The world's largest digital freelance platform, Upwork Inc. (NASDAQ: UPWK), took proactive measures ahead of its upcoming third quarter of 2024 earnings release due out Nov. 6, 2024. The company preannounced upside Q3 guidance along with organizational changes in its efforts to drive profits. The markets viewed this favorably as shares of the computer and technology sector company shot up by 26% following the news. It also helped its rival freelance marketplace platform operator, Fiverr International Ltd. (NYSE: FVRR), gain 4% in sympathy.
Raising Guidance Ahead of Earnings
On Oct. 23, 2024, Upwork provided preliminary Q3 2024 results that firmly beat estimates. Upwork reported Q3 EPS of $194 million, up from $179 million to $183 million in previous guidance, versus $182.13 million consensus estimates. Adjusted EBITDA is expected to be around $43 million, up from previous guidance of $36 million to $39 million. The company delivered margin expansion and continues toward its five-year profitability target of 35% adjusted EBITDA margin. The company has aggressively expanded margins by 21 points in the past seven quarters, from 1% in Q4 2022 to 22$ in Q3 2024.
Organizational Changes: Layoffs of 21% of Workforce
In addition to the preliminary results, Upwork also announced structural changes. They are streamlining the organization structure to reduce costs and accelerate decision-making to empower teams to deliver better outcomes for clients. The company will cut its workforce by 21%, generating nearly $60 million in cost savings. Upwork will leverage more automation and use third-party services to scale more efficiently and simplify processes. It will optimize research and development spending and rebalance product and engineering resources. Upwork wants to lower the costs of acquiring new customers and help high-value customers grow with the company.
Why Report The Good News Two Weeks Ahead of Scheduled Earnings?
Investors may wonder why Upwork reported preliminary earnings and material organizational changes two weeks ahead of schedule during the quiet period. It's common for a company to preannounce bad earnings to soften the blow and get the selling out of the way before the official release. However, some shareholders get suspicious when a company preannounces good earnings so close to its official release.
It can usually mean one of two things: potentially negative news to come when they officially release their earnings, or earnings are so amazing they couldn’t wait to let the cat out of the bag. Layoffs aren't usually done because business is booming. The company didn't provide forward guidance, which may be soft when they report. Get the good news out first before unloading the bad news.
A Proactive Measure in Response to Activist Shareholder?
On Sept. 15, 2024, Upwork's Board of Directors was served with a letter from a 3.5% stake activist shareholder, Engine Capital. Engine Capital harshly criticized the management, stating they were underperforming their rival, Fiver International. They suggested that Upwork simplify its platform, reducing costs and growing its enterprise business. Upwork responded it would maintain an open dialogue with Engine Capital and has met with them multiple times. The company noted that it is actively evaluating and planning further expense reductions, specifically in research and development costs. The preannouncement addresses Engine Capital's concerns.
UPWK Triggers a Symmetrical Triangle Breakout
A symmetrical triangle is comprised of a descending (falling) upper trendline resistance converging with an ascending (rising) trendline support at the apex point. The breakout occurs when the stock surges through the upper trendline. A breakdown occurs if the stock collapses under the lower trendline.
UPWK was trading at the $10.09 lower gap-fill level prior to the preannouncement. Share gapped up to the $11.60 upper gap fill after the announcement and proceeded to peak at $13.13 the following days before a pullback formed. Shares may stay elevated into its official earnings release on Nov. 6, 2024. Investors will be tuned in for the earnings guidance and whether the upside preannouncement was to brace investors for weaker forward guidance. The daily anchored VWAP support is at $10.20. The daily RSI has peaked and is falling back to the 71-band. Fibonacci (Fib) pullback support levels are at $11.60, $10.94, $10.09, and $9.51.
Upwork’s average consensus price target is $15.27, indicating a 23.57% upside, and its highest analyst price target sits at $21.00. It has eight analysts' Buy ratings and three Hold ratings. The stock has a 9.42% short interest.
Actionable Options Strategies: With shares already gapped higher, there could be a sell-the-news response if UPWK provides flat or lower guidance. Bullish options investors enter on a pullback using cash-secured puts at the Fib pullback support levels or take a bullish call debit spread for less capital than owning the stock while minimizing the downside with capped upside gains after the earnings release.
