Upwork, Inc Q3 FY2021 Earnings Call

Thank you. Welcome to Upwork's discussion of its Third Quarter 2021 financial results. Leading the discussion today are Hayden Brown, Upwork's President and Chief Operating Officer, and Jeff McCombs, Upwork's Chief Financial Officer. Following management's prepared remarks, we will be happy to take your questions. But first I'll review the Safe Harbor statement. During this call, we may make statements related to our business that are forward-looking statements under federal securities law. These statements are not guarantees of future performance, but rather are subject to a variety of risks, uncertainties, and assumptions. Our actual results could differ materially from expectations reflected in any forward-looking statements. In addition, any statements regarding the current and future impact of the COVID-19 pandemic on our business and current and future impacts of actions we have taken in response to the COVID-19 pandemic are forward-looking statements and related to matters that are beyond our control and changing rapidly. For discussion of the material risks and other important factors that could affect our actual results, please refer to our SEC filings available on the SEC website, and on our Investor Relation website, as well as the risks and other important factors discussed in today's shareholder letter. Additional information will be set forth in our quarterly report on Form 10-Q for the quarter ended September 30th, 2021, when filed. In addition, reference will be made to non-GAAP financial measures. Information regarding the reconciliation of non-GAAP to GAAP measures can be found in the shareholder letter that was issued this afternoon on our Investor Relations website at investors.upwork.com. As always, reported figures are rounded, unless otherwise noted. Comparisons of the third quarter of 2021 are to the third quarter of 2020. All measures are GAAP unless cited as non-GAAP. Now, I'll turn the call over to Hayden.

Thanks, Evan. And thank you all for joining us today for our third quarter 2021 earnings call. We are pleased to report another great quarter in which our team has continued to innovate, bringing us closer to realizing our vision of the world's work marketplace. We've not only delivered on our strategy, but we have also started to capitalize on the opportunities that Upwork is uniquely positioned to realize. As a result, GSV grew 38% year-over-year to reach 904 million and revenue grew 32% year-over-year to reach 128 million. A number of active clients grew 25% year-over-year and GSV per active client grew 12% year-over-year, proving both a strong pull of our platform and the strength of both sides of our marketplace. We are in the early days of the adoption of independent talent, and it continues to trend higher because of the sheer size of Upwork's global population and our unique leadership vantage point. You can see a number of critical trends that will dictate the next few years of growth for not just us, but all players in the space. First, the corporate war for talent has intensified and moved to a new frontier as 10 million Americans are currently considering leaving their full-time jobs to gain more flexibility freelancing. Organizations are also increasingly realizing that talent strategy predicated only on full-time employees doing all the work will fall behind. Second, a new type of career path has emerged with half of the Gen-Z talent pool actually choosing to start their careers in freelance rather than full-time employment, reflecting an important mental shift in the workforce. Third, as more and more customers participate in this market, they tend to invest in one preferred platform once they find it. We already see this trend with larger companies as they adopt solutions like our Bring Your Own Talent Product as part of their own moves towards vendor consolidation. To capitalize on these insights, as well as on our $1.3 trillion total addressable market, we are focused on a rapid succession of innovations that will empower talent and clients with powerful, mutually beneficial relationships that they can initiate in the blink of an eye, and leverage over the long term to meaningfully transform their businesses. These relationships feel familiar to customers in their robustness, but the range of work models supporting them from project catalog to talent marketplace to talent scout, feel very different from the rigid work paradigm they replaced. They're flexible, dynamic, and fast, and customers are able to access them anywhere else. They will define the work marketplace upon which tomorrow's businesses are built. In support of these trends, we continue to evolve our offerings to meet and anticipate emerging customer needs. Project catalog was launched earlier in the year, and talent scout was launched last quarter. Today, we're introducing virtual talent bench, a collection of features that service even deeper relationships between talent and clients than ever before. It's an essential place where clients can easily access, assemble, and deploy the talent they love. With this launch, we are simplifying the process of staying connected to talent, finding promising professionals for future projects, and organizing their talent network. These features also enable independent talent to streamline their opportunities for repeat business and enhance their ability to form stronger relationships over time. Virtual talent bench begins to erase the barriers inhibiting collaboration with full-time employees and independent talent and allows clients to think of and use their wider Upwork talent base more fluidly to enhance the capabilities of their team. These offerings complement our other solutions in our effort to make Upwork the singular destination for clients to build and manage their distributed workforce, such as payroll, compliance, and Bring Your Own Talent. We're also very excited about new tools and benefits offered through our partnerships with Loom and Catch, which support talent in their transition to more autonomy through freelancing and make a long-term career in freelancing even more viable and attractive. Together, these moves address all of our customer segments and make Upwork more instrumental in the lives of our remote workers and clients. To further support the impact of our innovations, we're also heavily invested in evangelizing and scaling our work marketplace. To augment our successful performance marketing, we're now addressing our single-digit unaided brand awareness by ramping up with an expanded brand marketing strategy that will spotlight the highly skilled professionals who call our work marketplace home and increase awareness of Upwork among more prospects. On the sales front, we've hit yet another record level of sales productivity and are moving forward with our plan to expand the team. We continue to see strong execution with new enterprise plan customers in the quarter up 143% year-over-year. And a number of customers who spent $1 million or more in the trailing 12 months up 11% quarter-over-quarter. A wonderful example of this a leading tech company operating an online lodging marketplace that just surpassed $10 million of spend within its first year as a customer on Upwork. Our program teams successfully built out a mass communication and onboarding strategy for both hiring managers and talent at the company. They added more than 1,500 of its existing talent population to essentially manage the program through the Upwork platform using our Bring Your Own Talent capabilities through our enterprise suites, and built new relationships with key stakeholders throughout the business to leverage Upwork to drive critical initiatives forward. Everything we do continues to be focused on getting people to that tipping point of positive experiences faster, more easily, and more effectively. This means inventing powerful new ways to form relationships in our work marketplace, improving the quality and depth of our offerings already in our portfolio, and creating experiences that push people to behave and think differently about how work gets done. We have a remarkable team that knows how to open the minds of our clients and talent on every front, from product and user experience to marketing, sales, and community building. Our greatest strength is the fact that Upwork is built for the long-term evolution of work that is unfolding right here and now. With our own hybrid team in which independent talent outnumber employees by more than 2 to 1, and in which a distributed workforce of 2000 people across more than 80 countries was already our way of working well before COVID. We know what great things are possible when teams and companies lean into new ways of working, leveraging the power of distributed talent and freelance contributors. While leveraging the power of these capabilities does require businesses to embrace change. We too are a company that has seized change opportunities by the horns, increasing our own rate of change over the past two years. And we are still early in our journey. We can't wait to see what other organizations do as they seize the opportunities afforded by the unprecedented shift in how work gets done and how they utilize the tools we're building for them to capitalize on this shift and improve the impact and effectiveness, adaptability, and inclusivity of their teams. Thank you for joining us on this journey. We will now open the call to your questions.

Thank you. Please hold while we prepare the Q&A list. Our first question comes from Bernie Mamtani. Please go ahead.

Thank you for taking the questions. Regarding the labor market, the labor shortages in the US have been widely recognized. I'm curious if this has influenced demand for your marketplace. I understand that many of the shortages may not relate directly to your market, so I'm interested in how this has affected you. Hayden, I know you briefly mentioned the competition for talent in your initial comments, but do you have any further insights on that?

We definitely see that this is a moment where talent is in short supply for every business, and that's not a new trend. I mean, certainly the war for talent was something that CEOs were talking about and wrestling with before COVID, coming into COVID and now with the great resignations. This is something that every company is really struggling with. So, we're seeing some tailwinds from that for sure, but I think what we're trying to do is really lean into this moment with, for example, the brand marketing increase that we're starting in Q4, to really raise the awareness that Upwork can be a solution for that. Because I think everyone understands the problem but with our single-digit unaided brand awareness on the client side, most companies still haven't figured out that Upwork can really be the solution. And so, we're seeing a little bit of that tailwind right now. But I think there's a lot more runway for us to build momentum there as companies connect the dots to the fact that brilliant talent, independent talent is highly skilled, is on our platform, is ready and able to solve so many of the challenges that these companies are wrestling with which are long-term challenges that are not going to go away, once the calendar crosses over to January 1, 2022. So, we're really focused on helping them realize that this is where the solution lies.

Understood. Thank you. And then I just wanted to hit on the enterprise sales force so exciting, doubling the land portion of the enterprise sales force next year. Can you just walk through maybe in greater detail why now is the right time to be making this investment in your confidence that new hires over time will be able to deliver the same level of productivity that you're currently hitting.

Our number one focus over the last couple of quarters has been building a really high performing machine in the enterprise side. Following very clear gates on unit economics, following a playbook around who the sales team is selling into and what that looks like. And we've just seen some really great performance from that team exceeding our goals quarter-after-quarter. So, our confidence is very high that the playbook is working. And we're just focused on expanding the team at a rate that we feel comfortable with where we're not going to break the model by moving too fast, but we're going to move as fast as we can to build the momentum there because we're seeing so much success with the playbook the team has built.

Thank you. And so, our next question comes from the line of Nick Jones from Citi. Please go ahead.

Great. Thanks for taking the question. Maybe if we come on the same line as they came as enterprise clients think about adopting the solution, I think we're seeing in the news there's a bit of a tug-of-war just between the employees in the corporate now on like who wants to go back to work, who doesn't? Do these kinds of solutions really come up now as part of solutions? Are they still kind of busy trying to figure out whether they are capitulating to employees or not? It allows a more remote dynamic. I guess the broader question is, is it kind of a longer timeline to drive this kind of adoption given kind of the confusion, maybe going on now on even what their core working environment is going to be like?

You can also just steer clear of that tug-of-war because I think the lesson that companies have learned depends on that remote work definitely works for a big portion of their workforce, whether or not they're calling some of those employees back into the office or not, they've definitely figured out that models like ours can absolutely serve them. And so the conversations we're in with customers is around they know they need access to talent, but they just can't get through some of the traditional models, whether it's full-time hiring or their staffing firms, those solutions are not serving them. And they know that remote work does work for some aspects of their work. And even as we're talking to customers about pulling their teams back into the office, they know some of that’s going to be flexible work. Some people have been working from home. So, when they're engaging with us, they're trying to figure out how do I make those lessons around remote-work permanent with talent solutions that are not about talent acquisitions, it's been more about talent access. Programs that put into permanent place freelancers doing workloads and programs that are built around freelancer talent that move forward into 2022 and beyond. And that's not really affected by whether or not some of their employees are going to be in the office or not. These programs are really irrespective of those decisions. And I think that's where clients have figured out that this is something that they need that's not going to be about office work or not, this is just work that they need to drive their critical initiative.

Thank you. Regarding partnerships, I noticed there have been frequent announcements, such as with Loom and Catch. Are there chances for collaborations focused on enhancing partnerships, like one with Squarespace, where users can easily access Upwork even if they are trying to manage things on their own? Are there specific challenges in creating those kinds of partnerships, or am I perhaps misunderstanding the situation? I would appreciate your insights.

I think the partnership aspect of the business serves us in a couple of different ways. And some of the ones you've rolled out so far definitely are focused on increasing stickiness of the product, engagement of users, serving the core needs they've had. Zoom was an example of that, Loom is another example of that. Our team is also always working on multiple options during the partnership phase, and I think as we have different partnerships to announce, we'll certainly share those.

Thank you. Our next question comes from the line of Nit Schindler from Bank of America. Please go ahead.

Yes. Hi. Thanks for taking my question. You guys are talking about increasing your brand spend, doubling or coming into this next quarter or more from where you were. What's the return you're looking for on that? When do you think you'll get the advantage of that brand spend? And obviously that it's EBITDA in the near-term, but when do we see the benefit start flowing into revenue?

Upwork becoming a world-renowned brand definitely takes some time and so this is a multi-quarter, potentially multi-year type of initiative. But we definitely will be looking to these investments to have an impact on the business, and certainly we have multiple measures around the investments that we're going to be looking at every single week, every single quarter, trying to triangulate that and optimize things like channels and creative building on the lessons we had from the Q2 campaigns we're running. That certainly is informing our Q3, Q4 investments in this area. So, it's definitely going to be dynamic. But I think we do know that brand spend is not like performance spend, it doesn't give the immediate in-quarter return. This is a longer-term investment, but one that we think is both critical and worthwhile, given the trillion-dollar team that we're going after, given the fact that our unaided awareness with customers is still low, and we've seen some traction in the past with brand campaigns having messaging that does resonate with customers, begins to change their views about how Upwork can serve them. And that's really what we're going after here is building this new category. It does require a level of investment and patience that we will have, even as we will be very rigorous in measuring and managing being dynamic with that investment, as we get feedback from the tests that we run.

Is this brand campaign that you're planning to launch in the fourth quarter going to be significantly different from the types of campaigns you've executed in the past, aside from its scale and scope? Also, regarding the brand campaigns you've previously run, how quickly did you see a return on those?

It's built on the lessons of the Q2 and Q3 campaign. So, it is evolving on the platform we've already launched around the work marketplace category. Building on those insights, so it's not materially different, but it is an evolution. And I'd say it puts to work the insight there around things like channel and audience and creative. So, I think that's where we're getting smarter every quarter as we are in the market doing brand messaging about when and how that can be effective for us. So, we're putting those insights to work and those are real. We see leading indicators around things like our aided awareness numbers starting to move. And then those things eventually do translate into metrics like registrations, job posts, things like that on the site. But we know those things take time to move through the funnel and that's where we have a measurement framework set up around that. So, we will be patient but also diligent in terms of watching and measuring those things as the campaigns are in the market.

Some of the metrics change more quickly, such as registrations or client starts, while others take longer to fully understand in terms of their effect on engagement and retention on the platform, which we expect the brand spend to influence. However, it does require time to grasp the true impact of that.

Thank you. As a reminder to ask a question, you will need to follow the operator's instructions. Our next question comes from Marvin Fong. Please go ahead.

Great. Thank you. Good evening and thanks for taking the questions. Just a first step. I may be on boosted proposals. I was very interested to see you guys mention that. Is that I think you guys said it wasn't us being tested. How likely is that to actually be officially deployed on the platform? And then it could be helpful if you could give us some idea of how you're thinking about the opportunity, whether it be in terms of revenue as a percentage of GSV or an increase in take rate, what the opportunity there might be? And then I have a follow-up after that.

Sure. The product feature was the proposal was the first time that we've introduced an auction mechanism to the marketplace which we're really excited about, Marvin. Because it really gives talent a better ability to signal their interest around certain job opportunities. And so, in terms of when if the feature will fully launch, the team is still reworking some aspects of the feature in the auction mechanism based on what the initial test was. So, I don't have an exact date for you on that, but we're definitely working with a lot of intensity on that, because we think the product is very valuable. And then in terms of the overall opportunity, the first focus of this feature, as some of the other things we're doing like availability badges, is not about just driving GSV and take rate, although that is a side benefit of these. The first and foremost focus is around really monetizing human attention in a way that makes people signal their interest and intent around jobs on the platform and really making that something that is highly valued. Therefore, we get better signal quality around certain aspects of people's interest in jobs. So, we're trying to use some of the insights we have from the initial testing to continue to innovate in this space. And then over time, these things will drive fill-rate and generate new revenue. But right now, it's early in these features and these are not things that we're expecting to generate meaningful top-line impact in the near future.

That's great. Thank you. And then my follow-up, just on the disclosure in the active clients and the GSV per active client. I think active clients year-over-year growth was in the mid-20s. I think in terms of the actual number was a bit of a slowdown from prior quarters and then the GSVs moving around a little bit. Just wondering if you could help us think about was that as expected this quarter and what we should think about these two KPIs doing in the fourth quarter. Thank you.

Sure. We continue to see good strength on both of those metrics in Q3. We don't provide guidance on them as metrics going forward. But from a return perspective, we would expect GSV per client would continue to show strength and there's a number of different dynamics beneath the surface there that give us confidence that there's good growth to continue coming from there. Obviously, both of these numbers will start to lap some of the strength that we saw over the last year. And so that will impact the numbers in some way, but what we're seeing in the business is, the absolute levels of client spend per client, what not are maintaining at kind of record levels that we set during the pandemic with a return to some normalcy on a week-to-week and month-to-month dynamic. So those are really the key drivers there. We're pleased with the performance on both fronts and would expect that the spend per client will continue to show strength going forward.

Sure.

Thank you. Our next question comes from the line of Rohit Kulkarni from MKM Partners. Please, go ahead.

Great, thanks. A couple, one is on this online lodging marketplace company that you mentioned that's been already $10 million in spending in the first year. I think just can you talk through what was it about this company or that use case that led to this growth? Can you replicate this across clients? Is this about a specific type of thing that this company was trying to do or something that you enable them to do? Then I have a couple of other follow-ups.

The sales team effectively targeted the right customers from the beginning, contributing to a successful strategy. Achieving a $10 million spend in the first year is unusual, as many customers typically reach only a million dollars, often not within the same timeframe. However, our team has been increasingly successful in helping customers reach the $1 million milestone. Additionally, they expertly developed a rapid expansion playbook after acquiring the account, ensuring that more hiring managers within the company became familiar with the program and transitioned their existing talent onto the Upwork platform using our Bring Your Own Talent solution from the start. Overall, the execution on this account was outstanding from top to bottom. While this account is larger than what we usually close, it's not our largest, and the team continues to improve at replicating this successful approach, which is very encouraging.

Okay, good. Regarding the enterprise and the lead team, can you clarify the guidance or spending plans for the next year in relation to what you mentioned during the Analyst Day? I believe I noted there were 18 account executives, and they could be 16. Since then, there have been developments with the land and expand strategy.

Sure. The Land team continues to perform very well. We indicated that our target productivity levels are roughly 6 deals per rep. They're comfortably exceeding those levels, providing us a ton of confidence that we can invest aggressively behind the opportunity. And there's a lot of work that needs to be done to make sure we do that well. So, we're balancing both that aggressiveness and operationalization challenges, but we expect to roughly double the team over the next year. I'll give you a kind of order of magnitude sense for where we would expect to end up at the end of 2022. We really are excited by the opportunity with the enterprise space bolsters as Hayden just talked about, that last customer represents an indication of what is possible. Clearly a bit of an outlier right now, but there's a significant opportunity here on the execution by the team, is really strong.

Okay. And last one, if I could. On this convertible note proceeds as in any particular call out or the way you're thinking about investments, organic, inorganic next year. Anything that we should think about how you could be deploying the extra cushion that you have right now?

At a high level, market conditions are favorable, so we wanted to ensure we took advantage of them and strengthen our balance sheet to position ourselves for continued aggressive investment. Our focus is on growth, and we aim to invest as much as possible in opportunities that meet our financial criteria, whether in sales, brand marketing, technology, or mergers and acquisitions. All these areas are potential avenues for investment. We don't have any updates to share regarding M&A, but we are excited about the organic growth opportunities we have for the company and will also remain aware of potential inorganic opportunities.

Okay. Thanks, Jeff. Thanks, Hayden.

Thank you, our last question comes from the line of Brent Thill from Jefferies, please go ahead.

Hi. Thank you. This is chime again for Brent Thill. I had a couple of questions. First on talent scout, I mean, it sounds like it would be helpful, I guess with the take rate as well as potentially driving more spend per client. But wondering if you could share some real feedback in terms of where you're seeing the adoption, the type of customers or categories? Thank you.

We're seeing great progress with talent scout. And one of the examples of that was we increased the average time to deliver a short crest we brought that down in the quarter by 30%. And I'd say, John, that there were two primary client personas that talent scout really goes after; 1 is customers who typically buy from staffing firms and are looking for a very easy out-of-the-box way to get pre-vetted talent, and this really meets those needs. And the other percentage of this goes after has really high-value clients who are already inside of our talent marketplace, and they're looking for an alternative when they don't want to take the time or the effort to do their own sourcing, and they really want to trust us to do a lot of that upfront legwork for them. I think even though it's very early, and this offering is very new and we haven't really built all of the acquisition channels around it yet, and all the cross-sell channels, even inside our own work marketplace to expose it to customers, one of the things I love about it is seeing the repeat buy rates that we're already getting from customers who have been through this experience once, and are coming back and saying that was awesome. I want to do this a second time or third time. So, the product market fit that we're seeing here is very high. The NPS scores from customers are very high. And we're just in the process of building out how to expose this to more of the market, because we think there are a lot of customers out there who really want this type of an offering.

It's very helpful. Thank you. And for my second question regarding advertising opportunities, it seems to differ from the availability badge and boosting. If that's accurate, could you provide more details on the types of advertising opportunities you see and how they might function?

I believe there is a significant opportunity in empowering both sides of the marketplace. Recently, we launched features like availability badges and boosted proposals, which provide talent with more control over how they indicate their availability and interest in new work. These features help them stand out when seeking new opportunities. There are also client-side opportunities where they can pay for increased visibility among the talent pool. Thus, there are opportunities for both parties to enhance their visibility to one another. These two features mark our initial steps toward facilitating this increased visibility, which is valuable since people generally seek visibility only when they are serious and highly qualified for work opportunities. Our early testing has supported our initial assumptions about the quality of the signals those features generate, along with other value aspects. While it's still early in this area, I see substantial potential for growth.

Great. Thank you very much.

Sure. Thank you.

Thanks. On behalf of the entire Upwork team, thank you for joining us today and thank you for your interest in Upwork. If you need any clarifications or have any follow-up questions, please do not hesitate to reach out to me at Investor@upwork.com. This concludes our call.

Thank you. This concludes today's conference call. Thank you for participating. You may disconnect.