Q1 2021 Upwork Inc Earnings Call

May 4, 2021

[music].

Good day, and thank you for standing by and welcome to the upward first quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. After the speaker presentation, there will be.

A question and answer session to ask the question during the session we need to press star one on your telephone. Please be advised for today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today, Ms. Denise Garcia with Investor Relations. Please go ahead.

Thank you welcome to upwards of discussion of its first quarter 2021 financial results, leading the discussion today are Hayden Brown of works, President and Chief Executive Officer, and Jack Mccombie upward 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 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 expectations reflected in any forward looking statements.

In addition, any statements regarding the current and future impacts 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 related to matters that are beyond our control and changing rapidly for a discussion of the material risks and other important factors that could occur.

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 press release additional information will also be set forth in our quarterly report on form 10-Q for the quarter ended March 31 2012.

The one when filed in addition reference will be made to non-GAAP financial measures information regarding reconciliation of non-GAAP to GAAP measures can be found in the press release that was issued this afternoon on our Investor Relations website at investors Dot <unk> Dot com.

As always reported figures of rounded unless otherwise noted comparisons of the first quarter of 2021 or two of the first quarter of 2020, all measures are GAAP unless cited as non-GAAP. The prepared remarks corresponding to the information reviewed on today's conference call will also be available on our Investor Relations website. Shortly after the call has concluded.

Now I'll turn the call over to Hayden.

Thanks, Denise and thank you all for joining today.

I'm pleased to report that first quarter revenue grew 37% year over year to reach $114 million and first quarter gross services volume grew 41% year over year to reach $787 million, marking our third consecutive quarter of accelerating year over year growth.

This year's strong start built on last year to clearly underscore the rapid acceleration of freelancing adoption by companies big and small across the globe the.

The pandemic has changed work forever permanently shattering the biggest impediment to online freelancer adoption, which is prior discomfort with remote work.

Regardless of their comfort levels before the pandemic companies now no they can build and grow their businesses faster and with greater efficiency by incorporating remote talent freely.

Freelancers are joining companies teams to do critical work that goes beyond all freelancers stereotypes challenging the traditional notions of who participates in the high performing work force.

We're in the midst of a tectonic shift in how work gets done and there is no going back the new way. We work is defined by opportunity not constraint flexibility not restricted by for office walls and trusted relationships not rigid employment contracts.

As we head down the exciting path. Our goal is to reflect upward critical role in aiding businesses and professional to push past current misconceptions and limitations to achieve more together, we realize the company's different working models may necessitate different ways of incorporating freely.

The comprehensiveness of our platform is unmatched and delivers what no. Other company can a complete ecosystem that empowers companies to work any way they want an app work.

Despite our strong performance over the past year, we haven't shown of bright enough light yet on our breadth of core differentiator. That's why we are introducing our industry category today, calling it the work marketplace from now forward.

Our strategy remains unchanged, but starting today, we are turning the floodlights on all of the ways that companies can work on our pork because of this breadth and depth enables customers to get exactly what they need exactly how they want it.

We will seek to introduce more companies to this incredibly unique value of upward and to help those customers leverage the comprehensiveness of our offering to even more rapidly evolve their upper experience from single transactions to strategic engagements. Our goal is to become the always on solution for all companies.

<unk> of every size hiring and managing freelancers at scale, we are unveiling a new identity and advertising campaign to show companies and freelancers, what is truly possible in this new world of work and how upwards work marketplace experience can help them achieve more together.

Im so excited by where work is headed and by the unique opportunity of pork has to enable the entire work of marketplace industry.

We can see that this journey is already underway through our strong first quarter performance, which I would like to now focus on by discussing the key drivers of our growth.

I'll start with new client acquisition in the first quarter, we grew new clients by 55% year over year, marking our fourth consecutive quarter of accelerating growth rates, we continue to execute with discipline against the marketing strategy, we put in place last year.

As an example, our SCM performance continued to strength and quarter over quarter. As we were able to increase S. E. M acquired new clients by 113% in Q1, while meaningfully lowering our cost per acquisition.

We are pleased with our client acquisition performance to date, and we see continued runway for further growth and optimization across SCM SCO mobile and international.

Next I'd like to discuss client retention the.

The strength of our model was evident in the increase in client spend retention from 102% in Q4, 2020% to 106% in Q1 of 2021, the fastest acceleration we have seen in the last five years.

As a reminder, this metric measures the spend retention of clients, who are with us 13% to 24 months ago.

We also saw strong retention in our more recently acquired clients. For example clients acquired in Q4 2020 increased spend by 9% in Q1 2021, which is also the highest quarter over quarter growth in spend retention that we have seen in the last five.

Years.

Furthermore, we grew our core clients buy more than 7000, approximately 61% more than the increase we achieved in Q1 2020.

Next I'd like to touch on our sales team, which saw strengthening performance this quarter as the previous quarter's adjustments normalized.

Q1 was our strongest quarter ever with respect to the number of new enterprise client signed which grew more than 40% quarter over quarter.

Sales cycles have also been shortening with standard deals down significantly to around three months and compliance deals averaging around six months.

The number of customers spending more than $1 million with us over the trailing 12 months was up 15% quarter over quarter and the number of customers spending over $100000 in the trailing 12 months was up 27% year over year given.

Given the strong signals, we're considering increasing investment as early as Q3 2021.

I noted earlier, how we are focused on helping our clients evolve their experience with upward from single transactions to strategic engagements.

I'd like to highlight one sales enabled customer digicel, which has gone through the exact transformation.

Seeing their outbreak engagement expand as they uncovered the true value of our platform.

Did you sell started with us over a year ago to localized creative AD content for their holiday campaign.

Subsequently as they contemplated of global relaunch of their brand. They realize this would be a highly complex effort requiring talent and coordination across 32 markets.

This is where the global depth and breadth of the upper offering came to bear.

Did you sell leveraged upwards global talent pool to complete the project reaping the benefits of the reality that new ways of working have enabled the more innovation fresh ideas and increase agility.

A global Fortune 500, consumer packaged goods company is another example of how companies are increasingly embracing freelancers and leveraging upwards to get core work done.

This company is using freelancers on upward to help with product market fit and user engagement through their online channels. The team began using upper <unk> in June 2020 to help with a simple landing page design and over the course of several months engaged the team of for answers developed a sophisticated web site with integrated online chat social proofs.

In an online library. Among other features the company continues to engage the free months of team as the central partners, providing quick execution of new user engagement ideas and testing the demand for potential new service offerings.

The two examples showcase the company's discovering that building of virtual talent bench of trusted highly skilled freelancers empowers them to instantaneously scale up and down their teams, realizing agility and cost efficiency to meet the changing demands of their businesses and prevent their teams from burning out.

And professionals working with freelancers are discovering that freelancing empowers them to work on their own terms given the more control over when we're for whom and on what they work.

This is a model that is truly a win win for all parties.

It's increasingly becoming evident that organizations that arent incorporating freelancers into their teams will be at of serious disadvantage to their competitors.

All of this translates into a massive opportunity for upward.

Our focus is clear.

Our single strategic priority for 2021 is innovating scaling and promoting the work marketplace for the world.

I'll now turn the call over to Jeff to discuss our financial results in more detail.

Thanks, Ed.

We are off to a great start for the year with Q1 results exceeding our expectations on both the top and bottom line.

<unk> continues to perform strongly across virtually every client related dimension.

From categories geographies, the 10 years of clients the acquisition and retention the sales and marketing.

On the talent side, we were also very excited to see the strong year over year growth in the number of freelancers, who are active in the quarter, which accelerated for the fourth consecutive quarter.

Now I will discuss the financial results for the first quarter of 2021 and provide our revenue and EBITDA guidance for the second quarter and updated guidance for the full year of 2021, which we included in our earnings release filed earlier today.

<unk> in the first quarter was $787 million with strong year over year growth of 41% revenue grew 37% year over year to $114 million in the first quarter.

The marketplace revenue for the first quarter was $105 million, reflecting the year over year increase of 40%.

Managed services revenue grew 6% for $8 9 million for the first quarter.

Total core clients grew by approximately 18% year over year for 7000 in the first quarter to 152000 with gross new core clients in the quarter growing 46% year over year and net additions of core clients up 61% of the year over year.

Our overall take rate in the first quarter was 14, 4% down from 14, 9% from Q1, 'twenty and down slightly from 14, 6%. In Q4. This decrease was expected and driven primarily by the fact that marketplace revenue grew faster than managed services revenue, which has a 100% take rate.

Normalizing for this mix shift our marketplace take rate in the first quarter was 13, 5% down just slightly from 13, 6% from Q1 'twenty driven by the changes to our connect program, which we implemented in Q4 and are performing well.

The marketplace take rate for the quarter was in line with a 13, 5% in Q4 'twenty.

Non-GAAP gross profit was $83 million for the first quarter for 73% of revenue compared to 72% in the first quarter of 2020.

Non-GAAP operating expenses for the first quarter were $79 million, representing 70% of revenue down from 75% in the prior year with G&A decreasing from 17% to 14% share.

It was in marketing decreasing from 36% to 34% R&D.

R&D remained flat at 21% and transaction losses remaining flat at 1%.

Non-GAAP net income was $4 2 million in the first quarter of 2021 compared to non-GAAP net loss of $3 6 million in the first quarter of 2020.

Our basic and diluted non-GAAP net income per share for.

<unk> in the first quarter of 2021 as compared to non-GAAP net loss per share of <unk> in the first quarter of 2020.

Adjusted EBITDA was $6 9 million in the first quarter of 2021 compared to an adjusted EBITDA loss of $1 million in the first quarter of 2020.

Now, let's move on the guidance, we our guidance second quarter revenue to between $119 million and $121 million and are increasing our full year revenue guidance of between $480 million and $490 million, representing 30% year over year of growth at the midpoint.

We continue to expect GSV growth to be slightly stronger than revenue growth as marketplace revenue will likely grow faster the managed services revenue.

And do the changes we've made to our connect program, they're driving better liquidity in the marketplace and higher GSP, while lowering connects specific revenue.

We are bullish about the investment opportunities in front of us and we'll continue funding growth initiatives, while closely monitoring our performance to achieve our return thresholds.

As such we expect second quarter EBITDA to be between 2 million and $3 million and are increasing our full year EBITDA guidance for $16 million at the $20 million.

We also anticipate a 7 million to $8 million G&A expense in Q2, which is an impairment charge, we expect to recognize pending the completion of the subleasing of our Santa Clara facility two of third party.

This will not be reflected in our EBITDA calculations and as such is not reflected in our EBITDA guidance cash and marketable securities were approximately $170 million at the end of the first quarter.

We hope you can all join us for our virtual Investor day on June 15th.

We look forward to sharing more details about our plans for the future and potentially new metrics as well as introducing our extended management team.

We will now take your questions.

Okay.

Thank you, ladies and gentlemen, if you'd like to ask the question at this time. Please press. The Star then the one key on your Touchtone telephone to withdraw your question press the pound key.

Please stand by while we compile the Q&A roster.

Now first question coming from the lineup.

Marvin Fong with <unk> Your line is open.

Great. Thank you for taking my questions. My first question is just if you could just provide.

Provide us a little more granularity maybe on how the project catalog has started.

You found any surprises.

Compared to your initial expectations.

And specifically do you think that you are seeing any cannibalization.

In the from the core marketplace.

Would be credit and I have a follow up back of the.

Share Marvin so the finding on catalog so far it's definitely still early days, but what we're seeing is this is additive to the business and certainly it's underscoring the power of our work more marketplace strategy because even though this is early what we're seeing is great signals that customers who are attracted.

<unk> of work based on seeing the.

The other campaigns around catalog, sometimes they convert for catalog and sometimes actually the end up converting to do talent marketplace as their first project. We're also seeing for existing customers in the talent marketplace that they are responding really well to cross sell promotions and placements were doing to educate them, but now they can also add on with <unk>.

Project catalog as an additional way to transact inside the marketplace. So we're actually seeing a lot of great signs that customers are interested in not just adopting one way of working so to speak but really are excited of the idea that maybe the interest around catalog might get them in the door, but then the better fit.

The offering might be talent marketplace, or vice versa, and so given the more ways to operate within our ecosystem is actually unlocking more engagement more interest more spend more marketing channel for us etcetera, and so while it's still early and we certainly have a lot more work to do to really tap into the full potential of this offering the signs are absolutely there.

For that this is additive to the marketplace at the hole.

Terrific and my follow up.

Wanted to drill a little deeper on the great wallet retention spend metric.

What do you attribute that to our clients.

Spanning into more categories or are they just raising the size of the projects any additional insight into that would be great. Thank you.

Marvin were you asking about client spend retention.

Yes, sorry, yes, thats the client spend retention, yes, yes.

Yes, absolutely we saw the.

The really.

Really quick acceleration from the 102% to 106%.

Which of the fastest I think for the last five years, or so and you'll probably be longer going back before them.

And as we mentioned in the past one of the.

One of the dynamics with that metric is that it's fairly lagging in nature.

So as the momentum that we've been seeing over the last five quarters, you sort of has built.

Continue to put that upward pressure on the metric.

And we think we think of lot of that comes from both the really strong execution of the team is doing a cross.

Cross product and marketing in particular.

And also the fundamental changes are happening in terms of client behaviors, where there see their understanding of the benefits of putting independent talent at the heart of their strategy.

And we're seeing that across as we mentioned virtually every dimension. So.

Every category has accelerated every tenure of cohorts.

Has accelerated.

In terms of year over year of growth.

The spend for clients has gone up and the client retention has gone up which then yields nice benefits from a marketing perspective, where that increase of the LTV and we have had great efficiencies from a marketing perspective, where we're able to bring down our tax, which then allows us to invest more.

Performance marketing dollars. So all round just a just a great story.

Great, Thanks, Hey, Dan and Jeff Congrats on the quarter. Thank you.

Thanks.

And our next.

Question coming from the line of Nick Jones with Citi. Your line is open.

Great. Thanks for taking the questions I guess first can you just expand a little bit on the work marketplace. The announcement today what maybe.

The clear to me I guess on how this will change the experience.

I guess for lack of business he was using the platform.

If you could expand a little bit of kind of what kind of improvement you expect this to add to the experience and then I have a follow up thanks.

Sure Nick So it's really clear from our Q1 results that our current strategy of winning and we're not changing the strategy that we've been executing on since I became the CEO, but we are launching this work marketplace to really define our category and raise awareness around the breadth of our offering which really addresses all the ways the clients of freelancers.

Seek to work together on up work and the research that we've done over the last few quarters has made it apparent that the breath as a differentiating factor on our platform is not well understood people too often think of the upper is only about really small gig projects or only about large complex project work and they don't really understand that they can do.

Both and more on our platform.

So it was time to really shine a light on the fact that they can do all of these think of our platform because we understand that there is the big awareness GAAP in the market that we need to close to reach our full potential and really unlock that full trillion Tam that we're going after.

So building awareness for our category and the solution is really how we plan to become this always on solution that really is part of the dynamic worth of workforce strategy of the companies of every size are utilizing to stay competitive. So it's not shifting our strategy, it's really educating the market around the full breadth and potential that exists on.

The work for them to stay competitive.

Got it that's helpful. Thank you and then and then on SCM and SCO.

Really great improvement here that each quarter.

How much of this is a function of there's just more impressions like people are searching the category of more versus.

Improve.

The strategies bidding out of the right keywords.

Things like that or is a little bit of both I guess I'm trying to understand how much more room. There is from here to see continued improvement.

Yeah.

There's absolutely a benefit from.

From both the overall market conditions and significant benefit from bidding strategies backend infrastructure.

International expansion.

Moving into having a broader mobile strategy.

And the team of execute incredibly well of rolling all of that stuff out at the moment in time, where there is more interest and opportunity to capture of that demand.

And as such the numbers are really Greg as we mentioned.

The client starts from SCM are up over 100%.

And while doing that we were able to bring down our cost per acquisition meaningfully, allowing us to significantly increase our spend.

So it's.

It is that combination of really really strong execution across the team combined with good market conditions.

Great. Thank you.

And as a reminder, ladies and gentlemen to ask the question. Please press star one on your Touchtone telephone.

And our next question coming from the line of Brent Thill with Jefferies. Your line is open.

Hi. Thank you. This is John Byun for Brent Thill head of.

Two questions one on an investment in go to market the one.

During the high you changing debt at all of this year, especially towards the enterprise.

And whether you had any.

Sales, we all of our quota changes and then on the.

On the enterprise clients just wondering about the behavior has changed now that we're on.

Since the onset of COVID-19.

I used the way that they are using upward change meaningfully at all any more categories that have emerged.

<unk>.

Sure I'll start.

With respect to the sales side.

On the enterprise side, as you mentioned or maybe take a step back yes first of all go to market.

We've seen a increase in sales marketing.

And in line with probably overall revenue growth rate, which was driven by more of an expansion in our marketing spend than our sales spend for all of the reasons that we've talked about in the past.

Which is that when we made the changes to our sales force in Q4 of last year and have been have been rolling those out.

In the end of Q4, and the and the first quarter and the team has done a great job of doing that really hasn't been that long since those changes were made.

And the numbers of Hayden mentioned on the on the call.

We're extremely pleased with the out of 40% quarter over quarter improvements in terms of the number of vehicles. They closed sales cycles are shortening.

The number the number of our large spenders is increasing materially.

And so we feel good that we've now we're in a good position with respect to the unit economics of the scale that we that we're at and really now we want to turn our attention to how do we scale of that and operationally balanced manner and so.

We're.

We're considering the increase in investments there as early as Q3 as I had mentioned.

And we see a lot of.

A significant opportunity there just want to be balanced in terms of how we do it with respect to.

The second question on overall clients behavior.

I guess, I'd say I'll start with enterprise client behavior.

I'll hit a few tactics, maybe hayden the can add in.

The clients.

Throughout the judgment demick, clearly any misconceptions of the clients had about their inability to grow and build their businesses with a remote workforce.

Hi, Ben.

It had been fundamentally altered they now see that this is a way that they can absolutely take the company to the next level and deal with all sorts of the dynamics that hardships and rapid expansions.

Impose on their companies and so during this period, we've seen across the broader business increase in retention rates increase in spend per clients.

And we've seen that across virtually when you look beyond enterprise virtually every category of the business. So it's not that it's simply happening in the website web mobile software development or sales and marketing or designing creative for really across the board in every category.

Thank you Nathan.

Net income Guy look.

I would add I think the numbers are really reflecting a broader narrative that we're hearing as we talk to Ceos and other executives who are universally just much more open minded and curious than ever before about finding new solutions to old problems and the two problems that they have constantly been banging our heads against.

For a while about our how do they compete in the war for talent and take advantage now of the remote work skills they've gained to compete for talent in this new world of work that they are finding themselves then and the second old problems. They've had that now they are trying to find new solutions for our getting more out of their teams without burning them out and how do they increase the efficiency in <unk>.

You're already in their businesses without burning everyone out in kind of getting into.

The problem there and so those two challenges really converge at of work, where we offer them access to talent that they absolutely need and a path to augmenting their workforce strategy that is absolutely critical with our work marketplace offering in a way that the kind of unlocks all of these things that are problems that they had before the pandemic problems they are facing.

Today problems they know they will face going forward.

Even after the pandemic is behind that and so we're having a lot of success right now as evidenced in our numbers with these conversations and with the kind of evolve the mindsets of Sony executives, who are trying to solve these problems with new tools like the work.

Very helpful. Thank you.

And our next question coming from the line of welcome Thomas with Stifel. Your line is open.

Hi, Hayden and Jeff.

Just a question on the the.

The advertising and marketing around the the rebranding campaign.

I think the.

The release mentioned from some broadcast and video spots along with the other supporting channels.

Are you sharing how much incremental investment you are anticipating to put behind this campaign.

To the extent of and it's worth noting.

And is this reflected in the updated EBITDA guidance would assume so but just wanted to ask and then is there a level of payback on this.

Debt investors should be thinking about or are we more focused on.

Awareness and brand and at this point.

Great. Thanks for the question.

So we're not disclosing the amount right now we are looking to.

Growing our awareness.

Of upwards of a brand of the value proposition to our clients and for your answers.

Is critical and we see a significant opportunity and.

And this is an important way to do that.

We're not disclosing the specific numbers. It is obviously reflected in our in our guidance.

We absolutely are.

The.

Staying close to the performance clearly these are not.

All performance marketing dollars, but we'll be looking at what is the return that we're getting across every dimension that we possibly can.

And would love to find opportunities to continue to grow that awareness.

And doing so in a financially prudent manner and we'll continue to look for those opportunities in the future, but it is all reflected in both the Q2 and full year guidance we provide.

Okay.

Great that Geoff and one follow up if I can are there yet is that a.

U S focused.

Will that be of U S focused spend particularly around branding.

The other kind of key markets Youre thinking about and then.

In hand with that could you maybe update us on how youre thinking about the international strategy.

Just a general update but also in how youre thinking about gain market share in <unk>.

Some of the large of international markets, where you might be relatively even less penetrated.

Yeah, our focus right now is on the U S. Because we still feel like we have the kind of runway in the U S.

You're kind of unlock the U S market, but we're also doing some global and international advertising as well predominantly places that are English speaking is the big focus for us because you know today, that's where our website is focused on.

The kind of still unlocking that opportunity, but we have seen a lot of traction with English speaking folks globally, even in non U S and non English speaking markets traditionally so our marketing focus is.

Distributed with the heavy focus on the U S right now and a lot of runway in other markets over the next couple of years.

Okay. Thanks, David.

And our next question coming from the line of.

Joseph J P M Securities. Your line is open.

Great. Thanks for taking the question I hate and Hi, Jeff I wanted to ask maybe a little bit more on just two things really the growth that youre seeing in GSV. Jeff can you just talk about revenue visibility as you know.

More clients come on the 2020 cohort spends more.

And basically just repeats buying I know you talked about that earlier on the call, but just any insights on visibility going forward would be helpful. And then on project catalog I know we're early in your comments earlier on but maybe Hayden it would be great to maybe hear a little bit more about are you seeing any sort of integration between you try out project catalog.

And more users are.

Using other services on up work of graduating up to up work or anything along those lines between the two services. Thank you.

Sure. Thanks, Sean.

Start with the with the revenue visibility question.

So as you know our client spend retention has been historically around 100% from has been trending upwards, which indicates good visibility into what our future performance will be based upon prior.

The cohorts spend and our forecast for absolutely base that the cohort sort of level.

We look at the retention curves of each of those cohorts be forecast out what sort of acquisition, we think will come in and so we have good.

Good.

Confidence in the numbers that we provide with the caveat around that being that obviously.

These are periods of dramatic change in customer behavior.

Which introduces new volatility or higher volatility into the forecasting than we otherwise would have we think all of these changes have great long <unk>.

Long term benefits for the business where customers will be using.

Freelancing platforms like ours much more so than the than we did in the past.

And trying to predict what exactly they're going to do in the next quarter can be a bit trickier, but we feel good with our assumptions in the guidance that we have.

And all of that is reflected in the update guidance.

For your question around project catalog, we're definitely seeing some early signs around those graduation opportunities between existing talent marketplace offerings and people wanting to then go on and buy of project catalog.

But I'd say, it's still really early in the sense that there's so many pathways Ron that we hadn't even built out yet so the first phase of project catalog has been around building the basics of the experience of building out of SCM programs to educate and convert users into those experiences and that's been.

Kind of phase one theres, a still a lot of runway for us to integrated project catalog into many more of the existing of work marketplace experiences that we have and so I think we've seen great signals that customers are doing some of that behavior of want to do even more of that behavior and theres. So many touch points between.

The existing experiences.

And on the talent marketplace side for example, and more of the integration opportunities for project catalog. So there's really a ton of runway for us still and it's been incredible to see the execution by our team in identifying those building those out building the roadmap for further integration of those different types of opportunities over time.

Say you know we're in still in inning zero of any one of our really exciting pathway of innovating on that solution and we've gotten so many exciting ideas as well from customers, both freelancers and clients, who are saying, hey, here's how I want to do these things together, here's how I would love to.

The work across different parts of the work marketplace that new airport half I think that's again been a really exciting time for us that we are exactly on the right path from the strategy of being validated that people really want to participate in multiple of these ways of working it's not about just doing one. So we're building these things as fast as we can to really listen to customers.

Expectations around how they want to do this.

Thanks, guys very helpful.

Thanks, Ron.

And that's all the time, we have for questions today, ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may now disconnect.

Yeah.

[music].

Good day, and thank you for standing by and welcome to the upward first quarter 2021 earnings conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask the question during the session. We need the press star one on your telephone please be advised for today's conference is being.

Accorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today, Ms. Denise Garcia with Investor Relations. Please go ahead.

Thank you welcome the upward discussion of its first quarter 2021 financial results, leading the discussion today are Hayden Brown, <unk>, President and Chief Executive Officer, and Jeff Mccombs upwards of <unk> 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.

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 additional information will also be set forth in our quarterly report on form 10-Q for the quarter ended March 31 2010.

At the always reported figures of rounded unless otherwise noted comparisons of the first quarter of 2021 of the first quarter of 2020, all measures are GAAP unless cited as non-GAAP the.

Prepared remarks corresponding to the information reviewed on today's conference call will also be available on our Investor Relations website. Shortly after the call has concluded now I'll turn the call over to Hayden.

Thanks, Denise and thank you all for joining today.

I'm pleased to report the first quarter revenue grew 37% year over year to reach $114 million.

First quarter gross services volume grew 41% year over year to reach $787 million, marking our third consecutive quarter of accelerating year over year growth.

This year's strong start built on last year to clearly underscore the rapid acceleration of freelancing adoption by companies big and small across the globe the.

The pandemic has changed work forever permanently shattering the biggest impediment to online freelancer adoption, which is prior just comfort with remote work.

Regardless of their comfort levels before the pandemic companies now no they can build and grow their businesses faster and with greater efficiency by incorporating remote talent.

Freelancers are joining companies teams to do critical work that goes beyond all of freelancers stereotypes challenging the traditional notions of who participate in the high performing work force.

We're in the midst of a tectonic shift in how work gets done and there's no going back the new way. We work is defined by opportunity not constrained flexibility not restricted by for office walls and trusted relationships not rigid employment contracts.

As we head down this exciting path. Our goal is to reflect upward of critical role in aiding businesses and professional to push past the current misconceptions and limitations to achieve more together, we realize the company's different working models may necessitate different ways of incorporating freely.

Answers into their work forces. This is why we have focused so intensely on expanding our platforms capabilities to go beyond the talent marketplace with project catalog talent Scout and our enterprise suite. The comprehensiveness of our platform is unmatched and delivers what no other company cash.

A complete ecosystem that empowers companies to work any way they want on at work.

Despite our strong performance over the past year, we haven't shown of bright enough white, yet on our breadth of the core differentiator. That's why we are introducing our industry category today, calling it the work marketplace from now forward.

Our strategy remains unchanged, but starting today, we are turning the floodlights on all the ways that companies can work on our pork because of this breadth and depth enables customers to get exactly what they need exactly how they want it.

<unk> of every size hiring and managing freelancers at scale, we are unveiling a new identity and advertising campaign to show companies and freelancers, what is truly possible in this new world of work and how upward work marketplace experience can help them achieve more together.

I'm so excited by where work is headed and by the unique opportunity of pork has to enable the entire work marketplace industry.

We can see that this journey is already underway through our strong first quarter performance, which I would like to now focus on by discussing the key drivers of our growth.

As an example, our SCM performance continued to strength and quarter over quarter. As we were able to increase F. E. M acquired new clients by 113% in Q1, while meaningfully lowering our cost per acquisition.

We are pleased with our client acquisition performance to date, and we see continued runway for further growth and optimization across SCM SCO mobile and international.

Next I'd like to discuss client retention the <unk>.

Strength of our model was evident in the increase in client spend retention from 102% in Q4, 2020% to 106% in Q1 2021 the.

Fastest acceleration we have seen in the last five years.

As a reminder, this metric measures the spend retention of clients, who are with us 13% to 24 months ago.

<unk>.

Furthermore, we grew our core clients buy more than 7000, approximately 61% more than the increase we achieved in Q1 of 2020.

Next I'd like to touch on our sales team, which saw strengthening performance this quarter as the previous quarters of adjustments normalized.

Q1 was our strongest quarter ever with respect to the number of new enterprise client signed which grew more than 40% quarter over quarter.

Sales cycles have also been shortening with standard deals down significantly to around three months and compliance deals averaging around six months.

Given the strong signals, we're considering increasing investment as early as Q3 2021.

I noted earlier, how we are focused on helping our clients of all of their experience with upward from single transactions to strategic engagements.

I'd like to highlight one sales enabled customer digicel, which has gone through the exact transformation.

Seeing the outbreak engagement expand as they uncovered the true value of our platform.

Did you all started with us over a year ago to localized creative AD content for their holiday campaign.

Subsequently as they contemplated a global relaunch of their brand. They realize this would be a highly complex effort requiring talent and coordination across 32 markets.

This is where the global depth and breadth of the upper offering came to bear.

Did you sell leverage of course global talent pool to complete the project reaping the benefits of the reality that new ways of working have enabled the more innovation fresh ideas and increase agility.

A global Fortune 500, consumer packaged goods company is another example of how companies are increasingly embracing freelancers and leveraging upwards to get core work done there.

This company is using freelancers on upward to help with product market fit and user engagement through their online channels. The team began using upper <unk> in June 2020 to help with a simple landing page design and over the course of several months engaged the team of for answers to develop a sophisticated web site with integrated online chat social proofs.

And then online library among other features the company continues to engage the free months of team as the central partners, providing quick execution of new user engagement ideas and testing the demand for potential new service offerings.

The two examples showcased the company's discovering the building of virtual talent bench of trusted highly skilled freelancers empowers them to instantaneously scale up and down their teams, realizing agility and cost efficiency to meet the changing demands of their businesses and prevent their teams from burning out.

And professionals working as freelancers are discovering that freelancing empowers them to work on their own terms, giving them more control over when we're for whom and on what they work.

This is a model that is truly a win win for all parties.

It's increasingly becoming evident that organizations that aren't incorporating freelancers into their teams will be at of serious disadvantage to their competitors.

All of this translates into a massive opportunity for upward.

Our focus is clear.

Our single strategic priority for 2021 is innovating scaling and promoting the work marketplace for the world.

I'll now turn the call over to Jeff to discuss our financial results in more detail.

Thanks, Ed.

We are off to a great start for the year with Q1 results exceeding our expectations on both the top and bottom line.

<unk> continues to perform strongly across virtually every client related dimensions.

From categories. The geographies, the 10 years of clients the acquisition and retention the sales and marketing.

On the talent side, we were also very excited to see the strong year over year of growth in the number of freelancers, who are active in the quarter, which accelerated for the fourth consecutive quarter.

<unk> in the first quarter was $787 million with strong year over year growth of 41% revenue grew 37% year over year to $114 million in the first quarter.

The marketplace revenue for the first quarter was $105 million, reflecting the year over year increase of 40%.

Managed services revenue grew 6% to $8 9 million for the first quarter.

Our overall take rate in the first quarter was 14, 4% down from 14, 9% in Q1, 'twenty and down slightly from 14, 6% in Q4.

This decrease was expected and driven primarily by the fact that marketplace revenue grew faster than managed services revenue, which has a 100% take rate.

Normalizing for this mix shift our marketplace take rate in the first quarter was 13, 5% down just slightly from 13, 6% in Q1, 'twenty driven by the changes to our connect program, which we implemented in Q4 and are performing well.

Marketplace take rate for the quarter was in line with a 13, 5% in Q4 'twenty.

Non-GAAP gross profit was $83 million for the first quarter for 73% of revenue compared to 72% in the first quarter of 2020.

Non-GAAP operating expenses for the first quarter were $79 million, representing 70% of revenue down from 75% in the prior year with G&A decreasing from 17% to 14% sales and marketing decreasing from 36% to 34% R&D.

R&D remained flat at 21% and transaction losses remaining flat at 1%.

Non-GAAP net income was $4 2 million in the first quarter of 2021 compared to non-GAAP net loss of $3 6 million in the first quarter of 2020.

Our basic and diluted non-GAAP net income per share for free.

<unk> in the first quarter of 2021 as compared to the non-GAAP net loss per share of <unk> <unk> in the first quarter of 2020.

Adjusted EBITDA was $6 9 million in the first quarter of 2021 compared to an adjusted EBITDA loss of $1 million in the first quarter of 2020.

Now, let's move onto the guidance, we're guiding second quarter revenue to between $119 million and $121 million and are increasing our full year revenue guidance of between $480 million and $490 million, representing 30% year over year of growth at the midpoint.

We continue to expect GSV growth to be slightly stronger than revenue growth as marketplace revenue will likely grow faster the managed services revenue.

And due to changes we have made to our connect program, they're driving better liquidity in the marketplace and higher GSP, while lowering connects specific revenue.

We are bullish about the investment opportunities in front of US we will continue funding growth initiatives, while closely monitoring our performance to achieve our return thresholds.

As such we expect the second quarter EBITDA to be between 2 million and $3 million and are increasing our full year EBITDA guidance for $16 million the $20 million.

We also anticipate a 7 million to $8 million G&A expense in Q2, which is an impairment charge, we expect to recognize pending the completion of the sub leasing of our Santa Clara facility two of third party.

We hope you can all join us for our virtual Investor day on June 15th.

We look forward to sharing more details about our plans for the future and potentially new metrics as well as introducing our extended management team.

We will now take your questions.

Okay.

Thank you, ladies and gentlemen, if you'd like to ask the question at this time. Please press. The Star then the one key on your Touchtone telephone to withdraw your question press the pound key.

Please standby, while we compile the Q&A roster.

Now the first question coming from the lineup.

Marvin Fong with <unk> Your line is open.

Great. Thank you for taking my questions. My first question is just as you could just provide.

Provide us a little more granularity maybe on how project catalog has started.

You found any surprises.

Compared to your initial expectations.

And specifically do you think that youre seeing any cannibalization.

In the from the core marketplace.

Would be great.

We'll follow back of the.

Share Marvin.

For the finding on catalog so far it's definitely still early days, but what we're seeing is this is additive to the business and certainly it's underscoring the power of our work more marketplace strategy because even though this is early what we're seeing is great signals that customers, who are attracted to up work based on seeing.

The other campaigns around catalog, sometimes they convert for catalog and sometimes actually the end up converting to do talent marketplace as their first project. We're also seeing for existing customers in the talent marketplace that they are responding really well to cross sell promotions and placements were doing kind of educate them, but now they can also add on.

With project catalog as an additional way to transact inside the marketplace. So we're actually seeing a lot of great signs that customers are interested in not just adopting one way of working so to speak but really are excited of the idea that maybe the interest around catalog might get them in the door, but then.

The better fitting offering might be talent marketplace, or vice versa, and so given the more ways to operate within our ecosystem is actually unlocking more engagement more interest more spend more marketing channel for us et cetera, and so while it's still early and we certainly have a lot more work to do to really tap into the full potential of its offering the signs are.

Actually there that this is additive to the marketplace as a whole.

Terrific and my follow up.

Just wanted to drill a little deeper on the great wallet retention spend metric.

What do you attribute that to our clients.

Spanning into more categories or are they just raising the the <unk>.

As of their projects any additional insight into that would be great. Thank you.

Marvin were you asking about client spend retention.

Yes, sorry, yes, that's the client spend retention, yes, yes.

Yes, absolutely we saw the the <unk>.

Really.

Really quick acceleration from the 102% to 106%.

Which of the fastest I think of the last five years, or so and probably longer going back before then.

And as we mentioned in the past one of the.

One of the dynamics with that metric is but it's fairly lagging in nature.

So as the momentum that we've been seeing over the last five quarters of so has built its.

It's continued to put that upward pressure on the metric.

And we think we think of lot of that comes from both the really strong execution of the team is doing a cross.

Across product and marketing in particular.

And also the fundamental changes that are happening in terms of client behaviors, where theyre see their understanding of the benefits of putting independent talent at the heart of their strategy.

And we're seeing out of cross as we mentioned virtually every dimension so.

Every category has accelerated every tenure of cohorts.

Has accelerated.

In terms of year over year growth.

The spend for clients has gone up and the client retention has gone up which then yields nice benefits from a marketing perspective, where that increases the LTV and we have we've had great efficiencies from a marketing perspective, where we're able to bring down our tax, which then allows us to invest more.

In our performance marketing dollars. So all round just day, just a great story.

Great. Thanks, Jeff.

Congrats on the quarter. Thank you.

Thanks.

And our next question coming from the line of Nick Jones with Citi. Your line is open.

Great. Thanks for taking the questions I guess first can you just expand a little bit on the work marketplace. The announcement today what is that.

The clear to me I guess on how this will change the experience.

I guess for lack of business, who are using the platform. So if you could expand a little bit of kind of what kind of improvement you expect it to add to the experience and then I have a follow up thanks.

Seek to work together on up work and the research that we've done over the last few quarters has made it apparent that this breadth of as a differentiating factor on our platform is not well understood people too often think of upper has only about really small gig projects or only about large complex project work and they don't really understand that they can do.

Both and more on our platform.

So it was time to really shine a light on the fact that they can do all of these things of our platform because we understand that there is a big awareness gap in the market that we need to close to reach our full potential and really unlock that for Chilean Tam that we're going after.

Building awareness for our category and the solution is really how we plan to become this always on the solution that really is part of the dynamic worth workforce strategy of the companies of every size are utilizing to stay competitive. So it's not shifting our strategy, it's really educating the market around the full breadth and potential that exists on.

The work for them to stay competitive.

Got it that's helpful. Thank you and then and then on SCM and SCO.

Really great improvement here that each quarter.

How much of this is a function of there's just more impressions like people are searching the category of more versus.

Improved.

The strategy is bidding on in the right keywords.

Things like that or is a little bit of both I guess I'm trying to understand how much more room. There is from here to see continued improvement.

Yes.

There is absolutely the benefit from.

From both the overall market conditions and significant benefit from bidding strategies backend infrastructure international expansion.

Moving into having a broader mobile strategy.

And the team has executed incredibly well of rolling all of that stuff out at the moment in time, where there is more interest and opportunity to capture that demand.

And as such the numbers are really Greg as we mentioned.

The client starts from SCM are up over 100%.

And while doing that we were able to bring down our cost per acquisition meaningful way, allowing us to significantly increase our spend.

So it's.

It is that combination of really really strong execution across the team combined with good market conditions.

Great. Thank you.

And as a reminder, ladies and gentlemen to ask the question. Please press star one on your Touchtone telephone.

And our next question coming from the line of Brent Thill with Jefferies. Your line is open.

Hi. Thank you. This is John Byun for Brent Thill head of.

Two questions one on an investment in go to market.

Wondering how you're changing debt at all of this year, especially toward the enterprise.

And then whether you had any.

Sales, we all of a quota changes and then on the.

On the enterprise clients, just wondering about sort of behavior had the has changed now that we're on.

Since the onset of COVID-19.

I used the way that they're using upward change meaningfully at all any book.

Categories that have emerged.

Sure I'll start.

With respect to the sales side.

On the enterprise side, as you mentioned or maybe take a step back yes first of all go to market.

<unk>.

We've seen a increase in sales marketing.

And in line with probably overall revenue growth rate, which was driven by more of an expansion in our marketing spend than our sales spend for all of the reasons that we've talked about in the past.

Which is that when we made the changes to our sales force in Q4 of last year and have been have been rolling those out.

In the end of Q4, and the and the first quarter and the team has done a great job of doing it really hasnt been that long since those changes were made in the <unk>.

For the Hayden mentioned on the on the call.

We're extremely pleased with the add of 40% quarter over quarter improvement in terms of the number of vehicles. They closed sales cycles are shortening.

The number the <unk>.

Of our large spenders of increasing materially.

So we feel good that we've now we're in a good position with respect to the unit economics of the scale that we that we're at and really now we want to turn our attention to how do we scale of that and operationally balanced manner and so we.

We're considering increased investments there as early as Q3 as I had mentioned.

And we see a lot.

A significant opportunity there just want to be balanced in terms of how we do it with respect to the.

The second question on overall clients behavior.

I guess I would say if I will start with enterprise client behavior.

I'll hit a few tactics, maybe hayden the can add in.

The clients.

The adjustment demick, clearly any misconceptions of the clients had about their inability to grow and build their businesses with a remote workforce.

Hi, Ben.

Have been fundamentally altered they now see that this is a way that they can absolutely take the company until the next level and deal with all sorts of the dynamics that <unk>.

Hardships and rapid expansions.

Impose on their companies and so during this period, we've seen across the broader business increase in retention rates increase in spend per clients.

And we've seen that across virtually when you look beyond enterprise virtually every category of the business. So it's not that it's simply happening in the web web mobile software development or sales and marketing or designing creative but really across the board in every category.

Yes and.

Then you can guide book.

I would add.

The numbers are really reflecting a broader narrative that we're hearing as we talk to Ceos and other executives who are universally just much more open minded and curious than ever before about finding new solutions to old problems and the two problems that they have constantly been banging our heads against the wall about our.

How do they compete in the war for talent and take advantage now of the remote work still think of gains to compete for talent in this new world of work that they find themselves in and the second old problems. They've had the now theyre trying to find new solutions for our getting more out of their teams without burning them out and how do they increase efficiency and agility in their businesses.

Without burning everyone out in kind of getting.

In two of problem, there and so those two challenges really converge at of work, where we offer them access to talent that they absolutely need and a path to augmenting their workforce strategy that is absolutely critical with our work marketplace offering in a way that the kind of unlocks all of these things that are problems that they had before the pandemic problems there.

Today problems they know they will face going forward.

Even after the pandemic is behind that so we're having a lot of success right now as evidenced in our numbers with these conversations and with the kind of all of the mindsets of Sony executives, who are trying to if all of these problems with new tools like the work.

Very helpful. Thank you.

And our next question coming from the line of welcome Thomas with Stifel. Your line is open.

Hi, Ed and Jeff.

The question on the the.

Advertising and marketing around the the rebranding campaign.

Yes, I think the.

Release mentions of some some broadcast and video spots along with the other supporting channels.

Are you sharing how much incremental investment you are anticipating to put behind this campaign.

The extent that it's worth noting.

This reflected in the updated EBITDA guidance would assume so but just wanted to ask and then is there a level of payback on this debt.

Investors should be thinking about or are we more focused on.

Awareness and branding at this point.

Great. Thanks for the question.

So we're not disclosing the amount right now we are looking to.

Growing our awareness.

Of upwards of a brand of the value proposition to our clients and for your answers.

Is critical and we see a significant opportunity and.

And this is an important way to do that.

We're not disclosing the specific numbers. It is obviously reflected in our in our guidance.

We absolutely are.

Staying.

Most to the performance clearly these are not.

All performance marketing dollars, but we'll be looking at what is the return that we're getting across every dimension that we possibly can.

And would love to find opportunities to continue to grow that awareness.

And doing so in a financially prudent manner and we'll continue to look for those opportunities in the future, but it is all reflected in both the Q2 and full year guidance we provide.

Okay appreciate that Jeff and I wanted to follow up if I can are there yet is that a U S focused.

Will that be U S focused spend particularly around branding are there other kind of key markets Youre thinking about and then.

In hand with that could you maybe update us on.

How youre thinking about the international strategy.

Just a general update but also in how youre thinking about gain market share and.

Some of the large of international markets, where you might be relatively even less penetrated.

Yeah, our focus right now is on the U S. Because we still feel like we have a ton of runway in the U S.

You're trying to unlock the U S market, but we're also doing some global and international advertising as well predominantly places that are English speaking is the big focus for us because today, that's where our website is focused on.

Distributed with the heavy focus on the U S right now and a lot of runway in other markets over the next couple of years.

Okay. Thanks, David.

And our next question coming from the line of from.

Joseph J P. M Securities. Your line is now open.

Great. Thanks for taking the question I hate and Hi, Jeff I wanted to ask maybe a little bit more on just two things really of the growth that youre seeing in GSV. Jeff can you just talk about revenue visibility as you know.

Clients come on the 2020 cohort spends more.

And basically just repeat buying I know you've talked about that earlier on the call, but just any insights on visibility going forward would be helpful. And then on project catalog I know we're early in the had comments earlier on but maybe Hayden it would be great to maybe hear a little bit more about are you seeing any sort of integration between you try out project catalog.

And more users are.

Using other services on up work of graduating up to up work or anything along those lines between the two services. Thank you.

Sure. Thanks, Ron.

Start with.

The revenue visibility question.

So as you know our client spend retention has been historically around 100% and has been trending upwards, which indicates good visibility into what our future performance will be based upon prior.

The cohorts spend and our forecast for absolutely base that the cohorts sort of level.

We look at the retention curves of each of those cohorts, we forecast out what sort of acquisition, we think will come in and so we have good.

Good.

Confidence in the numbers that we provide with the caveat around that being that obviously.

These are periods of dramatic change in customer behavior.

Which introduces new volatility or higher volatility into the forecasting than we otherwise would have we think all of these changes have great long <unk>.

Long term benefits for the business where customers will be using.

Freelancing platforms like ours much more so than they did in the past.

Trying to predict what exactly they're going to do in the next quarter can be a bit trickier, but we feel good.

With with our assumptions in the guidance that we have.

And all of that is reflected in the update guidance.

But I'd say, it's still really early in the sense that there is so many pathways Ron that we hadn't even built out yet so the first phase of private catalog has been around building the basics of the experience of building out that VM programs to educate on converting users into those experiences are not spin.

Kind of phase one there's still a lot of runway for us to <unk>.

Integrated project catalog into many more of the existing of work marketplace experiences that we have and so I think we've seen great signals that customers are doing some of that behavior of want to do even more of that behavior and there are so many touch points between existing experiences and on the.

<unk> marketplace side for example, and more of the integration of opportunities for project catalog.

So there's really a ton of runway for us still and it's been incredible to see the execution by our team in identifying those building those out building the roadmap for further.

<unk> of those different types of opportunities over time, so I would say we're in still in inning zero or any one of our really exciting pathway of innovating on that solution and we've gotten so many exciting ideas as well from customers, both freelancers and clients, who are saying, hey, here's how I want to do these things together, here's how I would.

Two.

Work across different parts of the work marketplace that new airport half and I think that's again been a really exciting time for us that we are exactly on the right path from the strategy of being validated that people really want to participate in the multiple of these ways of working it's not about just doing one. So we're building these things as fast as we can to really listen to customers.

Citations around how they wanted to do this.

Thanks, guys very helpful.

Thanks, Ron.

And that's all the time, we have for questions today, ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may now disconnect.

Q1 2021 Upwork Inc Earnings Call

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