Heading into the print last night, the stock had surged by more than 20% from the lows it hit on October 25. Of course, much of the rebound can be attributed to the strong reversal in the stock market, but, investors were also likely positioning themselves for a solid report. So, the recent upswing in the stock has likely amplified today's sell-off as traders lock in gains from that recent rally.
Taking a closer look at the results, UPWK posted a loss per share of ($0.01) missing analysts' expectations by a penny. While gross margin remained steady at 68%, the company swung to an operating loss of ($3.3) mln compared to an operating profit of $203K in the year ago quarter. Also, Adjusted EBITDA dropped into negative territory at ($100)K versus $2.8 mln a year ago.
The reason for the decline in profitability is simple: operating expenses grew at a faster rate than revenue. Specifically, revenue growth was somewhat lackluster at 22.6% to $64.1 mln -- slightly ahead of the $62.2 mln consensus. Meanwhile, total operating expenses climbed by 33% to $46.9 mln, with Sales & Marketing costs up 40%. And, as a percentage of revenue, Sales and Marketing expense increased to 29.6% from 26.0%, which isn't the most encouraging sign. It is especially worrisome because revenue grew at its slowest pace in at least four quarters.
On the positive side, UPWK's client retention spend of 108% was up significantly from the 95% it achieved in the year ago period. Furthermore, the metric has been improving over the past few quarters, moving from 99% in 4Q17, to 103% in 1Q18, and then 106% last quarter. This indicates that the increased marketing efforts are have some success in driving more revenue out of existing clients.
However, another issue that is dragging the stock lower today is its outlook. For Q4, UPWK is expecting revenue of $64.5-$66.0 mln, barely edging out the $64.4 mln consensus. But, the main concern is that, once again, revenue growth is expected to drop -- this time to sub-20% levels.
To conclude, while UPWK's results certainly weren't disastrous, they weren't overly impressive either as it missed the mark on earnings and as revenue growth is fading. Even as the company is hitting the accelerator on sales and marketing spend.