Welcome, everyone. Thank you so much for joining us. I am Bernie McTernan, one of the internet analysts here at Needham & Company. My pleasure to introduce the team at Upwork. We have Erica Gessert, CFO. Thank you so much for joining us this afternoon.
Yeah, great to be here, Bernie.
Great. Well, we'd love to start one of the beauties of this conference. It is right after earnings, so it's still top of mind for a lot of folks. What were some of your key takeaways from earnings, and maybe within that, some of the puts and takes of the raise to the 2024 guidance?
Sure. Yeah. So to that point, we're really excited to be able to raise both revenue and Adjusted EBITDA guidance for 2024. And in particular, one of the things we talked about is the ongoing leverage that we're seeing in the business. So hopefully, as people know quite well by now, we've increased our EBITDA margins by about 20 points over the past few quarters, and we were able to report 18% EBITDA margin in Q1 of this year. When we reported, we also raised our EBITDA margin guidance for the year substantially to 18%-19% growth this year or, sorry, EBITDA margin, and also raised our long-term margin target to 35% within the next five years. So really excited about the ongoing leverage that we're recognizing in the business.
Yeah, that's great. Just the macro is always a focus for investors. How does that backdrop feel for you right now?
Yeah, that's an interesting question. I mean, obviously, last year was pretty bumpy. We all kind of experienced that. I would say the macro environment continues to be pretty dynamic, both on the large enterprise side. I think budgets are still curtailed. People are still really focused on profitability. We're not seeing kind of a budget expansion at this point in time. On the small business side, I would say kind of the macro is not doing us any favors. I think money is still expensive, and that environment is affecting how small businesses are spending in general.
Yeah. And so within that backdrop, I mean, you mentioned earlier the raise to the EBITDA guidance for the year, the 35% long-term target. And so it's like controlling what you can control and focusing on profitability at this time. So just would love to get a sense in terms of how you guys think about that trade-off between revenue and profitability.
Yeah. Look, I think that the reality is, yes, we can control our profitability, our EBITDA margin. But we've also shown that we can really kind of control and create great kind of revenue growth outcomes even within a pretty dynamic and relatively challenging economic backdrop, especially for kind of businesses like ours. So we've been focused on showing great returns and growth untethered from the macroeconomic environment. And I think we continue to do that. Not just while GSV for our company has been kind of relatively flat over the past few quarters, we're showing very strong revenue growth and expect to on an ongoing basis.
Great. I certainly want to hit on the take rate next, which is the last one here, high level. One question we get from investors a lot is that if the macro does improve, if we do start to see GSV reaccelerate, would that be accompanied by a step up in sales and marketing intensity as well?
I can understand why people ask that. We have greatly optimized our sales and marketing line, particularly in the past kind of year or so. We've cut sales and marketing nearly in half. But the reality is that we have actually produced growing and increasing active client growth over the past three quarters, even as we've greatly reduced our sales and marketing costs. So we're able to produce great outcomes with the kind of level of spend that we're doing. And there's still more optimization we can do on the performance marketing side. At the same time, we're showing very good organic growth, not just kind of marketing-driven growth of the platform. And some of that is because of the acceleration in our kind of product launch and product innovation of the platform. In particular, we launched a Job Post Generator, AI-enabled Job Post Generator, a couple of quarters ago.
Now, 70% of our new Active Clients are using this Job Post Generator, where they can generate a job post in seconds in order to take themselves kind of from a prospect to an Active Client much, much faster. So the innovations on the platform, the acceleration of our performance marketing engine, all these things are contributing to Active Client growth. And I personally don't see a reason that we're going to need to meaningfully increase our sales and marketing spend going forward anytime soon.
Understood. So moving over to the take rate, the marketplace take rate has moved up from 14.3% in 4Q 2022 to 17.7% reported in 1Q. How much of this was driven by the change in pricing versus the increase in utilization of other services?
Yeah. So it's really important for people to understand kind of the dynamics of the platform. We have made a series of a couple of pricing changes over the past, call it, year or so. Now, just for context, we were one of the kind of lowest take rates in the industry before we made these changes. So the change is extremely rational and made sense for our platform, also really simplifying the pricing on our platform. We went from a tiered pricing structure of kind of 20%, 10%, 5% to a flat fee, 10% pricing structure, which for a dynamic marketplace like ours really actually simplifies the job matching process down the road. Now, in the very near term, we did see on January 1st, we cut over. All 5% contracts went to 10%.
So we saw some very temporary kind of GSV headwinds due to that final cutover in Q1, and we will kind of throughout the year this year. That GSV headwind was about two percentage points of growth for us. So absent that, we would have grown about 3% in Q1. To go back to your original question, which was how much of the take rate increase was from the pricing change versus other dynamics on the platform, the majority of it, the benefit was from the pricing change, particularly in the step up in Q1. That said, we also do have a very nicely growing ads and monetization business that I consider to be still relatively small compared to where it can be on an ongoing basis. So if you look at kind of other marketplaces, some other marketplaces have published that their ads business is about 25% of revenue.
Ours is not approaching that yet. And so we really do have a lot more runway to go there. We also have a relatively nascent subscription product called Freelancer Plus, which we really only have one category today. And so we have a lot more opportunity to grow that area as well.
OK. Certainly a lot there. We just wanted to clarify the pricing going from 5%-10% for that last cohort. That's on the supply side, right?
Yes, that's on the freelancer side. Correct. Yeah. Clients pay about 5% on the self-serve marketplace.
Yep. Understood. OK. So the price increase certainly seems well-received or at least revenue accretive. How much of this pricing or do you think pricing can be a lever for further take rate expansion in the coming years? Not saying it's going to happen right away, but is that?
Yeah. I mean, we're still relatively low-priced kind of within the industry. Our take rate is 18.6%. And compared to a lot of other kind of contingent labor or alternative workforce suppliers out there, that's still quite low. So I think we have a lot of options. In the near term, we look at expansion of our subscription products, continued penetration of our ads products as extremely GSV-friendly ways of continuing to grow take rate. So we have a lot of options here. And certainly, down the road, we can continue to make pricing adjustments as well.
OK. And wanted to make sure we hit on advertising specifically. So what are some of the mechanics for how an advertisement actually works, like boosted proposals? What's the return on ad spend? How much are you charging? Anything to give more nuts and bolts?
Yeah. So just so people understand, kind of our primary ads products are allowing freelancers to boost up their job proposal when a client posts a job and/or their profile. So clients can also invite freelancers to bid on a job or to take a job. And freelancers can boost up their profile itself in order to be more present and available to clients. So there are a lot of ways that freelancers can advertise themselves, and we can monetize. Most of these are not; they're dynamic pricing, right? So freelancers are also bidding to boost. And so there's not kind of one.
Oh, interesting.
Yeah, one price. But the monetization is very good. The other thing to understand about these products is it doesn't just help the freelancer, right? One of the realities of our dynamic marketplace is that some clients can get a very long list of proposals for the job that they're posting. So this really helps the efficiency and effectiveness of the marketplace in that freelancers who boost their proposals, they have skin in the game. They know they can do the job well. And so as a proposal gets boosted, it also has a much higher chance of having successfully executed work. So it actually makes the platform better, even as we're gaining monetization from the advertising.
OK. When we're talking about bid to boost, so if it's Google Search advertising, a big high-paying job, then that would get a higher probably someone would bid more on that than.
Yeah. Naturally, that is sort of the dynamic that happens.
OK. Understood. And so the comment that this could be or comparing your advertising business to other marketplaces, what's the major unlock to really scale the advertising business further?
Yeah. I mean, I think we simply need to kind of continue to build out the kind of suite of products. We have other ideas. We have a long list of other options to continue to build out the product suite and also just to make the match more effective over time. So it's more and more worth it for freelancers to do it. So I think there's just a long list of kind of optimization opportunities for that.
OK. And then, just lastly on the take rate here, when you think about your take rate relative to peers being below kind of industry averages, is that, could that be based on the scale of the GSV or different services? Or do you really think it's just you're charging less, and there's that ability to take it up over time?
Yeah. I mean, look, I think there are providers at the lower end of kind of the GSV scale or size and complexity of projects who have much, much higher take rates. We probably won't go that far because we do serve kind of a higher-end, more complex body of work. Our average GSV per client is about $5,000. So we do supply these kind of longer-term projects. From that point of view, we're not going to get up probably up to high 30s or 40%. And we certainly won't go up to where the kind of traditional staffing firms are. And that's one of our value props is we're actually better. We're faster. We have a more AI-enabled talent base than pretty much anyone out there. And we're cheaper. So a lot to like about the platform.
Yeah. Got it. And answering your previous question, you talked about that, I believe, as a 300 basis points headwind to GSV in 1Q absent the price increase. Can you just walk us through that math again, just so we have it right? And then kind of what does that mean for the rest of the year?
Yeah. So just so, again, everyone kind of understands, we announced our pricing change from the tiered pricing structure last year in May. But we stepped into it. And the very final kind of cut over to our flat fee pricing structure was on January 1st. All remaining 5% contracts moved to 10%. So what we saw from a GSV headwind was really a pull-in of kind of contracts wrapping up early just so that they wouldn't kind of endure the kind of step change in pricing. So that did have a GSV headwind. It's structural. It's temporary. And it was completely expected in kind of our guidance for the year. And really, across every measure that we have, the pricing change has been really effective. But it does have this kind of temporary GSV headwind about two percentage points.
Like I said, we would have grown about three percentage points in GSV if it weren't for that. We expect that to persist through the next couple of quarters and then should be beyond it.
OK. Got it. And so we're modeling 2024 to be another year of flat GSV. So that'd be two straight years of no GSV growth. But can you just bring us behind the curtain in terms of what's driving that? Because we can see active clients in our pool. But whether it's churn, gross ads, anything under the hood that you see that's maybe encouraging about the platform.
Yeah, for sure. Yeah. Look, I think last year, in 2023, we just saw, I mean, everybody saw kind of a big sort of paring back in budgets and spend, large enterprise, and even in smaller businesses as well, with the money being expensive and everything else. So I think that we're kind of largely beyond that. We are starting to see some nascent signs of GSV growth on the platform. In particular, our active client growth has been coming up, growing for the last three quarters. And the growth has been accelerating. In Q1, we had our largest active client growth in two years on the platform. And that's really coming from the demand side of the platform. So activations, reactivations of new and previously existing clients have really been accelerating.
And so that tends to be a really strong leading indicator for us of future GSV growth as clients who are coming onto the platform actually take a little while to ramp up. And they kind of experiment with a couple of small jobs and then start to ramp their spend. So that's really, really pleasing. I think the other thing to focus on is all of the work we're doing in product innovation and AI enablement of the experiences on the platform. Two weeks ago, right before we reported earnings, we announced the launch of Uma, which is Upwork's Mindful AI, which is both the underlying kind of AI on the platform and enabling each and every experience. I talked about the Job Post Generator. We also have kind of a Best Match generator for clients and talent to match more quickly.
And now we've just launched a conversational companion on our home page. That conversational companion, I mean, we just launched it two weeks ago, super early days. But we're already seeing clients actually kind of activate 7% faster and spend on the platform more quickly. So all of these things are great green shoots for us. And actually, even the Job Post Generator, I should mention, when clients are using that, the clients who use it are showing that they're spending 9% more with us than people who aren't. So this is all contributing to really nice signals on the platform of future GSV growth.
Yeah. No, that's great. Maybe staying on new products and generative AI, can you talk a little bit about the Headroom acquisition and how this enhances your product pipeline?
Oh, yeah. Really pleased about the Headroom acquisition that we did in Q4. This was an acquisition of a kind of small company that creates kind of collaboration tools but also brought in, more importantly, brought in some really great AI talent into our business, Andrew Rabinovich, who was the founder of this business, came from Google Glass, Magic Leap, is really well known in the industry and has come in, taken over all of our kind of entire AI function. And one of the reasons we were able to launch Uma just a couple of weeks ago is that just after four months of being in the business, they've accelerated our product innovation so much that we were able to launch. So it's been super successful. We're really excited about it. And Andrew himself is a real magnet for talent in the AI space.
We expect to continue to grow that bench as we go forward.
Understood. Let's stick on generative AI then. Your company, your stock, has been at the center of the AI debate. Can you talk a little bit about what you're seeing in your marketplace? Because there's the thought that all of a sudden, you're not going to need freelance talent anymore because you're going to do everything in-house. But just like kind of where you are, what's the latest thing?
Yeah. So I'm glad you point out that we've been kind of in the middle of this AI debate. I think last year, with the macro the way it was, I think there was also a lot of, there's kind of a big dialogue out there that AI was going to come in and kind of disrupt all jobs and disrupt our business. I think people are starting to see that that's inaccurate and that, well, there may be some AI disruption in the very, very kind of small transactional side of some of these jobs that overall, we certainly see and we have really one of the best data sets out there on this. But we certainly see that, on balance, AI is going to be a great tailwind for us. Obviously, our AI jobs category in itself continues to take off and accelerate.
It was at 50% year-over-year in Q1. That's on top of huge growth in the prior Q1. We see tremendous benefits from this trend. Overall, it's going to be a tailwind. The other thing that people should understand about the freelance community in general is that they self-train in these areas and really kind of advance the ball much, much, much faster than captive employees do. Actually, a survey just came out not too long ago that kind of surveyed across and asked workers how often they're using AI tools in their kind of daily work life. Captive employees said about 9% of them said they're using AI tools on a weekly basis. The freelancers on our platform, 54% of them said they're using AI tools on a weekly basis. So these guys are self-training faster.
We're really building out the most AI-enabled talent base in the world. We're also facilitating that trend ourselves by building out an AI tools ecosystem with many, many partners in the space. OpenAI, of course, is one of them, as well as many others, Jasper, Miro, others, to give our talent preferential access to these tools so that we can continue to help them self-train.
Yeah. And I think that's a really interesting point that you're working with OpenAI not only as a partner, but they're also an enterprise client as well.
Oh, yes. Absolutely. And we certainly have other AI enterprise clients within our portfolio. And with OpenAI, we have a really kind of unique partnership where we've created kind of an expert vetted talent pool, working with them to identify and access a talent pool on our platform of talent that can help them build AI solutions for their customers. We have other clients on the platform and actually a number of AI kind of clients lining up, wanting us to provide talent so that they can supply to their customers.
One of the really interesting dynamics of our platform is, because there's such a diverse need of different skill sets to help train models kind of for different contexts, we see this work popping up in all kinds of job categories, including, for example, translation, where overall, the translation category, of course, has gotten disrupted far before kind of ChatGPT came into the forum. But we now see translators getting hired in order to train models in foreign languages and things like that. So it's really quite an interesting dynamic across our platform.
Yeah. No, especially timely, given the OpenAI announcement, our product showcase yesterday.
Definitely.
OK. And so you mentioned the AI machine learning category is up 50% year-over-year. Any sense in terms of how big that is right now? I know you don't normally share stuff like that. But just if there's any kind of indicator.
Yeah. We don't release the kind of percentages of mix of job categories on our platform just because it's dynamic and competitive and those kinds of things. But all I can say is we don't see any limit in the growth potential for that category anytime soon. There's so many new dynamics coming to the fore all the time.
OK. I just wanted to pivot back to GSV and something that I want to just make sure we hit on was cohorts. That's something we cover Instacart as well. So they have this big COVID cohort that was huge. Then now it's declining while everything else is kind of growing. Is there any parallels to what Upwork is going through right now in terms of the COVID cohorts and where you are with lapping that?
Yeah. I think that's a really interesting question. We do release some cohort data in our 10-K. We did when we released that in February. And it did show some contraction for the first time in 2023 of some of our kind of these COVID cohorts that you're describing. And so I think that that is a real dynamic. And it was one for our business too as we were kind of a beneficiary of the shift to remote work. And our platform kind of doubled in size during that time. And now we've maintained that kind of level of size of our business. And I do see the kind of overall kind of cohort dynamic stabilizing now.
OK. No, that's great to hear. And just lastly on GSV, I know we talked about the macro being dynamic and changing a lot but certainly not being a tailwind right now. If we're looking from the outside in, what factors should we be looking at to get a sense that, OK, the macro could be improving if there's anything you get a read or that you're following?
Yeah. I mean, it's a good question. Like I said, in general, we're working hard to kind of untether ourselves from the dynamics of a fickle macro environment. But I mean, look, I do think that the cost of money makes a difference. And the inflation environment makes a difference just in terms of people having access to money and small businesses not feeling it in their pocketbooks.
Yep. Makes a lot of sense. Now you're moving over to enterprise. Overall, this revenue has been kind of flattened down over the last two years. And I know the original kind of really leaning into enterprise predated you. But what's made this opportunity more challenging than previously anticipated? And just what's the level of excitement about the business right now?
Yeah. Well, again, I think 2023 was just a tough year, I mean, especially in the first half that we saw. I mean, we all saw the dynamics. Enterprises were kind of slashing their budgets. There was 250,000 layoffs and tech layoffs alone in Q1 of last year. So it was just a tough time for those who are trying to sell into the enterprise space. What we saw during that time is simply a contraction of the spend of our enterprise clients. We didn't see necessarily a significant churn of logos coming out of our business. It was really just people contracting and cutting back. And also, during that time, we continued to grow our enterprise logos really nicely throughout 2023 despite this budget contraction. So I think that actually shows the potential of our enterprise business. And that dynamic has continued.
I think the other thing that gives me a lot of excitement about kind of future GSV growth for enterprise is some of the VMS and MSP partnerships that we have announced in the last couple of quarters. So these partnerships are actually really important to grow share of wallet with enterprises to ensure that kind of we are partnering with their vendor management systems and their internal procurement departments to be kind of an approved vendor. It opens up a lot of doors for us. So that will take some time as we kind of integrate client by client but shows really great growth potential for that growth in share of wallet over time.
OK. Got it. And just so we understand how these VMS becoming a preferred vendor, is that selling into the HR? Before, you were selling into one specific department. And now it's really going to HR or whatever the right context is.
Oh, yeah. Or procurement. I mean, so quite often, with large enterprise, you can kind of enter in with a certain level of spend. But you might hit a ceiling in terms of your ability to kind of sell into a large enterprise if you're not kind of integrated into their either procurement department or VMS system. So it is a big unlock for us. It also helps with kind of cross-pollination kind of across departments as we sell into these businesses. We have such a diverse platform of talent, over 125 job categories. We can really supply talent to any category within a department in a large enterprise. But you can imagine that, as you kind of sell into a marketing department, you may not cross-pollinate naturally into engineering, for example.
But as we get integrated and we become kind of in the drop-down menu of these businesses, there's a lot of potential to do that.
Great. Going to turn it over to audience questions shortly. But I just want to make sure we hit on the newly established long-term margin target of 35%. You think you can get there over the next five years? Would love to know, why is 35% the magic number? And what are some of the puts and takes to get there?
Yeah. Why is 35% the magic number? Look, I think we basically got halfway there in three quarters. So I think it's a really solid target that we can get behind and feel confident about within the next five years. And we kind of achieved high teens EBITDA margins, really mostly by optimizing on the sales and marketing line. And that means that there's just a lot more optimization to go in this business. And with 77% gross margins now, which we can also continue to optimize, we can continue to invest in growth in this business and produce substantial, meaningful improvements in our operating margins each and every year. I feel really confident in that. There's still tons of optimization in R&D. We've been growing that line quite substantially over the past few years.
And so we can now look at that, look at our workforce, and create more productivity out of what we've got so that we can produce those margins going forward.
Impressive considering all the innovation we were talking about on the platform. I mean, is that leveraging Generative AI? Is that Headroom? What's the best way to.
Yeah. I mean, it's all of the above. Like I said, I think our AI talent has really taken a step up with the acquisition of Headroom. We will continue to grow our AI talent bench. But we can continue to optimize in other areas. We can optimize our hosting costs. We can optimize our overall kind of our internal data and things like that that will just continue to help us from both a gross margin and operating margin point of view. So there's a lot that we can do. And I think we chose 35% because we feel like we've got a good line of sight to get there.
OK. Understood. Let's take a moment just to see if there's any questions in the audience. Yeah. Brian Pitz.
Can you spend a second on the enterprise business in Q1? That was a big acceleration both in terms of the number of clients added but in the actual growth. [audio distortion] So a lot of companies are saying that pause in enterprise spend that you cited is causing a slowdown in 2023. We really haven't seen that pick up across the board. Yet your business did. What specifically did you guys do in order to kind of drive an improvement in that business while the macro hadn't yet improved?
Yeah. Well, look, I think I mean, you mentioned kind of the ongoing logo growth that we've had. And that has been persistent even through 2023, even as we saw some curtailment of people's spend. So I think that's a real tailwind for us. We brought in a new head of the enterprise business, Zoë Diamadi, last year in June. I think she's really been able to really improve the sales motion both on the land and the expand side and really, I would say, also kind of increase the pace of product development in that business. So I think it's a multitude of kind of many things that we've been able to do to kind of grow that business. And we do expect to see, certainly on a year-over-year basis, ongoing decent-sized growth compared to what we saw in 2023.
One of the things you've talked about a lot is investing green shoots as far as GSV growth. And the active clients have now grown mid-single digits for two quarters in a row on a year-over-year basis. Is that a leading indicator for GSV growth? And does that portend to maybe an acceleration in GSV as we work through this year?
So absolutely. Incremental active client growth like we're seeing now is an important leading indicator for us for GSV growth. So we're really pleased with the pace. We do expect to continue to show active client growth this year. But as we've said, there is some ramp time for active clients for new active clients to kind of ramp up on the platform. That said, this, as well as some of the increases in kind of spend rates and time to activate that we're seeing from the kind of AI enablement of the platform, are also really good leading indicators for us that we're going to see GSV growth come. We've guided for this year to modest GSV growth for the year. And so that's our guidance. But we do expect things to kind of continue to tick up.
Anything else from the audience? Yeah. Go for it.
[audio distortion]That suggests there's an opportunity for a bigger acceleration in 2025. If some of these active clients really ramp as far as the GSV growth, then 2025 should be a step up from.
We haven't given 2025 guidance. I'm not going to do it right now. Like I said, we're seeing really good indicators on the platform.
Awesome. Maybe.
There's another one here.
Oh, yeah. Sorry. Go ahead.
[audio distortion]
It takes a few quarters. Yeah.
Thank you.
OK. Capital allocation. On your way to 35% EBITDA margins, you'll be throwing off probably $200 million in free cash flow per year. Can you just talk about priorities for use of cash and maybe specifically the buyback versus that convert that's due in 2026?
Yeah. Sure. Yeah. So we are going to be producing as we continue to step up our kind of operating leverage and show increasing EBITDA margins each year, we are going to be producing really nice free cash flow. Our EBITDA it's a pretty low capital intensity business, right? So our EBITDA converts to free cash flow at a very high rate, call it 90%. So we will be producing growing free cash flow. We also obviously think the stock is pretty undervalued at these levels. We just bought back $100 million worth of stock in the past few months. And so we are going to be continuing to look at options with our balance sheet. We plan to continue to use our balance sheet to return money to shareholders over time. We are also looking at options with inorganic growth and other things.
The Headroom acquisition was so successful that we'll kind of continue to look at options there as well. But shareholder returns are a big priority for us. And we're going to continue to show that on an ongoing basis.
OK. Maybe lastly, I just wanted to hit on the partner program.
Yes.
Can you just describe it for the audience? But it includes, we already mentioned, OpenAI. But there's Constant Contact, GoDaddy, just how it's used and how significant is it to GSV?
Yeah. Thanks for bringing that up. I think it's actually this is sort of an unsung strategy of ours that is kind of in its very early phases. But these are partnerships whereby we are essentially creating sort of a vetted talent pool for these businesses. It makes a ton of sense, right, that these businesses kind of want a specific vetted talent pool that can help enable the installation or the build of their products for their customers, right? GoDaddy, OpenAI, others, this is really an opportunity for us to increase our distribution and create kind of focused demand channels for certain types of talent. So we just announced a spate of these partnerships. They're in their very early days right now. But this is another great avenue and a new avenue for growth for us.
Is there a bottleneck for signing up new customers? Or do you just have to show some proof of concept first?
I mean, it does take time to kind of build number one, to kind of sign the agreement and kind of pull it together and then kind of build out the talent pool and other things like that. And then there are some of our partners where we're considering kind of deeper integrations within their flows and other things like that, which will take some time to build but will be super exciting for us.
Awesome.
Yeah.
Anything else from the audience? But if not, let's end it there. Thanks, Erica, so much for joining us.
All right. Thanks, Bernie. Great to be here.