If reports are to be believed, when the Freelancer IPO offer closes next Friday it will be oversubscribed by as much as 30 per cent.
Seemingly no one is too fazed by the pricing of the offer – a staggering 463 times forecast 2013 earnings; or by the lower than anticipated revenue that Freelancer.com is generating, $18.3 million forecast for the 2013 calendar year.
In reality, neither of the above are reasons to be spooked. Freelancer is profitable and growing – the two main things investors are looking for. Twitter is growing but not profitable, and seeking an $11 billion plus IPO. Tumblr was unprofitable with revenues estimated at below $12 million when Yahoo scooped it up for $1.2 billion. Compared to those two, Freelancer.com at an IPO valuation of $218 million seems like a steal.
The only problem is, some people did expect more out of Freelancer’s financials. The reason? In 2012 Wired, in an interview with Barrie, stated that Freelancer was doing $35 million in revenue per year. Now, while this could be interpreted as technically correct (depending on your definition of revenue), the reality was that Freelancer for 2012 generated $10.6 million in revenue from processing $50.8 million in payments.
There is a big difference between ‘payments’ and ‘revenue’ and this is where evaluating Freelancer can be confusing.
Freelancer categorises work it processes in the prospectus as ‘Gross Pay Volume’. For the 2012 calendar year this was $A50.8 million, and it’s forecast to increase to $A80.9 million over the 2013 calendar year. As a fee for facilitating these projects and payments Freelancer takes a clip of both sides of the transaction – that is, from both contractor and contractee – as well as payments for additional items, such as premium listings. It calls this, correctly, ‘revenue’ – which was $10.6 million for the 2012 calendar year and forecast to sit at $18.3 million for 2013.
Based on information contained within an interview internet industry publication The Next Web conducted with Barrie, the average project value of projects intermediated by Freelancer is around $200. Working from this figure, Freelancer is on track to process approximately 400,000 projects this year alone.
The key for the future of the business is turning this volume of transactions into a really meaningful profit figure. For the first half of 2013, Freelancer made a net profit after tax of $477,000 on $8.45 million of revenues. Freelancer retains around 21 per cent of payments processed via its platform. This means that on gross payments processed in the vicinity of $38 million the company should see around 1-1.2 per cent in profit. Put simply, for Freelancer to really fire it needs to process a huge volume of payments. In this case ‘huge’ means billions of dollars, not millions.
Herein lies the opportunity, and most likely the reason why the offer is reported to be oversubscribed. If Freelancer could process say, a billion dollars in projects within the next five to seven years, and maintain its current clip of 21 per cent, it would generate $210 million in revenue. At this scale operating costs would dip significantly as a percentage of overall revenue and it is not difficult to see how Freelancer could be a business delivering $50-60 million of net profit a year if it can maintain similar operating margins to other self-service heavy businesses like Facebook and Google.
A billion dollars is a long way from the current forecast $80 million project pool for 2013 – but given the momentum behind the concept of the global marketplace and the bold vision of chief executive Matt Barrie it’s one that many will be willing to take a punt on.
Buying into Barrie’s vision is something any possible investor will have to be very comfortable doing. Freelancer is unusually bucking the basic corporate governance principal that a company should not have a chief executive officer who also serves as chairman of the board. In addition, its board is only three people deep. Two of these are executives of the company – chief executive Barrie and chief technology officer Darren Williams. The other is the company’s second largest equity holder, Simon Clausen, who holds 38 per cent of its shares. The three board members between them will own 87.4 per cent of the company and ultimately continue to comfortably control all decisions the company makes.
It’s for this reason an IPO seems somewhat unusual considering Freelancer.com, based on its growth and operating position, should have no trouble raising funds via the venture capital route. Freelancer will incur $1 million in charges as a result of the process, which means after all is said and done it will ultimately raise $14 million in funds via the IPO. It’s possible Freelancer is taking this route as it will incur less onerous conditions than a raise via a prominent venture fund – who may request board representation and decision making power in return for their investment. Under the IPO route Freelancer can pick and choose who it allows to invest and will maintain full control. The IPO route also allows it to create a meaningful employee stock option plan for employees – a valuable tool for retention and also salary containment.
The other oddity was Freelancer choosing to list on the ASX, and not on the NASDAQ and NYSE. Australian investors are not traditionally used to earnings multiples over 400, whereas three digital earnings multiples within US dot.com companies are not unheard of. Barrie told Business Insider Australia he was doing it as a blueprint for other Australian companies to pursue a similar path. He might be onto something if the reports around oversubscription are correct. We will find out next week.