Upwork Inc. (UPWK) Earnings Call Transcript & Summary

I think we're going to get going with our next session. I know people are moving from room to room, but in the interest of time and for the webcast, let's move on. Our next session is with Upwork. We've got Hayden Brown, President and CEO; Erica Gessert, CFO. Hayden and Erica, thanks for being part of the conference this year.

Thanks for having us.

Okay. So Hayden, to level set, I think one of the things that's been interesting to us has been there -- one of the themes here at the conference has been macro, what's going on in the broader economy. There's a lot going on in your business that you've been talking about over the last 6, 9, 12 months. Bring us up to speed on your latest messaging on what's happening on the demand side of the platform and how your business continues to evolve. I'll get secular growth and then the demand environment.

Sure. So we saw in Q2 -- it was a quarter of mixed market signals, I would say. It was -- on the Enterprise side, which, as you know, is a smaller part of our business. We continue to see a lot of the same trends we have seen in Q1 in terms of companies operating with some degree of caution, similar kind of sales cycle elongation to what we had seen in prior quarters. So nothing really different in Q2 versus Q1 from that standpoint. However, our team was executing better through that environment, and we could talk more about that. But definitely, we're doing a lot of things that we have made changes in the business around how we were going against that demand opportunity and kind of the environment that we're facing. And then there's the marketplace side of our business, which is the larger part of our business. And I'd say in Q2, we saw stronger resiliency there. Definitely, client spending continued to improve. I think smaller businesses, which are the more kind of representative segment in that part of our business are feeling maybe more confident with the macro this quarter than they were feeling in the previous quarter, and that shows through in a lot of our numbers. So I wouldn't say we saw major changes, but definitely, those were some of the dynamics that characterized the quarter for us.

Okay. So moving aside from shorter-term demand, you've introduced this concept of sort of aligning the business for land and expand against the bigger market opportunity. So just level set for those who don't know it as well, the market opportunity you're going after and how the land versus expand strategy fits into that?

Sure. So we have always had the tremendous self-service product with our marketplace. That's been around now for 20-plus years, and it's been extremely successful. But as we look at opening up this $1 trillion-plus market opportunity, a lot of the clients that we seek to serve are larger Enterprise clients, many of whom have already been working with us in a self-service capacity for many years. But really to fully unlock that opportunity, we have been building an Enterprise team, an Enterprise product to really serve that part of the market, and those very specific needs those customers have. So the land and expand motion there, which we've been really building that team for a number of years now is really about both selling into these larger customers on the land side, and that can be upselling customers who are already maybe using us a little bit ad hoc in the marketplace, but maybe don't have a full-blown upward program, and that's really landing them as an Enterprise account, building a strategic program, unlocking a much bigger spend opportunity with them. And that's where our land team will identify those accounts, sell them our Enterprise product offering. And then the expand team will go through and really work to find more and more champions and buyers across the organization who can be adopting Upwork. And that could be, again, with existing marketplace customers who might be dabbling. And then also, for sure, customers that are either inbounding to us just to find out what they can do with Upwork through our Enterprise program as well as some outbound activity as well.

Okay. I would just add on to that. Just on the land and expand side of the Enterprise business, there's a lot of focus on kind of adding logos and continuing to build the landside, which is important, but I would just emphasize having come from a large enterprise company myself that the expand side of the opportunity is also enormous for us. Really kind of getting our foot in the door is usually in kind of 1 category within the Enterprise business. And there's an enormous amount of opportunity to kind of expand within these companies and offer the Upwork products.

And one of the things we've talked about before is, obviously, you're going after this large addressable market opportunity of how work and talent is shifting in the way it's being deployed in the broader economy. Where are we in this cycle of enterprises coming around to understanding this economic opportunity of how to think about these platforms as talent acquisition and aligning talent against their needs?

They are definitely waking up to the reality that this is a segment of the market that they need to have a strategy for. The data is there. I mean we've seen consecutive quarters and years now of more and more of the labor market moving in this direction. More than 50 million Americans are freelancing today. Large enterprises know this. They know this also because when they go to source the talent that they need from their traditional suppliers, they can no longer find it. And they also see the data that shows successive generations in the workforce are freelancing at greater and greater levels. We see more than 40% of generation Z today is freelancing. So large enterprises are definitely aware that they need to have a talent strategy that taps into freelance and flexible workers. They also know that this is critical to tap into the younger generation of workers. What they're not always sure is how to do that and how to engage to build kind of Enterprise-grade programs to do this and to do it at scale. And that's where they come to us for those answers. And that's where we're really -- we have the tools, we have the technology, we have the know-how. We have the full suite of solutions that help them unlock that opportunity.

Okay. Understood. And flipping it on the other side, when you go in and try to build awareness and build the client growth side on Enterprise, what are some of the friction points you're still running into? How much of it is education curve? How much of these things you need to build to address the market opportunity because enterprises come back and want certain levels of flexibility or product from you? How is that back and forth with Enterprise clients continuing to evolve?

Yes. I mean it gets easier every year and with every customer. I think more and more of them are seeing what's happening in the market. They're seeing what their peers are doing. And often, what we see with specific customers is once you get a foothold in and disclose the expand strategy that Eric was talking about -- once you're in a specific department or part of the business and the customers are seeing those gains, whether it's access to talent that they didn't have before or cost savings that, that department is getting that is just mind-blowing or speed, that's another huge one where people are getting work done on our platform so much faster. I mean I was talking to someone at our customer conference last week who said, "Hayden, we delivered a project on Upwork in 2 weeks. It would have taken us 9 months to get that work done in our organization because of the bureaucracy, because of the vendor sourcing requirements because of what that would have taken." And we hear that all the time from our customers. So once we see those wins and once the internal team at that client is seeing those wins, we're really socializing that out and making sure that that's visible because that is really like the proof point that they need to get more departments, more champions involved in the work. But it does take change and it's change management and awareness that does take some time, Eric.

Okay. You've also made pricing changes to the platform. Can you walk us through the elements of the decision to make those pricing changes, what some of the key learnings have been? And how you think about price as a dynamic for the platform for the long term?

Yes, absolutely. I think the level set on this one is everything we do around pricing and packaging is anchored in incentives and unlocking the full value of work for our customers and, of course, for our shareholders. And so we've made a number of changes over the last few years. All of those are premise and how do we create the right incentives and vehicles for customers to adopt Upwork at the fullest. So starting in -- 2 years ago, we launched a client price plan change and that was really about unlocking the full benefits that were previously behind a subscription paywall and making those available to all of our customers in the free plan, things like more invitations that they can send out to talent on jobs, advanced searching and filtering capabilities, access to premium talent. So many things that they would really use to grow their usage of Upwork available to everyone, but with a slight price increase for our free plan with the introduction of a client fee. So that was the first price change we made a year before last year. This year, we recognized that the tiered services fee that we have with our freelancer [ side ] pricing, where previously they've been paying 20%, 10%, 5% on a sliding scale on relationships that they form an Upwork, was really not serving our objectives perfectly in terms of getting them the most work that they could get on our platform. And this is because freelancers were pricing that 20% fee that they only pay for the first $500 they earn into the full length of the contract. And so when they're bidding on jobs, their bids were actually dampening the client demand because clients were seeing these higher bids that were pricing and as if they were paying a 20% fee for the duration of the contract. So by taking that fee down to 10% flat for the entire duration of the contract, we're actually able to drive lower pricing for clients because talents are bidding a smaller fee and then their pricing like our lower fee into their bids, and that means clients are actually posting and filling more jobs on our platform. So those are some examples of how we're driving the pricing changes to unlock core value for customers, and then that flows through with expanded take rate, better margins, et cetera, as well.

Yes. We do have other monetization opportunities on the platform, right? We have an [ ads ] product. We have other kind of monetization areas of the platform that are opportunities for us now that we continue to experiment with and will be on an ongoing basis as well.

Okay. Understood. You've been on quite a roller coaster with respect to the theme of AI over the last -- yes, so first of all, we're at a tech conference, so I can't -- probably the longest I've gone all week without mentioning AI yet. So now we're going to talk about AI. But in particular, it was interesting. I think the initial reaction from the investment community was worry about AI. And then I think you injected an interesting narrative about AI as an opportunity on this last earnings call. Talk about the way you're thinking about artificial intelligence and what it might do for your platform, not only both outwardly as a business driver, but also internally in terms of driving process and efficiencies.

This is such an exciting topic for us. So let's spend the next 25 minutes on it. So I'd say we have a couple of huge opportunities here. One of them is serving the world as the destination for AI-related talent, talent with the skills that everyone is looking for to both deploy AI models, whether it's the primary models that customers like ours are trying to build into their -- in their systems or just figuring out if I'm a small business, how do I incorporate some of the things that are out there into my tool chain or my offering right now. So there's a ton of energy right now where clients are coming to us. We've seen a 1,000% increase between Q2 and Q4 in job post, 13,00% increase in searches on our site with people coming and looking for talent with these skills. And I think this is just the beginning, as we all know, of where this opportunity can go. There's also this tremendous opportunity around talent in our marketplace, adopting and using these tools to become better, faster and more effective at what they do. And talent in the freelance economy in general always move super fast to upskill, to adopt new tools. I mean they're motivated to do this because this puts food on the table for them right now. They move faster than captive employees inside larger corporations who do this. And every time there's a technology change, a new tool, anything like that, the data shows freelancers always adopt faster. So we intrinsically benefit from this at Upwork, but there's more we are doing to make sure that our talent specifically have better access to some of these tools. So we cut a deal with Jasper.AI and have a number of other partners lined up to provide access at a preferential rate through our own products so that our talent can be adopting these tools at faster rates. And we already see across the 125-plus categories we serve, talent using these tools to deliver better outcomes for clients. And that's a big opportunity because our flywheel moves faster when clients are getting better outcomes, at better rates and doing so even more competitively versus maybe what they're getting in-house from their team or from alternative solutions. The third big opportunity for us is, as you mentioned, the solutions we're launching in the market our own product has tremendous topography. I mean we serve a huge ecosystem of everything from hiring and managing clients and talents together, delivering the work product on our site and also delivering payments. And so within our own product suite, we've already begun launching AI-related features using generative AI tools, such as a Job Post Generator, which we launched, which has already shown more than 50% increase in the time -- like accelerating the time it takes for people to get through that job post experience because they're not starting with a blank sheet. We're prerating the job post for them. They're editing it, they're customizing it and then getting a better work product because of that. We've launched 2 other AI features already. So we're launching a bunch of things in our own product to capitalize on what generative AI can do for our customers. And this is, again, early days in some of the things that we have in mind in terms of the road map there. And then, of course, we ourselves are using the tool. So our team is becoming more effective, you can have co-pilot of some other things to become really efficient in how we're doing our work.

Okay. So there's a lot there that we have to watch in the coming years.

I told you there is a lot.

Let's turn to the talent side of the equation. A year ago, we were looking at a labor market that was very, very tight and a lot of flexibility at the Enterprise level. Now we're looking at different elements of the labor market. How has the talent side of the equation evolved in the last 12 months? And how should we be thinking about growing and scaling the available talent on the platform to meet the demand you're looking for on the hiring side?

The talent that we work with is incredible. And whenever there is a platform shift or like the technology shift we're seeing with generative AI, and economic shift, the talent continually leads the way around these opportunities. And what I mean by that is, we're already seeing talent on our platform move very rapidly to fulfill the demand that we see coming in the door around AI as a key skill set, not just in the machine learning categories we serve, but also clients saying, "I want to hire people who are using the best tools, who can teach me how to use tools," and that might be in a marketing category or in a design category. So what we're seeing with talent is the rapid adoption of these tools. We're also seeing, for example, we cut an amazing partnership with OpenAI, where they actually were not able to find the talent to service their own clients with the talent to deploy OpenAI tools and APIs. So we did a deal with them where they -- we jointly created the AI services hub and OpenAI experts on Upwork specifically vetted talent that they couldn't find anywhere else to give their customers people who are qualified with very specific skills that OpenAI needed to give their customers to deliver on deploying those tools and models. And I think that's a great example of how talent in our ecosystem is upskilling themselves, adopting these tools, learning how to do things with this technology that you can't just go out and easily get certified or take a degree, a course to learn this stuff. People are doing it on the ground, learning by doing and becoming exceptionally good at this work and meeting the bar of even some of the most discerning customers in the world, such as OpenAI, who actually is also a customer of ours, but they work with us on a partnership capacity to find a unique pool of talent to serve their end customers in this way. So we're seeing some really interesting dynamics around that.

And OpenAI is really just the beginning, I think, of these types of partnerships. We have many, many other kind of businesses in this space who are kind of lining up behind OpenAI to kind of work with us having an expert [ vetting ] and those sort of types of things.

So we've talked a lot about where the platform is going from a growth standpoint, bring it all together for us on product innovation. When you think about where you're trying to align, to grow and innovate going forward, reflect back on some of the things you're the most intrigued by that can be amplifiers of market adoption or growth in the year ahead? And how you think about you and the team spending time and effort around scaling those innovations?

Yes. We have a plethora of opportunities. And so I'd say what we've been working on, that you've already seen us take to market has been really shifting over the last few years from being a freelancer marketplace with one way of doing work, which has historically been our post a job hiring model to a work marketplace, which is the place where you can come, find the talent you need, find the solution you need to get work done through many different ways, whether it's posting a job, whether it's hiring through project catalog, whether it's hiring a full-time worker who -- now we have a full-time offering as of this year. There's a variety of ways that we see clients coming to Upwork with a range of demands and to unlock that full world of work for them that they need, that full share of wallet that Erica was mentioning earlier. We've realized that we need to serve them with a multitude of models. And so we've already been innovating on that full work marketplace ecosystem that has been core to our product strategy, and you will continue to see us doubling down on that work ecosystem strategy, refining what those offerings look like in the year ahead.

Okay. I want to turn to the margin side of the equation. You went through a restructuring coming out of last year and into this year. Talk a little bit about what the cost savings that have been garnered from that restructuring, how we should be thinking about the trajectory of that, not only this year, but over the medium to long term?

Yes. Maybe I'll take that one. So I came into the business and as we reported Q1 earnings, and we announced kind of a series of cost cutting at that time, really largely in 2 places, one, was on the brand marketing side, another was kind of rightsizing the Enterprise sales force. And those were the initial announcements we made, I kind of came into the business. I was consulted on those as I sort of came in. And we agreed very quickly, as I was entering the business that we would take on sort of more programmatic multi-quarter efficiency endeavor within Upwork. And so that's -- we're engaged in that now. I would say we showed some good margin improvements with the initial steps we took in Q2 and we reported Q2. And the expectation is that the actions we took in Q1 will continue to show benefits and margin improvement throughout the year, and that's reflected in our guidance. And we'll continue to find efficiencies in the business. I think there are lots of places to go. I consider this a multi-quarter endeavor, and we're committed to showing year-by-year margin improvement as we continue to execute. And I think the nature of this marketplace business is that it's relatively high margin. And we can find those opportunities and then take them and reinvest in organic growth.

So I don't know if this is for you, Erica or Hayden you want to weigh in as well, but just sticking with the theme of sales force. It's a topic Hayden and I've talked about on a couple of different earnings calls over the last year or so. Where are we now in terms of productivity in the sales force? How happy are you with the ramp you continue to build in terms of productivity? And you've made some hiring in the Enterprise business on the GM side. How should we think about the Enterprise go-to-market strategy, scaling the sales force, driving productivity in the sales force and where we are in that journey?

Yes. We don't talk about productivity and then...

Yes. I mean the initial steps we took from a productivity point of view, we have already shown good yield where we've improved -- I think our revenue per sales rep went up 100% kind of quarter-over-quarter. And we're pretty committed to -- Zoe Diamadi has just come into the business. She's the new General Manager of the Enterprise BU. And -- she and I are very committed to being quite, I would say, judicious about how we think about yield per sales rep and other things like that as we kind of continue to grow and scale the Enterprise business. We expect it to continue to grow in scale, and so we'll kind of grow into that. But we're going to hold pretty rigid.

Yes. And just to add to that, Zoe has been a huge addition to the team, and she's just -- she started at the end of June. So she's not that far into it yet. But I think what you'll see in terms of the productivity improvements going forward will be it will be uneven progress because as she is certainly testing different initiatives. What's great about Zoe is she has this great R&D mindset. She comes in with this, let's have a pot of rep that's really testing and driving maybe new talk tracks or new sales approaches or some other things that we want to test out. Once we see those things working, roll them out to the team. If they're not working, we'll go to the next set of experiments. So she'll be testing some of those things. We'll see those productivity improvements kind of episodically coming through the team, which will be awesome. And I think that will continue to inform that side of the Enterprise sales equation even if she's also driving product enhancements and other things because she is the full GM that has responsibility over all of those pieces of the Enterprise puzzle.

Got it. Okay. Maybe this one, I'll start with you. Your brand marketing, as we were exiting last year, you were talking about leading in the brand marketing and wanting that to be an area of focus to drive the business forward. And then obviously, the macro volatility started to play out in the early part of this year, and you made some changes in the strategy around brand marketing. I wanted to go back first and then forward, what were some of the key learnings from when you led -- when you leaned into the brand marketing strategy that stick with you today? And how should we think about the evolution of the brand marketing strategy if the macro environment were to stabilize, improve, be at a different point somewhere down the road, how to think about that journey for brand marketing?

Sure. Learnings include -- we saw some really huge gains in terms of our brand awareness with the key segments of clients that we were targeting over the time of our investment in brand and in particular, since the campaign we launched in September of last year. So that was -- we really saw the work that we did was incredibly effective in driving the awareness numbers up. Now there's still a lot of headroom to go in terms of like growing those numbers more and we're very aware that, that is an opportunity for us. But I think we learned that investing in high-quality cuts through creative that really have a message that people are going to remember -- some of our campaigns were a little bit polarizing for some people like, who is that dead guy Jack, like what's going on there. But the feedback we thought actually was overwhelmingly positive. Memorability was high. People were like singing me the tune from a song [indiscernible]. And so I think investing in really great creative work did pay off in terms of driving the awareness that we're looking for. The reality was in this year coming to the year kind of coming forward point, we didn't feel in this environment, given where businesses were -- what we saw in Q1 was a lot of businesses were kind of just freezing spend across the board or pulling down spend across the board. I mean they were making decisions. It was like shoot first and ask questions later. And in this environment, we say, "you know what, this is not the best investment of our resources and we think there's better ways we can use our capital, but we will circle back in a different environment, different future and really reassess is brand spend going to be effective in a different context because for us and where our awareness is still not where we want it to be, that could be a kind of appetizing strategy for us. In the meantime, though, we are, of course, building brand and acquisition through kind of more kind of close to the dollar channels, and I think that is very effective in the here and now for what this environment represents.

Okay. Understood. Let's talk about -- you guys have talked longer term around where you want to take margins in the business from a longer-term perspective. For those investors who are a little less familiar, talk a little bit about the margin journey you expect to be on over the next couple of years when you get to a certain scale of revenue and a certain scale of margin? And then maybe I'll unpack that with a couple of follow-ups, if possible.

Yes, I would be happy to. So I mean, look, I think -- like I said, I think from a margin perspective, this is a naturally high margin business. I think we also want to invest into the very large TAM potential that this business has. And so it should be both a top and bottom line growth business. So I think -- we -- like I said, we're very committed to kind of steadily growing margins period by period, quarter by quarter, year by year. And we think we can do that and reinvest into the business to grow top line. I think we certainly are kind of looking at the kind of rule of 40 construct and saying, hey, how and when do we want to hit that? And that we're working through that right now. I would say that's probably one of my major jobs as a new CFO is to work through that framework and the time line. And so we'll come back to you with that in pretty short order. But like I said, I think we want to put together a framework that is going to grow both top and bottom line.

Maybe just one follow-up with the full acknowledgment I understand the business planning process. Just what are some of the key variables you want investors to keep in mind? How much of it is about just building revenue scale in the business versus elements of amplifying higher levels of return on absolute spend in the business over the long term. Just understanding some of the qualitative variables that are at play when you think about building towards our long-term margin structure?

Yes. Look, I think -- I mean, in general, we're going through a process right now of -- the organization shifted into kind of a business unit structure about a year ago, we're going through a process now of really refining the contribution margin of these businesses and thinking through the kind of yield within the business -- not just within the business units, but within individual business lines within the Marketplace business and thinking through like where do we get the best yield per dollar within these various business lines. So that's a process we're going through right now, but that's how we're thinking about the business. And we're really going to be running it on an individual business line basis between Enterprise, marketplace and then within marketplace and the individual products.

Understood. Okay. So couple of follow-ups before we wrap up. When you think about bringing it all together, Hayden and you talked about where you want the platform to go and some of the product innovation you're doing, talk about your priorities for allocating capital against growth, but also looking at your balance sheet, looking at your potential margin structure longer term and striking the right balance between margin expansion, maybe returns to shareholders as well as getting the growth algorithm, right?

Sure. We're very committed to durable profitable growth in this business, and we know we can drive that profitability profile of this business. As Erica mentioned, it's a very healthy marketplace business that has great attributes while also investing in growth. And so I think we are very clear about kind of what our envelope is for investing, how we want to continue to drive margin expansion over time and also preserve the capital we need to drive the unlock in a market that is still in its very early days. We are going after a $1 trillion market opportunity. We are early in unlocking that product innovation to be part of that. At some point, we probably will want to expand the sales team when the market and other conditions maybe are slightly more favorable. And so I think the good news is we can do both, we can continue to have that margin expansion and invest in key unlock for the business as we see those things coming up. And also, as you've seen with some of the decisions recently, we know we'll pull back. And when we see things that aren't working or aren't working at this moment in time, we move very quickly, can make those decisions and be very dynamic around resource allocation.

We think the dynamic in our expense line items, right? I mean G&A is down year-over-year, sales and marketing down year-over-year. We've kind of pulled back in areas, looked at overhead, look at that stuff. But R&D is up 24% year-over-year in the last quarter. We're investing into the business, and we're still able to grow margins. And that's the beauty of this business, and we can keep doing that. We're committed to growing cash flow at the same time. Now there's decisions to make about what we're going to do with that cash, and that's another part of the process, but it's -- we're able to kind of do it all in those areas.

You jarred me a little bit there, Hayden, with something I should have asked you earlier because you framed it interesting. One of the questions we get a lot from investors is, how to think about competition. And I think it's more valuable to hear it from you than when I say it to investors. But I think you generally frame it, if I'm correct, around disrupting the old way of doing things and some of the shifts in talent and work in the broader marketplace. How do you think about competition versus other players in labor marketplaces versus just elements of the seismic shift in the way some of the enterprises might change in which they allocate talent and projects?

I mean you're right. I think our biggest competition is like the old way of working and people -- frankly, their outdated mindsets about what's possible. So that is more of what we focus on than any specific category players or other competitors. I think I've been in this company almost 12 years now, and I have seen every year, every quarter, there are new entrants, people coming out of the business, coming into the business in this category, it's very rich. And yet it's extremely hard for any of them to scale and get to a level of scale, such as we have with tremendous clients and talents, the data asset we have, which I think will become even more profound as an asset with the AI kind of revolution that's happening and how we can use that to the advantage of our customers. And then everything we've built around that in terms of trust and safety mechanisms, the product itself, including the Enterprise product, which is extremely unique in terms of what it delivers from compliance, protections, reporting, integrations with other Enterprise tools. So I feel great about our position and what I've seen over the years in terms of continuing to pull ahead in this market even as others do really interesting things that I think it's hard to build and scale a marketplace business like this one. We know very well that challenge and just stay laser-focused on innovating these solutions that we think will take it forward for our customers.

Okay. So we're going to bring it all together in the last question. If we're sitting here a year from now, what should investors come away from this conversation thinking about as you and your team's key priorities, whether it's about investing in the business or executing on product or executing on the opportunity that you're the most focused on getting right in the next 12 months?

What we're going to nail is driving profitable growth within the framework we've outlined. That's unambiguous and the vehicle for doing that is going to be product innovation and growth in the Enterprise, those 2 things. I mean, those things go hand in hand. They power each other. The Enterprise business doesn't grow without the product and certainly Enterprise customers power part of the whole marketplace experience in terms of the quality and the kind of aspirational aspect of what that represents for us. I think both of those will be huge parts of our winning strategy going forward.

Okay. Hayden and Erica, thanks so much for being part of the conference. Appreciate the opportunity to have the conversation. Please join me in thanking Upwork for being part of the conference this year.

Thank you Eric.

Thanks Eric.