Upwork Inc. (UPWK) Earnings Call Transcript & Summary

Great. So I think we're live now. Thanks for everyone who's tuned in this evening. My name is Nick Jones. I'm a senior analyst here at Citi covering internet stocks. You can get my disclosure, I believe, in the link below this window. And if you have questions, you can use the text box that's also attached to this window, or you can e-mail me directly at nicholas.jones@citi.com. So we're really excited to have Upwork here. We have Hayden Brown, President and CEO; and Jeff McCombs, Chief Financial Officer. And I guess to kick things off, Upwork has been public for almost 2 years now. I think we're approaching that in October, I think.

So I guess for those who are new to the company or tuning in to kind of learn more ramp on the story as COVID unwinds and Upwork kind of is seeing some benefits here, can you maybe just give a quick overview of Upwork and kind of the ecosystem they're serving?

Yes. Thanks for having us, Nick. So Upwork is the largest 2-sided marketplace, really the largest freelancing platform that's serving clients that range from small business customers all the way up through 30% of the Fortune 500 using our platform to connect with freelancers all over the world to do really skilled freelancing work in areas such as web, mobile and software development, design and creative work. There are over 8,000 skills on our platform. And so client influencers connect on our platform, do that work actually remotely using our website and our mobile app and all the tools that we've built out for them. And as you can imagine, this has been a really interesting year for us because, even though we ourselves have been connecting freelancers to do the type of work remotely for over 20 years, with the onset of the pandemic and with so many companies really mobilizing around remote work models, I think that has really been an accelerant that we see to the secular trends around remote work and around freelancing that our business is really positioned squarely to capitalize on. And so that is something that's very exciting for us as we look ahead to where we are going after a $560 billion market of contingent work that is being done today that can move on to a platform like ours. And so I think this is really early innings for us as we go after a very large market using technology and tools to really move more and more of how people are working together in different ways onto an online platform like Upwork.

Great. That's a great overview. And you talked about a large market. I think that's an area that investors who are probably new to the name and also familiar focus on and that's kind of the total addressable market for Upwork. So maybe you could touch on how you view the TAM. What is the driving force behind Upwork's ability to penetrate it? How much of it's the employer's desire to outsource and workers preferring to be independent? I know there's a lot there, so I guess we can recap if we need.

Yes, definitely. So I think there is this huge amount of spend that existing companies already are doing with either staffing firms or outsourcing providers around contingent work that is knowledge work done through these kind of legacy models. And as we think about going after that market and how we unlock it, certainly, there's something important around the tools and the technology that we have built that let companies do that work in far superior ways. And this includes tapping into actually better, more qualified talent to do that work, and that's a huge part of our value proposition, is really connecting clients with talent that is rated and reviewed on our website by many other clients who have worked with those individuals on very similar types of projects. And they have the visibility using our platform to see exactly those talented individuals in that work history of what's been done before. Whereas in a traditional staffing or other environment, they would never have an understanding of that and frankly, would not have the confidence around what those individuals can do. On our platform, not only are those ratings and reviews available, but also the talent side of the marketplace are people who have chosen to really become independent entrepreneurs and businesses doing this type of work in a highly skilled way versus, again, the talent side of the equation in legacy businesses, I think, typically looks very different. So as we go to market and really try to unlock this opportunity, what we see is, number one, continue to educate clients about the quality of the talent on our platform, which is really important because, quite often, they don't even understand that that's something that they can get through a platform like Upwork. Number two is giving them access to the type of more sophisticated kind of tools and technology that they need as businesses to be running millions of dollars of spend through a solution like ours. And this is where we have really been building out and we'll continue to invest in solutions like our compliance offering, which lets companies have the peace of mind to know that they are indemnified against misclassification risk, a big piece of the puzzle for employers and knowing that they don't have any of those risks, making sure that they have things like reporting and integrations with the technologies that they're using inside of their business around, whether it's HRIS systems or other things for these types of programs. And so these are areas where we've been building out a lot of those capabilities over many years. And then the final piece of it, I would say, in terms of unlocking that market is around sales and support. A lot of these larger customers, they're not going to move million dollar programs over to a platform like this without talking to a sales rep, without having a services layer that sits on top of the technology and really make sure that they're getting everything they need, whether it is extra levels of recruiting support or someone that they can call if they need some kind of extra service. And so we really bring together the best of what the technology side can offer with the sales and services piece, which is a newer piece of our kind of investment strategy and our trajectory for unlocking that big TAM really as part of how we think we can serve the larger customers who are spending those big dollar amounts in this space. And that's a key piece of, I think, understanding our overall strategy and how we believe we can grow the business to a 20%-plus sustained level over time, and that's a piece of the puzzle for us.

Great. That was great. Maybe a follow-up, more as it pertains to COVID. Can you touch on how COVID has maybe impacted the TAM and maybe from the supply and the demand side of the ecosystem? How has that evolved as COVID's kind of, I guess, been unleashed on us in the world?

Absolutely. So first of all, I'd say this has been a really hard year for the economy for a lot of families as they've been struggling through this, and I want to acknowledge that, that is a reality. Specifically to the Upwork Business and to our platform, what we have seen is [Audio Gap] the pandemic and the economy becoming weak. They did pull back spending for a period of time in late March and early April. They then started to rebound back with us and return to pre-pandemic spending levels very quickly. At the same time, we saw, in terms of new customers, really a significant increase in new customers starting at the end of March and in April and progressing through Q2, where there was kind of an influx of demand to our site in the form of new clients registering, hosting new jobs to the platform and really indicating that what we were seeing was kind of a sea change in how people were thinking about the relevancy of remote work and freelancing to their businesses. And that's something that really has been sustained since that time period and something that we think will continue to be very elevated because as we talk to customers and the prospects, what they're telling us is we -- they're saying, "Look, we went like remote only in the course of like 6 days in March. And as a company, we didn't think remote could be something we did. Now we've learned that it is something that we can do and even though we will reopen our offices when we can, we believe that much of our workforce or a portion of our workforce will be remote going forward permanently." That's going to be something that's here to stay, and a lot of the data suggest this. I think 75% of CFOs have also said that this will be a permanent part of their companies going forward. So remote work is here to stay, and now they're saying: "We can tap into remote talent on your platform in ways that we probably weren't thinking about before." And Nick, that's consistent with feedback we've had from our sales team as well, where the sales team, prior to the pandemic, was hearing from customers and prospects that kind of the #1 objection in our sales process was people saying, "We love everything about what you're saying to us except the fact that these freelancers are all remote, and we're not sure we're comfortable with that." Fast forward to where we are today, and that's one of the top-selling points. In fact, customers are very comfortable with the idea that these freelancers are remote. And so there has been such a significant mental shift in the landscape over the last few months, and we've seen that really starting to show up in our funnel numbers with new clients that I think we're really at the early stages of seeing how this fully plays out, but I think a secular shift and an acceleration has happened that all of our customers are saying is really something that will be quite permanent even once offices reopen, and I think that's a huge tailwind for our business.

Great. Maybe a follow-up. I'm on that topic you touched on, the sales process, spend coming back, attitude shifting. I think, in Q2, there was a little bit of a slowdown in new deal close rate. How has that been trending since 2Q? Are these things kind of reverting quickly or even maybe improving better than expected? Or any color you could help provide there?

Sure. So as we were looking at the exit trajectory of, for example, our new deal close rates on the sales team at the end of Q2, we felt those were on a very positive trajectory. When we looked at new client acquisition overall, that was also on a very positive trajectory. When we looked at our existing installed base of clients and how they were doing, we felt like that was actually also on a very positive trajectory. Although we were cautious somewhat as we looked at Q3 and the guidance that we wanted to offer for Q3 because we knew that there were a lot of uncertain factors in the economy as a whole still ahead of us in Q3. And specifically, we knew that coronavirus cases at that time were continuing to increase in the U.S. Many geographies we're looking at shutting down further. We saw that small business loans potentially were drying up, and we weren't sure how that was going to potentially impact many of our small business customers, whether or not that would cause them to have issues with their businesses. So there were a number of kind of X factors in the economy as a whole, where when we were providing that guidance for Q3, we were not sure kind of what the shape of the quarter would look like, and we did model in some potential downside for our small business customers who may have been experiencing, we thought, some headwinds in the quarter from the economy as a whole. There was some offsetting effects that we also modeled in around continued strength in the top of the funnel from self-service customers coming in at much more elevated rates than we had seen previously. But for our business, for those who are newer to our story, in any quarter, the vast majority of our gross services volume and revenue is driven by existing customers who we have acquired in prior quarters and how well they continue to spend with us. Typically, those numbers are very stable in a global pandemic that is a little bit harder to predict. In any given quarter, the new customers we acquired inside of that quarter typically contribute a small amount of our total GSV and revenue. And so even though we were predicting that, that new customer cohort will be very strong, their ability to contribute to the total quarter because of the time it takes those new customers to ramp and spend, usually they're stronger contributors to future quarters. And so with all of that, our Q3 guidance was a little bit cautious in terms of how that would net out.

Great. I guess maybe touching on the cohorts you're winning and kind of reversion back to a little bit more normal behavior. How are you thinking about the trends you're seeing, I guess, first, in certain regions that are maybe more reopened and in regions like California or New York? And how are you thinking about how sticky these trends will be? Is this something that reverts? Or have the attitudes really shifted and you think this is long lasting and you're building a bigger base?

Yes. I mean as we've studied any kind of geographic trends in the business, we've tried to parse -- early in the pandemic, we were looking at places like Italy and Europe in general and was it a leading indicator of things we might see later in the U.S. I'd say, overall, we actually haven't seen strong outliers in terms of geographic performance that really look materially different. And I think that's probably because our business is so global and has -- was already pre-pandemic and is still today completely remote and distributed in terms of how people are working together. And so from a data standpoint, I'd say what we see is continued strength in relationships that people are forming on our platform, both domestically in the U.S., which is a big part of our story and those relationships are a big part of our GSV and revenue, but also the cross-border relationships that get nurtured through our marketplace. We're also continuing to see just kind of uptick in that, I'd say, across small customers, large customers. There hasn't been, I'd say, like one standout segment or geography that looks radically different, which leads us to really conclude that the whole going remote kind of experiment has been something that was kind of equal opportunity in terms of business size, is the segment for any business that wasn't a physical processing or hospitality and retail type of business. Basically, whether you were small or large, if you could, you did do that. And so I think our business is kind of reflective of the fact that across geographies, across sectors of the economy, where it was applicable, customers made that shift. And it seems to be sticking, and that's also consistent with kind of the qualitative feedback that we're getting from customers.

Great. Maybe switching gears now to Upwork strategic initiative. I think since IPO, Upwork has undergone a few shifts in focus over the last, I guess, 2 years. Can you update us on Upwork's current strategic initiatives to include attracting bigger clients, enabling more spend per client and generating higher quality matches?

Yes. So Nick, when I stepped into this role in January, it was really important to me that we set the company on a path to reaccelerate growth. I think given our huge TAM, given our differentiated offering and everything we are starting from, it's very feasible for us to be a business that grows at a sustained 20% plus revenue growth rate and a similar GSV growth rate over time and that we need to be focused on unlocking that TAM through a kind of simple, clear strategy that everyone in our company could understand and execute against and certainly that we could share with investors as well. And so I think this year, even though there has been a lot of turmoil externally and it's not probably the year that any of us would have expected, I will say that the strategy that we started out with in January largely is in place. We have made a few modifications in terms of specific road map items to address current client and freelancer needs. But number one, we are laser-focused on continuing to attract the right larger clients into our business and get more of them aware of and using Upwork because I think, historically, too few customers and prospects have ever even heard of Upwork. We're not a household name amongst these customers. And if they have heard of us, quite often, they have misperceptions about what we can do for them. For example, they may think that we're a logo, $50 type of gig economy company and that they're going to use us for these small transactional projects. In fact, 80-plus percent of our GSV comes from large complex project work and ongoing engagements. And so these are the types of things that we've really been tackling this year to reeducate the market about both what we do, what they can get done on our platform and also make sure that we're sending that message to the right audience. That's been even more important, and we've invested even more in some of our marketing channels this year as suddenly remote work has been even more top of mind and attractive to prospective companies. On our second strategic objective around driving more spend per client, this has really been about unlocking from companies the full potential of how they can be using Upwork. And something that drives me a little bit nuts is how often we have customers who are so happy using our product, and yet they don't even realize that there are so many more ways they could be using us. And so they have this kind of single-use case that works for them, and they score us 10 out of 10. And yet, they don't even realize that there's these other things they could be doing. And so there's a lot of work we've been putting into this year around expanding the adoption of Upwork around multiple use cases that customers can be doing, both within talent sourcing on the marketplace. So if they're doing something like animation work, can they also get the voice-over for those animations done through our platform. There's all these ancillary use cases. Then there's also adding things like payroll capabilities and employer of record services, which especially our larger customers really want to take advantage of and expanding that relationship. So they're truly using Upwork as a platform, not as just a narrow point solution for a single need. And that's -- I think there's a lot of runway there for us as I look at how much our current customers, both in the self-service marketplace and even inside of our larger enterprise accounts, how much they're spending with us today kind of pales in comparison to what potentially they could be spending with us if we're able to unlock more of those use cases and scenarios with them. So that's a big part of that second strategy. The third one around making high-quality matches is really about nurturing that lifeblood of the marketplace and that matching function, which is how all customers find success sourcing talent or sourcing jobs through Upwork. And this year has really been about focusing on the technical category of work, which ended up winding up really well with what we saw once the pandemic hit where there was a surge in demand for technical skills. Lots of people are doing digital transformation work. Lots of companies were looking for web, mobile software developers to help them navigate things. And so we had placed a bet this year on doing more with our technical matching infrastructure and user experience or some things like that. And also doing more with expert bedded talent in some of those types of fields, which has really aligned well with our clients have a lot of demand for very skilled individuals. And so I'd say that strategy is all about building the foundation not just for performance this year but really setting us up for sustained performance over the years to come.

I think this is probably a good point to kind of segue into the 20% year-over-year growth you talked about earlier. We've heard you talk about on earnings calls as well. I guess can you unpack that a little bit more? Why is 20% the right number? What's the confidence? Are there other proxies we can think about in terms of what kind of drives that is the right number, whether it's kind of self-serve digital companies, where you just see more websites being built and therefore, maybe more people who would be willing to use these types of products? I guess any color around the 20% kind of near-term or mid-term target?

Sure. I think as we look at some of the internal models we have around acquisition, retention and some of the things we're doing strategically, it's to drive performance of the business as well as the TAM that we're going after, which is very large. 20% does seem like a very reasonable and yet meaningful target for us to be getting to a place that is somewhat aggressive and yet achievable given, again, the capabilities that we have and the market we're going after. And so I'd say 20% is where we're headed. I think that's a reasonable goal for now. Once we get there -- also now that we have Jeff just onboarding and ramping up with us, we will continue to evaluate are there new goalposts we should be setting for the business, what should those be, over what time frame. And so I think that's something that we'll continue to scrutinize. But I'd say for now, our goal is let's get back to that 20% plus. We've been there before. We believe that, that is totally possible, and this strategy will get us there. But then we will reevaluate whether there's different goals we should be setting for the future.

Great. So my next question, and this will incorporate a question we got from a listener as well, I guess, focuses on your international strategy. So Upwork generates most of the revenue in the U.S., while most of the freelancers are not in the U.S. Can you talk to this dynamic in the broader international strategy? And maybe also touch on how much supply is in India or the Philippines, where things may be not -- are not so great right now as a result of COVID and what impact that may have on the supply side of the equation here.

Sure. I mean our business has always, from day 1, been a very global business. It's true that we have a large portion of our client side that is based in the U.S. Although we do have a lot of clients globally as well, and the freelancer populations are global. We have clients and freelancers in over 180 countries around the world. So I'd say the strategy around international -- today, we are still focused on English language as kind of the common language on the site. We serve now a number of currencies on the site for clients and freelancers internationally. We haven't seen negative impacts from the pandemic on the supply side over the course of this year. We do have lots of freelancers, this -- the viewer's correct, in the Philippines, in India. We kind of have some pools of talent that align with certain skill sets. Like it's not a perfect alignment but, for example, a lot of customer support and administrative support type of talent comes from the Philippines and Southeast Asia. We have a lot of that talent in India as well as a lot of kind of coding, web developer type of talent in India. What we've seen in the pandemic has actually not been challenges with that talent accessing or using our site with [Audio Gap] us because I think there's just a renewed interest and excitement about freelancing and/or people are looking for alternate sources of income at a time when maybe other sources of income have dried up. So globally, right now, we're seeing just a heightened level of activity, I'd say, in a lot of markets, both on the client side, as you've talked about, but also on the freelancer side as well.

Great. Maybe we switch gears to talk a little bit about client acquisition. Can you walk through the client acquisition strategy? We know you're kind of targeting larger clients. It sounds like the impact on the sales cycle maybe is improving. I guess pre-COVID, what was Upwork's primary channel to acquire new clients, maybe large and small? Large is probably more direct sales and small, other areas to lean in. In terms of customer acquisition costs, the CPMs are down. Any color would be great.

Sure. So we definitely have very robust acquisition of self-service customers both through paid channels like SEM but also a lot of strength on SEO direct to our website, things like that. And so we've seen both elevated activity on channels that are free to us, like direct and SEO, through a combination of, I think, new awareness, and we've been doing a lot of brand work ourselves. I mean we did do this $1 million talent grants program this year, which felt very important, both to raise brand awareness but also to create some really important stories for our customers who I think often -- prospective customers, specifically, don't always know how to get started on Upwork, where they might hear about Upwork conceptually and think like, "Oh, that sounds really cool. But how do I get started? Like what's the first project I should be doing? Or what's the first hire I should be making on Upwork?" And so when we did this Work Together Talent Grants Program, it was about seeding the market with some very specific use cases that we could then showcase through our marketing campaigns to really help customers see amazing ways that they could get started and also relate to amazing work that was getting done by freelancers on the platform for clients in this unique environment and year that we are in. So all of that is to say there's been a lot of work on both the brand side as well as on paid channels, technical investments in SEO, et cetera, to make sure that we are doing a lot to drive self-service traffic to the site, which is a big part of our growth strategy. As much as we love enterprise driven sales and all of that as a piece of how we unlock that big $560 billion TAM, we are still investing in smaller customers who do come in self-serve, and that's a big part of our growth story as well. So those investments this year have been very targeted and have been very focused on continuing to maintain the LTV to CAC ratios that we have historically had, and we found ways to invest at higher levels while maintaining those ratios this year, which has been really positive. On the kind of larger account side of things, we absolutely have been doing work this year to retool sales assets and our event strategy to go all virtual and things like that to make sure that we're really targeting the right customers who are ready to buy in this environment, who have budgets to spend in this environment and bring them in through the sales channel. And frankly, our sales team was already very adept at working virtually and remotely. And so I think they've found that, that piece of the puzzle in terms of adapting and touching customers through Zoom and everything else has been very effective.

Maybe staying a little bit on the topic of smaller customers versus larger. Are you able to describe the mix between kind of large enterprise clients given that a large portion are complex, more expensive projects versus smaller clients who are probably doing cheaper projects? And then I guess how does that factor into Upwork's ability to attract kind of maybe lower market or middle market clients and maybe some of your competitors are focusing on the lower end of the spectrum or cheaper projects?