Upwork GSV and Remote Work Industry

Macroeconomics and Politics
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Main article: Freelance & Outsourcing Industry - InvestmentWiki

2020 has been an explosion for the remote work industry to which I count freelance companies like Upwork and Fiverr and technology companies like Zoom.

The technology for the whole world to work together irrespective of location had been established for a while but Corona caused mainstream adoption and accelerated technological developments as SaaS businesses sprung up everywhere and secured massive funding rounds.

Internationalization of work is powerful as developed countries are facing an aging population and a shortage of workers and developing countries have an increasingly well-educated young population but attractive local jobs are missing.

Furthermore, remote work offers possibilities and flexibilities for all digital workers like the ability to travel the world while working, which is especially appealing to Gen Z.

When we are looking at Upwork - our current investment in this nascent category - we see that the total volume of transactions flowing through the platform nearly doubled from Q1 2020 (560 million) to Q1 2022 (1001 million).

Now in Q1 2023, the tides have turned and the challenge with this increased volume (called Gross Services Volume or short GSV) is to keep it, which Upwork managed so far (1,003 million).

The outlook is uncertain though as central banks are slowing down the economy, job markets will slowly start to ease, people return back to the office, young and innovative businesses which use Upwork lack money and freelancers are the first to lose their jobs.

Considering this, Upwork’s CEO Hayden Brown’s recent announcement to cut costs in order to reach FY 2023 adjusted EBITDA of 36 to 40 million looks more like a defensive move that could prevent Upwork from suffering large losses than a real increase in the businesses underlying profitability.

Personally, I am fine with Upwork not hitting those profitability targets as I like the long-term prospects of the business but missing them drastically could bring Upwork closer to a dangerous loss-making situation. (Their cash situation is alright but they have to repay a large bond in 2026 and should avoid losses at all costs)

Therefore it is very important for us to develop proprietary methods to predict Upwork’s profitability which depends on the volume of work flowing through the platform (GSV).

By doing so we could significantly derisk a risky investment and gain an edge compared to the market.

Our current attempts include studying all available reports about the freelance industry and having a look at the broader outsourcing industry, studying the state of small businesses in the united states which represent 2/3 of Upwork clients and analyzing data on Upwork’s platform.

So far we found that longer-term trends towards more remote work should be given, outsourcing and cost savings do not happen during a recession, small businesses in the U.S. should be alright as of now, and data from Upwork’s platform stays stable.

That said I am still struggling with any concrete prediction of GSV. @Magaly @Aron What are your thoughts? Do I miss important points? Do you have any ideas which kind of data we have to look for in order to gain a better understanding?

(Note: For discussions about small businesses or platform insights i suggest we use the above-linked standalone topics)

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I=7

  • The U.S. Department of Labor finalized a rule on Tuesday that will potentially force businesses to treat some workers as employees rather than independent contractors.
  • Though the rule is expected to face legal challenges, it’s widely expected to increase labor costs for companies that rely on independent contractors if it sails through.
  • Chamber of Progress estimates that the rule will affect 3.4 million gig workers resulting in $31 billion in lost income.
  • Upwork hasn’t issued a statement regarding the rule but Uber and Lyft expressed concerns over it though they don’t expect it to change how they operate.

US Department of Labor announces final rule on classifying workers as employees or independent contractors under the Fair Labor Standards Act | U.S. Department of Labor.

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Here is a summary of the Final Rule on worker classification:

  • The Final Rule rescinds the 2021 IC Rule which established two “core factors”: the degree of control by the workers and their opportunity “for profit or loss” are enough to determine the worker’s classification. Non-core factors included the number of skills required, the degree of permanency of work and whether the work is part of an integrated unit of production.

  • The 2021 IC Rule was to come into effect on March 8, 2021, but was delayed by the Department to March 4, 2021, and withdrawn on May 6, 2021. However, on March 14, 2021, a U.S. Court reinstated it saying it came into effect on March 8, 2021.

  • On October 13, 2022, the department published a proposal to rescind and replace the 2021 IC Rule, resulting in the Final Rule.

  • The Final Rule will be effective on March 11, 2024.

  • The Final Rule stipulates that the longstanding method of classifying workers: the totality-of-the-circumstances analysis will apply and that the following six economic factors (that carry similar weight) should apply.

  1. Opportunity for profit or loss depending on managerial skill: If a worker can negotiate the pay for the work, accepts or declines jobs or chooses the time of work, engages in marketing of their services, hires others to help with the work, purchases equipment or hires space, then they are classified as independent contractors.
  2. Investments by the worker and the potential employer: “Worker’s investments should support an independent business or serve a business-like function for this factor to indicate independent contractor status,” the rule states. Here, the investments by the worker should not be for one specific job (employer). The worker should also be able to market their services.
  3. Degree of permanence of the work relationship: Indefinite work duration favours employee classification while definite work duration favours independent contractor classification. If the worker can market their services or turn down work, they are independent contractors.
  4. Nature and degree of control: If the employer exercises control over work schedules, prohibits the worker from marketing their services and maintains close supervision over the worker, the worker qualifies to be termed as an employee.
  5. Extent to which the work performed is an integral part of the potential employer’s business: If the worker provides services that are not critical, necessary, or central to the business, they qualify to be classified as independent contractors.
  6. Skills and Initiative: “[w]here the worker brings specialized skills to the work relationship, it is the worker’s use of those specialized skills in connection with business-like initiative that indicates that the worker is an independent contractor,” the rule notes.
  • The department believes that this rule will not result in widespread reclassification of workers, particularly for workers who are correctly classified but would result in the reduction of misclassification. This is because the Department is adopting guidance that was used before the 2021 IC Rule.

https://www.federalregister.gov/documents/2024/01/10/2024-00067/employee-or-independent-contractor-classification-under-the-fair-labor-standards-act

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Given how the Biden Administration is desperate to cross some regulations in their bucket list before the presidential elections, I think they will implement it swiftly.

“There is a packed regulatory agenda, and there are things we need the DOL to do and finalize, probably by, you know, early May of 2024 to avoid any Congressional Review Act issues should President Biden not be reelected,” said Judy Conti, government affairs director for the National Employment Law Project [1].

However, some bodies including the U.S. Chamber of Commerce have promised to challenge it in court. Also, even if the Final Rule withstands the court challenges, it will be up to the court to decide how a worker should be classified (in case of a legal suit) and the courts have always referred to past laws in their decisions [2].

Assessment

Going through the above six economic factors, it seems to me that companies likely to be affected are the likes of Uber, Lyft and providers of trucking services that don’t conform to the fifth factor above. A company like Upwork may not be heavily affected by the regulation given that it already uses the six factors in classifying workers [3].

Even though industry experts claim that the Final Rule will create uncertainty in the labor sector and potentially make employers afraid of hiring independent contractors (due to fear of going against the Rule), I think Upwork clients will be on a safe side since the company profides indemnity of up to $50,000 if it misclassify workers hired by clients who use its classification system [4].

That said, it will still be good to see how Upwork will react to it and continue monitoring and assessing the situation to ensure we stay on top of it.

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A very brief update of my current view on Upwork GSV

After a surprisingly strong Q2 2023 in which we judged GSV wrong it became apparent that our current method of looking at Jobs posted on Upworks website has not been working reliably. (Nevertheless, we continue to track the data points as we are still trying to search for any possible correlation)
Q3 2023 was another stable quarter for GSV.

Finding ways to predict GSV could still be valuable as it could be a direct way to position before Upwork’s volatile earnings.

Since Q2 2022, GSV, active clients, and GSV per active clients have been remarkably stable. Likewise, in Q3 2023

  • GSV from new client cohorts is balancing out client churn as Upwork’s active client count increased 2% y/y and 1.7% q/q. (Retention has been slightly better, while client acquisition was slightly worse according to Q2 insights)
  • GSV from clients that increased spending balances spending cuts from other clients as GSV per active client decreases 1% y/y and 1.6% q/q.

Here are some theories for the bull case

  • Since Q2 2022, Upwork has suffered from a trend back to the office. Small businesses and ventures founded during the lockdown period have been closed. Startups ran out of money. Nevertheless, Upworks GSV remained stable while Upworks SMB and software-heavy key industries went through a heavy recession.
  • U.S. job openings fell from 12million to 9.5million in the period.
  • Upwork GSV had a CAGR of 22% between 2016 and 2019 before Covid. The whole effect of current macro headwinds on Upwork might be a temporary pause of growth before underlying secular trends continue.

What are your thoughts? Is there reason to believe that this is too optimistic? (E.g. could a decline in sales for small businesses or labor weakness hurt? Are there any additional GSV insights from Upwork’s Q3 2023 conference call that should be added here for context?

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These are the newest remote work trends according to Linkedin:
Sample: From January to December 2023, more than 30 million job postings were added to Linkedln across the 12 countries analyzed (Australia, France, Germany, India, Ireland, Israel, Netherlands, Singapore, Sweden, United Arab Emirates, the United Kingdom, and the United States). Similarly, more than 20 million positionswere added to Linkedln profiles from members in these countries in the same year.

Despite employees’ fairly uniform preference for more flexibility, employers scaled back their offering of remote jobs in 2023 compared to 2022. Instead, hybrid job postings have become more common than remote job posts in all countries.

This is how the outsourcing industry did in 2023, according to ISG Index:

ISG forecasts 4.25 percent growth for managed services and 15 percent revenue growth for XaaS in 2024.
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