Interviews do not imply endorsement of the company, its products, or any associated securities. Rather, it is meant to provide you more information for your consideration from those currently directly in the industry itself.
I recently had the opportunity to interview Brian Kinion, Chief Financial Officer for Upwork (UPWK). Upwork is a technology company that provides a platform for the buying and selling of freelancer services to businesses, institutions, and organizations.
Upwork functions primarily as a service which connects organizations with freelancers as well as provides tools for interviewing, selection, billing, controls, and more. In Upwork's 2018 annual report, it claimed to have over 30% of the Fortune 500 as clients and to operate in over 180 countries.
The company derives its revenue primarily from fees charged to freelancers who utilize the platform. It also collects fees for various services offered and utilized on the platform on both the organization and freelancer sides. The "marketplace" side accounted for $223.831 million in revenue in 2018 as compared to the "managed services" that totaled $29.523 million. Upwork has seen net annual losses in 2018, 2017, and 2016.
Upwork in its current incarnation was founded in 2015 as a merger of the 1999-founded Elance and 2003-founded oDesk. The company IPO'ed in October 2018 with pricing at $15 a share. While it has soared up to as high as $25 a share since, currently it hovers a bit below its IPO price and has a public market capitalization of about $1.6 billion.
Kinion joined Upwork in 2017 as CFO. Prior to that he was CFO at Marketo, a former public company acquired by Vista Equity Partners for $1.79 billion in 2016 and then by Adobe, Inc. (ADBE) in 2018 for about $4.75 billion. He has a many-decades background in corporate finance.
(Figure: Brian Kinion, Source: Silicon Valley Business Journal)
ER: Upwork describes its vision as to "connect businesses with great talent to work without limits" and its mission as to "create economic opportunities so people have better lives." What does Upwork do, what are its different operations, and how does the company itself make money?
BK: Upwork is a hiring platform that matches independent professionals to businesses seeking specialized talent. We empower our customers to confidently work together in more flexible ways. Our technology and services eliminate headaches caused by traditional hiring - for both businesses and talent. We make it easier and more cost-effective for businesses to find, hire, work with, and pay talent through Upwork and provide professionals - no matter where they are located - with access to more clients and secure payment so they can work when and where they want. Upwork is the place in-demand, independent professionals choose to find work and where businesses go to get work done. Talent on the platform offers services in more than 70 categories of work across more than 5,000 skills. As of June 30, 2018, there are approximately 475,000 clients hiring on Upwork and 375,000 professionals earning money through the platform. Our mission is to create economic opportunities so people have better lives.
Our marketplace revenue comes from a combination of activities, including the portion we get from freelancers (i.e., service fees and submitting job proposals) and clients (i.e. payment fees, subscriptions, and service fees for premium services). We also get managed services revenue, an offering where we engage freelancers to complete projects and directly invoice the client. which is, we have been profitable on an adjusted EBITDA basis since 2016. We continue to focus on profitable growth and driving leverage in our gross margins. We continue to invest in Sales and Marketing and R&D to drive growth and innovation.
ER: How does Upwork grow its business and bring in the freelancers and businesses who are part of its platform? What brings these customers to join the company's operations and what is it like for them?
BK: More than 30 percent of the Fortune 500 use Upwork to source quality talent today. Hiring has become more difficult, and with unemployment at record lows in many parts of the U.S., talent scarcity and access to skills are major hiring challenges that many companies face. Eighty percent of our customers turn to Upwork - through non-paid and non-sales channels - for its fast, secure, and efficient access to high-quality talent with more than 5,000 skills across over 70 categories and an average time-to-hire of less than three days. In addition to those who organically find the platform, Upwork also engages clients through sales efforts, paid acquisition and thought leadership content on the evolution of work. On the talent side, the most qualified professionals want more transparency, control and direct access to jobs, and Upwork gives them those things. We focus our acquisition efforts on the client side of the marketplace to provide more opportunities for professionals looking for work through the site Upwork in order to help them build successful businesses.
ER: Upwork IPO'ed quite recently, specifically last October. What led Upwork to join the public markets and how has Upwork benefited from and found its presence as a public company so far?
BK: As we grow our sales team and continue branching out into larger, more complex projects, joining the public market was an important step in our journey. The IPO fueled greater awareness and also gives the larger customers a new level of comfort working with a public company (and the visibility that provides) than they do with a private company.
ER: The "gig economy" has been on the rise in recent years and led to many companies being able to build businesses out of that trend. How do you see the "gig economy" moving forward, how will that affect Upwork, and how does Upwork hope to capitalize on those developments?
BK: The gig economy is extremely nuanced. Policymakers need to better understand that no two business models are alike; for example, Upwork is much different than other companies such as home-sharing, ridesharing or on-demand delivery. Our model is differentiated in meaningful ways such as enabling freelancers to build their business according to their own needs, choosing their own clients, setting their own pricing and determining the manner of control over the work in a unique contract with their clients. In addition, “gig work,” which we define internally as small, one-off projects of $1,000 or less, only accounts for approximately 15% of the work done on Upwork, while the rest is made up of larger, complex projects or projects completed by agencies. Upwork focuses on skilled knowledge work. This differentiation, among others, will be important in a policy context for how the future of work is regulated.
ER: Upwork total revenue has been growing significantly, rising to $253.4 million in FY 2018 as compared to $202.6 million in FY 2017. In that time, 2018 non-GAAP net loss was $(600) thousand, compared to $(900) thousand in 2017, and adjusted EBITDA was $3.8 million in 2018, compared to $7.9 million in 2017, and is guided so far to be flat for 2019. What is the vision for how Upwork hopes to achieve profitability?
BK: As an emerging company, our focus is on growth as we address the disruption of a large market opportunity. We estimate that the total addressable opportunity for professional service jobs that can be performed remotely was approximately $560 billion in 2017. McKinsey Global Instituteestimates that, by 2025, online talent platforms could add $2.7 trillion annually, or 2%, to the global gross domestic product (GDP). We continue to take a long-term view and balance investing in sustainable profitable growth while expanding our leadership position of this very large and expanding addressable market opportunity.
Expanding our footprint in the contingent talent market requires an investment in enhancing our core competencies as well as building new ones. Research and development (R&D) costs help us continue to improve the quality of our marketplace, while marketing allows us to engage with our current and prospective customers. Sales is another growth area that allows us to reach out to and support new companies which may benefit from working with independent talent. We intend to continue to invest in sales and marketing with a focus on sound unit economics to drive long-term profitable growth.
Long-term, we believe these investments will help us grow and reach profitability.
ER: Many gig-economy companies have found themselves expanding into additional "side gigs" ironically that turn out to be major new revenue lines. What is the long-term vision for Upwork and does the company see itself growing in new ways that utilize its existing user base?
BK: The ways in which we could expand the scope of our business are pretty boundless - and that’s really exciting to us. We are driven by our mission to create economic opportunities so people have better lives. Improvements to the ecosystem, such as education, insurance, financing, etc. are all additions we'd be thrilled to address, as they would further support that mission. At this point, our immediate priorities are around growing our core business, and we look forward to expanding our focus as we come further in addressing those goals.
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