An investor has called into question Upwork (NASDAQ: UPWK) management and strategy, saying the talent platform is not living up to its potential.

“This is due to Upwork’s lack of strategic clarity and focus, ineffective execution, poor capital allocation and revolving management team under CEO Hayden Brown,” Engine Capital, a New York-based investment company, wrote in an open letter released today. “We also question whether the board is appropriately holding senior management accountable for its numerous missteps.”

“Upwork’s board of directors and management team maintain an open dialogue with and value constructive input from investors,” Upwork said in a statement in response to Engine Capital’s letter. “We continually evaluate options to enhance value and are committed to acting in the best interests of all shareholders. Upwork has met with Engine Capital on multiple occasions over the course of our regular shareholder engagement and appreciates their perspectives, as we do those of all our shareholders.”

Engine Capital said in the letter that it owns 3.5% of outstanding shares of Upwork. It also argues that Upwork has underperformed its closest peer, Fiverr International (NYSE: FVRR), and other staffing firms that have faced the same macroeconomic headwinds.

Engine Capital also said it spoke with more than 20 former senior employees, which it said made clear the company’s issues are self-inflicted and attributable to senior management.

It’s calling for a board refresh, improving the platform and focusing on enterprise among other changes.

Engine Capital’s letter was signed by Managing Member Arnaud Ajdler.

Key issues

The letter levels the following complaints against Upwork:

Lack of strategic clarity and focus. Upwork is not pursuing a clear, consistent strategy and appears unfocused and unable to prioritize initiatives, according to Engine Capital. It cited Upwork’s Enterprise efforts as an example.

Poor execution. Engine Capital said Upwork’s platform continues to suffer from functionality issues that prevent broader freelancer and client adoptions. It also said too many scammers remain on the platform.

Poor capital allocation. It argued the company has a long list of speculative projects which have questionable return on investment.

Significant management turnover. Engine Capital’s letter noted turnover in several key roles, including CFO, head of engineering and chief product officer. It noted Chief Sales Officer Eric Gilpin was let go in 2023 and “bizarrely” not replaced.

Proposed Changes

It calls for several changes at Upwork:

• Improve the functionality of Upwork’s marketplace. This includes making its platform less confusing and more intuitive as well as improving freelancer and client vetting. It said too many jobs are posted without a credit card on file.
• Focus on enterprise opportunity. There is a tremendous opening for the company to grow its enterprise business, the letter stated. It also called for more features for enterprise clients.
• Optimize the company’s cost structure and reduce dilution from stock-based compensation. It said the company’s cost structure remains bloated even after recent restructurings. It also argues there are too many layers of management and too many vice presidents making more than $1 million. “Upwork would be better served by hiring at least some senior executives from the staffing industry it is trying to disrupt,” the letter said.
• Aggressively buy back undervalued shares.
• Strengthen the board. It says the board would benefit from a significant refresh. It said no current board member has relevant staffing industry experience.

Response

In its response, Upwork said it is focused on the right core value drivers of its business and is making demonstrable progress, including:

• Maintaining focus on the critical set of revenue and GSV growth levers as the company said it articulated in its second-quarter 2024 earnings call.
• Significantly improved profitability, with adjusted EBITDA margins expanding from (2)% to 21% over the past five quarters.
• Returned meaningful capital to shareholders with $100 million in share repurchases in 2024, representing approximately 7.5% of current market capitalization.
• Taken significant steps and is continuing to optimize its cost base, including discontinuing brand marketing and further optimizing performance marketing over the past five quarters.
• We are actively evaluating and planning further reductions to our expenses, notably R&D, as part of ongoing cost management. The company said it mentioned this in its second-quarter earnings call.

“As we execute against our strategic priorities and growth and profitability goals, we look forward to continuing to engage with all of our shareholders,” Upwork said.

Upwork ranks as the largest talent platform based on gross spend volume, according to SIA’s Talent Platform Update 2024 report. The report noted the global market for talent platforms contracted for the first time in 2023.

Upwork reported Aug. 7 that revenue was up 14.5% to $193.1 million in its second-quarter, though gross services volume had fallen 2.7% year over year.