Upwork Reports Q3 2018 Financial Results: Trends Continue, But Q4 Growth A Concern

Upwork Inc., ​the global online freelancer marketplace and enterprise solution company that had a successful IPO in early October, reported its third quarter 2018 financial results Wednesday. Spend Matters has extensively covered Upwork in past years, and the Upwork Enterprise technology platform made a strong showing in our Q3 2018 SolutionMap for contingent workforce technology.

Since the company’s Q2 2018 and earlier financial results had been disclosed in the Form S-1 before the IPO, it was not a surprise that Q3 results reflected a continuation of mostly positive trends. Q3 2018 gross services volume (GSV) increased by 27% over Q3 2017 to $449.5 million, potentially putting the company on track to cross the $2 billion annualized run-rate Q4. Total Q3 2018 revenue increased by 23% year-over-year to $64.1 million.

At the same time, Q3 2018 operating expenses (R&D, sales and marketing, G&A) increased 33% over Q3 2018 operating expenses, 10 points higher than the year-over-year increase in revenue. While “take rate” and gross profit margin remained steady year-over-year, Q3 2018 operating loss of ($3.3 million), adjusted EBIDTA of ($0.1 million), net loss of ($7.3 million) were significantly worse than Q3 2017 (a trend that investors will not like).

Perhaps a positive sign, the rate of increase in operating expenses has been declining over each of the past three quarter in 2018: the Q1 2018 over Q4 2017 was 20%, Q2 2018 over Q1 2018 was 8% and Q2 2018 over Q1 2018 was 3%. Contributing to the trend, sales and marketing expense actually declined by 3% Q3 vs. Q2 — which could be a good thing from cost management, unless it it portends a drop in revenue.

Stock Price Falls

There’s one possible surprise to investors: Upwork’s guidance on Q4 revenue indicates a range of $64.5 million to $66 million. The lower end of the range would imply essentially no growth in revenue Q4 over Q3, and the high end would imply only 3% growth (compared to 8% over the last two quarters).

At the close of the market on the day of the earnings announcement, the share price was $20.29, around where it had been trading since shortly after the IPO. However, its price slid in trading Thursday, ending at $18.07 a share. And tomorrow is another day.  In any case, at this stage of the game financial analysts and investors are trying to gauge and understand a complex, entirely new type of business that has a vision of destination but is still working out the route to get there.

From our standpoint, Upwork will be walking a fine line between top-line growth and costs. The company  has quite a number of irons in the fire, which can be a good thing or a not-so-good thing, depending on the number that is manageable and how hot or cold they are.  Upwork is looking to achieve a significant degree of brand recognition, develop new functionality and solution offerings (like in-country marketplaces), penetrate the larger enterprise market (like a classical disrupter) and expand internationally. And then there’s the holy grail of data and analytics. All of these achievements do not come cheap.

The Road Ahead

We don’t mean to seem pessimistic about Upwork now that it is a publicly traded company — we are not by any means. Upwork and its management have moved mountains over the past several years, merging two competitors, replatforming one freelance marketplace to another and launching and getting traction with the Upwork Enterprise solution offering. In terms of GSV, the company is about to double in size over a period of just a few years. To get the company to where it is today, Upwork has demonstrated extreme skill in navigating a very complex, changing market environment; and that should serve it well in the coming years.

We also believe that the discipline of “the market” will promote additional clarity about resource allocation and sharper focus on top opportunities in a complicated and evolving market with large, experienced and well-capitalized industry players, next-gen technology (e.g., blockchain) upstarts and potential for new entrants from outside the contingent workforce industry (e.g., Uber Works).

We’ll be keeping our eye on revenue growth rate, cost structure and enterprise penetration in the coming quarters. In the meantime, we have very high hopes for Upwork.