In October last year, when Upwork (NASDAQ:UPWK) was already a public company, I wrote a valuation piece, which consisted of two parts (here and here), in which I showed company’s value was around $14 and that it was overvalued at $20 price it was trading at that time. Six months through and one 10K report, nothing has changed fundamentally, in my view, to re-assess that narrative; nor has there been any impressive performance on the part of the company.
Interestingly, and perhaps due to unimpressive revenue growth rates, just yesterday, Upwork CEO Stephane Kasriel announced of an impending change in the way the company was going to engage with freelancers going forward. With this change in mind, it is interesting to consider what repercussions, if any, this may or will have for the company.
According to the announcement, starting in May this year, freelancers will have to pay to obtain the so-called ‘Connects’ tokens to gain access to the platform. Historically, freelancers received 60 free Connects each month, which they could then use to send proposals to the projects posted by clients (with the “cost” of sending those proposals ranging from 1-6 Connects per each proposal). While freelancers were able to purchase more Connects, if they needed, it was not necessary or required, given that 60 may have been just enough for them. With this privilege comes a cost in the form of Upwork charging a tiered ‘take-rate’ as a platform, where freelancers and clients meet, which, on average, stands at around 13%. Now, however, freelancers will have to pay $0.15 per Connect on top of that, and this is where things are getting interesting.
An essential thing to begin with is to look at who the typical freelancer is. According to the latest 10K report and S-1 report filed during the IPO, freelancers come from the following regions:
While it is the case that the United States still accounts for the greatest proportion of freelancers, this is so only on individual-country basis. Two of the countries that follow, India and Pakistan, have the same revenue contribution when combined, and there are more countries with low per-capita incomes in the ‘Rest of the World’ category (for some background look at this link).
Meanwhile, revenue generation by client shows a completely different picture:
Most of the revenue generated from clients comes from the US.
This very factor of US-located clients, on the one hand, and freelancers located in low-income countries, on the other, had been the value proposition I referred to in my earlier report on the company. Given this change, these freelancers may now be reluctant to spend their money purchasing Connects, given there is no guarantee to get hired and the fact they already give up about 13% of what they earn as platform charge (there are also other minor charges related to payment processing fees). What is more, there is no discount for bulk Connects purchases – that is, regardless of whether a freelancer purchases 10 Connects or 60 Connects, she still ends up paying $0.15 each, and with some freelancers charging $5-$10 per hour of work before Upwork's 13% take-rate fees, the new structure just may not seem feasible for them.
This action can also be discerned from the tone Upwork sets in its 10K filing:
As a result of […] surplus of freelancers relative to clients, we primarily focus our efforts on retaining client spend and acquiring new clients as opposed to acquiring new freelancers and retaining existing freelancers. […] [T]he number of freelancers retained between periods is merely one of many factors that may impact client spend in a particular period and is not a primary driver of our key metrics and operating results. For these reasons, we do not calculate or track freelancer retention metrics in order to manage our business.
Talking about the plausible impact from this change, there are three outcomes that I personally foresee:
Regardless of the outcome, it is the clients who will be on the receiving end.
With few freelancers from low-income countries, there will be proportionately more from mid- to high-income freelancers, where rates are relatively higher, thereby hitting clients in the pocket (obviously, a similar outcome is achieved, if freelancers directly increase their charge rates). Additionally, with fewer freelancers, the talent pool may deplete – again, negatively affecting the type of service clients expect and end up receiving.
Apart from negatively impacting clients, this action also dissolves the previously mentioned value proposition – that clients from high-income countries would like to receive high-quality service at a fraction of a cost they would get otherwise.
While the reason for introducing this new structure is understandable (to widen revenue pool), it is important to remain cautious about whether the benefits of extra revenue streams will outweigh the drawbacks mentioned above.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.