Hi, everyone. I'm Andrew Boone. I cover internet here at Citizens JMP. Hey, Erica, thank you so much for being here. I appreciate the support of you guys attending. Really appreciate it, and look forward to us having this conversation. Let's just start off with kind of a bigger picture question in terms of freelancer activity, right? So we went through this massive period during COVID, now we're kind of in this post-COVID period. Just talk about activity on the platform and how it's changed from, like, 2019 into COVID, into today. What's different? Where are we today in terms of activity, and how has that evolved?
Sure, thanks for having us. You know, we continue to see every year, like, record-breaking numbers of freelancers on the platform, and frankly, freelancing as a trend continues to grow massively. You know, we saw 64 million Americans freelancing last year, 38% of Americans, over $1 trillion of contribution to the economy. So this is a mega trend that's happening. It started many, many years ago, and continues to increase every year. In terms of activity on the Upwork platform, what we've seen over the last couple of years is continued strength in the core categories where Upwork has historically been very strong. So we see a lot of freelancing in our main biggest category, which is web, mobile software development, so technical work is alive and well.
We also see lots of activity in categories like marketing, where there's design and things like that happening. And then, there's a long tail, over 125 categories of work happening on Upwork, so everything from, you know, translation, writing, customer support, I mean, there's just legal, administrative services, everything is happening. I'd say the biggest trend that's really changed in the last year is a huge surge in AI. So, AI was the biggest, fastest grower—I mean, the fastest grower for us for sure last year, 70% year-over-year growth. It's still a small category relative to the whole, but that's a big one, where tons of clients are coming to Upwork looking for freelancers who have the skills, whether it's around data labeling, data engineering, machine learning, building foundational models.
Like, the entire value chain around AI is a place where they're getting talent on the platform. And so that's certainly something that's changed the dynamics of the ecosystem overall. And freelancers are also adopting AI tools at large in all of the kind of workflows that they're doing across the platform. So that's, I think, something that's gonna shake things up and change the nature of work, you know, overall in the world, and certainly in freelancing for sure.
Every year, I look forward to the 10-K that you guys put out, just given the cohort chart that you guys drop into that.
Yeah.
Talk to me about cohorts over the last year, right? It looks like from the chart, they stepped down a little bit.
Yeah.
What was that? Is there anything to call out as we think about the underlying cohorts for Upwork?
No, you know, I think the, you know, obviously the cohort chart that we published in our 10-K, it's an annual chart, so it reflects the full activity of 2023. You know, as we all know, early in 2023 was a particularly, you know, high beta, you know, kind of tumultuous time in the market. We saw 250,000 tech layoffs alone in the first quarter, and, you know, I think that affected all businesses, and, you know, that was really... We talked a lot about that at the beginning of the year. I think the cohort chart that we published on 2023 reflected that activity at the beginning of the year.
It was largely concentrated in kind of large enterprise, larger-sized companies, that were really just compressing their budgets and compressing their spend across many, many vendors, including ours, and including us. And so, you know, as we look at some of the more quarterly cohort charts as we march through the year, we actually start to see, you know, things start to gradually improve. But, you know, for the full year, we saw that compression.
So it sounds like there's stabilization there on a quarterly basis.
Yes
... and that's the expectation for 2024?
Mm-hmm.
Okay. Let's go to active clients, right? 5% growth in the last quarter, but you guys noted a 20% increase in terms of new client starts in Q4. Right? Can you just help us better understand that top-of-funnel success? Are you doing anything different in terms of that 20% growth of new clients, or help us better understand the drivers?
Yeah. Well, I'll start, maybe Hayden can add in. So first and foremost, the year-over-year growth that we saw was both in activations and in reactivations, the highest we've seen in two years. And so we're really, really pleased with that progress. I would say it's a combination, you know. I don't think that we see a material change in the macro environment right now. I, you know, everybody's opinion is open on this, but, you know, things continue to be fluid and, you know, so we put it down, you know, much more to execution than, you know, any material change in macro. Only about 25% of our activations are from paid channels, so the rest is organic or unpaid channels.
But we, you know, we really put it down to a lot of, you know, acceleration and improvements on the platform. Our product release momentum has doubled in the past year, and we're constantly, you know, adding new benefits to the platform, Job Post Generator, our new Upwork Chat Pro availability, our AI Services Hub. All of these things together, I think, are just creating more interest in the platform.
That's right. I'd also say we have been investing for quite some time in our performance marketing and all of our marketing channels, and so even as we brought down our brand spend last year, you know, that's been another area where we've continued to have, you know, improved efficiency in our marketing, which has been, you know, supporting our overall growth.
Yeah, actually a 25% year-over-year improvement in CAC in Q4 as well.
Yeah.
Let's transition to take rates, right? The move from the tiered take rates last year into the flat 10% into 2024 with now everyone on that 10% level, right? Talk to us about the step up that we should expect for Q1. And then, just bigger picture question, right? How do you guys feel about pricing overall in terms of the platform? There are multiple examples I can give you of people charging 20%+-
Yeah
-for the freelancer side. How do you guys think about that 10% versus the overall opportunity on pricing?
So just so, just to make sure everyone understands the pricing change that occurred, you know, we in May of last year, we previously had a tiered pricing structure, whereby certain levels of spend were at 20%, between $500-$10,000 spend was at 10, and then stepped down to 5%. The majority of the pricing changes happened right before, you know, in the past six months. But we honored 5% contracts, which then, at the end of the year, stepped up to 10%, and so we're now at a flat fee, 10% for all of our freelancers. And so that does create a benefit to take rate in Q1. We haven't spec...
We haven't given, you know, an exact number, but we do expect, you know, a decent-sized step up in Q1 from Q4. And then from there, you know, I would expect that we have some, you know, nominal or, you know, small kind of take rate accretion through the year. I'll describe a little bit of the reason why. But before I do that, I want to make sure people do understand that there is, you know, of course, with any price change, there's going to be some GSV headwinds as you go through it. Q1 we are experiencing a little bit of that, and that's why we've described the fact that we expect only, you know, very modest GSV growth in the first quarter, first half of the year.
And that's natural, expected, and, you know, really the price change across every measure that we've looked at has been extremely successful. But, you know, then, you know, the other kind of tailwinds we have for take rate are in our ads and monetization products, which we have really had a lot of success with over the past year. It's our fastest-growing revenue stream, and it is also accretive to take rate as our customers start to take up and use our ads products more and more and more. Our freelancers can boost their proposals up so that they can be at the top of the list.
And what we find when our freelancers do that, not only do, you know, is there, you know, kind of revenue for us, but it's a more effective match for the client and the talent. Because the freelancer is more likely to be, you know, highly qualified for the job, and they have skin in the game. We also... And then, you know, another kind of third tailwind to our take rate is in our subscription products, which is Freelancer Plus. We just bundled Upwork Chat Pro with that. And so we do have a number of things that are going to continue to benefit take rate as we go along, although albeit at a slower pace than we've seen in the last three quarters.
Yeah, I'm going to interrupt you before we-Ed and I, we get to the bigger picture question. But in the past, I think we've talked about a point benefit to take rate from the 5%-10% move.
Mm.
Is that still on the table, that that's about the way that we think about that, and then advertising products is the rest of that?
So we had talked about a point in total from the beginning of the change through, you know, through Q1, in essence. We haven't broken out exactly what the ads and monetization products are contributing to take rate. To be honest, we're constantly experimenting with it, and we're constantly updating. So, you know, I think that, you know, it remains to be seen, and we actually expect it to be a tailwind for some time. But, you know, I guess quarter to quarter, you know, we're sort of in the range of-
Okay.
Yeah.
Pricing, bigger picture question.
Yeah.
More than 10%.
More than 10%? You know, I think we just made this big change in the last year, and now it's, you know, finally fully launched on the platform, and I think we're in a good place. You know, we've done a lot of research and experimentation with pricing over the last decade in this business, and going from the tiered services fee to the flat 10% fee, I think is the right move for so many reasons. As Erica said, the change has been incredibly successful. It's met or exceeded all of the dimensions and expectations that we had for this change, whether revenue, customer behavior, GSV, and so we're incredibly pleased with that, and I don't think we need to make any further changes right now. However, we have a ton of opportunity on other levers of the business.
We are very early in building the ads and monetization roadmap that Erica mentioned. You know, we've just launched a number of new products in the last year around things like our boost of proposals and Connects and other things, which, as Erica mentioned, we have a lot more experimentation and feature launches, you know, in store for this year. Things around, like, dynamic pricing, new ads products for both clients and freelancers.
And so, you know, we have this very vibrant, very large at scale, two-sided network of clients and talent coming together on our platform, and we are very early, frankly, in figuring out all the ways that we can both capture value at the places where we're creating value for them and fundamentally make sure that we are creating the right signals in the ecosystem and pricing those signals effectively, which is really what a lot of this roadmap is about. So I'd say there's a lot more runway there for us to do that, as well as to the subscriptions point that Erica raised.
You know, we have a pretty small and limited SKU lineup of subscription products for both clients and talent today, and there's a lot more we can do to optimize, and offer those subscription plans in the ways that customers want to be consuming our products. So I think that does give us a lot of room for, the right levers around take rate that are really aligned with where we're creating value for customers in those dimensions, and we're going to be doing that.
I'm actually—I want to try this in a different way. Are you ambiguous in terms of whether monetization comes from ad products or other forms of just increased take rate in that manner versus a structural uniform change that may be that 5%-10% move? Is it the same to you, or is it different as you think about the levers of monetization?
... What do you mean by that?
If you guys increase ad load, for instance, you guys could get to the same one point increase across the platform theoretically.
Right.
Right. Is that the same as saying, "Hey, I'm gonna take one point of take rate on fee structure?" Do you think about that the same way, or does that change the incentives of the platform?
I mean, the outcomes you see from that are very different because there's a natural tension between, if you increase take rate, customer behavior is very different than if you, you know, sell that same take rate increase through vehicles that are more around, moments where customers are getting value that's not necessarily the same, you know, extracted through the take rate increase at the product side of consuming services. So what I'm saying is, where you price the services has to be in line with where you think you're gonna get the right customer behavior outcome, and I think that's where we're very focused on optimizing.
Just driving up, you know, percentage points on take rate by saying, "Oh, today's 10% fee goes to 11% to 12% to 13%," if we were to do that, we would see changes in spend and changes in customer activity on the platform that might not be the best for our customers and for the business. Whereas, if we're adding value with new products that customers can buy or ways they can consume the business differently, they actually are increasing their spend, increasing GSV, and increasing take rate at the same time. So I think those are two very different outcomes that we could see if we're making different decisions about how we build the ads and product and monetization services versus just extracting more fees from the same customer base.
I think our goal is not just to increase take rate on the same customer base, it's actually to create more value with our services, so customers actually want to spend more. And we're growing our GSV, we're growing revenue, and we're increasing take rate commensurate with that.
Yeah, I mean, ultimately, we want to price to value, right? And you know, we think there are a ton of more value-added services we can add to the platform, bundle up, and give people, you know, a satisfying experience that they feel like they're getting value for their money.
You guys talked about the multiple levers in terms of ad products that are coming to market in 2024. Can you guys just flesh that out? Like, what should we be expecting as you guys do, kind of evolve both subscription and advertising products over the next couple of years?
Some of it will be in the area of subscription, so enhancements to plans like Freelancer Plus and Client Plans. Some of it will be in the Connect area. So we've had a lot of success in working with what are the right bundles of Connects, how should they be priced, how much should jobs be priced at in the marketplace? Should they be fixed, or should it be more dynamic based on the supply and demand dynamics in the ecosystem? And so that's an area where that pricing will be changing over time. And then, you know, there may be some places where we can add new products, where we see clients or talent willing to pay to have their services or their job ad be visible.
There's a lot of topography in the ecosystem today where that's not... You know, we haven't created those kind of ad features yet. So I think those are some of the places where we know we have opportunity for sure, and our team is gonna be experimenting and figuring out, you know, where are those things beneficial for customers and beneficial for Upwork.
Okay. Erica, the change in enterprise reporting last quarter with the combination of self-service as well as managed services-
Yeah.
What's the bigger picture signal there about how you guys are going to market? Is that the right read, or is it just the change in reporting? How else do we think about that?
Yeah. So the change in reporting was really intended to more accurately reflect the way we're running the business. That is the best way to think about it. It's a very simple change. All we did was we took our enterprise revenue line, and you know, are adding it up with managed services for a full kind of enterprise, and we pulled out the enterprise revenue from the marketplace total revenue. The reality is that the business moved from you know, kind of a more functionally aligned business to a business unit structure over a year ago now. But you know, that kind of new structure was gelling. Obviously, Zoë Diamadi, our GM of Enterprise, came in.
She and her team, as she's, you know, really kind of rethought some of the go-to-market, you know, thrust and other things. You know, those two products, the managed services product and our, our general kind of enterprise platform services products, are really sold as a continuum, right? These are, these are products that enterprise, you know, sometimes they want a more managed services, sort of a delivery of a product type thing. Sometimes they want, you know, more use of the, of the platform, or sometimes they want both. And, you know, and the, the lines are blurring a little bit between these products as we, as we go and we, and we sell to enterprise. And so it really just reflects the way that we're we internally are managing the business, the way that our, our teams are selling.
You mentioned Zoë Diamadi, right? She's been there for about nine months. Usually, it takes somebody about a year to kind of start to evolve and put their fingerprints on a platform. Talk about what she's done and the changes she's made, as well as how do you see enterprise evolving over kind of the next three years?
Sure. I'll start with the first stage of her work has been really around optimizing the sales team. We've seen a ton of progress on land team efficiency, productivity. You know, we made a big change in May, and really have seen a step up in the efficiency of the sales function. So that's been kind of part one of the focus, changing the sales comp plans, making sure we're really paying for, you know, productivity and value delivered. So all of that work started last year and is continuing through this year. I think the next phase of work that she's been working on has been around the product and really driving the product roadmap.
We launched a number of new VMS integrations that allow us to really get in the workflow in a different way of how our enterprise customers currently are managing their contract work. And so that's started with the launches we had in December with Flextrack and SAP Fieldglass, and we have more of that work coming this year. There's a lot more in the product pipeline for the enterprise side, and I think the focus there is really around driving the expand side. You know, with land was the focus last year, expand and expanding spend per customer is the focus this year, and that's where a lot of the product muscle is gonna come into play with that roadmap.
So, you know, she and her team are doing a lot of great work and, you know, it's gonna take some time to retool, you know, some of the things in that business and get our larger customers into some of these new product features and, you know, adopting them at scale, but we're very excited about what's happening there.
... If I think about core Upwork, right, it's historically was kind of an SMB focused platform, and enterprises can be very different in terms of what they may require in terms of the type of projects, certainly for larger ACV-type work. Does talk about the evolution that needs to happen or may have already happened in terms of addressing what is, you know, a six-figure type contract versus what may take place for an SMB. Is it different or is it not?
You know, it's not that different in the sense that, a lot of these enterprise customers, you know, it's, it is more programmatic usage, but, what the sales team is often doing is taking a success case or that may exist in a certain team or a certain department, and then replicating that across departments and making sure that there's a more, you know, there's more governance and there's more awareness, and there's, you know, there has to be integrations into the corporate systems and things like that. So that is where some of the product, integration things like that really help, and the features and functionality we have around reporting and compliance, like, these things are necessary.
But at the end of the day, a lot of the core functionality of Upwork and the scale of our marketplace and the skills and all that stuff, that's also the bread and butter of what's happening. So in that sense, it's not that dissimilar, but that layer on top of where sales and the product kind of package are also necessary to kind of put that wrapper on it and also get what might be happening, you know, for one team or one department from, you know, that scale to be something that is a, you know, a multimillion-dollar situation.
Yeah. Led off talking about the success of AI categories on Upwork.
Yes.
Let's talk about the AI tools that you guys are enabling for freelancers. Upwork Chat Pro, Job Post Generator, Proposal Tips, right? All kind of examples of that. Talk about the evolution of what AI unlocks, right, in terms of liquidity on the platform. Like, what are you seeing? And then, two, like, you have the product roadmap, what, what's in front of us that we should expect for Upwork within kind of AI tools?
Absolutely. So our goal is to be the destination for AI work and workers globally, and we're definitely making big strides on that. In terms of the platform, we have launched a number of features over the last year, and certainly even this year, focused on enabling our own customers to use AI tools inside Upwork, embedded, to deliver their work or to get their work done even faster, and so that includes things like Job Post Generator. We've seen a 70% increase in the speed at which clients can post jobs. Proposal Tips enables freelancers to submit proposals faster and better and higher quality. Upwork Chat Pro uses GPT-4 to really enable freelancers to do work better, and that's now bundled into our Freelancer Plus subscription.
So all of these things are just actually the tip of the iceberg in terms of starting to enable AI features and functionalities to show up and enhance how work is getting done on Upwork today. And so there's a robust roadmap there, really enhanced not just by the feature work of our teams as they've always been, but also we did an acquisition in Q4 of last year of a company called Headroom, which is an AI-based company. Andrew Rabinovich, who is an absolute legend in the space, is now running all of our AI and ML services at Upwork and really driving the roadmap there. So a lot more to come around, really how we're revolutionizing our own platform, using our tremendous data asset, as well as, you know, the network that we have to do some really exciting stuff.
So that's kind of part one of our story. The second piece is around tools, which you were asking about, and this is where, you know, we are a platform that's all about work. Work is happening at scale every day by all of the talent on our platform, and as all of you know, out there are, you know, millions of tool builders, you know, SaaS companies, et cetera, who are also leveraging AI to enhance their own tools and make it better and change, you know, their tools every day using technology. So what we've started to do is cut deals with everyone from Adobe, AWS, all of these providers who are now showing up in our ecosystem, giving our freelancers privileged access to their own software and technology, so that freelancers can now start to experiment with: what are these tools?
What are the best ones? We have the data to see which ones are actually making their work more productive, helping them earn more money, and we can help promote and showcase that in our ecosystem. So we're doing that with our tools partnerships. We're also doing partnerships with companies like OpenAI and others to actually curate the experts on these new technologies for their own end customers, where they're coming to us and saying: "Look, we need OpenAI experts, or we need experts in this technology area to help unlock our own customers adopting our technology." And this is where we've created these curated pools of talent for our partners, such as OpenAI, to make sure that their end customers can get the talent they need to actually deploy the software or maintain it, or do whatever else.
So these are some of the partnerships that we're doing that are really activated by some of the AI energy and innovation that's happening right now, but also we're not limited to AI-related technologies. We're doing this, you know, across the board with kind of different SaaS companies.
We got one minute left, so try to sneak one more in. You talked about curation there in terms of partnerships. What does that do for demand, right? When you actually have a company that is validated, kind of Upwork's place within the marketplace, are you seeing a change in terms of the types of customers that come in for these jobs? Or how do we think about, again, that attracting kind of additional demand on the platform?
Yeah, we do see incremental demand from these partnerships, and it's early. I mean, since the OpenAI AI launch in July, we've seen it cut 12 more of these partners, partnerships in this kind of vein, with more to come. So I think we'll see more of that unfold this year. Those expectations are in our guidance, and kind of we'll go forward from there.
Does it create a different go-to-market motion that you guys need in terms of saying: "Hey, look, we're—we have X, Y, and Z?" Or is it just people that are obviously already browsing the platform and then finding this?
It is a little bit different-
Yeah.
and we have a BD team that's kind of activating that with partners.
Okay.
Yeah.
Okay. We're at time. Thank you so much for participating and supporting the conference. We appreciate you guys being here.
Thank you so much for having us.