Under the Microscope: Upwork’s 4th Quarter and Full Year 2019 Financial Results Recap

Upwork, the largest global freelancer website by gross services volume, recently reported its financial results for the final quarter and full-year 2019. Overall, the company posted strong results, and its new CEO laid out the strategic roadmap for future growth.

Results Recap

Note on accounting changes: Upwork changed the way it accounts for various financial metrics due to it no longer being classified as an “emerging growth company.” For this article, we use the firm’s updated Accounting Standards Codification Topic 606 numbers unless otherwise noted.

Fourth-quarter Gross Services Volume (GSV), which represents a combination of client spend on freelancers and additional fees received for other services, increased by 16% year-over-year to $549 million. For the full year, GSV grew by 19% to $2.087 billion. Revenue, which is the amount Upwork keeps from GSV, grew 19% year-over-year, reaching $80.3 million during the quarter; for the full-year, revenue grew 19% to $300.6 million.

Upwork’s “take rate,” which is the percentage of GSV the firm takes to facilitate its transactions, was 14.6% for the quarter and 14.4% for the year.

Discover how Upwork has made significant financial wins throughout their final quarter and throughout 2019 in @TalentTechLab's latest article: Click To Tweet

Non-GAAP net income for the quarter at $3.4 million and for the year at $5.5 million. Adjusted EBITDA for the quarter was $3.5 million, which is down slightly from the same quarter in 2018. The annualized figure, $7.4 million, is substantially better than the prior year’s $3.8 million.

Upwork’s net loss for the fourth quarter was $5.5 million (or $0.05 per share); the annual net loss was $16.7 million (or $0.15 per share). The 2019 figure shows improvement over 2018’s net loss of $19.9 million. You can find the earnings call and accompanying report here.

A New CEO and a New Strategy

Since its IPO on October 3, 2018, Upwork retooled its strategy and welcomed a new CEO, Hayden Brown, who moved into the role on January 1, 2020. She believes that Upwork can make serious inroads into the $560 billion market for remote professional services and set a goal “to sustain 20%+” year-over-year growth for the foreseeable future. To support her goal, she established three objectives:

• Attract more and bigger clients
• Enable more spend per client
• Make more high-quality matches, particularly in technical categories of work (e.g., mobile and software development)

Brown noted that the problem of attracting more enterprise clients lies, in part, with a misunderstanding regarding what Upwork provides. Specifically, the bulk of the company’s GSV – 85% of the just over $2 billion – came from “large engagements and complex projects, not small gig work,” she said during the most recent earnings call; though the market may have a different perception of the kinds of work facilitated through Upwork. To change this, the company recently launched a marketing campaign focused on professional staffing buyers to showcase Upwork’s capabilities for hiring long-term freelance workers. The sales team has also been increased to 90 to help bring in new clients.

For existing clients, Brown said the goal is to make it faster and easier for them to use Upwork’s platform so that they can use it more widely across their organizations. Specifically, Brown said Upwork is “investing in a more robust temp-to-hire offering for full-time work…These and other changes are aimed at enabling more clients to get longer-term, larger, and more ongoing work done via our site.”

Upwork’s client spend retention rate (essentially the amount of recurring revenue for clients that have used Upwork in the past) was 102% in 2019, down from 2018’s all-time high of 108%. The decrease is likely due to the rollout of a “domestic marketplace” offering (i.e., US clients connecting with US workers), which might have made it easier for clients to connect with freelancers and then take work off the platform. Brown expects the number to level off around 98% to 100% as the marketplace stabilizes.

The company believes that it can facilitate better matches between clients and freelancers, especially regarding technical categories. Brown said that while technical categories account for a major portion of Upwork’s total GSV, the categories are not growing as quickly as they should be. To meet client demand, Upwork is mimicking changes implemented last year to increase growth in their design category.

Analysis 

Overall, Upwork had a strong quarter, and its new CEO laid out a straightforward strategic roadmap with targets for future growth and a plan to get there. The two big questions that remain to be unanswered are 1.) will Upwork actually be able to hit the 20% growth target it set for itself, and 2.) is there a path to sustained profitability? (The company has yet to turn a profit.) We suspect that the answer to both will be contingent on Upwork’s ability to grow its large-enterprise clients (both new and existing).

With a strong quarter behind them, Upwork's new CEO, Hayden Brown, is making strategic advances to ensure their company is heading in the right direction moving forward. @TalentTechLabs has more: Click To Tweet

One notable development is the firm’s positioning itself as a more “traditional staffing” alternative. For example, Upwork is rolling out new payroll solutions and temp-to-hire options, things the incumbent industry has done for decades. Further, two of its relatively recent additions to the executive team, Lars Asbjornsen and Eric Gilpin, both have ties to the industry (Robert Half and CareerBuilder, respectively). For a category of company that some have espoused as a “staffing disruptor,” it’s interesting (and from the perspective of its competitors, perhaps refreshing) to see the largest company in the category take some pages from the incumbents’ playbook.

We are bullish on the online staffing model, and given Upwork’s position as the most significant player in the space (by a substantial margin), think they have some unique advantages. While the public market has not been kind to investors (as of the writing of this article the stock is down more than 60% from its post-IPO highs), we believe the underlying value proposition of the business and business model has not changed, and think the tailwinds are blowing in the right direction. At its current valuation, we think the firm might actually be an acquisition target for those that have shown interest in the space (e.g., Recruit, Microsoft, Adecco, Randstad, etc.).