With earnings due for release, I thought a wrap up of the current status of the business is worth doing, to help new investors understand the company.
Overview
FLN has two main parts, the bulk of revenue is the contractor marketplace. It allows buyers and sellers of services to find each other and work together reasonably safely. Examples might be getting a web site designed, or the packaging for a new product.
The other line is Escrow.com, it is a payment business that facilitates transactions between parties that benefit from a third party to ensure fairness by holding the payment until agreed outcomes occur (e.g. item is delivered as agreed, or the transfer of ownership is completed).
Performance
Escrow:
The performance of Escrow.com has been poor lately, with substantial contractions in volumes and value of transactions originating in China. Commentary says this is because there was a bubble in Chinese domain name values that has since subsided. The domain name resale business is a key market for escrow.com, with some shady operators, so the security it gives is valued. At around the same time, laws for financial market places changed requiring them the take steps to reduce money laundering. These are usually abbreviated to AML (anti-money laundering) and KYC (know your customer) regulations. The upshot is Escrow needs to get extra personal info from users. Not a problem for legitimate users, but if you were trying to evade capital transfer regulations, for example, you might not want to be positively identified. Note, being a publicly listed company in Australia is, I think, a plus here long term, as people trust our regulatory regime to do the right thing.
Management says the bubble revenues and AML hiccup are receding, allowing underlying positive growth to show through. The next few quarterlies will confirm this.
Freelancer marketplace:
The marketplace is the much larger part of the business ($45m revenue in FY16 vs $7.5m for Escrow). The freelance market place is, I think, somewhat negatively correlated to economic growth - that is, there are more companies seeking outsourcing and more freelancers looking for work when times are tough. The marketplace has 2 main elements, contracts and contests. Contests seek entrants to perform a service for a set fee, being awarded to the best entry. Contracts suit projects where bids are sought and then an ongoing relationship established to deliver the work, usually with milestones etc.
Contests has seen ongoing steady growth, within expected seasonality.
The contract marketplace hit a growth slump early last year. Management commentary says this slump was because of a change in the main website where you create projects. They introduced a "one click" option. This caused extra projects to get started, but over time, it became clear these were poor projects. It appears forcing users to go through several steps to describe their project acts as a gate to discourage time wasters. The old way has been restored, and there is some evidence to show the correction is working. Importantly for me, the other way to create projects (on mobile) never had this change either way, and continued to show steady growth.
Coming quarterlies will confirm if this is accurate.
Macro:
For me, the key story to invest in is the growth in outsourcing to lower cost locations. This has happened formally for years (think Infosys or Wipro in India) and doesn't really show signs of abating. FLN offers direct access to outsource partners suitable for smaller engagements, and improving global connectivity adds to this.
Competition:
The main competitors are Upwork and Fiverr. Both are private and hence hard to analyse. My guess is Upwork makes a loss and sustains itself on VC money, and Fiverr is likely somewhat profitable. An article on Upwork financials is here:
https://goo.gl/Yfk1XX
Upwork seems to focus on the North American market, with platforms designed to suit American freelancers. This, plus a marketing budget focused in the USA, seems to give them good word of mouth recognition in the US freelance community. Freelancer seems to be more focussed on global sourcing, and the accompanying cost savings.
Fiverr started out as super low cost 'side gig' marketplace where you could get somebody to do a tiny job for $5 (edit a photo or proof read a brochure are examples). They seem to be trying to move up the value chain, as it is now hard to find a $5 job on there, as sellers charge multiple 'gig' fees to do much at all.
A press release about their last funding is here:
https://www.pehub.com/2015/11/fiverr-nets-60-mln/
My feeling is the global nature of FLN's approach will lead to the largest network, and the network effect will ultimately govern who is most successful (the freelancers will be attracted to the market with the most customers, and the customers will be attracted to the market with the most freelancers).
Issues:
Apart from transient issues like the one click and domain bubble already mentioned, there are some systemic problems to overcome.
The marketplace attracts poor quality bidders who compete primarily on speed and price - but a poor outcome will sour the experience for customers. The flip side is time wasting customers who leave a poor experience for legitimate freelancers. FLN tries to manage both issues, but this is an ongoing task, and in my opinion, the biggest obstacle to massive growth.
The marketplace also acts as a barrier for freelancers in developed countries, who don't see much point in competing against low cost suppliers abroad. This is just a fact of life, I think, and spending lots of time and resources trying to keep these freelancers happy is a dead end. They are correct that for some tasks they offer better value, and that they can get better pay from off-line sources. That doesn't impact the global value proposition FLN offers.
Opportunities:
The business recently launched a marketplace API to allow other sites to "hook in" to place jobs or bid for work and this may have substantial long term growth prospects. It will take a year or two to really get going, however, as it needs other businesses to embrace it.
They also launched payment integration into Escrow, so it can be used by other sites for payment as easily as paypal or credit card. Again, lots of upside, but there will be a period before it impacts underlying financials.
Investment:
As an investment, FLN looks to be a longer term one for me, although I acknowledge a short term trader could easily see 100% return in the next couple of quarters.
Matt and Simon own over 75% of the business, and declined a private sale pre-IPO valuing the business over $1 a share. They did do a private placement at $1.40 a share, ostensibly to increase liquidity. This means both have substantial cash assets in addition to their shareholding, removing the chance of an opportunistic take over, in my opinion.
I also think they would be reluctant to merge with their big competitors - I think they value their control and feel they can dominate through competition.
In any case, the directors were relentless buyers under 70c last year, and I expect them to buy again when the current quiet period ends.
The business is cashflow break even. Barrie has made a lot about the analytics FLN use to manage the business, and I believe they carefully reinvest any surplus income back into growth to constantly operate at break even. Some commentators look at the financials and see a business incapable of making a profit for this reason, so I tend to ignore them.
This does raise the issue of whether a dividend could be paid. A half cent dividend would certainly put a rocket under the share price at these levels, and only cost about $2m. This would also allow for the business to be valued on more traditional measures.
I would still prefer the income reinvested in growth, but it is an idea to consider.
The business has no debt, and there seems no obstacle to it continuing to operate successfully. The underlying question for the share price is whether growth rebounds to justify a higher price.
My guess? I am heavily invested and in the red at these prices, but I feel confident the business will grow sustainably and deliver good results. Because I don't think there is risk of a takeover (although maybe a management buy-out is possible) I remain happy to hold, and invest more as money for investing becomes available.
I think the next results will demonstrate good growth, and we will see director buying and good share price appreciation.
(20min delay)