Upwork Inc (UPWK) 2021 Q3 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Upwork Q3 2021 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your first speaker today to Mr. Evan Barbosa, Vice President of Investor Relations. Please go ahead.

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 Executive 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 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 website and on our Investor Relations 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 30, 2021, when filed.

In addition, reference will be made to non-GAAP financial measures. Information regarding -- a 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've 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. The number of active clients grew 25% year-over-year and GSV per active client grew 12% year-over-year proving both the 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, we can see a number of critical trends that will dictate the next few years of growth for not just us but all players in this 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 a talent strategy predicated only on full-time employees doing all the work will leave them 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 found 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 to the rigid work paradigm they replaced. They are flexible, dynamic and fast, and customers aren't 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 services even deeper relationships between talent and clients than ever before. It's a central 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 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 attacking our single-digit unaided brand awareness by turning up the volume 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 the number of customers who spent $1 million or more in the trailing 12 months up 11% quarter-over-quarter.

A wonderful example of this is 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 team successfully built out a mass communication and onboarding strategy for both hiring managers and talent at the company, added more than 1,500 of its existing talent population to a centrally managed program through the Upwork platform using our Bring Your Own Talent capabilities through our enterprise suite, 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 2:1 and in which a distributed workforce of 2,000 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 2 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 are building for them to capitalize on this shift and improve the impact and effectiveness, adaptability and inclusivity of their team.

Thank you for joining us on this journey. We will now open the call to your questions.

(Operator Instructions)

I show our first question comes from the line of Bernie McTernan from Needham & Company.

Great. Just first on the labor market. The labor, the shortages out there, especially in the U.S. have been well documented. I'm just wondering if that's been a driver for people or demand to your marketplace?

I know that a lot of the shortages out there maybe for jobs that could -- that might not be applicable to your market. So just wondering how it's been a tailwind or not. And Hayden, I know you touched on it maybe with the corporate war for talent in your -- in the prepared remarks, but just any thoughts on that.

We definitely see that this is a moment where talent is in short supply 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 flips over January 1, 2022. So we're really focused on helping them realize that this is where the solution lies.

Understood. 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. And your confidence that new hires over time will be able to deliver the same level of productivity that you're currently hitting.

Our #1 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.

I show our next question comes from the line of Nick Jones from Citi.

Great. Hayden, maybe kind of on the same line of thinking. As kind of enterprise clients think about adopting the solution, I think we're kind of seeing in the news, there's a bit of a tug of war just between the employees and the corporates now on like who wants to go back to work, who doesn't. Do these kind of solutions really come up now as part of a solution? Or are they still kind of busy trying to figure out whether they're going to capitulate to employees or not and allow a more remote dynamics. I guess kind of the broader question is, is it kind of a longer time line to drive this kind of adoption given kind of the confusion maybe going on now on even what their kind of core working environment is going to be like.

We've been able to steer clear of that tug of war because I think the lesson that companies have learned through the pandemic is 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 actually serve them.

And so the conversations we're in with customers is around they know they need access to talent that they just can't get through some of the traditional models, whether it's full-time hiring, whether it's 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 are going be 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, but they're 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 initiatives.

Got it. And then maybe on partnerships. You made -- there's new partnerships announced, I think, fairly frequently, Loom and Catch. Are there opportunities to have partnerships that are maybe more GSV enhancing, like a partnership with SquareSpace or something like that, where people are kind of being facilitated, maybe they're trying to do it themselves but they can quickly access Upwork.

And I guess, are there barriers to entry to kind of create those types of partnerships? Is there kind of a reason that there's not maybe more GSV-enhancing partnerships? Or maybe I'm just thinking about this the wrong way, but I would love your thoughts.

I think the partnership aspect of the business serves us in a couple of different ways. And some of the ones we'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 in the partnership space. And I think as we have different partnerships to announce, we'll certainly hear about those.

I show our next question comes from the line of Nat Schindler from Bank of America.

You guys are talking about jacking up your brand spend doubling it 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 branch spend? Obviously, that hits EBITDA in the near term, but when do we see the benefit start flowing into revenue?

Building Upwork into a world-renowned brand is definitely going to take some time, and so this is a multi-quarter potentially multiyear 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 were 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 $1 trillion TAM 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, does begin to change their views about how Upwork can serve them.

And that's really what we're going after here. It's building this new category does require a level of investment and patience that we will have, even as we will be very rigorous in measuring and managing and being dynamic with that investment as we get feedback from the tests that we run.

And is this brand campaign that you're going to run in the fourth quarter or start in the fourth quarter, is it -- other than scale and scope, is there any significant differences between the types of campaigns you've run in the past? And on the types of brand campaigns you've run in the past, how quickly did you see really returns from that spend?

It builds 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 insights there around things like channel and audience and creative. So I think that's where, Nat, we're getting smarter every quarter as we're 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 -- 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, again, that those things are -- 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.

And some of those metrics -- just to add on to that, some of the metrics do obviously move faster, whether they're registrations or client starts, and some metrics are much more -- take longer to truly understand in terms of lift to engagement and retention on the platform, which we would anticipate that the brand spend would have. But they do just take time -- much longer time to understand the true impact of that.

(Operator Instructions) I show our next question comes from the line of Marvin Fong from BTIG.

Great. Just the first, if I may, on boosted proposals, I was very interested to see you guys mention that. Is that I think you guys said it was being tested. How likely is that to actually be officially deployed on the platform?

And then I think it would 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 percent 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 booster proposal is the first time that we've introduced auction mechanism to the marketplace, which we're really excited about, Marvin, because it really gives talent a better ability to really signal their interest around certain job opportunities. And so in terms of when the feature will fully launch, the team is still reworking some aspects of the feature and 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 and 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 kind of 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. And 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 things like fill rates 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.

Got you. That's great. And then my follow-up, just on the disclosure, the active clients and the GSV per active client, I think active clients, the year-over-year growth was in the mid-20s. I think in terms of actual number, it was a bit of a slowdown from prior quarters and then the GSV's moving around a little bit. Just wondering if you could help us think about was that as expected this quarter? And sort of what we should think about these 2 KPIs doing in the fourth quarter?

Sure. We continue to see good strength on both of those metrics in Q3. We don't provide guidance on them as a metric going forward. But from a term perspective, we would expect that 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 are -- 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 that the absolute levels of clients, spend per client, whatnot, are maintaining at the 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 clients will continue to show strength going forward.

I show our next question comes from the line of Rohit Kulkarni from MKM Partners.

A couple, one is on this online lodging marketplace company that you mentioned that's done already $10 million in spend in the first year. And then just can you talk through like what was it about this company or their use cases 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've enabled them to do? Then I have a couple other follow-ups.

What we see with this company is the sales team had an excellent strategy in going after the right customer at the outset, and that really is the playbook they've in building. Then the ramp to the level of spend, the $10 million of spend in the first year is definitely not typical. We see a lot of customers ramping to $1 million of spend faster and faster, although usually they don't even get to that level of spend in the year. But the good news is our team has been getting customers to that $1 million mark at an increasing rate, which has been great to see.

And in this case, the team also did a fantastic job building this rapid expansion playbook once the account was landed in terms of getting more and more hiring managers with them -- and the company aware of the program and migrating all of this talent that the company was already working with onto the Upwork platform using our Bring Your Own Talent solution out of the gate.

And so we just executed incredibly well kind of top to bottom on this account. And I think while, again, this is larger than the typical account that we might be closing, it's definitely not our largest, and it's a playbook that the team is getting better and better at replicating, which is a great sign.

Okay. Cool. And on enterprise and the lead -- or the land team rather and the expand team, the color that you have on the guidance or the spend plans over the next year, can you just reconcile that with what you said back in the Analyst Day. I think I have these notes 18 account execs and they could do 6 deals per year. Since then, how has that thinking evolved with this land and expand team as such?

Sure. So 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. So that will give you 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, both 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 and the execution by the team is really, 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?

So I'll start. At a high level, market conditions were great, so we wanted to make sure that we took advantage of those and build up the balance sheet to put ourselves in a good position to be able to continue to invest aggressively. We are focused on growth, and want to make sure that we can invest as much as we possibly can and the opportunities that clear our financial hurdles, whether that's in sales, brand marketing, tech or M&A.

So all of those are potential areas that we potentially would use for that. We have no updates, nor are we to share them if we did on the M&A front. But we're excited by both the organic opportunities we have to grow the company, and will continue to be cognizant of the inorganic opportunities out there as well.

I show our last question comes from the line of Brent Thill from Jefferies.

This is John Byun for Brent Thill. I had a couple of questions. First on Talent Scout, I mean it sounds like it would be helpful, I guess, in -- with the take rate as well as potentially driving more spend per client. But wondering if you could share some really feedback in terms of where you're seeing the adoption, the type of customers or categories.

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 (inaudible). We've brought that down in the quarter by 30%. And I'd say, Brent -- or John, rather. There were 2 primary client personas that Talent Scout really goes after. One 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 persona that this goes after is really high-value clients who are already inside of our Talent Marketplace, and they're looking for an alternative when they 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.

And 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 of the cross-sell channels even inside of 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've been through this experience once and are coming back and saying, that was awesome. I want to do this a second time or a 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.

Great. That's very helpful. And then second question on advertising opportunities, from reading the shareholder letter, it looks like it's different than the availability of badge and the boosting using Connects. If that is right, I mean, could you talk about what kind of advertising opportunities you see? Just a little bit more detail on to how they might work.

I think the opportunity here is really around enabling putting more control in the hands of both sides of the marketplace. In the case of those features we launched last quarter with availability badges, boosted proposals, these are examples of giving talent more control over really signaling to the market that they are available, interested in new work and really standing out from the crowd in the moments when they are looking for those next work opportunities. And so that's what these features do.

Clearly, there are other client-side opportunities as well where they could potentially pay to get more visibility with the talent side of the marketplace. So opportunities exist on both sides for parties to increase their visibility in front of the other side of the market.

But these 2 features represent kind of our first forays into doing more to enable that increased visibility, which is a really valuable signal because obviously, people only pay for that visibility when they're serious, they're high intent or highly qualified typically to participate in those work opportunities.

And the early testing we've done around that has validated some of those early hypotheses about the quality that those signals would generate for us, not just other aspects of value. So it's early for us in this space, but certainly an area where I think there's a lot more runway for us.

Thank you. This concludes our Q&A question. At this time, I'd like to turn the call back over to Evan Barbosa, Vice President of Investor Relations for closing remarks.

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.