Q3 2023 Upwork Inc Earnings Call

[music].

Good day, and thank you for standing by and welcome to the upward Q3 2023 earnings Conference call.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

To ask a question during the session you will need to press star one one on your telephone.

You will then hear an automated message advising your hand is raised.

To withdraw your question. Please press star one on again please.

Please be advised that today's conference is being recorded.

I'd now like to hand, the conference over to your first speaker today, David and halt manager of Investor Relations. Please go ahead.

Thank you welcome to outbreaks discussion of its third quarter 2023 financial results. Joining me today are Hayden Brown, <unk>, President and Chief Executive Officer, and Eric <unk> Guesser upwards, Chief Financial Officer. Following management's prepared remarks, we will be happy to take your questions, but first I'll read.

The Safe Harbor statement.

During this call we may make statements related to our business that are forward looking statements under federal Securities Law forward. Looking statements include all statements other than statements of historical fact, 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 for.

For a discussion of the material risks and other important factors that could affect our actual results. Please refer to our SEC filings available on the SEC website, and our Investor Relations website as well as the risks and other important factors discussed in today's shareholder letter additional information will also be set forth in our quarterly report on Form 10-Q for the three.

<unk> ended September 32023, and.

In addition reference will be made to certain non-GAAP financial measures information regarding a reconciliation of non-GAAP to GAAP measures can be found in the shareholder letter that was issued this afternoon on our Investor Relations website at investors got upward Dot com.

As always unless otherwise noted reported figures are rounded and comparisons of the third quarter of 2023 are to the third quarter of 2022, all financial measures are GAAP unless cited as non-GAAP now I'll turn the call over to Hayden.

Thanks, David.

You all for joining us today in.

In the third quarter of 2023 upper continued to drive durable profitable growth, while advancing our position as the world work marketplace.

We made significant progress on our goal to become the preeminent destination for AI related talent and work, while also improving the efficiency effectiveness and speed to match on our platform through improvements to our core product experiences and capabilities.

In the third quarter, we made huge strides on our financial goals.

We achieved better than expected results generating third quarter 2023 revenue of $175 7 million up 11% from a year ago.

We recorded GAAP net income of $16 3 million and adjusted EBITDA of $31 $2 million this quarter, demonstrating very rapid margin improvement.

We also continued to make important investments in near and long term growth opportunities.

These include adding new features and functionality to the platform, including new innovations to our ads and monetization products.

These products contribute revenue to upward, but more importantly, they contribute to the efficiency of the platform by helping professionals and clients connect more quickly.

One of our most ambitious growth goal is to foster the most AI empowered independent professionals in the world.

In pursuit of this we greatly enhanced our AI services hub, which has seen a ton of increase in average monthly visitors since its launch in the second quarter and just yesterday announced an extension of the hub with a new suite of generative AI apps offers and educational content.

<unk> designed for talent.

Our scale as the world work marketplace.

Aided us in creating a deep and diverse ecosystem of partners. That's been education technology and special offers for client and talent.

New featured partnerships for AI powered apps and offers for independent professionals.

<unk> industry, leading companies like Adobe Amazon click up and mirror that of advanced integration of generative AI into their tools and services alongside educational AI skill based courses and content from leading providers like Coursera, Jasper and <unk> to me that form a new.

Education marketplace, an upward Academy.

We also launched limited access to upper chat pro.

Our new generative AI application embedded directly on upper platform and powered by <unk> four.

Upward chat pro utilizes unique insights from upward about independent professionals to provide specific contextualized responses and recommendations that are relevant to the needs of professional cleanup work.

<unk> them, and starting creating and completing projects more efficiently and effectively.

In the third quarter, we continued on our journey to unlock the vast opportunity in the enterprise space, increasing our new enterprise logos in the quarter by 21% versus Q2 2023.

We added 23, new enterprise clients in the third quarter, expanding our customer roster with notable new organizations like Dropbox, It's sugar, Madonna and Florida State University.

We also drove substantive growth and our highest value cohort of customers as the number of enterprise clients in the third quarter spending $5 million or more over the trailing 12 months rose 43% quarter over quarter.

We continue to be pleased with the progress we are making toward our long term strategy of providing companies with the talent skills and tools they need to get critical work done through.

Through harnessing the power of generative AI on the platform.

Innovating on behalf of all of our customers optimizing our operations and running our business to drive durable profitable growth.

We are on track to deliver a record year in 2023 in both revenue and adjusted EBITDA and a set of steady course for sustained momentum in the quarters ahead.

I'll now turn it over to Erica for more details on the financials.

Thank you Hayden and Hello, everyone I'm delighted to be here with you today to review of a very successful third quarter.

Do you see again exceeded $1 billion in the third quarter.

Revenue grew 11% to $175 7 million with marketplace revenue of 160 179.

The enterprise business unit, which includes managed services and enterprise revenue was flat quarter over quarter with revenue of $26 1 million.

This quarter managed services revenue increased 4% every year to $14 million.

Enterprise revenue, which is reported as a part of marketplace revenue was down 3% to $12 $1 million.

These offsetting growth rates are due to the movement of a customer to managed services during the quarter.

Total revenue growth was the result of take rate expansion driven by strength in our other products and our move in 2023 to a simplified flat fee pricing assumption.

Total take rate in the third quarter of 2023 was 17, 1% up from 16, 3% in the previous quarter and from 15, 4% in the third quarter of 2022.

Active clients increased 2% year over year and quarter over quarter to approximately 836000.

Occupying growth was driven both by improvements to our client retention as well as improvements inefficiency and acquisition of new clients.

In particular, we saw strong improvements to our performance marketing efficiency in the quarter.

GSV proactive claims decreased slightly by 1% year over year to $4906 a reflection of the strong active client growth in the corner.

non-GAAP gross profit was $133 million or 76% of revenue in the third quarter.

Baird to 75% in the third quarter of 2022.

non-GAAP operating expenses for the third quarter of 2023 were $103 5 million, representing just 59% of revenue compared to 78% in the prior year period with.

With R&D expense, increasing 16% year over year, offset by sales and marketing expense decreasing by 26% year over year, and <unk> decreasing by 2% year over year.

Provision for transaction losses decreased a remarkable 84% year over year.

The strong improvement in operating costs were the result of aggressive management action to focus on efficiency and profitable growth.

We will continue to identify ways to improve our efficiency, while also investing in innovation innovation to grow with it.

In the third quarter, we made huge strides in our focus on durable profitable growth.

non-GAAP net income was $28 $9 million in the third quarter of 2023 compared to non-GAAP net loss of $4 $2 million in the third quarter of 2022.

Our non-GAAP net income per basic and diluted share with 20 cents in the third quarter of 2023 as compared to non-GAAP net loss per basic and diluted share of three cents in the third quarter of last year.

This rapid improvement is the result of our ability to quickly identify areas of cost optimization and efficiency.

Adjusted EBITDA was $31 million in the third quarter compared to negative $2 $9 million in the third quarter of 2022.

Adjusted EBITDA margin was 18% in the third quarter of 2023 compared to adjusted EBITDA margin of negative 2% in the third quarter of last year.

Our strong adjusted EBITDA results are due to revenue over performance as well as the implementation of the cost optimization programs with this call.

We are very pleased with our ability to rapidly identify these cost efficiencies in our business, which we expect in part to reinvest inorganic growth in future quarters.

In Q4, 2023, we remain committed to our previous guidance of exiting the year at approximately 15% EBITDA margin.

Our focus on profitable growth is also increasing our cash balances.

With cash from operating activities of $37 million in the third quarter and cash cash equivalents and marketable securities of approximately $555 million.

I'm also delighted to announce that our board of directors of improved approved a share repurchase program with.

With authorization to purchase up to $100 million of our outstanding shares of common stock.

This is a testament to our strong financial performance and ongoing commitment to durable profitable growth.

Turning now to guidance.

We are guiding fourth quarter revenue to between 175 million and $180 million.

Which resulted in full year revenue guidance to between $680 million and $685 million, which represents a 10% year over year growth rate at the midpoint.

We're raising our revenue guidance, primarily due to the revenue over performance, we saw in the third quarter, particularly around our eyes and monetization products.

We expect fourth quarter, adjusted EBITDA to be between 24 million and $28 million, which represents an adjusted EBITDA margin of 13, 5% to 15, 8%.

We're also raising our full year 2023, adjusted EBITDA guidance to be between 67 million and $71 million.

We continue to be on pace to personally adjusted EBITA in 2020 three that is more than double that of any year. Since we went public.

We also expect to generate positive free cash flow on an ongoing basis.

The third quarter has been another successful one for airports business and I'm proud of our team's ability to rapidly execute on our efficiency goals.

Going forward, we will continue to balance our commitment to strong steady growth of revenue and EBITDA margin expansion, while also focusing on shareholder value.

I want to thank the fantastic team for everything they contribute every day to drive value for our customers and building a growing and successful business.

Thank you and we'll now turn the call to your questions.

Thank you at this time, we will conduct a question and answer session.

As a reminder to ask a question you will need to press star one on one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.

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

Our first question comes from the line of Matt <unk> of Piper Sandler Your line is now open.

Thanks for taking my question and congrats on the really strong results.

You highlighted throughout the shareholder letter the continued innovation on the AI front would love just to hear how sentiment among both talent and clients is evolving around the topic.

Things slowed down at all or is it full steam ahead.

Thanks, Matt absolutely definitely sentiment is very positive on this front I'd say clients of talent are both pretty eager to take advantage of what's out there in the ecosystem and more specifically the innovations that we've been launching on our own platform, including some of the really exciting partnerships that Tam.

<unk> can now take advantage of directly on a park leveraging tools like <unk>.

Amazon code words for neuro click off and others yesterday so.

Seeing upward talent is the first in the U S.

At the forefront of all of these AI adoption because freelancers no. This is what puts Brent or are on the table their ability to work quickly and effectively to deliver incredible outcomes for clients.

Absolutely transformed five useful the technology. So the sentiment amongst talent is strong with what we announced yesterday also with our own innovations around upward chat pro which is powered by <unk> by GBP four and embedded across.

The upper <unk> platform, we're seeing a lot of interest in that product as well. So there's just I think a lot of excitement there.

Both the class a client side and the Taliban.

And I know you aren't going to provide any quantitative commentary for 2024, but what are some of your priorities for next year, whether it's areas of investment opportunities for outsized growth.

Anything you could highlight would be great. Thanks.

Sure you know as we look at the data on our platform. It's obviously early.

Early days in the growth of some of these generative AI.

You know skills and work, but we did see already.

Saturday I categories of work were up 34% quarter over quarter in Q3, we're seeing AI and machine learning are growing tremendously data science and analytics firm tremendously. So you know this is a priority for us in terms of really building up work to be the preeminent destination for where clients of every size.

Can come and find this talent and again you know this year, we're already starting to see that even off of a smaller base that we're growing from so next year, we're going to continue to deliver the tools and technologies to talent. So they can be effective we're going to continue to innovate around the product completions on our own platform for both client and talent and leverage generative AI powered features and.

Already on our Burke and well continue to leverage our partner ecosystem as part of that ensuring that everyone who comes and uses our work is not just using our own tools, but the best holes in the business.

To deliver work because we are I've worked at and that's after all.

And Hey, Matt This is Eric I'll, just add you know what.

As he said, we're not giving any specific guidance on 2024 at this point that said you know, we we said last quarter and it remains consistent.

Our committed as a business to year upon year, improving our revenue growth rates from 'twenty, three 'twenty, four and and improving our EBITDA margin year over year. So that remains very very consistent from what we said last quarter and obviously, we'll give you more.

No more concrete guidance when we report Q4.

Yeah.

Alright. Thank you one moment for our next question.

Next question comes from the line of Kunal Madhu Kumar of UBS. Your line is now open.

Okay.

It's a lot different Jason off will come out from UBS a couple of questions.

The first one is on Opex.

So in terms of Opex could you help us understand how to think about the run rate of sales and marketing expense for Q4 as well as Tony 2040 as possible in the percentage of revenue.

That's been declining consistently the last several quarters up 39.

38% range. It was also a lot lower than expected for Q3.

Goodbye some details a lot of the underlying drivers of that marketing spend efficiency.

I appreciate it thank you.

Yeah sure Jason well, yes, so obviously at the beginning of the year in Q1, when we announced the reductions our decision to reduce our brand spend we did indicate that that would be kind of gradual reduction over the course of the year. So I think Q3 are you know kind of reductions are consistent with that.

We did actually see some very good efficiencies on the performance marketing front in Q3, I'm. Just you know kind of more efficient yield on that spend mm, which also enabled us to reduce costs, but we're.

We're not giving guidance on 'twenty 'twenty four or so so I'm not going to update you on any specific run rates there.

I will say you know from an EBITDA margin point of view them as we committed to earlier in the year, we expect to exit.

2024 in Q4, I'm, sorry, 23 in Q4 rounded out the 15% EBITDA margin.

And again, we'll give you more concrete guidance on 'twenty 'twenty four and when we when we guide for the year.

Thanks, a lot yeah. So thats sort of my next question, which is on the EBITDA.

You had said before EBITDA margin typically peaks in Q4, but dropped sequentially in Q1.

One Sidney dogs, 200 to 300 basis points.

Given the stronger than expected, but the guide for Q4, how would you characterize the magnitude of sort of a sequential decline in EBITDA margin.

Thank you for that.

Yeah sure. So look at you know as I as I talked about last quarter I'm letting you know when I came into the business in Q1, we committed to reductions in brand spend and you know we also reduced costs really kind of on the sales side as well.

I talked about last quarter. The fact that you know we were going to continue to look for cost efficiencies in the business, which we have done I think a very very effectively.

I'm actually incredibly proud of the team for our.

Working hard to identify places, where we can reduce cost in the very high EBITDA margin in Q3 of 18% reflects our ability to do that.

It's not just you know kind of in you know discretionary expenses, but also in reducing spend and longer term projects in favor of reinvesting in growth.

And kind of more near term term opportunities things like the AI partnerships, we just announced other AI ml innovations and product platform improvements that we plan to invest into in Q4.

In order to enable growth in 2024. So we are deploying some investment in right. Now in Q4 ahead of 2024, and that's why you'll see a little bit of margin offset and closer to kind of the 15% range as we exit the year, but that's appropriate as we remain committed to profitable growth going forward.

Thank you very much.

Thank you one moment for our next question.

Okay.

Next question comes from the line of Logan right of RBC. Your line is now open.

Hey, good afternoon, Thanks for taking my question.

On the strong quarter.

That's the macro question on just what you guys are sort of school.

Hum on the macro backdrop and trends with Macquarie.

As it pertains to both active clients and that also spend quite a bit just wondering if there's anything to call out there.

Geography basis or.

Or like upsize the clock basis, and then also just any sort of impact from the conflict in the middle East.

Yeah sure. This is Eric maybe I'll I'll take this one.

Speaker 1: Good day. Thank you for standing by. Welcome to the Upwork Q3 2023 Earnings Conference call.

Speaker 2: At this time, all participants are in a listen-only mode.

Speaker 3: After this speaker's presentation, there will be a question and answer session.

Speaker 4: To ask a question during the session, you will need to press star 1 1 on your telephone.

Speaker 5: You will then hear an automated message advising your hand is raised.

Speaker 6: To withdraw your question, please press star 1 again.

Speaker 7: Please be advised that today's conference is being recorded.

Speaker 8: I would now like to hand the conference over to your first speaker today, David Enholt, Manager of Investor Relations. Please go ahead.

Speaker 9: Thank you. Welcome to Upwork's discussion of its third quarter of twenty twenty three financial results. Joining me today are Hayden Brown, Upwork's President and Chief Executive Officer, and Erica Gesser, Upwork's Chief Financial Officer.

Speaker 10: Following management's prepared remarks, we will be happy to take your questions. But first, I'll review the Safe Harbor Statement.

Speaker 11: During this call, we may make statements related to our business that are forward-looking statements under federal securities law. Forward-looking statements include all statements other than statements of historical facts. 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.

Speaker 12: For discussion of the material risks and other important factors that could affect our actual results, please refer to our SEC filings available on the SEC website and our Investor Relations website, as well as the risks and other important factors discussed in today's shareholder letter.

Speaker 13: Additional information will also be set forth in our quarterly report on Form 10Q for the three months ended September 30, 2023.

Speaker 14: In addition, reference will be made to certain non-GAAP financial measures. Information regarding a reconciliation of non-GAAP to GAAP measures can be found in the shareholder letter that was issued this afternoon on our investor relations website at investors.upwork.com. As always, unless otherwise noted, reported figures are rounded and comparisons of the third quarter of 2023 are to the third quarter of 2022. All financial measures are GAAP unless cited as non-GAAP . Now I'll turn the call over to Hayden.

Speaker 15: Thanks, David. Thank you all for joining us today.

Speaker 16: In the third quarter of 2023, Upwork continued to drive durable, profitable growth while advancing our position as the world's work marketplace.

Speaker 17: We made significant progress on our goal to become the preeminent destination for AI-related talent and work, while also improving the efficiency, effectiveness, and speed to match on our platform through improvements to our core product experiences and capabilities.

Speaker 18: In the third quarter, we made huge strides on our financial goals.

Speaker 19: We achieved better-than-expected results generating third quarter 2023 revenue of $175.7 million, up 11% from a year ago.

Speaker 20: We recorded GAAP net income of $16.3 million and adjusted EBITDA of $31.2 million this quarter, demonstrating very rapid margin improvement.

Speaker 21: We also continue to make important investments in near and long-term growth opportunities.

Speaker 22: These include adding new features and functionality to the platform, including new innovations to our ads and monetization products.

Speaker 23: These products contribute revenue to Upwork, but more importantly, they contribute to the efficiency of the platform by helping professionals and clients connect more quickly.

Speaker 24: One of our most ambitious growth goals is to foster the most AI-empowered independent professionals in the world.

Speaker 25: In pursuit of this, we greatly enhanced our AI services hub, which has seen a 10x increase in average monthly visitors since its launch in the second quarter. And just yesterday, and now it's an extension of the hub with a new suite of generative AI apps, offers, and educational content.

Speaker 26: specially designed for talent.

Speaker 27: Our scale as the world's work marketplace has aided us in creating a deep and diverse ecosystem of partners that span education, technology, and special offers for clients and talent.

Speaker 28: New featured partnerships for AI powered apps and offers for independent professionals.

Speaker 29: include industry leading companies like Adobe, Amazon, ClickUp, and Miro that have advanced integration of generative AI into their tools and services alongside educational AI skill-based courses and content from leading providers like Coursera, Jasper, and Udemy that form a new education marketplace on Upwork Academy.

Speaker 30: We also launched limited access to Upwork Chat Pro, a new generative AI application embedded directly on Upwork's platform and powered by GPT-4.

Speaker 31: Upwork Chat Pro utilizes unique insights from Upwork about independent professionals to provide specific, contextualized responses and recommendations that are relevant to the needs of professionals on Upwork.

Speaker 32: assisting them in starting, creating, and completing projects more efficiently and effectively.

In the third quarter, we continued on our journey to unlock the vast opportunity in the enterprise space.

increasing our new enterprise logos in the quarter by 21% vs. Q2 2023.

We added 23 new enterprise clients in the third quarter, expanding our customer roster with notable new organizations like Dropbox, It's Sugar, Moderna, and Florida State University.

We also drove substantive growth in our highest value cohort of customers. As the number of enterprise clients in the third quarter spending $5 million or more over the trailing 12 months, growth 43% quarter over quarter.

We continue to be pleased with the progress we are making toward our long-term strategy of providing companies with the talent, skills, and tools they need to get critical work done.

through harnessing the power of generative AI on the platform.

innovating on behalf of all our customers.

optimizing our operations, and running our business to drive durable, profitable growth.

We are on track to deliver a record year in 2023 in both revenue and adjusted EBITDA, and have set a steady course for sustained momentum in the quarters ahead.

I'll now turn it over to Erica for more details on the financials.

Thank you, Hayden, and hello everyone. I'm delighted to be here with you today to review a very successful third quarter.

GSB again exceeded $1 billion in the third quarter.

Revenue grew 11% to $175.7 million with marketplace revenue of $161.7 million.

The Enterprise Business Unit, which includes managed services and enterprise revenue, with flat quarter of a quarter with revenue of 26.1 million.

This quarter, managed services revenue increased 4% year-over-year to $14 million.

Well, enterprise revenue, which is reported as a part of marketplace revenue, was down 3% to $12.1 million.

These offsetting growth rates are due to the movement of a customer to manage services during the quarter.

Total revenue growth was the result of take rate expansion, driven by strength in our as products, and our move in 2023 to a simplified flat fee pricing structure.

Total take rate in the third quarter of 2023 was 17.1%, up from 16.3% in the previous quarter, and from 15.4% in the third quarter of 2022.

Active clients increased 2% year over year and quarter over quarter to approximately 836,000.

Active client growth is driven both by improvements to our client retention, as well as improvements in efficiency in acquisition of new clients.

In particular, we saw strong improvements to our performance marketing efficiency in the quarter.

GSB per active client decreased slightly by 1% year over year to $4,906, a reflection of the strong active client growth in the quarter.

non-GAAP gross profit was $133 million, or 76% of revenue in the third quarter, compared to 75% in the third quarter of 2022.

non-GAAP operating expenses for the third quarter of 2023 were $103.5 million, representing just 59% of revenue, compared to 78% in the prior year period.

with R&D expense increasing 16% year over year, offset by sales and marketing expense decreasing by 26% year over year, and G&A

Provision for transaction losses decreased a remarkable 84% year-over-year.

The strong improvements in operating costs were the result of aggressive management action to focus on efficiency and profitable growth.

We will continue to identify ways to improve our efficiency while also investing in new innovations to grow our business.

In the third quarter, we made huge strides in our focus on durable, profitable growth.

non-GAAP net income was $28.9 million in the third quarter of 2023, compared to non-GAAP net loss of $4.2 million in the third quarter of 2022.

Our non-GAAP net income per basic and diluted share was 20 cents in the third quarter of 2023, as compared to non-GAAP net loss per basic and diluted share of 30 cents in the third quarter of last year.

This rapid improvement is the result of our ability to quickly identify areas of cost optimization and efficiency.

Adjusted EBITDA was $31 million in the third quarter, compared to negative $2.9 million in the third quarter of 2022.

Adjusted EBITDA margin was 18% in the third quarter of 2023, compared to adjusted EBITDA margin of negative 2% in the third quarter of last year.

Our strong and adjusted EBITDA results are due to revenue over performance, as well as the implementation of the cost optimization programs we've discussed.

We are very pleased with our ability to rapidly identify these cost efficiencies in our business, which we expect in part to reinvest in organic growth in future quarters.

In Q4 2023, we remain committed to our previous guidance of exiting the year at approximately 15% use of Domino's.

Our focus on profitable growth is also increasing our cash balances.

with cash from operating activities of $37 million in the third quarter, and cash, cash equivalents, and marketable securities of approximately $555 million.

I am also delighted to announce that our Board of Directors have approved the Share Repurchase Program.

with authorization to purchase up to $100 million of our outstanding shared of common stock.

This is a testament to our strong financial performance and ongoing commitment to durable, profitable growth.

Turning now to guidance.

We are guiding fourth quarter revenue to between $175 million and $180 million, which results in full year revenue guidance to between $689 million and $685 million, which represents a 10% year-over-year growth rate at the midpoint.

We're raising our revenue guidance primarily due to the revenue overperformance we saw in the third quarter, particularly around our ads and monetization products.

We expect fourth quarter adjusted EBITDA to be between $24 million and $28 million, which represents an adjusted EBITDA margin of 13.5% to 15.8%.

We're also raising our full year 2023 adjusted EBITDA guidance to be between $67 million and $71 million.

We continue to be on pace to post an adjusted EBITDA in 2023 that is more than double that of any year since we went public.

We also expect to generate positive free cash flow on an ongoing basis.

The third quarter has been another successful one for Upwork's business, and I'm proud of our team's ability to rapidly execute on our efficiency goals.

Going forward, we will continue to balance our commitment to strong, steady growth of revenue and even down margin expansion.

while also focusing on shareholder value.

I want to thank the fantastic Upwork team for everything they contribute every day to driving value for our customers and building a growing successful business.

Thank you, and we will now turn the call to your question.

Thank you. At this time, we will conduct the question and answer session.

As a reminder, to ask a question you will need to press star 101 on your telephone and wait for your name to be announced. To withdraw your question, please press star 101 again.

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

Our first question comes from the line of Matt Ferrell of Piper Sandler. Your line is now open. Your line is now open.

Thanks for taking my question, and congrats on the really strong results.

You highlighted throughout the shareholder letter the continued innovation on the AI front. Would love just to hear how sentiment among both talent and clients is evolving around the topic. Have things slowed down at all or is it full steam ahead?

Thanks Matt, absolutely. Definitely sentiment is very positive on this front. I'd say clients of Talon are both pretty eager to take advantage of...

what's out there in the ecosystem and more specifically the innovations that we've been launching on our own platform including some of the really exciting partnerships that talent

can now take advantage of directly on Upwork, leveraging tools like

Amazon, Code Whisperer, you know, Miro, ClickUp, and others yesterday. And so we're seeing upward talent is...

the first and at the forefront of all of these AI adoptions because freelancers know this is what puts bread and butter on the table, their ability to work quickly and effectively to deliver incredible outcomes for clients.

is absolutely transformed by these tools and technologies. So the sentiment amongst talent is strong. With what we announced yesterday also with our own innovations around Upwork Chat Pro, which is powered by GPT-4 and embedded across the Upwork platform, we're seeing a lot of interest in that product as well. So there's just, I think, a lot of excitement there on both the client side and the talent side.

And I know you aren't going to provide any quantitative commentary for 2024, but what are some of your priorities for next year, whether it's areas of investment, opportunities for outsized growth, anything you could highlight would be great. Thanks..

Sure, you know, as we look at the data on our platform, it's obviously early days in the growth of some of these generative AI.

skills and work, but we did see already generative AI categories of work were up 34% quarter over quarter in Q3. We're seeing AI machine learning growing tremendously, data science analytics growing tremendously. So you know this is

a priority for us in terms of really building Upwork to be the preeminent destination for where clients of every size can come and find this talent. And again, this year we're already starting to see that even off of the smaller base that we're growing from. So next year, we're gonna continue to deliver the tools and technologies to talent so they can be effective. We're gonna continue to innovate around the products and solutions on our own platform so both clients and talent can leverage generative AI powered features and functionality on Upwork.

And we're continuing to leverage our partner ecosystem as part of that, ensuring that everyone who comes and uses Upwork is not just using our own tools, but the best tools in business to deliver work because we are a work business after all.

And hey Matt, this is Erica. I'll just add, as you said, we're not giving any specific guidance on 2024 at this point. That said, we said last quarter and it remains consistent, we are committed as a business to year upon year improving our revenue growth rates from 2023 to 2024 and improving our EBITDA margin year over year. So that remains very, very consistent from what we said last quarter and obviously will give you more concrete guidance when we report Q4.

All right, thank you. One moment for our next question.

The next question comes from the line of Kunal Madhukar of UPS. Your line is now open. Your line is now open.

I have a couple of questions. The first one is on Outbox. How can I figure out which one to load and what is in the listener's account?

So in terms of optics, could you help us understand how to think about the new run rate of sales and marketing expense for Q4 as well as 2040 if possible in the percentage revenue? It has been declining consistently in the last several quarters after 39...

38% range. He was also a lot lower than expected for Q3.

provide some details around the underlying drivers of that marketing spend efficiency. Thank you.

Yeah sure Jason. Well yeah so obviously at the beginning of the year in Q1 when we announced the reductions our decision to reduce our brand spend we did indicate that that would be you know kind of gradual reduction over the course of the year.

So I think Q3 kind of reductions are consistent with that.

We did actually see some very good efficiencies on the performance marketing front in Q3, just kind of more efficient yield on that spend, which also enabled us to reduce costs. But we are not giving guidance on 2024, so we are not going to update you on any specific run rates there. I will say from an EBITDA margin point of view, as we committed to earlier in the year, we expect to exit 2023 and Q4 around about the 15% EBITDA margin. And again, we will give you more concrete guidance on 2024 when we die for the year.

Thanks a lot. Yeah, so that's sort of my next question, which is on Ibita.

You said before, EBITDA margin typically peaks in Q4 but drops sequentially in Q1 in the decimals of 200 to 300 basis points.

Given the stronger than expected EBITDA guide for Q4, how would you characterize the magnitude of sequential decline in the EBITDA margin off of the 50% Q4 guide?

Yeah, sure. So look, as I talked about last quarter, listen, when I came into the business in Q1, we committed to reductions in brand spend and we also reduced costs really kind of on the sales side as well.

I talked about last quarter the fact that we were going to continue to look for cost efficiencies in the business, which we have done I think very, very effectively.

I'm actually incredibly proud of the team for working hard to identify places where we can reduce cost and the very high EBITDA margin in Q3 of 18% reflects our ability to do that. That's not just kind of in discretionary expenses, but also in reducing spend in longer term projects in favor of reinvesting in growth and in kind of more near term opportunities. Things like the AI partnerships we just announced, other AI ML innovations and product platform improvements that we plan to invest into in Q4 in order to enable growth in 2024. So we are deploying some investment right now in Q4 ahead of 2024.

And that's why you'll see a little bit of margin offset and closer to kind of the 15% range as we exit the year. But that's appropriate as we remain committed to profitable growth going forward.

Thank you very much.

Thank you. One moment for our next question.

The next question comes from the line of Logan Reich of RBC. Your line is now open.

Good afternoon. Thanks for taking the question and congrats on the short quarter. Just wanted to ask a macro question on just what you guys are sort of seeing on the macro backdrop and trends with your clients as it pertains to both active clients and then also spend per client. Just wondering if there's anything to call out there on a geography basis or like a size of client basis and then also just any sort of impact from the conflict in the Middle East. Thanks.

Yeah sure this is Erica maybe I'll take this one Hayden can you obviously can add anything. So you know I would say that we haven't seen any real material improvement in the macro environment in Q3. The external micro trends continue to be I would characterize as uneven and a little difficult to anticipate and honestly sometimes even changing month to month. This all lends itself to customers tending to keep their purse strings a little bit tighter and we're seeing this especially on the large business side.

Even despite this, we're focused on what we can control. And as we said in the prepared remarks, we continue to add active clients, up 2% year over year and quarter over quarter. And our new enterprise logo growth is up 21% quarter over quarter. So we're really pleased with our ability to execute in what we consider to be a continuing and even environment.

Another really important point is that we are increasing our revenue from monetization strategies, like the ads products that we talked about, again, in the prepared remarks. These are things like boosted proposals and also subscription products like Freelancer Plus.

And these aren't just bringing revenue to upwork or increasing customer lifetime value. They're also driving efficiency on the platform and enabling talent to get jobs faster. Our talent who use boosted proposals, for example, have about a 25% higher chance of securing a job.

So, you know, we've said for a couple of quarters now that we're really focused on untethering ourselves from the macro environment and I think, you know, our results really do display the success in doing that.

So really proud of what we've been able to do and we're committed to both, like I said, improving revenue growth rates year over year and expanding EBITDA margins.

Yeah, and Logan, just to address.

The question about geo and client side, I don't think there's anything notable to call out there. Nothing really major this quarter. I say our very small business clients actually are the ones leading the pack in terms of their performance, but nothing specific to mention. In terms of the conflict in the Middle East, obviously this is incredibly heartbreaking and we are really, just our hearts are with everyone who's impacted by this terrible tragedy. It's absolutely shocking and deeply sad to see these devastating events unfolding and impacting civilians in such a horrific way. We have a very small number of team members across the region whose safety and wellbeing we're focused on. We don't anticipate any impact to our business as our GSB from that area is negligible.

Thank you very much. Appreciate it.

All right, thank you. One moment for our next question.

Next question comes from the line of Bernard McTernan of Needham & Company. Your line is now open.

Great, thank you for taking the question. Just wanted to double click on the ads marketplace. Can you go a little bit deeper into this opportunity? The shareholder letter spells out how it's driving conversion, but how much is this being used right now? How much do you think it could be used in the future? And if it could provide upward pressure on take rate over a longer period of time. And then just to follow up on the take rate, when should we expect to see the full benefit of the pricing changes in the take rate? And if it's possible to decouple those two in terms of the sequential growth in the take rate this quarter.

Sure Bernie, we have a lot of runway on this ads and monetization area of the business and we've been building the strategy over the last couple years and really starting to see it there.

As Erica mentioned earlier, you know one thing that we love the most about this is it's not just about monetizing the business It's about doing so in a way that advances customer goals around talent being discoverable, people who are really excited to get jobs and are qualified to do so being found faster in the marketplace. So we're seeing data such as talent using availability badges receiving 50% more invites than those who are not.

clients are 62% more likely to actually get their invites accepted or invite those or work with those who are badge talent. Boosted proposals is another feature here that is increasing professionals likelihood to get hired by approximately 25%.

So overall, this is actually still early in the strategy because there are other features and functionality around different types of ad products as well as optimizing those we've already launched, which we think will provide further opportunities in 2024 and beyond. So that's kind of the bigger picture. We really are focused on the efficiency, the equitability, and the optimization around these features. And certainly I think that's a plus for both customers and for our shareholders over time.

And maybe just a little bit more color on your question of how to think about the dynamic between the flat fee pricing structure and the ads and monetization products.

When we made the transition to the simpler pricing structure in May of this year, and when we did that, we said that we would, you know, we expected to get accretion from on take rate over, you know, sort of the next four quarters. And just as a reminder, at the end of the year, is when, you know, the 5% tier moves up to 10%. And of course, we've given a long runway to those talent at 5% to, you know, to have time to adjust and, you know, price appropriately with their clients.

But that also means that we will get additional accretion from the pricing change itself, you know, into the first half of next year. We're not breaking out the exact dynamics, but we did say at the time when we made the price change in May, you know, that over the next several quarters we'd get, you know, all around about a point of total accretion, and so that kind of remains consistent.

Perfect, thank you both.

Thank you, one moment for our next question.

The next question comes from the line of Brent Phil of Jefferies. Your line is now open.

Hi, this is John Bianca for Brent Self. Thank you. I'd like to go back a little bit on the macro. And you mentioned it's been hard to predict a month by month, but is there anything you've seen in terms of monthly in linearity, including through, I guess, first trick of November so far? I mean, anything.

notable other than maybe for seasonality.

I just want to make sure I understood the question. You're asking in Q4 if we're seeing any kind of changing dynamics. Is that the question? Each month of Q3 as well as Q4 so far.

Yeah.

I would say that we're not seeing any notable changes. I think we're all observing the sort of environment of uncertainty, you know, is affecting all types of businesses spend in this environment.

Maybe I can give you a little color on some of the underlying trends in the platform. One example we're seeing is that new clients coming onto the platform, we have seen good growth like we said, after clients growing, more loavers coming in enterprise side. But one thing we're seeing is that new clients are ramping spend a bit more slowly than what we saw a couple of years ago. We do think that that clearly speaks to just some of the macro impact.

You know, another thing is...

that we're seeing some bright spots, also in hours for contract, are up slightly quarter of a quarter. And actually, when we look at even the year over two year trends, hours for contract are up about 10%. So I think that that shows that there is good, strong, robust growth happening on the platform.

Thank you.

Great, that's helpful Colin. Maybe on the AI skill set and so on, I think you shared one metric, but is there anything else to share in terms of how that might be in terms of...

projects and talent putting out skills. I guess the average rate, probably is much higher as well. But anything else you could add, that would be great. Thank you.

John , so in terms of how projects and talent skills are trending, I think we're seeing

just a lot of positives in terms of what the overall impact of AI is to the platform right now. I think that's really the headline. So we're seeing growth in categories like AI machine learning, which is up to 52% year-on-year. Data science and analytics is another big growth category for us, up 30% in job posts.

And so I think the thing to understand is even though we are measuring, you know, like every single thing in the business around some of these AI specific impacts, it's also important to understand...

The AI positive growth we're seeing is in both.

categories that are specifically AI and generative AI type categories as well as a growth in demand for talent across categories of work where people want you know content writers who are using AI in their work or translators who are using AI in their work and so we're actually seeing that shift as well and in those cases what we're seeing is

talent who are using these new tools are actually commanding premiums in terms of their wages, which is extremely positive as we see kind of the mix shift around that work actually evolving and seeing the talent themselves upskilling and again adding tools to their toolkit, which again goes back to the strategies you see us deploying around some of the partnerships. So we're seeing the growth in specific categories as well as talent across categories really evolving how they're working and getting the benefits of these new tools as they go. Thank you.

Very helpful. Thank you.

Thank you. One moment for our next question.

Next question comes from the line of Rohit Kulkarni of RothMKM. Your line is now open.

Thank you. A couple questions. One on enterprise NetAds.

Anything you'd flagged that leads you to believe that this inflection or the uptick that we are seeing in new client additions is

is this trend is sustainable perhaps due to the team, productivity of reps or maybe it is macro that you think you are now in a new.

sustainable care and tough fun growing net ads in enterprise and then

Quick clarification on Erica's comments, I guess, regarding 24, were you trying to say that you are committed to improving gravity growth rate, which means accelerating growth rate from 23 to 24, just want to clarify that.

Yeah, so on the enterprise side, the continued improvement we're seeing in adding new logos to the portfolio is definitely a testament to the hard work we've been doing to increase the land team productivity and that started back in Q1 and has been kind of a steady march and it's certainly continuing under Zoe's leadership of the enterprise service unit. And I think it also speaks to the value of our product, despite the macro backdrop, which is certainly challenging I think for many and most businesses in this environment. So we're continuing to execute there and feel good that that is going to be a sustaining trend. It may not be perfectly even quarter to quarter, but certainly the demand is there and we're getting more and more efficient at completing that demand.

Yeah, and on the question on 2024, I really appreciate the clarifying question to make sure everyone understands it. What we've committed to is year over year from 2023 and 2024 to have our growth rate increase on revenue. Similarly, year over year from 2023 to 2024, our EBITDA margin is also expected to increase. That's what we talked about last quarter. That remains consistent, and obviously, like I say, we will give more detailed guidance on 2024 and the Q4 call, but it's really on a full year versus full year growth rate and margin that we are making the comparison.

Great. Thanks, Arithav. If I could add one more. On GSV, what would it take for the GSV to start to grow beyond the zip code that it has been in the last three, four quarters? I know pricing has changed a lot, and that may be weighing on the GSV. But overall, how should we think about GSV as in your algorithm into revenue growth as such?

Yeah, you know we're not we're not going to GSB right now nor have we traditionally done so. And look I would say that there's really no doubt that GSB is being affected by the macro environment. Like I said you know to some of the earlier questions there really is a lot of uncertainty still out there. And trends and sentiment can kind of change month to month these days.

And what we're seeing is that that translates to some general hesitation for all types of businesses to spend into this environment.

Like I said, there are some really nice bright spots under the covers. Kind of I referenced the kind of sequential increase on hours per contract. We do see some very good dynamics there on a kind of year over two year basis. And so I think that we do expect that also some of the investments that we're making on the platform into new innovative AI experiences, other things like that, will continue to help us on the GS3 front as well. But we'll give more of an update on that as we approach 2024.

Thanks, Erica. Thanks, Adam.

Thank you. One moment for our next question.

Our next question comes from the line of Andrew Boone of JMP Securities. Your line is now open.

Good afternoon and thanks for taking my questions. I wanted to go back to sales and marketing.

Erica, is there a framework that you have or that we should be thinking about as we think about maybe demand coming back and macro improving and what that would mean to sales marketing in.

Meaning, is it artificially low right now, but there will be a period where it expands, or do you have a framework in which we should apply?

Um

So a couple things on that I would say we're really pleased with the performance marketing you know the performance of our performance marketing spend we do see some improvements in yield there You know we're going to continue to Balance our commitments on EBITDA margin accretion with investments into growth Right now that those investments into growth are really focused on R&D The other thing that you've seen us do since we reduced our brand spend at the beginning of the year is Make some surgical investments in brand spend around new product and feature launches

We certainly do plan to do that next year as well. And so you will see us from time to time making brand spend investments.

I think beyond that it's a little bit too early to tell. Beyond the fact that, you know, I think that over time, you know, while balancing kind of EBITDA margin accretion, I do think that we, you know, believe that we can make good return on brand investment as, you know, macro factors return.

Yeah, the other thing I'd add on this Andrew is on the sales side specifically, you know we're very focused as you can see from the performance of our numbers on the enterprise side right now on increasing the efficiency in our model and on sales team optimization. I mean, this is a great time for us to be doing that and driving those improvements which we think we can continue to deliver over time which will help us in any demand environment, you know the current macro or an improved macro and just help us have a more efficient team to deliver the results that we want.

And then Hayden, I wanted to ask you a product question. So Upwork Chat Pro.

I understood this is basically a first version of the product. How do you see AI tools evolving as you guys help freelancers be more efficient on the platform?

This is definitely a first version of, frankly, there's a lot of different features that we have been working on here. We launched the features in Q2, this is the latest one in Q3, Q4, we've got more in the pipeline and we're going to continue experimenting. I think to the question of how do these tools evolve, there are so many different touchpoints that we have with talent across.

their life cycle of matching with clients, of delivering the work with clients, and really delivering great outcomes. And so…

I think we're still in the early days of

you know with the partnership side making sure that they have amazing tools the best in the market at their fingertips at discounted rates and knowing which are the best tools to be using to deliver that work. And then within our own platform with chat with chat Pro clearly, there's a lot we can do to smooth out the workflows you know to give them an even better experience for the work delivery through the pieces of the puzzle that we serve them with directly. So again, this is early days. I think these tools are going to get better and better both our own tools and those in the market and we're just really excited to be pushing things forward you know innovating on the forefront and getting a ton of customer feedback along the way that will continue to guide product roadmap as we go.

Thank you.

Thank you. One moment for our next question.

Our next question comes from the line of Eric Sheridan of Goldman Sachs. Your line is now open.

Thanks for taking the question and hope everyone on the team as well. I'll just ask maybe one big picture one as we've gotten through a lot of the big topics. When you look at these newly announced partnerships, can you take a step back and help us better understand what that will do to demand and supply on the platform over the longer term and how we should be thinking about potentially partnerships like you're announcing potentially improving the return or the efficiency of your go to market strategy over the medium to long term. Thank you so much.