Freelancer.com – the next Apple?

Financial journalist and commentator on 3AW and Sky Business
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The initial public offer (IPO) market is running hot at the moment, and one of the issues attracting the most interest is Freelancer.com, the owner and operator of the world’s largest online marketplace for outsourcing, freelancing and crowd-sourcing services.

The history

It is a rare kind of stock, being a global Australian technology success story.

Founder chief executive and chairman, Matt Barrie, started the business in June 2008 under the domain name biditout.com. He later bought similar sites, including Swedish-owned business getafreelancer.com and freelancer.co.uk, establishing what is now Freelancer.com in 2009. Since then, the company has expanded aggressively through acquisition to increase its global reach, buying EUFreelance, Scriptlance in Canada, and LimeExchange and vWorker (formerly RentaCoder) in the US.

Freelancer.com says it is the world’s number one business services website. It connects freelance workers with companies and individuals offering short-term work assignments: most commonly these are services like web development, design work, data entry and editorial assignments, but it could be anything. The site has been a major player in the wave of outsourcing that has flowed between businesses in the developed world and freelancers in developing countries, to generate the modern phenomenon of “cloud labour.”

The target market is small businesses that are looking to keep their costs low by outsourcing tasks. According to the prospectus, there are more than 600 job categories ranging from website design, to accounting, to manufacturing. Freelancer.com makes its money from the type of introduction fee billed to the tenderer, depending on the size of the job. Using the site is free, but it charges 3% of the bid’s value or $US3, whichever is greater, for awarded projects. Freelancer.com says it has more than 9 million users, who have completed 4.9 million jobs tendered on the site, worth more than $1.2 billion, with transactions involving 230 countries.

The financials

The recent top-line growth rate has been impressive. Freelancer.com’s revenue grew by 37% in 2011 and by 64% in 2011 and 2012, and it is expected to grow by 73% in 2013. Last year Freelancer.com reported net revenue of $10.6 million, with an after-profit tax of $728,000. This (calendar) year the company forecasts revenue to rise by 73% to $18.3 million, with a profit of $471,000 (after the costs of the IPO). Forecast earnings are 0.11 cents a share, and there is no dividend in the offing.

The float will raise $17.55 million, through the issue of 30 million shares at 50 cents each, under a general offer and a further 5.1 million shares offered to staff. That represents only 8% of the company’s capital, valuing Freelancer.com at about $218 million.

Barrie will retain a 46% stake in Freelancer.com.au, valued at $100.2 million at the issue price. Barrie and fellow directors will own 87% of the shares after the float, in voluntary escrow for 12 months, not precluding a takeover offer for the company. Non-executive director Simon Clausen will retain 38.7%, valued at $84 million, and chief technology officer Darren Williams will hold a 2.9% stake in the company, valued at $6.3 million.

This is not an IPO as a private-equity vehicle, which has been a recent bugbear of the stock market: this is not a situation where directors do not own enough shares in the companies on whose boards they sit, a practice against which the Australian Shareholders Association (ASA) is campaigning. Freelancer.com’s directors have serious skin in the game. That alignment aside, a board of just three directors (none independent) and Barrie filling the roles of chairman and chief executive means Freelancer.com is not going to be used by the ASX as a poster company for its ideal corporate structure.

M&A activity

One interesting thing about the IPO is that in September, a deal was reported to be almost closed that would have seen Freelancer.com bought by Japanese recruitment company and jobs website operator Recruit, for US$400 million. Barrie has clearly decided that selling a minority stake on the stock market can end up valuing the company at more than Recruit was willing to pay.

In Freelancer.com’s IPO prospectus, Barrie states that the company’s growth strategy will ride on the next wave of people to move online in developing economies.

“Today, I find it hard to believe that with 7.1 billion people in the world, only 2.7 billion people are on the Internet. Almost 4.5 billion people are yet to connect. We are confident that there is tremendous growth potential ahead for the company, as the rest of the world’s population goes online,” he wrote.

Elevated PE

One very startling number emerges from the Freelancer.com prospectus: its price/earnings (P/E) at issue is 463 times earnings. Even for a globally oriented tech stock, that number is enough to give a value-oriented investor a headache – particularly when there is no dividend.

Barrie could have listed Freelancer.com on the Nasdaq Stock Exchange in the US, where that kind of elevated P/E would not raise eyebrows. But he is on record as saying he wanted to foster the Australian technology industry and “put his money where his mouth was”. It is almost an absurd P/E, but for companies like this, growth potential is huge. Barrie would no doubt have looked closely at New Zealand-based cloud accounting software provider Xero, floated in 2007, which has risen 2000% on the stock market – despite still being in loss.

With just over twice as much revenue as Freelancer.com, and no profits, Xero is worth A$2.9 billion – more than Air New Zealand. Just last week, Xero raised A$158 million in a capital raising, selling 8% of the company, with US investors, including Matrix Capital Management – an early investor in Apple –and PayPal co-founder Peter Thiel, taking more than four-fifths of the new shares on offer. That is the kind of investor companies like these can tap into.

In any case, from what I am hearing, it will not matter what Freelancer.com’s P/E is: a lot of fund managers want this stock, but it is very difficult to get any. There is likely to be massive scale-back for those who can get the stock, which means significant buying interest when Freelancer.com lists on November 15 – and a likely hefty premium.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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