Upwork – 2021 Q4 Earnings
Upwork posted another period of impressive growth in 2021 Q4 for both user engagement (with clients growing by 22% y/y) and top-line results (up 35% y/y), surpassing noteworthy milestones. However, growth trends have decelerated while growth spending continues to remain elevated, limiting margin performance. Management’s decision to pull forward the $1 Billion sales target by a year, from 2025 to 2024, which translates to a revenue CAGR of 26% in the next 3 years, shows confidence in these investments, though the company was also expected to have increased investments spending, particularly on sales and marketing expenses in the near-term.
Here are our key points from the results and call! And we will discuss Upwork’s valuation given the pulling forward of the sales target in our next Multibagger Research Series Meetup!
Gross Services Volume (GSV) grew by 35% y/y to $980 million in Q4 2021. The company also saw the number of Active Clients grow 22% y/y to 771,000 in Q4 2021. While both have impressive growth rates, the rate of growth for both metrics has decelerated once again from prior periods. In contrast, GSV per Active Client continues to improve, growing 15% in the period to $4,599. For the full year 2021, GSV increased 41% y/y exceeding $3.5 billion.
Revenue growth of 29% in Q4 2021 was slower than GMV (as take rate continues to decline). Upwork reported $137 million of revenues in Q4 2021, up from $106 million in Q4 2020. The improvement in Q4 2021 was driven by marketplace revenues that grew 30% y/y from $97 million to $125 million, and revenue from managed services that grew 23% y/y. For the full year, revenues climbed 35% exceeding the $500 million mark for the first time.Because of the pace of growth and early success of new product offerings, management announced that they have moved earlier the company target of generating $1 billion in revenues by one year, from 2025 to 2024. This pull forward of the guide, comes only 6 months after the target was initially set. If this target is met, the company will deliver a 26% top-line CAGR over the next three years.
As expected, the Marketplace take rate fell again in Q4 2021, down 60 bps y/y and 20 bps Q/Q, to 14.0%. This is, and will, continue to be driven by two key factors:
As Marketplace revenue growth outpaces that of managed services revenues, there is a negative mix headwind, as managed services revenues have a 100% take rate.
This is further amplified as the business model leads to lower Marketplace take rates as clients and freelancers establish longer term relationships. As the amount of GSV within a given relationship increases, the take rate falls from 20% to 5% once certain thresholds are exceeded. Said differently, higher GSV/client drives lower take rates. In Q4 2021, the Marketplace take rate fell to 12.9%, the lowest since this detail has been reported.
However, new innovative offerings such as Enterprise relationships, Project Catalog, and Talent Scout programs all have higher overall take rates. The future success of these programs could help offset some of the impact of the two headwinds discussed above. Management believes that these offerings could result in the overall take rate starting to show improvements in 2022, which we will monitor closely.
For the first time, the company broke out metrics around enterprise clients explicitly. The revenue contributions from this group of clients was $10.5 million in Q4 2021, or 7.7% of total sales. While still relatively small, this is the largest contribution to total sales since the enterprise offering was launched, and revenues from the group increased 64% y/y. As at end 2021, there were 108 clients that spent >$1 million in the trailing 12 months, which was a 61% increase y/y, or 11% increase q/q. There were also 7 clients that spent >$10 million in the trailing 12 months, of which 5 spent a whopping >$20 million. During the earnings call, CEO Hayden Brown discussed the company’s target to achieve $300 million of enterprise revenues by 2025, which represents almost 10 times that in 2021, or a 71% CAGR over the next four years (and 30% of the $1 billion total revenue target in 2024, one year earlier). More to come on the spending to achieve this target below.
Gross margins again held constant y/y at 73% of revenue in Q4 2021, contributing $100 million of GAAP gross profit, as the company’s platform continues to hold impressive margins.
For the remaining points of this earnings summary, check them out at our Multibagger Research Series (linked below). https://learn.moneywisesmart.com/courses/multibagger-research-series/lectures/38297369
For our free analysis of other high quality companies, check them out at our free Research Series (linked below).
For our analysis of the earnings (in video form), check out the video below.
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