Upwork Inc (UPWK) 2019 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Upwork Q1 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this call may be recorded.

I would now like to introduce your host for today's conference, Palmira Gerlach, Director of Investor Relations. You may begin.

Hi, and welcome to Upwork's discussion of its first quarter 2019 financial results. Leading the discussion today are Stephane Kasriel, Upwork's President and Chief Executive Officer; and Brian Kinion, Upwork's Chief Financial Officer. Following management's prepared remarks, we will be happy to take your questions.

But first, let me review the safe harbor statement. During this call, we may make statements related to our business that are forward-looking statements under the federal securities laws. 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 the expectations reflected in any forward-looking statements. For a 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's website and on our Investor Relations website as well as the risks and other important factors discussed in today's press release.

In addition, reference will be made to non-GAAP financial measures. Information regarding reconciliations of non-GAAP to GAAP measures can be found on the press release that was issued this afternoon on our Investor Relations website. Please note that the prepared remarks corresponding to the information reviewed on today's conference call will also be available on our Investor Relations website at investors.upwork.com shortly after the call has concluded.

Now I'll turn the call over to Stephane.

Thank you, Palmira. Good afternoon, and thank you for joining us to discuss our first quarter 2019 results.

We had a solid start to the year with continued GSV growth and margin expansion, and we are excited to share our detailed results with you. What drives us day in and day out is our mission: to create economic opportunities so people have better lives. We continue to make progress in launching new products, features and enhancements to our online talents marketplace. We do this to improve the quality of our marketplace, to capture more of our large addressable market opportunity, and to address the needs of our most important constituents, the freelancers and clients who work together on our platform.

On the product front, we now have 4 marketplace offerings to help better serve the needs of our different clients: Upwork Basic, Upwork Plus, Upwork Business and Upwork Enterprise. As background, historically, we had 2 marketplace offerings, Upwork Standard and Upwork Enterprise. Upwork Standard was a self-service offering targeted at sole proprietorships and small businesses, while Upwork Enterprise is sold by our sales team and targeted at mid-market and enterprise customers.

It became evident over time that we needed to have additional offerings to better address the needs of our diverse client base. Therefore, in late Q1, we renamed Upwork Standard to Upwork Basic, and launched Upwork Plus and Upwork Business. I will now describe which clients each of these products is targeted at, from our most entry-level products, to our most advanced products.

Upwork Basic is targeted at very small businesses, giving them access to our marketplace to find, engage and collaborate with talents. Upwork Plus is targeted at small businesses that wish to engage freelancers in a self-service way and need the tools to stand out from the crowd and easily collaborate with coworkers. Upwork Business is targeted at mid-market businesses looking for ongoing flexible access to talent that need consolidated billing and a team of advisers to help them set up their freelancer programs. And Upwork Enterprise is focused on the largest businesses, which need a more tailored product solution, enhanced access to premium talent in Upwork and compliance services.

The pricing of each product offering is as follows: Upwork Basic does not have a subscription fee, but does have a client payment processing fee and administration fee of 3%, up from 2.75% in the previous Upwork Standard offering. The new 3% client fee applies to all new Upwork Basic clients.

We have a tiered freelancer service fee schedule based on cumulative lifetime billings by the freelancer to each unique client relationship using Upwork Basic. Freelancers working with clients on Upwork Basic typically pay us 20% for the first $500, 10% for the next $9,500 and then 5% for any amount over $10,000 that they bill. The subscription fee for Upwork Plus is about $50 per month. The freelancer fee is the same tiered fee as Upwork Basic. The client fee is 3%, but is waived if the client pays via ACH.

The subscription fee for Upwork Business is about $500 per month with a client fee of 10% and a freelancer fee of 10%. Upwork Enterprise pricing remains unchanged with a subscription fee that varies based on the complexity of the engagement, a freelancer fee of 10% and a client fee of either 10% or 20%, depending on whether the client is using our compliance offering or not.

For both Upwork Business and Upwork Enterprise, we also offer discounted pricing for what we call bring your own freelancer, or BYO, where the client brings their existing freelancers and agencies on to the Upwork platform. For freelancers brought in to the BYO relationships with the client, the freelancer does not pay a fee.

While Upwork Plus and Upwork Business are relatively newly launched, we believe these additional products are one way in which we will stabilize our take rate and support future revenue growth. We've seen good early traction from these launches. And one such case study is New York-based Lady M Confections, a fast-growing international e-commerce and brick-and-mortar business, with 38 cake boutiques around the world. The marketing team came to Upwork to tap into our global talent pool of high-quality professionals. They selected Upwork Business because it was the best fit for their team in finding talent quickly and Upwork handled all of the onboarding.

This allows their team to focus on work versus the administrative side of hiring freelancers. As Lady M is opening new boutiques, posting pop-up experiences in new markets and growing its online community, their marketing team is tapping into freelancers in local markets specifically for photography and social media needs. From Hawaii, Washington, Texas to Asia, Upwork has helped them connect with freelancers quickly.

We are also focused on making our platform the most trusted on which to get projects done. We strive to ensure that it is professional, that customers are uniquely and accurately represented, and that the matching process results in good outcomes for both parties. Our trust and safety teams continue to excel in all key pillars of identity, trust, marketplace quality, security, fraud and risk managements.

With regard to marketplace quality, in April, we announced plans to update Connects. These rolling updates have begun and will continue through the end of June. Connects are virtual tokens within Upwork that allow freelancers to bid on jobs. Previously, a freelancer would receive 60 Connects and an agency would receive 80 Connects for free every month. Now existing freelancers will no longer receive free Connects each month, and newly admitted freelancers to the platform will continue to receive 20 Connects to get started.

With the new Connects launch, freelancers will purchase Connects for $0.15 each, which is a decrease from the prior $1 per Connect price. To take into account the value of different projects, the number of Connects required to bid for a project will vary from 0 to 6 Connects, depending on the size of the project, where previously, every project required 2 Connects to bid. Bids submitted in response to invitations from clients will continue to be free.

These changes in Connects are aimed at helping skilled professionals win more projects. We expect freelancers will submit fewer proposals focusing on projects for which they are the most qualified and most likely to win. As a result, clients will have a smaller selection of highly relevant proposals to review, making it easier for them to identify the best talent for their projects. We believe this change in Connects will be revenue neutral in the near term as the main objective of this change is to encourage higher-quality projects and client relationships on our marketplace.

During last quarter's call, I mentioned several of our priorities for 2019. I would like to provide a quick update on our progress against our categories, domestic and enterprise initiatives. In categories, we've done a lot to help freelancers differentiate themselves through their profiles. You can see this today in the visual nature of some of the design and creative profiles. Freelancers in those categories now have the option to showcase their portfolios in a more visual fashion. And in the second quarter, we will expand this enhanced visual functionality to include visual portfolio search for different project types as well as -- which allows freelancers to showcase their images in search results.

Also, as of March, all freelancers have access to specialized profiles. This is particularly pertinent to freelancers who are marketing multiple skills, which is the case for many freelancers. By allowing each freelancer's account to house multiple profiles, the skills most relevant to the project at hand are displayed first, making for a much cleaner immediate match. Early indications for this feature are very positive. Our data shows that freelancers who take advantage of specialized profiles are invited to a project over 30% more often than those that do not.

One top-rated freelancer, [Anton], a product designer, who also leads a development agency, shared with us that since specialized profiles launched, many of his clients have commented positively on the new format. Anton provided feedback that he can better showcase his deep understanding of 2 different skill sets. Before, Anton felt the prior profile titles were too long, and by having multiple specialized profiles, now he can add specific information in each category that is directly related to what clients are looking for. Indications make us confident that as additional freelancers adopt specialist profiles, project matching algorithms will continue to improve.

Shifting to our domestic marketplace initiatives. Though on a smaller base, our domestic U.S. to U.S. marketplace continues to perform very well. We are seeing continued improvements in first job posts, fuel rates and growth in overall project size in the U.S. to U.S. business. Our U.K. testing is ongoing, but we have no plans to expand that beta at this point.

There continues to be an exciting opportunity to also address more local needs using our domestic marketplace offering, where we have existing liquidity in certain of our categories. For clients interested in finding freelancers within the same metropolitan area, our local freelancers search option test continues in San Francisco Bay Area, Los Angeles and New York, and has expanded to other cities, including Austin, Seattle, Washington D.C. and Chicago. Within these markets, about 50% of clients and a portion of freelancers are able to select the local search option. This exposure will expand further this year to additional clients and freelancers as we amplify our efforts in select test markets.

In 2018, we made the decision to centralize our sales team in Chicago, strengthening our foundation for enterprise sales. Hiring is on target, with our total sales team reaching 120 people at the end of Q1. We now have approximately 50 reps on a new business of growth quartile, which is an increase from around 35 reps in Q1 of last year. We've come out of the gates strong in Q1, exceeding our overall new business goals as we've seen good early traction on the Upwork Business product since launch. We look forward to continued momentum on all of these initiatives as we head through the year.

As the business grows, we are also driving more high-level influential conversations as part of our industry leadership. With that in mind, yesterday, we announced our first Chief Economist. As our Chief Economist, Dr. Adam Ozimek, will drive Upwork's growing body of research and public data releases. Our goal is to help businesses better understand hiring trends, help professionals spot emerging trends and make our data more available to those of us working to create a more positive future of work. To the last point, I myself participate in the World Economic Forum through my role as co-chair of the organization's working group on the future of work. My goal is to help guide constructive conversations that steer the world towards better future of work scenarios.

In addition, our Chief Business Affairs and Legal Officer, Brian Levey, was recently named to the SEC's newly-formed Small Business Capital Formation Advisory Committee. The committee provides a formal mechanism for the SEC to receive advice and recommendations on matters relating to small businesses. Through this appointment, Brian intends to further our efforts to enhance marketplace efficiencies and unlock economic opportunities for entrepreneurs across all regions of the United States.

And with that, I will turn the call to our CFO, Brian Kinion.

Thank you, Stephane, and good afternoon, everyone. I'll start with a brief update on our key operating metrics. Then I will discuss both our financial results for the first quarter of 2019 and our guidance for the second quarter and full year 2019, which we included in our earnings release earlier today.

Please note that the numbers are rounded for the sake of convenience. And unless noted otherwise, comparisons of the first quarter of 2019 are to the first quarter of 2018. I will be referring to GAAP measures unless explicitly cited as a non-GAAP measure.

We monitor and measure our business performance using the following key operating metrics: gross services volume or GSV, core clients, and client spend retention. We believe these metrics are key indicators of our growth and the overall health of our business. GSV, which includes both client spend and additional fees we charge for other value-added services, increased by 21% in the first quarter to $487 million. We continue to drive GSV with year-over-year increases in both core clients and client spend retention.

The number of core clients increased by 22% to approximately 111,000 as of March 31, 2019. Client spend retention was 107% on a trailing 12-month basis as of March 31, 2019, compared to 103% as of March 31, 2018. This is consistent with our expectation that client spend retention will stabilize in the 106% to 108% range for the near term. We continue to focus on the increasing spend from our expanding base of clients on the platform.

With these key operational metrics in mind, I will now turn to our financial results. Total revenue increased by 16% to $68.9 million in the first quarter. Marketplace revenue increased by 17% to $16.9 million, representing 88% of our total revenue for the first quarter. Growth in marketplace revenue continues to be driven by an increase in the number of core clients and our client spend retention. This is evidenced by strength from our small business customers, our focus on customized experience for categories for tailored features and functionalities, growth from our U.S. to U.S. domestic market marketplace offering and an increase in spend from clients using our enterprise offering. As a reminder, we have a long-standing client that uses our managed services offering, and we recognize the entire GSV of their projects as revenue.

Managed services revenue increased by 10% to $8 million in the first quarter, primarily due to an increase in the amount of freelancer services engaged by this client. Managed services has grown at a slower rate than our marketplace revenue and we anticipate this trend to continue.

Total revenue of $68.9 million was the high end of our guidance range of $68 million to $69 million. As we noted in our Q4 earnings call in February, there are several factors to keep in mind with regard to our revenue growth in 2019. One, we were lapping the U.S. to U.S. domestic marketplace launch in our first and second quarters of 2019, which makes for a harder year-over-year comparison. Two, the number of Mondays in any given quarter impacts our sequential and year-over-year revenue growth rates as the most work in a given week is typically completed on a Monday, which is also the day we recognize our client payment processing administration fee each week.

The first quarter of 2019 had 12 Mondays whereas the first quarter of 2018 had 13 and the fourth quarter of 2018 had 14. Third, we've currently elected to spread our marketing investment and acquisition spend in brand awareness more evenly throughout 2019 as compared to our past practice of spending disproportionately in the first quarter. While we feel this was the right decision to acquire customers at a lower cost, it will impact revenue growth in the short term.

Our take rate, which we define as revenue developed by GSV, was 14.2% in the first quarter, roughly consistent with the fourth quarter of 2018. As noted on our previous calls, we expected a slight deceleration in take rate as a result of our long-term strategy to align our incentives with: one, the freelancers that have longer-term client relationships and now billed a 5% fee tier; and two, clients that continue to adopt ACH as a payment method, which waives the payment processing and administration fee. As mentioned earlier, that fee will only be waived for paid subscribers of the newly introduced Upwork Plus product. Long term, we believe freelancers billing at the 5% tier reduces friction and clients adopting ACH encourages larger and longer projects.

As Stephane described, we launched additional value-added products to offset some of the take rate deceleration and to increase spend and revenue on our platform. We have many leverage to increase take rate, and we will use them, assuming it's beneficial for the health of the platform. The new product offerings of Upwork Plus and Upwork Business are examples of these types of levers.

Non-GAAP gross profit in the first quarter increased by 21% to $47.9 million. We are focused on driving gross margin leverage. Non-GAAP gross margin was 70% for the first quarter, up from 67% in the first quarter of 2018. Gross margins are influenced by multiple factors, but primarily by payment processing costs. While the increased ACH adoption puts downward pressure on take rate and revenue, it positively impacts our gross margin.

Gross margin is also impacted by our spend on AWS, which is driven by GSV. We continue to focus on growing revenue faster than our AWS costs in the near term and have been successful in achieving this for the last 2 quarters. Finally, our cost of revenue to provide managed services constitutes a drag on our gross margin. It becomes less meaningful as our marketplace revenue continues to grow faster than our managed services offering.

Turning to operating expenses. Non-GAAP sales and marketing expenses increased by 3% to $19.9 million in the first quarter, representing 29% of total revenue compared to 33% in the first quarter of 2018. We also plan to spend significantly more in marketing and advertising in 2019 as compared to 2018. We believe this will allow us to acquire customers at a lower cost, drive brand awareness, and attract new users throughout the year. We intend to expand our sales team throughout the year in order to execute on our plans to land and expand across mid-market and enterprise customers.

Non-GAAP R&D expenses in the first quarter increased by 11% to $14.4 million, representing 21% of total revenue compared to 22% in the first quarter of 2018. In 2019, we plan to continue focusing our efforts in developing new products and features such as those in categories for improved profiles and portfolios as well as our continued mobile-first transformation. We believe continued investment in R&D is important to further our longer -- long-term strategic objectives.

Non-GAAP G&A expenses in the first quarter increased by 32% to $12.6 million, representing 18% of total revenue compared to 16% in the first quarter of 2018. These increases were primarily due to our investments in finance accounting and legal to support being a public company. We expect sales and marketing, R&D and G&A expenses to increase in absolute dollars. Otherwise, as a percentage of total revenue, they may fluctuate from period-to-period.

We continue to see improvement from our provision for transaction losses. Transaction losses decreased by 50% to $0.6 million in the first quarter, representing approximately 1% of total revenue. This is below our normal range of 2% to 3% of total revenue. We expect the reserves to return to our normal range and increase proportionally as our GSV grows.

Net loss was $4.7 million in the first quarter of 2019 compared to a net loss of $6.8 million in the first quarter of 2018. For the first quarter, our basic and diluted net loss per common shares outstanding was $0.04 on 106.6 million shares. Non-GAAP net income was $0.5 million in the first quarter of 2019 compared to a non-GAAP net loss of $3.9 million in the first quarter of 2018. Our basic and diluted non-GAAP net income per share in the first quarter of 2019 was breakeven compared to a net loss per share of $0.11 in the first quarter of 2018.

Adjusted EBITDA, a key metric for us in operating the business, was $1.2 million in the first quarter compared to a negative adjusted EBITDA of $3.1 million in the first quarter of 2018. We exceeded our adjusted EBITDA margin guidance primarily due to gross margin leverage and lower transaction losses. We continue to take a long-term view and balance investing in sustainable profitable growth, while building upon our leadership position at this very large and expanding addressable market opportunity.

Moving to the balance sheet and cash flows. We ended the quarter with $121.2 million in cash, cash equivalents and marketable securities compared to $129.1 million at December 31, 2018. As of December 31, 2018, and March 31, 2019, we had $24 million in debt outstanding from our 2 term loans. We also temporarily drew down $25 million from a revolving line of credit to provide working capital to fund our marketplace accounts receivable as of March 31, 2019, which was a Sunday. As a licensed escrow agent, we're required to fund the trust with our operating cash if there's ever a shortage due to the timing of cash receipts from clients who have completed hourly billings.

We repaid the $25 million revolver on the first day of the second quarter. Please note that the quarter ending June 30, 2019, also ends on a Sunday, and therefore, you should expect us to use the revolving line of credit in a similar fashion as we did this quarter and prior quarters that fell on a Sunday.

We used $29.4 million in cash for operating activities in the first quarter, which was largely driven by the shift of operating cash to fund our escrow obligations related to the Sunday effect that I just mentioned. We used $76.3 million in investing activities during the first quarter, primarily related to the purchase of $71.7 million of marketable securities and approximately $1.6 million to start the build-out of our new Santa Clara headquarters.

Cash provided by financing activities for the first quarter was $25.8 million, primarily due to the temporary drawdown from our revolving credit line discussed previously. As a reminder, our first principal payment to pay down the term loans began in April 2019.

To note, we will be incurring additional onetime capital expenditures of approximately $5 million and $500,000 in the second the third quarter of 2019, respectively, to compete the build-out of the Santa Clara office, due to our long-standing Mountain View lease expiring in the second quarter.

Before turning to guidance, as noted previously, we are lapping the launch of our domestic U.S. to U.S. marketplace during the first half of 2019, while also spreading our marketing spend evenly throughout 2019. For the second quarter of 2019, we expect revenue in the range of $72.5 million to $73.5 million. We expect adjusted EBITDA in the range of breakeven to positive 1% of revenue and weighted average common shares outstanding to be in the range of 109 million to 111 million for the second quarter.

We are on track with our plans and expect revenue growth to accelerate across the third and fourth quarters, and full year revenue in the range of $299 million to $304 million or 19% year-over-year growth as a midpoint of this range. We expect adjusted EBITDA in the range of breakeven to approximately 1% of revenue and weighted average common shares outstanding to be in the range of 109 million to 114 million for the full year.

And now I'll turn it to Stephane for closing comments.

Thank you, Brian. Our first quarter performance puts us on a solid trajectory to achieve our plans for 2019 and beyond. We continue to lead both our business and our industry ahead as we fulfill our vision to connect businesses with great talent to work without limits. We are confident in the strategic initiatives we set for long-term growth and pleased with our progress against them.

And with that, we will now take your questions.

(Operator Instructions) Our first question comes from Mark Mahaney with RBC Capital Markets.

It's Zach Schwartzman on for Mark. Stephane, I saw you exchange some comments on Twitter responding to a VC about the growing opportunity of hiring tech talent outside the Bay Area, especially for newer private companies. How do you see Upwork Plus and Upwork Business addressing those opportunities that Jack Dorsey, Bill Gurley and you were tweeting about this weekend? And a follow-up for Brian, on the core clients. This is the highest quarterly sequential increase we've seen with 6,000 core client net adds. Is there anything in particular there that the team's been focusing on? Or has this just been the natural progression of the business? Maybe anything from early adoption of Upwork Plus or Upwork Business?

Sure. Thank you for the question. I'm happy to take the first one. There's been a growing trend of what some people in the industry call distributed companies or remote first companies, which in some cases, don't even have an office anymore. And we've always thought this was a big part of the destiny of this company, was to enable businesses that are based in New York and Silicon Valley, which are 2 of our top cities in the world, who really struggle to find good talent locally because the competition is so high, to be able to hire great talent from elsewhere in the U.S. and globally.

And what's been happening over the last few years is the cost of living in the Bay Area, in New York, and in other places continues to grow faster than most people's income. And so increasingly, people are struggling to move to San Francisco, move to the Bay Area, and companies conversely are increasingly really struggling to find the talent in the Bay Area.

So a few years ago, when I talked to VCs -- part of the reason why I replied to Bill. I mean Bill is a VC at Benchmark, who happens to be one of our biggest (technical difficulty). Historically, when we would have these conversations with VCs years ago, they would say, "Well, that's crazy. How could you possibly find great talent? How could you possibly build a good culture? How could you be productive, et cetera, et cetera, if your company's distributed? This doesn't scale. That's not how Google operates. That's not how Microsoft operates. Therefore, that's not how our portfolio companies are going to operate." But now you're at a state where you have companies like us, about 1,500 people globally, only 400 or so in an office, and more than 1,000 are working from home. And we're not the only ones. You see this with BizCount. You see this with Automattic , the company that builds Wordpress. You see this with Mozilla, which is Firefox. You see this with the Wikimedia Foundation.

And over the last few weeks, you've seen Stripe announcing that they have 4 development centers and they've been looking to open up a fifth one. And after looking all over the world, they've decided the fifth one was going to be distributed. Meaning, their fifth development office is the cloud. And I think you're going to see that as an increasing trend. And obviously, for Upwork, that's a huge opportunity, right? That is what we allow companies to do.

Plus, and Business specifically, are really taking this to the next level. Historically, what we would hear from growing companies is Upwork Basic was too basic for them, if you will, and Upwork Enterprise was too complicated for them. And there was kind of a missing middle, if you will. We had this bubble approach to product development. And now we say, "Well, there's clearly 4 different segments of customers. And we're going to have 4 different offerings for the 4 segments."

And then Zachary, your question on core clients. So core clients has actually grown 22% year-over-year for the last 4 quarters. We've been -- quarter-over-quarter, about 5% growth rates. We've been adding about 5,000 every quarter over the last year. It's too early on the Upwork Business to see anything there because it was launched in Q1. So you'd hope to see that come through throughout the year, though.

And our next question comes from Brent Thill with Jefferies.

Just in terms of the back-end loaded year-end revenue, can you maybe just talk through what you're seeing there? And just from the mid-market products, can you just maybe address what you're seeing? I know it's super early, but to talk through kind of the trajectory that, that adoption, what you see currently.

Sure. Yes. So I mean, there's a combination of a few things, right? I mean, some of which is just this whole thing about number of Mondays. I mean, there's nothing really magical about this other than we make more money on Mondays. And so when there's more Mondays in a quarter, we make more money. And when, comparatively, to the previous year or the previous quarter, if you're looking at quarter-over-quarter or year-over-year, if the number of Mondays changes, it also has an impact on the numbers. So that's one thing.

Second one was a decision we made, which I mentioned on the previous call. A decision we made to spread investment in marketing more evenly throughout the year. And the rationale behind this being that the lifetime value of accounts that we sign in Q2 or in Q3 is similar to the lifetime value of accounts that we sign up in Q1. Meanwhile, if we spend more money in Q1 than Q2 or Q3, then the cost of acquisition ends up being higher. So the CAC-to-LTV ratio, we believe, is going to be maximized by spreading marketing investments through the year.

Unfortunately, in the short term, what that does is depressing the numbers a little bit because instead of acquiring tons of clients in Q1 that would then spend through the year, we're going to be -- we've acquired fewer clients in Q1 and relatively speaking, we're going to acquire more clients in Q4. And so that's leading to a progressive acceleration of the business through the year.

The third thing which we mentioned last time is the lapping of a great year last year with the domestic launch. And so this really hurts us more in Q1 and Q2 and less in Q3 and Q4. But I think the short answer to your question is the overall plan for the year is on track, which is why we are renewing our guidance with pretty much the same that we said last time. And I would add again that one of the things that's pretty clear about this business is how predictable it is, right? And so we tend to have really good visibility into what the client spend retention is going to look like, what the core client spend is -- the core client number is going to be like. And these are the 2 metrics that drive us for the rest of the year.

Oh, and sorry, you asked a question about mid-market products. I mean, these are like long-term investments. The -- I would say the initial launch is performing better than we expected, but it's on a small number and a few weeks. Currently, the guidance that we're providing is taking into account all of these launches, the Upwork Business, Upwork Plus, the change in Connects. All of that stuff is embedded in there. But I would say these are multi-year type of -- that's very much like the investment in local, it's not going to have a huge impact for 2019, but we think, over the long run, will have a really, really big impact for the business.

And then the last point I would add is we really had a very deliberate effort in managing the costs of Amazon Web Services, which we are seeing a lot of leverage from right now. And the other thing that is kind of the -- hurting take rates, but improving gross margin is the switch from credit card to ACH, which we think, for the overall system, is a really good thing. Ultimately, money that goes to the credit card companies does not benefit either Upwork or the client or the freelancer, but it does have an adverse impact on the take rates, which we then make up for in the gross margin. And that's why when you look at gross profit growing faster than revenue this quarter, it's the combination of these 2 things, essentially, right? Less AWS cost as a percentage of revenue and more ACH as a percentage of GSV.

And our next question comes from Mark May with Citi.

On the client side, the hiring side, any interesting changes in the type of clients and maybe on the new client side that you're seeing from a mix perspective, maybe not, but just curious if you are. And then I know you provided the revenue retention growth rate, of course. But just wondered if there's anything else that you'd add in terms of client retention trends that you're seeing recently?

Sure. So I would say we have a deliberate effort in the company to try to go after bigger companies, right? So historically, if you go back 3 or 4 years ago, before we had a way of segmenting our user base, if you signed up with a Yahoo! or Gmail address or if you signed up with an e-mail address that matched a Fortune 500 company, we would treat you the same. And because we didn't know the difference from an acquisition marketing standpoint, we would spend them the same amount of money to acquire both.

As we became more sophisticated, it became clear that having a good segmentation was really essential. And we are spending much more of our time thinking about the larger companies, I mean, definitely the ones that are 10 employees and above, but frankly mostly the ones that are 50 employees and above, than the people that sign up with a Yahoo! and Gmail address. So yes, over time, we see fewer individuals and fewer sole proprietors and a smaller contribution of them to the overall business, which is part of the way we've improved client spend retention. As you can imagine, bigger companies tend to retain significantly better than very small businesses. So that is a very deliberate approach.

The other thing that's been happening over the last 2 years or so is the shift from more of the business being cross-border to more of the business being domestic. And that's been this success that the domestic marketplace has been. And it's been really good for everybody because freelancers in the U.S. no longer compete against freelancers overseas. So they're able to have higher rates. Clients in the U.S. that otherwise would not be interested in Upwork because they felt it was risky to hire people overseas are now spending incrementally. And then for us, because the hourly rates tend to be higher and our take rate is the same, we end up making more money for the same projects, right? So it's been a pretty big win all around.

And then, overall, I mean, what you see in the numbers also is our international business on the client side is growing faster than the U.S. business so progressively, we're becoming more distributed, even on the buyer side, not just on the freelancer side.

And on your question for client spend retention, I just would say it's in the expected brand that we highlighted the 106% to 108% range. Nothing out of the ordinary for Q1. Obviously, we want to increase that rate over time and a lot of what we're doing with these new products and functionalities to drive those up. But that -- this is based upon current cohorts of information we have today.

And our next question comes from Ron Josey with JMP Securities.

I just wanted to maybe, Stephane, a quick follow-up, and then another question on the local freelancer search. So Stephane, I think in the opening remarks, you were talking about the build-out of the enterprise sales force, and I thought I heard you say you're seeing traction in the Upwork Business post-launch or Upwork for Business new marketplace. So can you just talk about how the sales group is grouped together or whatever, focused on each one of these marketplaces understanding that probably more on the business and enterprise? And then, the second part of the question, just with the local freelancer search options test, great to see it expanding the newer markets, but can you just talk about maybe the KPIs here that give you the confidence to expand to these newer markets?

Sure. So maybe starting with the first one. The way the sales team is organized is by segment, not by product. Reps only book of Business so we have mid-market reps that manage companies between 100 and 1,000 employees. We have large account reps that manage a book of Business of companies from 1,000-plus, and then we have strategic reps that handle a subset of the Fortune 500, if you will.

As you can imagine, the strategic reps are much more likely to be selling Upwork Enterprise and the mid-market reps are now much more likely to be selling Upwork Business. But the goal of the rep is to identify what is the best solution for the customer. We just give them more options to choose from. And I think what we'll see, because we believe the sales cycle is going to be a lot shorter and the price is obviously a lot lower, I think we'll see increased adoption by the mid-market segment of the Upwork Business solution, even if later, once they've grown to a certain skill, they decide to upgrade to Upwork Enterprise.

And then for freelancer search, I mean, would say at this stage, it's a combination of the data that we have. If we believe we have enough density of supply and demand in a given metropolitan area, then it makes sense to launch it. But it's also our ability to test and run multiple experiments at the same time. So we started maybe a little bit conservatively with just a handful of cities. And given that the KPIs we're looking at right now, which are things like do we get incremental posts that we were not getting before? Are they getting filled? Do the jobs tend to bill as much as we think they would bill? Like, for instance, do we get this intermediated would be an example, question we would look at. And generally, does this almost micro marketplace look healthy? Does it have liquidity? Are the buyers finding what they want? Is the quality high? Does the repeat business happen the way we would expect it to. And if so, then we go and expand it.

And our next question comes from Nandan Amladi with Guggenheim Partners.

So as you roll out these new marketing plans, how much effort are you spending on attracting freelancers versus businesses and enterprises? You've talked about how your sales teams are structured. Can you talk a little bit about your efforts on the freelancer side?

Yes. I mean, overall, if you look at the macro level, we remain very supply -- very demand constrained, very oversupplied in terms of number of freelancers. Every day, there's over 10,000 people who apply to join Upwork as freelancers and we only have jobs for about 2% of them, right? And so in some emerging categories, we may find that the supply level is not high enough. The way we see it usually is because the fill rates on those jobs is low. For the most part, freelancers -- existing freelancers who have adjacent skills figure this out on their own. And they teach themselves the skills. If they don't figure this out on their own, then we may nudge them a little bit to acquire the skills. But it's very rare that we'll have a dedicated sales and marketing effort to try to get more freelancers on the platform.

It's happening organically through word-of-mouth, right? I mean, fundamentally, if you're a freelancer in the middle of the country in the U.S. or abroad, you have access to better jobs that pay a lot more money, that give you more flexibility and more freedom because really, [what's] not to like about being successful in Upwork? The tough thing, the thing that keeps us up at night is we just don't have enough jobs for people, which is why we turn down 98% of people. And these are people with a college degree, right? Over 80% of our user base are freelancers that have a college degree.

So if you just look at the U.S. alone, they'll have close to 1 million college-educated Americans that will try to join Upwork this year and we don't have jobs for the vast majority of them. So the reason why we spend a lot of money on sales and marketing relatively speaking on the client side compared to the freelancer side is because of the imbalance between supply and demand.

And anything to note with your partnership with Microsoft that you launched last quarter?

Yes, we're getting a lot of really, really good traction with it. I would say existing Upwork Enterprise customers are really interested. I mean, as you can imagine, many large enterprises are Microsoft customers, and so they're very interested in essentially taking all the best practices that Microsoft had internally in learning how to use Upwork as well as the integrations we've built with Power BI and Microsoft Teams and Microsoft Flow, et cetera, et cetera. And they are getting deployed at an increasing number of our enterprise clients. As well as I would say the other happy thing that's been happening is Microsoft has been also sending us a lot of leads that they get on their end from Office 365 customers that are saying, "Hey we've been thinking about using Upwork for a long time. Can you get us connected with their freelancer toolkit to the Upwork product?" But it's early days, right? I mean, this is going to be a very long journey hopefully full of other product integrations and a lot more joint marketing and joint sales opportunities.

And our next question comes from Marvin Fong with BTIG.

So 2 questions. I guess the first one, Brian, if you could just help us on the shape of the potential pressure on take rates? Do you think that the first quarter, we have seen the worst of the pressure or do you have a view on that? And then the second question is just on the new products. If you can give us some additional color on how you think about the opportunity between Basic and Plus, like how much of your -- the client base that was formerly on Standard might be addressed by the Upwork Plus product? And just as a second follow-up on that. Are you guys now set with your go-to-market with these 4 different membership plans?

Okay. So on take rate, there's multiple elements that impact take rate. So the freelancer tiered service fee, as more people get to the 5% that's downward pressure, but it makes it much more secure within the platform, which helps our clients spend retention and our core clients. You've also got the ACH adoption as another option that puts pressure on take rate as well as revenue. But again, drives GSV on the platform. So the new products have different take rates from the perspective of, obviously, Plus having a 3% is a little bit of a lift, the business has a higher take rate. And so as a result, we implement these things to try to stabilize the take rate. But there's always a lot of moving parts in here. And as more customers get to the Enterprise, that's also got a higher take rate as well. So I would say you probably see a little deceleration, but we're working on trying to stabilize it, but our focus really is on driving GSV growth and being profitable. I don't know if you want to take the product. Question was on the products, Basic and Plus.

Yes. I mean, like in an ideal world, I mean, the way we've tried to build the product is that we have 4 segments of customers, 4 products and everybody seems to like exactly the right product for them. Obviously, we can't possibly know exactly what -- every customer is unique and every need is unique. And so the mapping may not be exact. But nonetheless, I think what we've said at the time of the IPO, about 80% of our business is done with companies that are 100 employees or less. Many of them are in that Plus segment. A big part of the GSV is there. And so we think, progressively, we're going to see people that are currently on Upwork Standard, which eventually will be discontinued as a product. They'll have to choose whether they get the Upwork Basic product, which is a scaled-down version of Upwork Standard, or whether they upgrade to Upwork Plus, which is a scaled-up version of Upwork Standard.

So we're going to have people make an explicit choice and obviously, they can upgrade or downgrade from there. I think over time, we'll get massive adoptions of Upwork Plus. But this is early days, and we'll probably need to have quite a few iterations from a product standpoint, and possibly from a pricing standpoint before we completely get it right. And I would say the go-to-market itself is in version 1.1, and there's going to be many iterations of that as well.

This concludes our Q&A session. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone, have a great day.