Upwork (UPWK 21.82, +6.82, +45.47%), which owns and operates an online platform
for freelance workers, saw very healthy demand for its IPO. Not only was the
projected price range lifted to $12-$14 from $10-$12, but the deal size was
also bumped slightly higher to 12.48 mln shares from 12.3 mln, and, the deal
priced above the upwardly revised range at $15.
Implementing a business model that resembles that of recent IPO Eventbrite (EB) -- which opened for trading on September 20 and has surged by 50% versus its IPO price -- investors were likely drawn to UPWK with the expectation of enjoying similar results. We discuss its business in more detail below, but in succinct fashion, Upwork, like Eventbrite, operates an online platform in which it generates revenue from commissions. Where the two differ notably is in the type of payment activities through which each charges commission. Eventbrite's commissions come from ticket sales, while Upwork takes a cut of the wages paid to its freelancers.
Additionally, UPWK is growing its top line by solid double-digit rates; its valuation was quite reasonable when considering that growth. Specifically, at the mid-point of the original expected price range, UPWK had a P/S of 5.3x annualized FY18 revenue. Now, with the IPO pricing above the upwardly revised price range, the valuation is a little richer at 6.4x.
As for the IPO, it generated $187.2 mln in total gross proceeds, nearly 40% more than anticipated. The lead underwriters on the IPO were Citigroup, Jefferies, and RBC Capital Markets. The stock opened for trading earlier this morning on the Nasdaq at $23.00.
Upwork can be thought of as a LinkedIn for short-term work ("gigs"), mainly tailored towards work regularly performed in offices such as computer programming, sales, creative design, and administrative assistance while also providing a channel for a broader range of miscellaneous skills and services, from academic editing to translation services to voiceover talent work. Individuals can sign up for free, create and post a profile, and bid for jobs. Freelancers using the platform benefit from access to quality clients and secure and timely payments while enjoying the freedom to run their own businesses, create their own schedules, and work from their preferred locations. Additionally, freelancers have real-time visibility into opportunities that are in high demand so that they can invest their time and focus on developing sought-after skills.
On the flip side, companies and organizations have access to an expansive pool of qualified freelancers to contract with in order to complete short or longer-term projects. Every day, an average of approximately 10,000 independent professionals and agencies apply to join the platform. Furthermore, as of February 2017, according to an internally-conducted survey, over 80% of freelancers using its platform were college degree holders or held advanced degrees, with 34% holding post-graduate degrees.
What also really stands out is the speed in which businesses find and hire a qualified worker via the platform. According to the company, clients often receive proposals within minutes of posting a job, and the median time to hire was 23 hours in 2017. Its marketplace streamlines the interviewing, screening, and contracting process through proprietary search algorithms incorporating freelancers’ availability, online status, and skill profiles.
From a broader perspective, UPWK is benefiting from some technological and cultural changes in the workplace. Perhaps most importantly, thanks to technological advances, work is no longer constrained by location. In its IPO prospectus, UPWK comments that in this "labor revolution", work is now moving to the worker, rather than the worker moving towards the work. Similarly, worker collaboration, eased by advances in communications functions such as file sharing and remote conferencing as well as in tasks like remote contracting and secure payment, is less constrained by physical proximity, particularly for high-skilled workers. Of course, this flexibility is primarily the result of workers being able to access communications and applications on the cloud through mobile devices.
Taking a look at the financials, for the six months ended
June 30, 2018, total revenue increased by 28% year/year to $121.9 mln.
Marketplace revenue, which is generated from its Upwork Standard, Upwork
Enterprise, and premium offerings, accounted for 88% of total revenue,
consistent with the year ago period. Marketplace revenue growth was driven by an
increase in gross services volume, which was up 30% year/year, due to a 22%
jump in the number of core clients as well as improved client spend retention
of 106% versus 92% in year ago period.
The other component of revenue, Managed Services, was up 25% to $14.5 mln. Managed Services revenue consists of providing services and engaging freelancers directly or as employees of third-party staffing providers to perform services on UPWK's behalf.
Gross margin did slide modestly to 67% from 68% in the year ago period as cost of revenue climbed by 29% to $40.1 mln. This increase was primarily due to higher payment processing fees from an increase in client spend on its platform.
Moving down the income statement, Sales and Marketing expense (its largest expense) surged by 52% to $36.1 mln. As a percentage of revenue, it also increased to 30% from 25%, which is a little disconcerting. The jump in Sales & Marketing expense was due to the building out of its sales team and the salaries that go along with that. Overall, total operating expenses were $87.5 mln in the six months ended June 30, 2018, higher by 39% than total expenses in the prior year period.
With the slight drop in gross margin and with expenses growing faster than revenue, UPWK went from an operating profit of $1.6 mln to an operating loss of ($5.7) mln. Additionally, Adjusted EBITDA declined sharply to $256K from $7.0 mln.