect AI to help Fiverr sellers generate authentic content faster.
• Kaufman said it's too soon to pick any trends in usage of AI by small businesses, large businesses or new buyers.

Macro environment

• CFO Ofer Katz said they do not see any changes to their current underlying macroeconomic assumptions .
• Kaufman noted that as macro recover they will mostly likely see an increase in active buyers before an increase in spend per buyer.

Management Guidance and Analysts Estimate

Q1 2023

• Fiverr's Q1 2023 guidance reflects the challenging macroenvironment "where SMBs are more cautious towards spending and investments." The company added "we expect Q1’23 to be the most challenging quarter in terms of year over year growth rate, due to the comparison to Q1’22 when growth was minimally impacted by macro headwinds."
• Fiverr has beaten earnings estimates in all the trailing four quarters.
• Analysts expect its revenue to exceed the mid-point guidance of $87.5 million by 0.2%.

	Management Guidance						Analysts Estimate
Key Items	Lower Point	Y/Y Growth	Mid Point	Y/Y Growth	Upper Point	Y/Y Growth	Consensus Estimate	Y/Y Growth
Revenue	$86.5 million	-0.23%	$87.5 million	0.92%	$88.5 million	2.07%	$87.66 million	1.15%
Adjusted EBITDA	$9.0 million		$9.75 million		$10.5 million

Full year 2023

• The company said they forecast year over year growth rate to increase over the course of 2023 while adding that they " expect to exit 2023 with double digit revenue growth rate at midpoint."

	Management Guidance						Analysts Estimate
Key Items	Lower Point	Y/Y Growth	Mid Point	Y/Y Growth	Upper Point	Y/Y Growth	Consensus Estimate	Y/Y Growth
Revenue	$350.0 million	3.86%	$357.5 million	6.08%	$365.0 million	8.31%	$359.57 million	6.52%
Adjusted EBITDA	$45.0 million		$50.0 million		$55.0 million

Analysts Commentaries

Piper Sandler

• While commenting on why Upwork shed 25% on May 5, the firm said the reason for the selloff is the thoughts around the impact of artificial intelligence on freelance platforms, with a few investment banks even putting out "AI Killer" indices.
• It pointed investors to the Upwork (UPWK) earnings call, which it it says pointed to no impact from AI taking share amid the broader macro headwinds.
• It added that the move in Fiverr shares is more based on the fear of "what if" rather than anything known today.

BTIG's Marvin Fong

• He initiated coverage of Fiverr with a price target of $50 and a Buy rating on April 10.
• Marvin views Fiverr as the "purest way to play the attractive online freelancing opportunity with the lowest execution risk."
• He told investors that the pullback in the stock "belies the substantial improvement in fundamentals," which include revenue for 2023 tracking over 60% higher than was expected before the pandemic, the analyst tells investors in a research note.

Insights

• A recent report by Fiverr found that "Artificial Intelligence" searches on the platform increased by 56% in the past 6 months compared to the previous 6 months. "AI" and "AI Art" searches increased by more than 1,000% and nearly 7,000%, respectively. Fiverr added that "Since the beginning of the year, earnings for freelancers offering AI services related to programming & tech — such as AI app development — were responsible for the majority of revenue for AI services."