Good day, ladies and gentlemen, and welcome to the Upwork Q4 2018 Earnings Conference Call. At this time all participants are in a listen only mode. Later we will conduct the question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call may be recorded.

I would now like to introduce your host for today's conference, Palmira Gerlach, Director of Investor Relations. You may begin..

Hi, and welcome to Upwork's discussion of its fourth quarter and full year 2018 financial results. Leading the discussion today are Stephane Kasriel, Upwork's Chief Executive Officer; and Brian Kinion, Upwork's Chief Financial Officer. Following management's prepared remarks, we will be happy to take your questions.

But first, let me review the safe harbor statement. During this call, we may make statements related to our business that are forward-looking statements under the federal securities laws. These statements are not guarantees of future performance, but rather are subject to a variety of risks, uncertainties and assumptions.

Our actual results could differ materially from expectations reflected in any forward-looking statements.

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

In addition, references will be made to non-GAAP financial measures. Information regarding reconciliation of non-GAAP to GAAP measures can be found in the press release that was issued this afternoon on our Investor Relations website.

Please note that the prepared remarks corresponding to the information reviewed on today's conference call will also be available on our Investor Relations website at investors.upwork.com shortly after this call has concluded. Now I'll turn the call over to Stephane..

Good afternoon, and thank you for joining us to discuss our fourth quarter and full year 2018 results. We are excited to have finished the year with a solid performance. I want to thank our employees and incredible community of skilled freelancers and clients, working together at the Upwork.

Your loyalty and forward thinking is at the core of everything Upwork has accomplished to date. Together, we are fueling our vision of work without limits. We are truly grateful for your role in our journey as Upwork drives positive change. Successfully completing our IPO and transitioning to being a public company was, obviously, a highlight of 2018.

We graduated from our chapter as a private company to the next level and gained more momentum than ever to lead our industry forward. We closed a pivotal year for Upwork, punctuated by exceeding our fourth quarter expectations for both revenue and adjusted EBITDA. I'm proud to have met our objectives for both the quarter and the year.

We continue to invest in our platform to add innovative and dynamic options for our users. With a guiding principle of driving long-term growth with sound unit economics, we are committed to executing on our strategic priorities to better capture our large market opportunity.

Upwork continually seeks to enhance the customer experience for both the freelancers and the clients that use our platform. The partnerships and product updates we have implemented and those that we will continue to roll out to support this goal.

I want to take a moment to highlight some of our accomplishments in 2018 that I believe will contribute to our future growth. In December 2018, we announced the partnership with Microsoft to empower enterprises to embrace flexible teams.

For context, enterprises increasingly recognize the need to transform the way they work to compete in a global economy. While enterprises today spend an estimated 3.5 trillion on contingent labor, the model for working with external talent is restrictive.

Together with Microsoft, Upwork is empowering organizations to adopt a more flexible workforce model that delivers better visibility, greater access to skills, and richer reporting capabilities than can be gained through traditional workforce models.

The Microsoft 365 freelance toolkit provides built-in product integrations between Upwork and Microsoft products such as Power BI, Microsoft Teams, SharePoint and Flow. These integrations guide enterprises through the freelance engagement process.

The toolkit also includes templates and best practices to help organizations effectively launch and scale an enterprise-wide freelance program. We will offer the toolkit to Upwork Enterprise customers and Microsoft will promote Upwork Enterprise to its customers of these products.

I'd also like to highlight additional features we launched in 2018 that leveraged the vitality so innate in our products. On our prior earnings call, we discussed the feature called Help Me Hire. Since then, we have expanded this capability within the product to encourage current users to invite a coworker.

These features allow current account administrators to invite and engage other hiring managers within their company with only one click. We have driven over 10,000 hiring manager sign-ups within existing accounts thus far. And we plan to continue to invest in these features in 2019.

Without the need to deploy any Upwork sales or support functions, these features allow us to expand our SMB self-service clients' engagements. In our last earnings calls, I also discussed our mobile transformation.

By the end of 2018, we largely completed the optimization of our mobile web experience, making the experience via mobile browser, the same as it is via desktop browser.

In early 2019, we took that a step further relaunching our mobile iOS app for freelancers, which takes all current functionality beyond the confines of the desktop and mobile browser and into a mobile app.

As part of this, we also plan to relaunch our Android app for freelancers as well as relaunch both our iOS and Android apps for clients using this new architecture. Mobile will be a co-part of the way we develop our platform and innovate going forward, and I command the team for executing well on this huge undertaking.

As we enter 2019, we continue to benefit from macro-level tailwinds. New research shows the demand for more flexible work models continues to grow.

Our future workforce reports, which will be released next week, provides insight into how the world of work is evolving as millennials and Gen Zs ascend to managerial roles and have more hiring and decision-making authority. The research has positive implications for Upwork from both perspectives.

On the workers' side, younger generations are more likely to choose to freelance. And on the hiring side, younger generations are more than twice as likely to engage freelancers as older generations. Freelancers also serve an invaluable role as businesses attempt to bridge the skills GAAP.

According to the future workforce reports, 60% of hiring managers in October 2018 said that talent scarcity is the biggest hiring challenge. And businesses are not the only ones being held back by the skill gap.

According to a new report from the staffing industry analysts, staffing firms believe that talent scarcity is the biggest inhibitor to their business today and will continue to be 10 years from now. With freelancers engaging in skills training more frequently, they are more likely to possess the emerging skills businesses need.

Earlier this month, we released our latest quarterly skills index ranking the 20 fastest growing skills on Upwork. Our index represents the hottest skills among the knowledge work being performed via our site.

From cutting-edge skills, such as Hadoop and Kubernetes to security skills like Certified Information Systems Security Professional as well as more traditional work, such as app store optimization and even employee training.

The dynamic nature of this quarterly index shows how businesses are tapping freelancers to help upscale their workforce in real time.

As these tailwinds continue to gain momentum, we are finding more and more that many of the people working in the Upwork have chosen to leave full-time employments and become independent professionals to increase their freedom and flexibility as well as their earnings.

For example, J is a marketing executive who left a Fortune 500 company after nearly a decade rising through the ranks to regain control over his time and work.

Choosing to freelance through Upwork, J focuses on presentation design, working with companies of all sizes, from entrepreneurs needing pitch tags to major international brands needing specialized assistants for product launches, internal training programs and major marketing launch presentations.

J sees freelancing and running his own business as the way of the future and is preparing his own children to be their own boss when the time comes. On the client side, we've also seen compelling engagement as companies look to augment and upscale their current teams.

For example, CompuVision, a lean managed IT services organization that strives to be at the forefront of offering its clients cutting-edge technology recently started hiring freelancers to support its marketing team of one.

Its marketing director quickly saw the opportunity to increase their impact with expert freelancers from graphic designers, writers, video editors, voiceover artists and e-mail marketers to web developers. And has tripled output with the cost savings of $0.70 per marketing dollar.

What is even more powerful is how the marketing director's example is paying off for the company, inspiring other departments to leverage freelancers and freeing up more time to focus on strategic partnerships and new business opportunities.

This positive macro trends will continue to shape our priorities in 2019, along with our core mission to improve the future of work. These priorities fall into four key areas. One, vertical category extension; two, self-service SMB customer opportunities; three, growth in our domestic marketplace offering; and four, our enterprise business.

First, we are focused on deepening the category-specific experience on our sites. The horizontal nature of our platform is one of our greatest strength and we continue to invest in making each category more rich with category-specific capabilities. For example, in design, we are working to enhance the job post and the search experience.

Clients in the design category more often use a freelancer's portfolio of prior work to make their hiring decisions. And as such, we will be making these portfolios more prominent in search results.

As we tackle further verticalization of our product, we believe this will improve matching and the client experience in finding the best freelancers for their projects. Furthermore, Upwork will deliver additional features to enable freelancers to provide a crucial specialized storefront to market their business.

Second, we will continue to build product features so that our self-service SMB clients can easily invite colleagues to bring their jobs to Upwork. We will add features that businesses need to be successful in managing their remote workforce. Third, we are investing in our domestic marketplace offering. The U.S. to U.S.

domestic marketplace is the fastest growing corridor in our business. For some clients, location is an indicator of familiarity, trust; and for some projects, a necessity.

Given that this dynamic is meaningful for a portion of the marketplace, we will be investing in features that amplify location, drive local freelancer supply and encourage clients to use local features to adopt Upwork. And fourth, we believe our enterprise product and sales efforts will be an important growth driver in 2019 and beyond.

The team is focused on building product features that will add larger more complex projects on the platform. One lever for this is continued and enhanced support for agencies on the platform to shift spend from existing statement of work providers to Upwork.

As you may have already seen, underpinning our initiatives for 2019 is our continuous strategy around multichannel marketing and advertising. On January 15, we launched a major ad campaign called This Is Happening, which raises awareness of Upwork and the innovative ability to hire high-quality talent remotely and for enduring projects.

As a result of this ad campaign, there have been over 60 million impressions across channels, including terrestrial radio, digital radio, television and professional sports' integrations. With the foundation of 2018 and the power of our four key priorities I noted, we look forward to making 2019 another strong step forward into the future of Upwork.

Now Brian will provide greater detail around the quarter and year, and our outlook for 2019..

gross services volume or GSV, core clients, and client spend retention. We believe these metrics are key indicators of our growth and the overall health of our business.

GSV, which includes both client spend and additional fees we charge for other value-added services, increased by 25% in the fourth quarter to $472 million, an increase of 28% year-over-year to $1.76 billion. Growth in GSV was driven by an increase in both core clients and an increase in our client spend retention.

Core clients defined as a client that has spent in aggregate at least $5,000 in their lifetime on our platform, and their spend in the last 12 months increased by 22% to over $105,000 as of December 31, 2018. Client spend retention was 108% on a trailing 12-month basis at December 31, 2018, compared to 99% at December 31, 2017.

Based upon our analysis of our current cohorts, we continue to expect client spend retention to stabilize in the 106% to 108% range for the near term. With these key operational metrics in mind, I will now turn to our financial results.

Total revenue increased by 23% to $67.3 million in the fourth quarter, an increase by 25% to $253.4 million for the full year 2018. Marketplace revenue increased by 24% to $59.7 million, representing 89% of our total revenue for the fourth quarter, and increased by 26% to $223.8 million for the full year.

Growth in marketplace revenue was driven by an increase in the number of core clients and higher client spend retention, evidenced by strength from our small business customers, growth on our U.S. to U.S. domestic marketplace offering and an increase in direct sales from enterprise offering.

We also benefited from better timing of our weekly billing cycle in the fourth quarter as our business results are impacted in part by the number of Mondays in a given quarter. The most work in a given week is typically completed on a Monday, which is also the day we recognize our client payment and administration fee each week.

There were 14 Mondays in the fourth quarter, while the first quarter of 2019 has 12. Managed services revenue increased by 12% to $7.7 million in the fourth quarter and by 20% to $29.5 million for the full year 2018. Managed services revenue is growing as expected at a slower rate than our marketplace revenue and we anticipate this trend to continue.

Our take rate, which we define as revenue divided by GSV, was 14.3% in the fourth quarter, consistent with the third quarter of 2018, but down slightly from 14.5% in the fourth quarter of 2017. For the full year of 2018, our take rate was 14.4% compared to 14.8% in 2017.

This deceleration in take rate was expected and reflects our long-term strategy to align our incentives with both one, the freelancers that have longer term client relationships and now bill at the 5% fee tier; and two, the clients that continue to adopt ACH as a payment method, which waves the 2.75% payment processing and administration fee.

We believe these are both beneficial for the business in the long-term as it encourages larger and longer projects and lowers the overall cost of working with Upwork, which in turn encourages additional project work and recurring spend on our platform.

In 2019, we plan to launch additional value-added products and features to offset some of the take rate decline. Non-GAAP gross profit in the fourth quarter increased by 25% to $46.6 million and non-GAAP gross margin was 69%, slightly up from 68% in both the third quarter of 2018 and the fourth quarter of 2017.

For the full year 2018, non-GAAP gross profit increased by 25% to $172.2 million and non-GAAP gross margin was 68%, which was the same as the prior year. Gross margins are influenced by multiple factors. First, the mix of revenue between our marketplace and managed services offerings.

Second, payment processing costs, which is our primary component of cost of revenue increased by 21% in the fourth quarter and increased by 23% for the full year 2018. We are seeing more customers adopt ACH as a payment method, which reduces our take rate and revenue, but is beneficial to gross margins.

Third, the cost of revenue for freelancer services to deliver managed services increased by 17% in the fourth quarter and increased by 23% for the full year 2018. This is mostly due to an increase in spend from a client and, to a lesser extent, the use of more costly service providers.

And fourth, our spend on Amazon Web Services, which as of the fourth quarter was growing slower than revenue compared to a year ago. We are focused on driving gross margin leverage. We continue to see more ACH adoption and are focused on managing our AWS costs to grow at a slower rate than revenue growth in the near term.

In future periods, we expect cost of revenue to increase in absolute dollars, although the level and timing of revenue and cost of revenue items could fluctuate, and therefore affect our cost of revenue and gross profit in the future. We expect our gross profit to grow at a faster rate than revenue in the near term. Turning to operating expenses.

Non-GAAP sales and marketing expenses increased by 12% to 17.3 million in the fourth quarter, representing 26% of total revenue compared to 28% in the fourth quarter of 2017. For the full year of 2018, non-GAAP sales and marketing expenses increased by 38% to 71.3 million, representing 28% of total revenue compared to 26% last year.

These increases were driven by investments to build out our enterprise sales team, online marketing and off-line advertising activities to drive brand awareness and attract new users. We intend to continue to invest in sales and marketing with a focus on sound unit economics to drive a long-term profitable growth.

We've also made a decision to smooth our online performance marketing investment throughout 2019 versus spending a larger share of it in the first quarter as we've done in the past. This could have a short-term impact on GSV in revenue, but we believe it will allow us to acquire customers at a lower cost.

Non-GAAP R&D expenses in the fourth quarter increased by 6% to 13.3 million, representing 20% of total revenue compared to 23% in the fourth quarter of 2017. For the full year 2018, non-GAAP R&D expenses increased 19% to 52.2 million representing 21% of total revenue compared to 22% last year.

Our R&D spend in 2018 was focused on efforts to develop new products and features as well as our mobile-first transformation. The absolute spend on R&D was relatively consistent throughout 2018 and grew relatively in line with the revenue growth.

Our R&D team worked on more capitalizable projects in 2018 than in prior years, such as our mobile-first transformation, which will benefit the platform over the long run. We believe continued investment in R&D is important to further our long-term strategic objectives.

Non-GAAP G&A expenses in the fourth quarter increased by 18% to 11.9 million representing 18% of total revenue, which is consistent with the fourth quarter of 2017. For the full year non-GAAP G&A expenses increased by 32% to 41.3 million, representing 16% of total revenue compared to 15% last year.

These increases were primarily due to our efforts to support being a public company. We expect sales and marketing, R&D, and G&A expenses to increase in absolute dollars, otherwise our percentage of total revenue, they may fluctuate from period to period.

Our provision for transaction losses in the fourth quarter decreased by 13% to 1.2 million, representing approximately 2% of total revenue and increased by 37% to 5.8 million representing approximately 2% of total revenue for the full year of 2018.

These results are within our normal range of 2% to 3% of total revenue and we expect the reserves to increase proportionally in this range as our GSV grows. I also like to note the accounting for two common stock warrants.

First, in connection with the establishment of Upwork Foundation initiative in May of 2018, we issued a common stock warrant to purchase 500,000 shares of our common stock at an exercise price of $0.01 per share. This warrant becomes exercisable for 1/10 of these shares on each anniversary of the IPO.

We incurred a charge of approximately 225,000 in the fourth quarter of 2018 related to this warrant. We expect a noncash charge recorded in G&A related to this warrant of approximately $900,000 during 2019. We plan to exclude this expense in deriving our adjusted EBITDA and non-GAAP net income on a go forward basis.

Second, as we noted on our third quarter earnings call, we had a preferred stock warrant that was converted to a common stock warrant upon our IPO. As a result, we incurred a non-cash expense of approximately $2.4 million in the fourth quarter. This expense will not recur in future periods.

Net loss was $5.4 million in the fourth quarter of 2018 compared to a net loss of $5.2 million in the fourth quarter of 2017. Our basic and diluted net loss per share in the fourth quarter was $0.05 on 103.4 million shares -- common shares outstanding.

For the full year, we incurred a net loss attributable to common stockholders of $19.9 million compared to a net loss of $10.6 million in 2017. Our basic and diluted net loss per share for the full year was $0.38 on 52.3 million weighted average common shares outstanding.

Non-GAAP net income was $2.7 million in the fourth quarter of 2018 compared to a non-GAAP net loss of $8.9 million in the fourth quarter of 2017. Our basic and diluted non-GAAP net income per share in the fourth quarter of 2018 was $0.03 compared to a net loss per share of $0.27 in the fourth quarter of 2017.

For the full year in 2018, we incurred a non-GAAP net loss of $600,000 compared to non-GAAP net loss of $900,000 in 2017. Our basic and diluted non-GAAP net loss was $0.01 per share for 2018 and $0.03 per share for 2017.

Adjusted EBITDA, a key metric for us in the operating the business was positive $3.6 million in the fourth quarter as compared to a negative $1.9 million in the fourth quarter of 2017. For the full year 2018, adjusted EBITDA was positive $3.8 million compared to positive $7.9 million in the prior year.

We exceeded our prior guidance due to better-than-expected revenue and lower transaction losses. We continue to take a long-term view and balance investing in sustainable profitable growth, while expanding our leadership position of this very large and expanding adjustable market opportunity. Moving to the balance sheet and cash flows.

We ended the year with $129.1 million in cash and cash equivalents compared to $21.6 million at both September 30, 2018 and December 31, 2017. As of December 31, 2018, we had $24 million in debt outstanding from our 2 term loans. During the fourth quarter, we repaid $10 million that we have used to repurchase shares in 2017.

We also repaid during the fourth quarter $15 million on the revolving line of credit that we had drawn at the end of the third quarter to provide working capital to fund our marketplace accounts receivable, due to September 30, 2018, being a Sunday. Please note that the quarters ending March 31, 2019 and June 30, 2019, both end on a Sunday.

Therefore, you should expect a similar impact on our balance sheet and cash flow from operations to fund our escrow accounts and for us to use the revolving line of credit in a similar fashion as we did at September 30, 2018. Looking forward, just to note, our first principal payments to pay down the term loans began in April 2019.

Operating activities provided $21.9 million in the fourth quarter, which was largely driven by the return of operating cash from escrow related to the Sunday effect.

We used $2.9 million in investing activities of the fourth quarter primarily related to the build-out of our new Chicago office, and capitalized software for the mobile-first transformation project.

Cash provided by financing activities for the fourth quarter was $83.1 million primarily driven by the completion of our IPO from which we raised $109.4 million net of underwriting discounts, and partially offset by $25 million in debt repayments. Looking forward, we have some onetime expected capital expenditures coming up in the next 6 months.

We just signed a lease for a new office in Santa Clara due to our Mountain View lease expiring in the second quarter. We anticipate spending approximately $7.5 million to build the site out to our needs over the next two quarters. Turning to guidance.

For the first quarter of 2019, we expect revenue in the range of 68 million to 69 million and adjusted EBITDA in the range of negative 2% to negative 1% of revenue. We expect weighted average common shares outstanding to be in the range of 106.5 million to 108 million for the first quarter.

For the full year, we expect revenue in the range of 298 million to 304 million and adjusted EBITDA in the range of breakeven to approximately 1% of revenue. We expect gross profit to grow at a faster rate than revenue as our mix shifts more towards marketplace revenue and additional clients adopt ACH.

We expect weighted average common shares outstanding to be in the range of 109 million to 114 million. As a reminder, our first and second quarter 2019 are lapping the first year of our U.S. to U.S. domestic marketplace. As noted earlier, the number of Mondays in a given quarter impacts our revenue growth when comparing sequential and year-over-year.

We are still assessing our transition to the new revenue recognition standard or 606 as we'll adopt the standard at the end of 2019. And now I'll turn it to Stephane for closing comments..

Thank you, Brian. We are really excited about our 2019 outlook and strategy. Our marketplace is truly a place where high quality work is done and freelancers can earn a meaningful living.

At Upwork, we ourselves practice a work without limits model that includes a distributed team of on-site and remote employees and we also engage with over 1,000 freelancers all over the world for our own specialized projects.

It is amazing to have access to this highly skilled global workforce, which we believe to be a key component of our business success. With macro trends at our back, we're investing in our products, our brand and our sales capabilities to go after our long-term addressable markets.

Again, thank you to our employees, the freelancers who provide services to us, the freelancers and clients who use our platform, our partners and our investors. We are looking forward to success in 2019 to build a company for the ages. With that, we will be happy to take your questions..

[Operator Instructions] Our first question comes from Mark Mahaney with RBC Capital Markets..

Two questions, please. The partnership with Microsoft, Stephane, you started off the call talking about and you announced in December, could you help us think through the -- how to -- the financial implications of that? That's obviously a very large potential partner or current partner now. So just help us to think through the implications there.

And then on the domestic marketplace, could you quantify the contribution? And I think you are also expanding that to other international markets, I believe, the UK. Just talk about the success you've seen with that here in the U.S., it looks promising.

How much potential do you think that has in some of your international markets?.

Sure. So I would say the answers to the first question is, it is very early days with Microsoft. We have very ambitious goals I would say to integrate further our product suites with Microsoft and would say more generally we want to be available wherever people use the types of services that Upwork provides.

So think of, you're inside of Microsoft SharePoint, you need help to build a SharePoint website. Historically, the experience would have been that you needed to think, oh, there's this thing called Upwork.

You go to upwork.com, you post a job, hire a freelancer, you may not know how to hire freelancers through a SharePoint, that's why you need the help. Then you need to give them access to the SharePoint sites, et cetera, et cetera. So, it's a very disjointed experience.

The idea here is to build integration so that you can have access to preapproved veteran freelancers that in this case would have been pre-approved by Microsoft. And you can hire them on the spot, while using the tool.

What we've announced to date is a, I would say, an early phase of this integration, which is mostly targeted at allowing other enterprises to use Upwork the same way Microsoft has been using Upwork internally.

So Microsoft has been using Upwork, obviously, also using their own products for a while and they wanted to document the types of technical integrations they have done between our two different products as well as the work process itself.

How do they use Flow, SharePoint, Teams, GitHub and a bunch of other pieces of software with external freelancers that they hire through Upwork and make that available to large enterprise customers that may already be using Upwork today, but typically already using Microsoft today.

To the second question about domestic marketplaces, we -- what I announced last quarter is that, in addition to our U.S. domestic website, which has been a phenomenal success over the last 12 to 18 months, we continue to invest there and continue to see plenty of additional momentum.

In addition to that, we launched two very small experiments, one was in the U.K. where the idea would be to allow U.K. businesses to hire U.K.-based freelancers. And the second one, which was further localization within the U.S.

itself and we launched a pilot in New York and launched a pilot in San Francisco with the idea again of, you have a small business in San Francisco and you want to hire designers preferably in the Bay Area and not so much in the rest of the U.S., making the geolocation happen. And I would say, it's early days.

We don't have enough data at this stage to really claim victory. But it seems like these two locales are showing a lot of promise. They're going to grow faster than the rest of the business. But you have to remember they start from a very, very small base.

And so these are really long-term bets for the company, but we think that multiple years out, there will be a huge engine of growth for the business moving forward..

Thank you. Our next question comes from Mark May with Citi..

I had a couple, please cut me off if I ask too many, but actually following up on Mark's question about domestic-to-domestic. When you first launched the domestic marketplace, you saw a nice bump in the business it seems, and now you're talking about what seems to be some new initiatives to further enhance growth from the domestic marketplace.

Should we think of those as potentially pretty meaningful incremental drivers of growth for the business? Or just more kind of incremental type of things that you're doing there? Just trying to get a sense of how excited or the magnitude of some of the things that you have on the plate for this year.

I had a couple of others, but maybe just not to want too many at once. But next question would be on take rate. You talked about why the reported take rate, which is obviously a blend is declining.

Is there more clients at freelancer repeat business that kind of drives that takes it down, but how much will that continue to weigh on the average take rate, like the mix shift their driven by repeat business? Or will -- like new features in the Enterprise segment and other things that are offsetting, are those things enough to kind of fully offset that mix shift? Just trying to get a sense of the mix dynamics you see going forward..

Sure. So like the question on domestic, I think the way I would look at it is to look at S curves, right. So we have this core business today, which is mostly SMB, mostly cross-border and a big part of it in IT.

And we are building these long-term S curves that are enterprise, that are non-IT, that's what this category expansion and verticalization is about and domestic, right. So these are three different directions that the business is going into. In the long run, each of these will be bigger than the core marketplace that we have today.

But they start from different sizes initially, right. So if you think about U.S. as an example, I think we disclosed this in our S-1, right. The U.S. was already the number one source of clients and the number one source of freelancers. So we are starting from a base that is substantial, when we launched the domestic marketplace, we got an instant bump.

If you look at the UK, UK to UK is a lot smaller than U.S. to U.S. was. And so while it's a nice bump, it's not a meaningful bump from the standpoint of the overall business.

However, if you think about the underlying addressable markets, right, I mean, if you think about the larger staffing firms in the world do revenue in the UK, that is similar in absolute terms to what they do in the U.S., right.

So there's a really big underlying market but because we're starting from a smaller base, the impact in 2019 will be lesser and you'll start seeing some of these impacts in 2020 and beyond. Your question about take rate. I would say, we really tried to focus on building long-term sustainable growth for this business.

There's a ton of things that we could do to increase take rate in the short-term, but we think that the compounding effect of higher client spend retention in the long-term completely dwarfs the amount of monetization we could be doing in the short term.

So we used to have -- as Brian mentioned, we used to have 99% client spend retention like a year ago. We're now at 108%. Compound that for multiple years compared to an extra X basis points of take rate, we really believe it's the right thing to do. So ACH drives take rate down, but by reducing the cost in the system, it increases stickiness.

Similarly, the 5% tier, obviously, drives take rate down, but it also increases retention for large ongoing staff augmentation type of projects, both of which will compound for years to come.

Now that being said, I think something that we've talked about a little bit earlier in this call, we are looking to introduce new product offerings, targeting medium-size businesses that are sitting in between Upwork's standard, which is our very small business offering and Upwork Enterprise, which is really designed for extremely large companies.

And those in the middle will help with new ways of monetizing, with new additional functionality, which should help stabilize the take rate. But the way, I would say, the way we look at it is create new value and then monetize the value as opposed to monetize more for the existing value that we already generate..

Our next question comes from the line of Brent Thill with Jefferies. Your line is open..

Stephane, I'm curious if you could just talk a little bit about some attraction with the larger enterprises? And as you progress through '18 and '19, did you notice any interesting trends that maybe you had seen historically that you think carry into '19? And I had a quick follow-up for Brian..

Yes. I mean, I think what we're seeing is, increasingly people considering this as a normal way of conducting business. When we started talking to very large companies two or three years ago, obviously, the first question they would ask is, who else is using it. And the answer at that time was, well, not a ton of people.

Now we're getting to the stage where a lot of the people we talk to came from other companies that were already using Upwork or other similar platforms come from a generation in the workforce for whom this is totally obvious and totally logical thing to do.

And generally, they read reports online from various research firms that are saying that they're not alone and other companies are doing this. And so I would say increasingly people are excited to start proofs of concepts and pilots with us.

And some of the ones that started pilots 2 or 3 years ago are starting to spend meaningful amounts of money on the site. It's still very early days, right. Our enterprise business remains in the 15%, 20% range of our business as we disclosed during the IPO.

And even though I fully expect it to grow faster than the rest of the business, it's going to be many, many years before it's more than 50% of the business..

Okay, great. And Brian, you grew 25% in '18, you're guiding 18% to 20% growth in '19. Can you just walk through a bit of the assumption of the deceleration, obviously, coming off larger numbers.

But is there anything that's different as you go into this year that would point to that deceleration?.

Well, I think we've been consistent since the IPO when we talked to you when we were on the road show and things like that. We're confident in the long-term and the full year we're guiding to. In the first quarter what you're seeing is, the lapping of the U.S. to U.S. marketplace, which we had known about.

You're seeing more ACH adoption and that's part of what we're seeing in the business now few months in, which is -- obviously, helps our gross profit, but does take -- effect our take rate as well as revenue growth.

And then what you're seeing also is the impact of this cyclicality in our business cycle, where the number of Mondays impacts our business. And so for instance, in Q4, there was 14, in Q1 there'll be 12, Q2 they'll be 13 and Q3 will be 14. So there's a little bit about that goes for the year.

And as we guided during the road show is that we would see a little bit deceleration in the first half of the year because of the lapping and then we will see acceleration in the back half of the year as we continue to grow the business. Another thing I'd add -- sorry, I'll add, Brent sorry.

The one thing I did mention on the call was we did smooth out our online performance marketing investment throughout 2019. In the past, we had spent most of this in the first quarter and we felt like it was prudent for us, one is, to smooth out our EBITDA, but also to smooth our acquisition cost at a lower cost..

And our next question comes from Ron Josey with JMP..

This is David, on for Ron. I wanted to follow up on client retention, I thought it was pretty good this quarter at 108%. Can you talk about what's driving that? And how sustainable is it going forward? And number two, on enterprise sales build-out.

Can you talk about where you are in terms of hiring relative to expectations? And how is the ramp going to do a full productivity?.

I'll take client spend retention, and then Stephane can talk a little about the sales. I mean, as I mentioned on the call, based on our current cohort analysis, we expect that to be in the range of 106% to 108% for the near term.

We are focused on increasing our client spend retention from existing clients, by building these new features and functionality in products. So based upon what we can see, it's sort of that 106% to 108% range..

Yes. And then, your question about sales. As I think I may have alluded to in the last call, we just signed a lease for a new office in Chicago that is designed to, at full rollout, host about 500 people, not all of whom will be in sales, but many will. And so we are continuing to aggressively hire.

We are very comfortable with the sales productivity numbers. People are hitting numbers that we are comfortable with. And in terms of actual headcounts, we've tried to hire as aggressively as we could absorb in the team.

I would say we've been a little bit slower than what we expected, but nonetheless, we are doing good compared to what we were expecting for the overall revenue from the business..

Our next question comes from Scott Devitt with Stifel..

Two questions, if I could. There was minimal GSV deceleration in the quarter and the comp was considerably more difficult. So I was wondering if you could just provide any detail in terms of maybe verticals or GOs that you'd call out in the quarter? And then secondly, Stephane, you mentioned the four key product investments for 2019.

Just wondering if you could talk through potential contributions from the introductions of those product offerings throughout '19 that you think could potentially benefit either GSV or monetization?.

Sure. I'll take the first one? All right. Well, so I think like, I mean, ultimately, we did better than I think we had expected in both spend retention. If you remember, we had said it's 108% last quarter, but we think it's going to go down to 106% and it stayed at 108%, so that naturally creates more GSV.

And then our core clients' spend was pretty strong. And I would say, some of the features that I highlighted during the call, the Help Me Hire, when I said we added more than 10,000 hiring managers, that goes to both of these numbers, right.

When you have additional hiring managers on a given account, the account is more likely to hit that $5,000 threshold mark faster and, therefore, become a core client earlier as well as it obviously increases client spend retention, a client that might have spent X with one hiring manager, when there's two hiring managers might be spending 2x.

So that's what's been driving it.

And then the second question was?.

Relating to just the product initiatives in 2019..

Right.

Related to contribution?.

Yes..

Well, I think, in 2019, I would say, the way we tend to look at it is, these features rollout through the year and the ability to have a major impact in the year itself is somewhat tied to when in the year they launch. And so I would look at it more as on a multiyear cycle, if you will.

Typically, things that are driving more acquisition will take longer to mature, right. So things that would make it easier for us to sign up new enterprise clients as an example are long-term bets for the business. Whereas things that helped increase the spend of existing clients tend to be a faster impact to the business.

So to give you an example, when we talk about category experience optimization, we already do a lot of work in graphic design. We think that the new experiences that we're building will make those transactions convert at a higher rate. And so because this is not net new acquisition, this is just changing the existing behavior that happens on the site.

Those tend to have a faster payouts than things that might be more about customers that we don't have yet.

So I would look at it as -- and that's how we look at it internally as the portfolio of bets, some of which are more incremental and with a more certain faster payback and others that are more experimental and may have higher impact overall, but might be taking longer to mature..

Thank you. I'm showing no further questions at this time. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone, have a great day..