Upwork released its 2022 Q2 earnings in July 2022. Here are the key points that you don't want to miss for upwork from this earnings!
In 2022 Q2, as with the previous quarter, Upwork continued to grow its clients (+11%) and revenue (+26%, which was much faster than competitor Fiverr’s 13%) well, while continuing to invest a lot on its sales and marketing, leading to negative profits.
Although it increased its full year 2022 revenue growth guidance from 19% to 22%, it also saw softening trends on its business recently, including lower client acquisition and retention rates, particularly in Europe and from small- and medium-sized businesses. A day after the earnings, its share price crashed by 18% to USD 19.
So how does this revenue growth compare to the medium-term target set by the management in 2021, which is used in our latest valuation of the company?
Let’s explore that, together with Upwork’s overall performances, in this article.
On some key financials:
Active clients grew 11% y/y (to 807 thousand clients), which is a slowdown from the 27% growth a year ago and the 16% growth a quarter ago. This 11% clients’ growth was higher than competitor Fiverr’s 6% growth (to 4.2 million active buyers). Upwork expected a further slowdown in clients growth in the second half of the year, due to some softening seasonal and macroeconomic trends observed in Q2, including lower client acquisition and retention rates, particularly in Europe and from small- and medium-sized businesses. However, it is still optimistic about the longer-term secular mega trends around remote work and digital transformation which would help with the growth of its business;
However, existing clients have been finding value on the marketplace, and spending more money over time, with the number of clients spending >$100k per year growing significantly, by 38%. This resulted in the gross service volume (GSV) per client growing by 16% y/y (to $4,874), which is higher than the 8% growth a year ago, but lower than the 18% growth a quarter ago.
Considering the above two factors, total GSV grew by 19% (to slightly over $1.0 billion), slower than the 50% growth a year ago, or 27% growth a quarter ago.
However, overall take rate improved to an all-time high of 15.0% since IPO (vs 14.2% a year ago, or 14.1% a quarter ago), mainly due to Upwork’s implementation of its new Client Marketplace Plan (which replaces & simplifies the previous basic plan and plus plan, and leads to higher fees overall but with more features overall for a flat service fee), and the high revenue growth from Enterprise Clients (which has higher take rate). On the implementation of the new Client Marketplace Plan, management said that there has not been any material reduction in client retention, so that’s good and indicative of the value Upwork provides its existing customers and its pricing power.
With a higher take rate, revenue grew faster than GSV, by 26% (to $157 million), slower than the 42% growth a year ago, but faster than the 24% growth a quarter ago. The 26% revenue growth was faster than competitor Fiverr’s 13% revenue growth, although Fiverr mentioned that “with market conditions worse than anticipated, when growth becomes expensive, instead of growing at any cost, we decided to prioritize EBITDA and free cash flow, and accelerate the pace towards our long-term target model. We believe this puts us in a stronger financial position to double down on growth investments when market conditions improve”.
Gross profit margin also grew to an all-time high of 74% since IPO, slightly higher than the 73% a year ago or a quarter ago. Thus, gross profit grew slightly faster than revenue, at 27% y/y (to $116 million).
Operating expenses as a % of revenue stood at 89%, which was higher than the gross profit margin of 74%, hence leading to a net loss for the quarter. The 89% total opex was higher than 87% a year ago, mainly due to an increase in sales & marketing spending (by 3% point, to 40%) and transaction losses (by 3% point, to 4%), offset by a decrease in general & administrative expenses (by 5% point to 21%). The higher % of transaction losses was mainly due to increased instances of fraud and higher chargeback losses, and Upwork is closely monitoring the situation and putting additional measures to decrease losses going forward.
The net loss for the quarter was $24 million (i.e. 15% of revenue), higher than the $17 million loss a year ago, and close to the $25 million loss a quarter ago.
After adjusting for the non-cash share based compensation expense (12% of revenue), etc, the free cash flow (FCF) was minorly negative at -$2.4 million (i.e. a FCF margin of -2% of revenue), mainly due to the high spending on S&M etc. The adjusted EBITDA loss was slightly higher, at negative $1.9 million or -1% of revenue.
On capital allocation…
For the remaining points of this article, check them out at our Multibagger Research Series (linked below).
For our free analysis of other high quality companies, check them out at our free Research Series (linked below).
For our summary analysis of the company, check out the video below.
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