Upwork Inc. (UPWK) Earnings Call Transcript & Summary

All right. I think we are live. So good morning, everybody. This is Stephen Ju from the Crédit Suisse Internet Equity Research team. We are very pleased to have joining with us Hayden Brown, the CEO; and Jeff McCombs, the CFO of Upwork. So guys, welcome, and thank you for joining us today.

Thanks for having us.

Thank you.

Awesome. So let's start off with a couple of product-related questions before we zoom out to the macro. I think recently you mentioned a virtual talent bench. So can you explain what that is?

Yes. So Stephen, the virtual talent bench is really an experience that clients discover when they start using the Upwork platform where they realize that the independent talent available to them on Upwork is talent that is not just available for a single project or a one-off engagement, but really is talent that they can use either every month or it might be coming back once a year over many years. But really, this is talent that's there for the long-term for their business. And it's really something that's transformational for them because I think a lot of companies think that the freelance ecosystem outside of Upwork is really messy, and it is. But when they use Upwork, they realize that these freelancers on Upwork are sustaining practitioners who are there for them for their business, day-in and day-out, year-in and year-out. And so the virtual talent bench that they build on Upwork is really a set of talent that they can build their core operations around. And this is a transformational thing for them. This means that they don't have to limit their usage of independent talent to marginal roles or small projects on the fringes of their business. They have this -- our clients have this aha moment that they realize they can really put core operations in the hands of this independent talent workforce that is available through the virtual talent bench doing primary functions for them that they can really rely on and these people get to know their business, get to know their nomenclature their culture, build really strong relationships with their teams as part of kind of their core operations. And so this is a really powerful thing that lets them really change how they think about the extensibility of this workforce for their business, flexing operations up and down as they scale, as they grow, as they need to shrink based on demand, based on the dynamic market that they're facing with their businesses. And this is putting a huge amount of control in the hands of our customers to dynamically manage their operations going forward using this workforce, which is available, skilled and have these strong relationships and knowledge of their business. So it's a very powerful kind of tool that our customers are discovering as they use the virtual talent bench that they build on Upwork.

Yes. I mean it sounds like it's a great development, not only for your corporate business clients, but also for the freelancers as well, right? So you theoretically go from what might be more of an ad hoc use case to a consistent use case, right? So it must do wonders for your retention in terms of client retention. For the freelancers, you get like a consistent job instead of having to find the next one, then the next one and the next one.

Absolutely, Stephen, because the freelancers, they want a steady stream of income. They want a -- basically, they think of it from their perspective as their virtual client roster of clients that they know well, they have these strong relationships with, they know the businesses and the operations of these clients, and they have the reliability of knowing that these folks are going to come back to them with requests, that they have kind of a portfolio of income opportunities with this set of clients who are bringing them work again and again, and there's a lot of repeat and recurring work that they're getting from these clients. So for both parties, it's a hugely beneficial relationship because the last thing that our freelancers want to be doing is hunting for that next job opportunity, wondering where their next paycheck is going to be coming from. Instead they're getting a steady stream of request of new work opportunities from a pool of clients that they trust, that they know, that they have worked with in the past. And so it's exactly the way that they want to be running their freelancer business with this kind of stable of clients that they have built up over time through our platform.

Yes. Can you discuss Project Catalog? What you hope to accomplish for clients as well as your freelancers?

Sure. So as the world's largest work marketplace, what we believe is critical is that our clients and our freelancers can really do the full range of work types and sizes through Upwork. And so with Project Catalog clients can immediately discover different types of work that they can do with freelancers because it's really a one-click e-commerce kind of instant buy, shopping experience where they can see the work that freelancers can do for them. They can purchase those package projects immediately. And then our freelancers can really graduate those client relationships from smaller projects or -- and those immediate needs that clients have and purchase upfront into the longer term recurring relationships ongoing work projects, which our platform has already proven are really kind of core to how people are working on Upwork today. And so it's a great entry point for new clients to see and discover what's possible and then kind of get their foot in the door and then become more sustaining users of other things. We've also heard from freelancers in this early beta phase how excited they are to kind of cross-sell their existing clients with like add on work, incremental projects, things like that, using this prepackaged model.

Got it. So switching gears a little bit. How do you define the enterprise and the mid-market client? And can you explain how the changes you announced this quarter impacts both?

Yes. So we are really excited about the ability to serve kind of the full market with both self-service products and capabilities using what we have with our basic and plus plans where clients can come in and self-serve there as well as with our sales-enabled offerings, which we've just retooled a little bit with the sales team now focusing instead of on some of the smaller accounts previously where they were going all the way down to clients that had 100 employees, sometimes even smaller. Now with the changes we just announced a few weeks ago, our sales team has raised the bar and is only focusing on clients that have 250 employees and larger. Because what we've seen is the economics of those accounts are really strong. Our enterprise clients are spending on average $1 million per year, which is great. We know that these enterprise buyers have significant programmatic spend. Our sales team has been successful in unlocking that spend. And so our sales team is very focused on delivering a lot of value to those customers, who have those more programmatic needs, who want to be using the full suite of what Upwork has to offer. And so for the sales team, it's really about going after those larger accounts, working with those customers. And then with our self-service offerings, we know that the SMB customers, who aren't yet ready to go to that level of spend, they can be using what we have with our basic and plus plans to really be getting the full range of what Upwork can offer without the kind of higher cost model of the sales and the support costs that go with the enterprise offering. So we really have kind of been optimizing where the sales team focuses and where we have the really strong economics for the enterprise team and the enterprise offering along with what we have with the self-service side of the marketplace.

Yes. It's funny how kind of just -- kind of zoom out to the macro a bit. It's kind of funny how the world has completely changed. And I think for companies like yours, the world has now kind of arrived at your doorstep because, I mean, the nature of remote work was kind of what you did in the first place. And so as you look at a post-vaccine world, how do you think the pandemic will permanently change or accelerate the dynamics in the workforce?

Yes. I mean, what we've seen over the last 7, 8 months around remote work has been remarkable. But the shift towards remote work well predates this pandemic. I mean there was already a huge increase in remote work demand, both from workers who were saying they wanted more freedom, flexibility, fewer commutes, things like that, as well as companies looking to broaden how they tap into talent across locations, got more diversity, et cetera. But this year has been absolutely seismic. I mean companies whole set out to shifting remote work in a way that we've never seen before. And for Upwork, that has meant the barriers to adoption of our solution have dramatically fallen away as customers have gotten so much more comfortable with the idea that they can work remotely. And with the idea that workers on the other side of the screen, namely the freelancers on our platform who have always been remote workers are truly not so foreign to them anymore. They maybe previously thought, are these people really working, is remote working really a thing? And the bogeyman of weather remote work was something that companies could really take seriously. You know this year I think that has become completely a nonissue. And I talked to so many CEOs who have said to me, "Wow, I thought my company wouldn't be able to do this or the remote work wasn't something that I could take seriously for my teams, and I was so wrong." So companies have radically changed their entire view, I think, on remote work. And even those that once this pandemic passes, obviously, they will reopen their offices, workers will be back to some of those pre-pandemic practices. But what I'm hearing from our customers and from just everyone in the ecosystem is remote work is here to stay. I mean, some form of this is going to be part of the new normal in the business landscape for sure. And for us that means that companies have just gotten comfortable with a set of practices that are part of how people use Upwork. They're tapping into these workers. And what we see with our customers is once they taste the magic of the workers that they get access to through Upwork and the way that they get to use these virtual talent benches to truly get more control and flexibility over a dynamic cost base for running operations with a set of talent that, again, is variable to their needs versus a fixed cost model around FTEs, which is a lot less flexible to matching what their business might need going forward. They never want to go back. We talk to clients all the time who say, "How did I not know that this exists? And why would I ever go back to the old way that I was doing things once I figured out that Upwork is an option for my business." So once things normalize again post-pandemic, I have every confidence that our customers, who have figured out what is possible using Upwork as a core part of their operations, they don't want to go back to using the legacy ways of working, the fixed models that do not give them flexibility and control. They absolutely love the opportunities they have to manage their business in a much more nimble and successful way using everything that's available to them on Upwork.

Got you. Anything that we should be thinking about, given the upcoming political transition, any sort of potential impact to your business from a potential change due to immigration and visa policies in U.S.?

We have seen -- I think it will be more like what we saw under the Obama administration, which was really favorable for us in our business at that time as well. So we're not anticipating anything particularly negative. I think, again, the more overwhelming trends in our favor here are around the secular shift towards remote work, people really opening their eyes to how they need to access talent in some new ways, including independent talent, to really mobilize assets of their business forward. I mean we've seen some things with AB5 in California over the last couple of years, that has not had any negative impact on our business whatsoever because the workers on Upwork or knowledge workers who independently negotiate the rates of their business and other things, which really insulate them from the impacts of that type of legislation. So I don't think we're expecting any kind of negative ripple effects from legislation moving forward.

Got you. Who have been the early adopters of Upwork? And how has that most recently -- are you seeing an increased willingness by the more, shall we say, tenured corporate employees willing to try new guys out for the first time?

I think what we've seen this year has been such kind of phenomenal strength in our business across kind of every -- I mean, Jeff and I talk about this all the time, if you look at the last couple of quarters and where we've seen our newer clients, those cohorts have been incredibly strong in terms of acquisition and their performance on GSV, on sheer numbers in terms of the numbers of clients coming in our retained base and those clients coming in and having kind of the strongest quarters we've seen yet in terms of how they performed for us. And then if you cut our business by hourly post fixed price work, the different categories of work, we don't actually take demographic data on our customers. So we don't ask people their age and things like that. So we don't have some of those cuts of data. But pretty much on every dimension, the business this year has been kind of at its peak in terms of strength. And so I think what we're really seeing is people really, again, leaning into a new way of working and a backdrop of some of the legacy ways of working being exposed for the weaknesses that they had. The myth of in-office work kind of me exposed for the fact that it wasn't that great, to be honest. I mean, the fact that people had to commute into the office to do things that, frankly, they could do at home in front of a computer and people realizing there is a better way to do this, and they can use a platform like Upwork to get these things done and just mobilizing themselves to do that, I think, is one of the things that we've seen here. I had one of our clients on our customer advisory board, which is a panel of our largest enterprise customers who we work with to give us great input on how to design our product for them. And she said to me, "Hayden, this year, I have been banging the table at my company." She works with a larger enterprise company. She said ,"I've banging the table about Upwork at my company for years, but it did take this pandemic to have some of my colleagues who've been hearing me talk about Upwork for years to finally come and say, Carol, what is this Upwork thing again? I know you've been talking about this, but now I really want to get serious about this because it seems like we should be using this more." So companies even that have been using us and have seen some of the benefits well before this pandemic have, I think, suddenly gotten much more serious, and the scales have fallen from their eyes a little bit with some of the demographics of more seasoned workers in the workforce and others saying, "Wait a minute, there has to be a better way that we can be doing these things with some more modern tools and technologies to really break through on some of the challenges that we've had well before this pandemic around access to talent, around how we're getting some of our operations done, breaking through on the flexibility and the speed and the nimbleness and the ways that we're doing things." So I think we are seeing that with customers where this pandemic has really forced them to look at many of their core operations and reconsider how they're doing things, where they can be doing things in a much more effective fashion, where remote work can really unlock some of the keys to things in their business that were not particularly working for them or that now have been exposed as really needing some new practices to give them the agility that they need. And I think this is where Upwork is now seeing some of that success, and customers are really waking up to what we can offer.

Got it. One more longer duration philosophical question that I would like to ask is, what do you think about automation and increased utilization in AI in areas having such as cashiers, professional employees, et cetera? And what do you think the broader impact to employment will be? And what are some of the tools or offerings that you might like to have in place to help with the broader transition of work?

Yes. It's interesting. I mean, given that our platform really focuses on knowledge workers, we don't see the automation in the near term affecting the type of work that our workers are doing significantly. Even where automation is happening, we see a lot of our workers. There is some level of like data curation, data labeling, things like that, that is happening through workers on our platform working alongside machines and kind of the data processing of machines, and that's really creating more opportunities. We also see that the freelance workforce is the most nimble workforce in our economy at reskilling. And the data shows that time and again that freelancers reskill faster, they move to where the newest work opportunities are the quickest. And we do a lot with our platform to expose to workers, "Here's where the newest cutting-edge opportunities are, here's where the adjacent emerging skill gaps and skill kind of opportunities are given that you know this skill, like here's wherein a lot of new client demand is coming up, maybe you should learn this skill or this is where clients now are seeking new workers." And so we do a lot to kind of surface that through the platform and through the visibility and the transparency that we offer. So I think as the economy keeps evolving around different skills becoming much more relevant for workers and things like that, a platform like ours is really a critical place where workers can come online and have the visibility to see where are things going? Where do I need to have that set of skills to stay relevant. And then frankly, they can sharpen those skills, using a lot of the e-learning and other things that are out there on other platforms, and then putting those skills to work, really building their portfolios and working for clients on our platform, really delivering great work to customers at the cutting edge of whatever those skill sets are. So I think we have the benefit of kind of that bird's eye view of those emerging skill pockets showing workers kind of where those trends are happening. And then they are kind of moving swiftly because freelancers, again, are at the cutting edge of the economy usually on these things much more so than full-time employees at kind of upskilling, reskilling and then being out there where the emerging needs are.

Got it. I think we're almost out of time. But -- so let's fast-forward to a year from now. And once again, you are presenting at the Crédit Suisse technology conference. What do you think we'll be talking about in terms of your accomplishments over the trailing 12 months?

I think the next year is going to be basically a solidification of some of the emerging trends and themes that we've started to see this year. I mean, this year has been, I think, a cracking open of starting to see what's possible with remote work as an emerging theme and independent workers being now available, I think, to so many more companies in a way that they didn't imagine. I mean we've known this, and we've been building the strategies for this for quite some time. But so many companies didn't realize that independent workers could be available to them at the core of their operations doing really critical work and giving them the flexibility and the nimbleness to really adapt. And I think that's one of the second order effects of the remote work trends that many companies haven't yet fully realized. I think a year from now, many more companies will have realized that this is something that is a critical strategy for them to be competitive. And so a year from now, I think there will have been a much bigger solidification of that talent strategy for so many more companies out there, and that will be much more of a primary realization for the world, whereas this year, it's much more about remote work as a primary realization. And I think next year independent workers at the heart of many companies will be much more of a primary realization for so many businesses with Upwork really leading the way in that conversation.

Got you. And with that, we are out of time. Hayden, Jeff, thank you very much for participating, and best of luck in the coming year.

Thanks so much, Stephen.

All right.

Thanks, Stephen.

Take care.