Freelancer — AI to drive return to growth

Freelancer (ASX: FLN)

Last close As at 04/05/2024

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Research: TMT

Freelancer — AI to drive return to growth

Freelancer’s Q124 results were mixed. Operationally, the company is seeing rising demand for AI specialists as customers seek affordable ways to develop proprietary AI. Notably, in Enterprise, the company delivered a large-scale AI pilot for a tech giant, sourcing 20,000 freelancers in 24 hours across 52 languages. This impressive achievement could lead to a substantial multi-year contract. Major initiatives across Loadshift and Escrow with leading organisations are set to be deployed over the coming months, potentially catalysing performance and diversifying revenue streams. We revise our forecasts to account for a weaker Q1 than anticipated, though positive lead indicators, especially relating to AI, underscore long-term optimism.

Max Hayes

Written by

Max Hayes

Associate Analyst

TMT

Freelancer

AI to drive return to growth

Q124 results

Software and comp services

25 April 2024

Price

A$0.205

Market cap

A$93m

Net cash (A$m) at 31 December 2023

(excluding A$17m of lease liabilities)

21.0

Shares in issue

451.7m

Free float

16.9%

Code

FLN

Primary exchange

ASX

Secondary exchange

OTC FLNCF

Share price performance

%

1m

3m

12m

Abs

0.0

(2.4)

(6.8)

Rel (local)

1.1

(4.7)

(11.8)

52-week high/low

A$0.29

A$0.17

Business description

Freelancer is an Australian company, operating one of the world’s largest online marketplaces for freelancers. Its marketplace division has two business units: 1) its core platform, which provides services targeted at small and medium-sized companies and includes an enterprise service for large multinationals; and 2) Loadshift, which is Australia’s largest marketplace for heavy haulage freight. Separately, the company owns Escrow.com, which is a large transactions processor.

Next events

H124 results

July 2024

Q324 update

October 2024

Analysts

Max Hayes

+44 (0)20 3077 5700

Katherine Thompson

+44 (0)20 3077 5700

Freelancer is a research client of Edison Investment Research Limited

Freelancer’s Q124 results were mixed. Operationally, the company is seeing rising demand for AI specialists as customers seek affordable ways to develop proprietary AI. Notably, in Enterprise, the company delivered a large-scale AI pilot for a tech giant, sourcing 20,000 freelancers in 24 hours across 52 languages. This impressive achievement could lead to a substantial multi-year contract. Major initiatives across Loadshift and Escrow with leading organisations are set to be deployed over the coming months, potentially catalysing performance and diversifying revenue streams. We revise our forecasts to account for a weaker Q1 than anticipated, though positive lead indicators, especially relating to AI, underscore long-term optimism.

Year end

Revenue (A$m)

Operating EBITDA*
(A$m)

PBT**
(A$m)

EPS**
(c)

EV/EBITDA
(x)

P/E
(x)

12/22

55.7

(6.6)

(6.9)

(1.5)

N/A

N/A

12/23

53.3

0.6

0.3

0.1

117.7

396.3

12/24e

56.6

2.1

1.8

0.3

34.0

72.7

12/25e

61.0

3.3

3.0

0.5

22.0

44.7

Note: *Includes depreciation and interest charges associated with capitalised leases. **Excl. amortisation of acquired intangibles, exceptional items and share-based payments.

A mixed Q1 reflected in revised estimates

Q124 gross marketplace volume (GMV) was down 23.8% y-o-y to A$227.1m, driven by a 26.5% y-o-y decline in Escrow GMV to A$195.7m after a particularly strong Q123, with Freelancer GMV down 2.2% to A$31.5m. The impact on cash receipts was substantially smaller, down 3.6% y-o-y to A$13.2m across the group given Escrow’s substantially lower take rate versus Freelancer. Management expects to integrate Escrow with two world-leading e-commerce platforms in Q2, supporting revenue diversification. Cost reductions in FY23 supported a year-on-year swing to positive operating cash flow of A$1.0m in Q124 (Q123: -A$0.1m).

Upcoming initiatives to support long-term success

AI has been pivotal in the group’s latest initiatives. AI is being used to optimise job postings, automate outreach and reduce malicious activity, while also expanding job types, potentially driving operationally geared growth. In Q1, the Enterprise business rapidly deployed an AI pilot for a tech giant, showcasing scalable AI services that could lead to a major long-term contract in FY24. Loadshift, which is continuing to transition to the Freelancer marketplace model, reported 70.9% y-o-y GMV growth as more freight was monetised, remaining a primary performance driver. Despite operational progress, we revise down our revenue forecasts slightly while maintaining similar margin expectations as we anticipate a more material benefit from current initiatives in the medium term.

Valuation: Several potential levers for value creation

On EV/sales, Freelancer trades at a 1.2x average across FY24e and FY25e versus peers on an average of 2.0x. Demonstrating the group’s ability to scale profitably, leveraging any of its businesses to support growth, could close this discount.

Q124 results show several positive lead indicators

Freelancer’s Q124 GMV of A$227.1m (-23.8% y-o-y) was primarily affected by Escrow, which saw GMV fall 26.5% y-o-y to A$195.7m after an exceptionally strong performance from domain names in Q123. Freelancer, which includes the retail marketplace, Enterprise, and Loadshift, reported a smaller year-on-year decline of 2.2% to A$31.5m. We note that there were fewer business days in Q124 compared to Q123 due to the timing of Easter. We believe smaller project size across its retail marketplace was the primary driver of the decline in the Freelancer business, given volumes were up and the other two divisions reported positive progress. The group is continuing to see growing interest for AI specialists, which has the potential to catalyse both volumes and project size. We believe this will be supported by investments in the user interface and collaborative features, which are designed to optimise user engagements, retention and expand the potential scope of certain projects.

The decline in cash receipts from customers, a proxy for revenue, was less pronounced at 3.6% yo-y for the group to A$13.2m. This reflects the smaller take rate (the share of revenue generated from GMV) of Escrow at c 1% versus Freelancer at c 13%.

Exhibit 1: Q124 results overview

(A$m)

Q124

Q123

y-o-y

GMV

Freelancer

31.5

32.2

-2.2%

Escrow

195.7

266.1

-26.5%

Total

227.1

298.3

-23.8%

Cash receipts from customers

Freelancer

10.8

11.0

-2.0%

Escrow

2.3

2.6

-10.2%

Total

13.2

13.7

-3.6%

Group cash flow

Operating cash flow

1.0

(0.1)

N/A

Cash and cash equivalents

21.7

22.7

-4.2%

Source: Freelancer

Freelancer stated that it made a small operating loss in the period but generated operating cash flow of A$1.0m. We believe this swing to positive operating cash flow year-on-year partially reflects cost reductions made in FY23, discussed in our last note.

Operational highlights to drive value across Freelancer

Below we highlight several operational updates that we believe could drive long-term value across the group:

Freelancer retail marketplace

Launching a new feature for newly registered freelancers to reach out and engage with clients they have previously worked for outside of the platform. This could become a significant new channel for client acquisition given the substantial number of freelancers joining the platform daily.

AI tools including guides, assistants and more to help scope out and expand a project.

Enterprise

Delivered a large-scale pilot for a tech giant, crowdsourcing generative AI tasks to train its foundational model. The pilot sourced and qualified over 20,000 freelancers across 52 languages within 24 hours, showcasing Freelancer’s ability to rapidly mobilise a global workforce for AI projects.

Further proposals with three companies to white label Freelancer’s marketplace.

A 235% y-o-y increase in repair volume in Q124 in global field services.

Launched a competition for the Australian Space Agency, in collaboration with NASA’s Artemis programme, to design Australia’s first lunar rover.

Escrow

Integrating into two of the world’s leading e-commerce platforms, which management expects to complete in Q224. One of the partners has more than 70,000 active stores and processes over US$1bn in monthly transaction volume, although we maintain the view it will take time for users to become aware of and comfortable with the service.

Changes to forecasts

We revise our revenue forecasts down marginally, reflecting the decline in Q1 GMV and cash receipts. However, we note this may be conservative, particularly if one of the aforementioned initiatives, particularly in Enterprise, gains traction more rapidly than expected.

Exhibit 2: Summary of forecast changes

FY24e

FY25e

New

Old

% change

New

Old

% change

Revenue

56.6

57.3

-1.3%

61.0

61.6

-1.0%

Growth

6.1%

7.5%

-1.4%

7.8%

7.5%

0.3%

Gross profit

47.7

48.3

-1.3%

51.4

52.0

-1.0%

Gross margin

84.3%

84.3%

0.0%

84.3%

84.3%

0.0%

Operating EBITDA

2.1

2.5

-15.6%

3.3

3.6

-9.2%

Operating EBITDA margin

4%

4%

-0.6%

5%

6%

-0.5%

Normalised net income

1.3

1.6

-17.6%

2.1

2.3

-10.0%

Normalised diluted EPS (c)

0.28

0.34

-17.6%

0.46

0.51

-10.0%

Net debt/(cash)

(25.7)

(26.1)

-1.8%

(30.1)

(30.8)

-2.2%

Source: Edison Investment Research

We maintain our cost assumptions, with profits and margins marginally affected from our lower revenue expectation. Our forecast net cash still shows that Freelancer will maintain a robust balance sheet, supported by our net income assumption and the company’s low capital intensity.


Exhibit 3: Financial summary

A$'k

2018

2019

2020

2021

2022

2023

2024e

2025e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

51,675

57,911

58,771

57,419

55,660

53,334

56,594

61,012

Cost of Sales

(7,651)

(9,455)

(9,786)

(9,689)

(8,740)

(9,093)

(8,887)

(9,580)

Gross Profit

44,024

48,456

48,985

47,730

46,920

44,241

47,707

51,432

EBITDA

 

 

(672)

2,044

5,793

3,972

(746)

6,784

8,267

9,416

Operating EBITDA

 

 

(705)

(1,084)

(447)

(2,690)

(6,579)

608

2,105

3,254

Normalised operating profit

 

 

(1,202)

(1,170)

1,081

(922)

(5,216)

2,051

3,530

4,676

Amortisation of acquired intangibles

0

0

0

0

0

0

0

0

Exceptionals

0

0

0

0

0

0

0

0

Share-based payments

(558)

(329)

(192)

(156)

(159)

(115)

(115)

(115)

Reported operating profit

(1,760)

(1,499)

889

(1,078)

(5,375)

1,936

3,415

4,561

Net Interest

(33)

(219)

(1,751)

(2,035)

(1,655)

(1,717)

(1,703)

(1,703)

Joint ventures & associates (post tax)

0

0

0

0

0

0

0

0

Exceptionals

0

0

0

0

0

0

0

0

Profit Before Tax (norm)

 

 

(1,235)

(1,389)

(670)

(2,957)

(6,871)

334

1,827

2,973

Profit Before Tax (reported)

 

 

(1,793)

(1,718)

(862)

(3,113)

(7,030)

219

1,712

2,858

Reported tax

309

127

216

856

1,617

(30)

(514)

(857)

Profit After Tax (norm)

(1,235)

(1,389)

(670)

(2,957)

(6,871)

234

1,279

2,081

Profit After Tax (reported)

(1,484)

(1,591)

(646)

(2,257)

(5,413)

189

1,199

2,001

Minority interests

0

0

0

0

0

0

0

0

Discontinued operations

0

0

0

0

0

0

0

0

Net income (normalised)

(1,235)

(1,389)

(670)

(2,957)

(6,871)

234

1,279

2,081

Net income (reported)

(1,484)

(1,591)

(646)

(2,257)

(5,413)

189

1,199

2,001

Basic average number of shares outstanding (m)

449

450

450

450

451

451

452

452

EPS - basic normalised (c)

 

 

(0.27)

(0.31)

(0.15)

(0.66)

(1.52)

0.05

0.28

0.46

EPS - diluted normalised (c)

 

 

(0.27)

(0.31)

(0.15)

(0.66)

(1.52)

0.05

0.28

0.46

EPS - basic reported (c)

 

 

(0.33)

(0.35)

(0.14)

(0.50)

(1.20)

0.04

0.26

0.44

Dividend (c)

0

0

0

0

0

0

0

0

Revenue growth (%)

0.0

12.1

1.5

(2.3)

(3.1)

(4.2)

6.1

7.8

Gross Margin (%)

85.2

83.7

83.3

83.1

84.3

83.0

84.3

84.3

EBITDA Margin (%)

-1.3

3.5

9.9

6.9

-1.3

12.7

14.6

15.4

Normalised Operating Margin

(2.3)

(2.0)

1.8

(1.6)

(9.4)

3.8

6.2

7.7

BALANCE SHEET

Fixed Assets

 

 

33,459

60,699

61,727

66,372

66,248

60,502

60,086

59,667

Intangible Assets

26,429

26,429

26,457

34,119

34,120

34,120

34,120

34,120

Tangible Assets

557

27,446

22,785

19,392

18,323

13,751

13,335

12,916

Deferred tax & other

6,473

6,824

12,485

12,861

13,805

12,631

12,631

12,631

Current Assets

 

 

37,657

37,326

41,964

38,955

30,797

28,182

33,789

38,638

Stocks

0

0

0

0

0

0

0

0

Debtors

3,474

4,003

5,593

6,448

4,825

3,927

4,906

5,289

Cash & cash equivalents

33,211

32,014

34,341

30,316

23,358

21,153

25,782

30,247

Other

972

1,309

2,030

2,191

2,614

3,102

3,102

3,102

Current Liabilities

 

 

38,628

42,984

48,170

50,849

48,831

45,009

48,887

51,201

Creditors

35,898

36,607

39,166

41,259

39,647

36,529

40,407

42,721

Tax and social security

71

57

87

43

18

4

4

4

Short term borrowings

121

121

286

121

121

121

121

121

Lease liabilities

0

3,248

5,628

5,709

5,562

4,842

4,842

4,842

Other

2,538

2,951

3,003

3,717

3,483

3,513

3,513

3,513

Long Term Liabilities

 

 

1,413

25,102

26,356

23,148

21,749

16,850

16,850

16,850

Long term borrowings

0

0

0

0

0

0

0

0

Lease liabilities

0

23,134

19,094

16,082

15,519

12,187

12,187

12,187

Other long term liabilities

1,413

1,968

7,262

7,066

6,230

4,663

4,663

4,663

Net Assets

 

 

31,075

29,939

29,165

31,330

26,465

26,825

28,139

30,254

Minority interests

(20)

(20)

(20)

(3,674)

(3,674)

(3,674)

(3,674)

(3,674)

Shareholders' equity

 

 

31,055

29,919

29,145

27,656

22,791

23,151

24,465

26,580

CASH FLOW

Op Cash Flow before WC and tax

(717)

1,623

4,066

2,637

(943)

4,922

5,935

6,741

Working capital

(660)

300

5,094

(1,463)

(3,930)

(3,505)

2,899

1,931

Exceptional & other

(160)

(196)

(1,439)

1,313

535

339

0

0

Share-based payments

558

329

192

156

159

115

115

115

Net operating cash flow

 

 

(979)

2,056

7,913

2,643

(4,179)

1,871

8,950

8,787

Capex

(135)

(227)

(221)

(429)

(149)

(53)

(120)

(120)

Acquisitions/disposals

23

0

(28)

(7,662)

0

0

0

0

Borrowings

121

0

176

0

0

0

0

0

Equity financing

57

340

0

3,987

0

0

0

0

Dividends

0

0

0

0

0

0

0

0

Other

86

(3,091)

(2,721)

(3,479)

(3,845)

(4,201)

(4,201)

(4,201)

Net Cash Flow

(827)

(922)

5,119

(4,940)

(8,173)

(2,383)

4,629

4,466

Opening net debt/(cash)

 

 

(31,908)

(33,090)

(31,893)

(34,055)

(30,195)

(23,237)

(21,032)

(25,661)

FX

2,130

(275)

(2,792)

915

1,215

178

0

0

Other non-cash movements

(121)

0

(165)

165

0

0

0

0

Closing net debt/(cash)

 

 

(33,090)

(31,893)

(34,055)

(30,195)

(23,237)

(21,032)

(25,661)

(30,126)

Source: Edison Investment Research, company accounts

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General disclaimer and copyright

This report has been commissioned by Freelancer and prepared and issued by Edison, in consideration of a fee payable by Freelancer. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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London, WC1R 4PS

United Kingdom

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