Upwork Inc. (UPWK) Earnings Call Transcript & Summary

Okay. I think in the interest of time we're going to get started and I'll keep track of everything. Okay. So first of all, welcome, everyone. Thanks for coming to San Francisco and being part of the Communacopia and Technology Conference. We're happy to welcome everyone from Goldman Sachs. It's my pleasure to kick off my series of fireside chats today with Hayden Brown, CEO of Upwork. Unfortunately, Erica Gessert could not be here. She's now with a positive test of COVID. So if Erica is listening on the webcast, giving her a shout out to feel better. And for those who don't know me, my name is Eric Sheridan, I'm Goldman Sachs' Head of U.S. Internet Equity Research. So Hayden, thanks for being here. Thanks for being part of the conference again.

Maybe just to let that for those who don't know the story, you've been on quite a journey since becoming the CEO of what you're building and what you're scaling and what your priorities are. Maybe just level set with a little bit of an introduction of the company for those who know it less.

Sure. Upwork is a 2-sided marketplace. We are a pretty unique business because we are in the labor side of 2-sided marketplaces and we connect talent, which is typically independent freelance talent with clients, which range from small businesses all the way up through Fortune 100 companies who are really looking for an alternative to kind of the old ways of working. These are businesses that are leaning into a more modern, flexible work paradigm, working with independent talent on our platform, spanning the globe. These are talented individuals who are really entrepreneurs, solopreneurs, part of really the creator economy trend that many of you probably know well. And really, we offer both sides a new way of working on our platform, matching them together and also giving them the tools to work through their entire life cycle of work. So not just the match but also the contracting, the work engagement, the communications, the collaboration tools kind of the full life cycle. And that includes a really robust trust and safety system, our reputation management on both sides. So really, this gives us as a tech company proprietary data and insights about how those matches are going as well as the ability to feed that back into our system over time and really continue to give both parties better and better data insights to drive matching collaboration and work through our ecosystem. So we -- we're a company that's been around for a while now. We went public in 2018. This year, are on track to do over $730 million of revenue and power about $4 billion in our kind of economy of work annually. So it's a very interesting business and also has great profitability characteristics, which I'm sure we'll talk about today as well, Eric.

So maybe just go one step lower just to understand in terms of the business model itself, just in terms of the revenue streams you have, just what's built up in terms of how you charge, how we can make money. Just maybe go a little bit deeper there and then we'll talk about some product initiatives specifically?

Sure. So our marketplace generally monetizes through a take rate-based model. We have two large kind of product offerings, self-service offering on our marketplace side, which are customers can come in and use and we monetize through a client fee and the talent fee that is a kind of a take rate-based model. We also have an enterprise offering where we work with our larger enterprise suite clients. They have a combination and a take rate fee that they pay us for that offering. And we also have a newer revenue stream coming from our ads and monetization products. So these are things where we have both subscriptions, value-added services, also connect, which is our virtual currency in our ecosystem, which allows freelancers to bid on visibility as products facility with clients, things like that. And so this is one of our fastest-growing revenue streams. It's a very exciting opportunity for us within the marketplace to build lots of new ways that we can kind of monetize what we're kind of offering both sides.

Okay. I want to go a little bit deeper in some of that, but maybe let's first double-click down on the Enterprise. You've been on this journey of building scale on the Enterprise size, sales force, you and I've talked a lot on public earnings calls and at this conference around sales force efficiency and ramping what you're trying to accomplish on the Enterprise. I wanted to do a little bit of a check in for us on where you sit now in terms of what you're trying to build on the Enterprise side of the business and what you're most excited about in terms of initiatives, not only this year, but looking out over the medium term?

Sure. The Enterprise business is a huge total addressable market for us. As you know, the vast majority of labor spend in the United States and globally is in the Enterprise. And so today, about a fifth of our revenue comes from our Enterprise services and yet we see a big runway that we're building into it. And so where we are today is the specific Enterprise Suite of products that go after customers with compliance offering, quarter classification and indemnification offerings so that they know they're working with independent contractors in our ecosystem. We can buy those [indiscernible] in that area of the business. But more broadly, we've been doing a lot to iterate on and continue to test experiment with pricing, packaging, services, et cetera, in this area of the business. This past quarter, our rapid experimentation there led us to 46 new enterprise customers were -- that we landed, 27 of those were with a newer offering that we were kind of testing out in the market. And I think that just goes to show that we are really rapidly working what is the right option of kind of products and services that these customers are looking for. And we're definitely not going to get -- this is kind of early need for us in terms of unlocking this huge addressable market, and we're going to be continuing to kind of work on that project over the course of this quarter, next quarter and many quarters to come as we unlock this huge [indiscernible].

Okay. You talked a little bit earlier about some of the newer innovative ways in which you're monetizing what you built on the platform side. Obviously, value-added services is one area. It allows you to sort of drive revenue faster than volume. Maybe talk a little bit about some of the innovation and value-added services that have been built on top of Upwork. And again, sort of what are your key priorities around those initiatives for the long term?

Sure. So -- I mean one of the ways you've been doing that is with our subscription services, Eric, where we've added, for example, for our Freelancer subscription plan, Upward Chat Pro, which has GPT 4 powered chat capability, which does things like help freelancers with proposal tips and how they can present themselves best to clients. And that product has now over 100,000 users and was a big driver of our revenue growth in the monetization space last quarter. But this is really a broader area where we have a lot of opportunities. As you think about talent on our platform who are constantly looking at ways to stand out from the crowd and do more efficient and effective work for clients. We have also partnerships that we're bringing into play. And this is an area where we can give them the best partners in the domain where they're working because our platform is very broad. We serve 125 categories of work. And that means in every domain that we serve, there's partners like Dropbox, GoDaddy and many others that we can give kind of bespoke tools to our talent base in the form of the partnerships, the value-added services that we can monetize kind of on top of kind of the base offering that we have. And our talent can take advantage of that just kind of be more effective and efficient in delivering work for clients and turning a premium for how they're doing that. So we kind of benefit from that and they benefit from that. So these are just some of the early things that we're working on to really monetize our products better. It's again, very kind of early and there's a lot of ways as they think about all the categories we serve, all the partnerships that we're kind of working with and the huge talent base that is on our platform.

Maybe just to level set, when you think about what you're building on the Enterprise side and the self-service side and then obviously, with the freelancer who's driving a lot of the activity level on the platform, how do you think about elements of subscription versus a la carte monetization across the various components of the Marketplace. Where are you most excited about subscription, maybe taking hold and continuing to build scale over the medium to long term?

They both have huge opportunities for us. I'd say on the talent side, we have basically one subscription plan today that's of note. There's certainly an opportunity to go into more of like tiering and -- we have agencies on our platform today, where there's probably a lot more we can do there in terms of different subscription tiers. On the client side, we have our kind of free marketplace offering, and then we have our -- our Enterprise Suite, but we don't have a lot of other kind of options in between. So there's also a lot more we can do on the subscription side with clients. And then in terms of a la carte services, certainly, there's a lot that we could do. We don't have a lot of paid offerings that are kind of one-off that today. Now our goal is not to nickel and dime users. Our goal is to find places where in the world of work, they can opt into things that really do add value for them. So this is again, there's a lot of opportunity here but we are very focused on finding things that drive overall kind of share of wallet, overall GSE growth on the platform and enhance users' experiences around work, which there's a lot of opportunity for us to do. But we're seeing kind of like the big picture view here, not trying to just find like one which used the opportunities to monetize.

Understood. One of the big debates over most of the last 12-plus months has been the demand environment you found yourself in. Obviously, there's been different points at a time where you've seen headwinds and tailwinds to client growth or headwinds and tailwinds to spend per client coming off of earnings in the middle of the summer, how would you characterize the current demand environment that you find yourself in and reflect back on what that meant in terms of client growth, client activity, client spend. What was your key message coming out of that set of earnings?

Yes, this is a tough demand environment. There's no doubt. Job openings were down 14% in Q2, which was the lowest in 3 years. Tech openings were down 17%. Layoffs in tech were up in the first half of last year significantly. I think 25% versus the back half of 2023. So it's been a tough environment in terms of hiring overall. I probably don't even tell you that because you read the headlines and the job reports just like I do. But against that backdrop for our business, we delivered only a modest decline in our GSV top line and a 15% revenue growth number in Q2, which I think speaks to the preference that clients and talent have for our model versus full-time hiring versus job boards versus staffing versus all of these kind of legacy traditional incumbents. People are really preferencing flexible, independent, alternative ways of working because they are better and stickier versus the alternative. And so we see that with the metrics on our platform even in a tough environment like this one, even when the macro is tough, even when clients, especially the larger ones are tightening their budgets and pulling back. So this model is extremely enduring and sticky but it is a tough demand environment and that does flow through to our numbers as well.

Okay. Understood. Away from the demand environment, the other big debate that's taken over your company in the subsector more broadly is the impact, medium and longer term around generative AI on the category. I think over the last 12, 18 months, I've heard bearish debates, bullish debates on what it will do to work, what it will do to your platform. Why don't you level set and just give us your world view about generative AI, where it sits today and your current working view on how it impacts your company and your platform?

Sure. This is, I think, one of the most exciting thematics for us as a business. And I mean, honestly, I think for all of us, we are living through what is the reinvention of work and the next 5 years is going to be the most exciting. I mean, the time that we're going to tell our kids about, those of us who have really little ones and they're not out there in the workforce yet. For us at Upwork, we see this as our moment to bring to bear our technology assets, our talent assets, our know-how in the workspace and to be really driving the reinvention of work through our own platform. It's a tremendous opportunity. There certainly are concerns that people have about, is this a time when we're going to see job losses on the platform. I mean people are worried about job losses out in the broader environment. And when we look at the numbers on our own platform and the trends that we see, we've cut the numbers a million different ways, as you can imagine. And specifically look at, for example, the projects on our platform that are the small kind of simpler tasks that feels the most easily to be disrupted by AI. And that includes projects, for example, under $300 of spend, which comprise today just under 5% of our GSV. And when we look at that category of work on Upwork, to be clear, we are not seeing any broad-based disruption. But if you peel back within that segment of work on our platform, we do see in categories like writing and translation, not surprisingly, there has been ongoing disruption since before AI and certainly accelerated by AI with writing and translation jobs, for example, being automated at a higher rate. And the interesting thing is most recently within those categories, we're now starting to see a counter trend where hours per contract in writing and spend per contract and translation is actually starting to increase, because we're seeing that the work outputs from AI models now need humans who are expert writers and export translators to manipulate a message and improve those outputs. So this really speaks to the need for AI to be complemented by skilled humans in a lot of these categories that I think many have viewed as completely destructible or replaceable by AI. And we actually see that the AI work is now actually leading human intervention and human augmentation. And I think that does suggest also in the medium and long term, where there will be AI augmented work, not just AI replaced work. So we're very excited by what we see in the trends around both in these smaller areas in our ecosystem where there is still actually increasing demand for sophisticated human work like running a translation, but also more broadly, the thematic of AI augmenting humans, which we do see across our ecosystem, where humans are using AI tools all the time in many categories. And the fact that businesses are increasingly turning to Upwork, looking for the humans who know how to use these tools because the reality is in most companies, workers are actually moving very fully to adapt these tools and to adopt them and know how to use that more as we've seen on Upwork a huge increase in workers intrinsically using these tools because it puts bread on the table for them. And so this is becoming a source of strength for clients who are coming in and seeing the advantage of independent freelancers in accelerating kind of stalled AI projects or bringing in talent who actually know how to use these things where they can't find that knowledge in-house.

Okay. I mean you did talk a little bit there at the end. I just want to put a finer point on that. So when we think about demand for AI skills. Obviously, you're still very early innings of that as a potential category and a potential stimulant. When you think about what you need to build, what you need to advertise, what do you need to make people aware on both sides of your marketplace. How is maybe some of the investments you want to make or some of your priorities of CIO aimed at capturing that demand and making both sides of the marketplace that are looking for AI skills come to Upwork first?

Yes, AI is a fastest growing category right now, Eric, as you know. And so we're seeing a lot of demand for this. And we've done things like launch our AI storefronts where we're really promoting and doing a lot of marketing around the fact that people can come into our ecosystem and find a variety of individuals with skills across machine learning, data labeling, data augmentation, the full suite of things. So there's a lot on the sales and marketing side we're doing. But there's also a lot we're doing in terms of the actual product experience. We launched our own AI companion called UMA, which is a place where even for a customer visiting our website, they can start to work with UMA to ask how can I use Upwork for these things. And so they're using AI to learn more about how to use AI on our site and how to use AI talent, specifically within Upwork. So it sounds a little bit meta. But it is really important that people can start to figure out what we can do for them in these ways, and that's just one of the ways that we're doing that. And then, of course, we have features like our jobless generator and proposal tests and all the other things that are UMA powered that are making our entire funnel more productive using AI. So across the entire customer journey, we're both educating the market about what can be done on Upwork with talent that is very equipped using these things and then using the technology itself to accelerate people's journey around connecting to and getting this work done.

Understood. So following up on the AI theme, but it's a broader question than just AI. Can you talk about the role you alluded to earlier, partnerships playing in what you're trying to build as a platform, both within AI and maybe away from AI, what are some of the most notable partnerships you've executed on? And how do you think about the role of partnerships in evolving a company like Upwork in the years ahead?

Sure. Well, think of AI, OpenAI was one of our launch partners in terms of who we went to market with actually on the subject of AI-related talent where we launched a curated set of upward talent, skilled in OpenAI's, own APIs and technology so that they could actually help OpenAI clients adopt their technology. So kind of furthering that theme, our view is there's a few different partnership opportunities for work that we're focused on. One is helping customers like -- partners like OpenAI enable their end customers, adopt their technologies using Upwork talent. And when we started with that partnership last year, the first implementation of that was to have kind of aggregated talent -- Upwork talent for OpenAI customers in a place where OpenAI could send their talent to and they get find and interact with that Upwork talent. What we're doing now has evolved from that strategy to even more kind of reversing it and taking Upwork talent and putting it out into the ecosystem where customers are already interacting with our partners of products and services. And so this is an excellent acquisition strategy for us where we're seeing instead of customers having to come to Upwork and find that talent and hire that talent and create a network account, we're actually testing some things now where we take our own talent and kind of plug it in out in the world of third-party services where the services are being bought and sold and they can kind of buy packages of services and kind of deliverables out in third-party ecosystems. And that's a great acquisition strategy for us where they don't have to come to us. They can just kind of buy those services out in the ecosystem where they're transacting. So you'll see more from us as we go forward but that's kind of the second like of our partnership stool. And then there's other ones like in the Enterprise space, we have VMSP partners, where we're really leaning into that enterprise TAM, and unlocking that through partnerships that really enable enterprise demand to flow through the systems where enterprises typically manage and push their demand for talent and services and we get to access. I'd be part of that in a way that's very kind of familiar to those customers. We have KellyOCG, Beeline and others that we announced recently, Windley as partners in that space. And then finally, there's the partnerships around the kind of talent tools, which I mentioned earlier. So places where talent are already using tools like GoDaddy, Dropbox and others. And those partners enabled our talent to be very effective and efficient and continue to use those tools at similar or even higher rates than they were in the past and providing services to their end clients through our ecosystem. We have a very multifaceted partnership strategy.

So with all that said, and I think you hit on 4 different themes in there on partnerships, if we take a step back, how do you think about partnerships when you think through the prism of the CEO of the company and you have to either build things organically or maybe partner and speed up time to market and do things inorganically that you don't own and operate. How does that fit into your broader strategy or your own priorities to CEO?

Strategy around client acquisition, which is where two of those things we're enabling, basically, in the OpenAI example or the second example I gave you, it's really about bringing clients in the front door. And then there's other places where you're right, we don't want to have to build the capabilities around website building or website hosting and those types of things where it's really about giving our customers easier access to the products and services that they need to be successful in delivering their end goals around the work and our talent are a piece of that equation, but tools are the other piece of the equation. And so that's, I think, key piece of it for us, kind of giving them the best-of-breed tools and solutions. But here is kind of a one-stop shop as they're trying to get their work outcomes accomplished. And then the last piece of it is in the enterprise space, we know we're not on island. We're just a piece of the kind of talent puzzle for our Enterprise customers. And so having an API and integration strategy that really works well. So we play in the ecosystem of our enterprise customers, and make it really easy and seamless for them to get Upwork talent working in their kind of home ecosystem as the last piece of the strategy.

Okay. I want to come back to a couple of points you made so far before we wrap up and just maybe ask one follow-up. So we talked at the onset about the business model and the platform and what you've been building. Obviously, you've talked about it a lot, and it's out there in a lot of industry data that you're still relatively early in the penetration curve against the broader addressable market opportunity. When you go out and talk to clients and you look at your business, what do you see as some of the key friction points you're still trying to solve for to potentially speed up the penetration rate of the addressable market? Like what do you see as some of the unlocks that you want to execute against to make sure you execute on the multiyear opportunities to companies on?

Yes, I'd say the biggest one is unlocking velocity in delivering work outcomes to our target customers, which are SMBs and Enterprise. So when the customer comes to Upwork and is trying to get a website build or a marketing campaign delivered, we're trying to drive that flywheel around, number one, getting that outcome to them better, faster, cheaper than they can in any other circumstance, which we already have a huge advantage around, but we know with AI, we can do even more, and that's a really exciting unlock for us. And then getting their share of wallet even bigger because often they come to us with one outcome in mind, but actually they have a lot more things in their ecosystem that they could and should be doing on Upwork. And so driving their awareness and their understanding that they could actually get -- their next -- if they're doing a marketing outcome today, there's kind of adjacent things in marketing and web development and other kind of areas of their business, they could be doing with us that they may not know coming in because they're [indiscernible] for that one use case. So we start with kind of a land of strategy around that one thing they're doing and then expand into the other use cases that we as a horizontal marketplace can do for them that they're not really thinking about on that first day. So kind of winning that first use case and doing it exceptionally well and then driving the awareness and the kind of the cross-sell motion around the other things that are adjacent to that, either in that first apartment or even adjacent departments from that business, that's really as simple as it is for us.

So maybe just to follow up, so I make sure we come away with the right view. It's really at the end of the day, educating on the customer side and pushing more for centralization because if customers are doing it, project by project or one-off by one-off. At the end of the day, better understanding holistically at the client side, how a platform can serve a wide array of needs is really thus the goal?

Yes, and that's our advantage as a horizontal marketplace. If we were just a single provider who only did web development or only did marketing, we wouldn't have the advantage that we do as Upwork serving customers across all of these different use cases, and where we can acquire them very cost effectively with exceptionally low CPAs in the area we serve them in, but then cross-sell them over time to use us for more and more use cases across their business. I mean, that's really the secret sauce of why we have such a great business today is we don't just serve them in one place. We -- our average customers using us across multiple use cases, multiple departments, multiple scenarios in their business and they figure out that Upwork is their secret sauce. It's kind of running their team, their program, their back office, whatever it is, depending again on kind of what business they're in and what they're trying to accomplish. And that is what differentiates us from just being kind of a one true pony provider who's just doing one vertical use case and then can't really get something else going with them.

Okay. Great. Super interesting. One other follow-up. We talked a little bit earlier about the demand environment you currently find yourself in. But then we followed that with talking about partnerships and AI and all the different avenues in which you're investing in product and platform. When you find yourself in a demand environment like you're in right now. How does that inform the priorities for where you want to invest on the product side or what your key initiatives are? I'm just kind of curious like how it frames. What your highest priorities are looking out over the next 12, 18 months and somewhere maybe you have to hold back because of the demand environment, you have to strike a balance. I'm just curious your thought process around all that?

Look, we're incredibly focused, I think, in any environment, and particularly in this one. I think in this environment, we know that -- we need to continue to be laser-focused on our profitability goals. We've put us out there this 5-year adjusted EBITDA target of 35%, and we've made huge progress, 21% this past quarter, which is up from 8.5% 4 quarters ago. And so we are going to deliver on that target. And we're going to do that no matter whether the demand environment improves or doesn't, like we are very committed to that. And we know that with a business that has 77% gross margins and is continuing to kind of inch up in that area and has a lot of other levers we can pull on from a profitability perspective. We got it, like we're going to figure that out. So we have extreme confidence on our margin goals. We also know that in a time when this incredible technology around AI has kind of emerged rapidly in the last 2 years and is continuing to kind of improve at an unbelievable pace every single week, this is a moment to lean in on innovation. And we know this is a business that can grow and we can use technology and our data and our incredible assets to drive growth, it's less predictable in this environment and there's like certain things we have confidence in and certain things we also want to be prudent and kind of prune from the portfolio. But we are in a business that's reinventing work. So we're going to lean in on the growth opportunities to reinvent work even while we manage the merger structure of the business with a ton of confidence. And I think it's really that simple. Like we know what this business is great at. We see the technology opportunity that we use the tech company can drive, and we're going to keep very focused because it's a huge market we're going after. And it's early innings of a huge market. And so we have to execute with discipline and rigor towards the goal that we have a kind of confidence in.

Okay. With that as the fine point on that, and we did this prior. So putting you on the spot, if you look out over the next 3 to 5 years and you think about either predicting or thinking about the future of work or the future of your platform, what are you most excited about in terms of as you see the landscape today and how it might evolve in the next 3 to 5 years. We'll try to end on a forward-looking thought process about your key priorities where the business goes?

I would be a fool to try to predict what work will look like in 5 years, Eric. I think this is going to be a time of radical change. I think Upwork will be a huge part of it because of the way we're positioned in the landscape and because of our determination to execute into something very exciting. What I can say is we have the opportunity, I think, there are some companies in the landscape where now that have an opportunity to really shape work. And I think Upwork has the data, the talent, the technology and the vision to do that. So when I look out 5 years, I think we will be a much bigger company with a much bigger role to play and a product right now that will be forbidable as we are today. But again, 5 years is a long time for a lot of things to change, especially given against the backdrop of what technology is doing right now. So again, I think a lot will be different, but I'm very excited about what we're executing into. And of course, the assets that we have to go against that opportunity.

Okay. Well, we'll look forward to the years ahead. Thank you, Hayden, for being part of the conference this year. Please join me in thanking Upwork for being part of the conference this year.

Thank you.