Ladies and gentlemen, thank you for standing by, and welcome to the Upwork Fourth Quarter and Full Year 2020 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Denise Garcia, Investor Relations.

Thank you, please go ahead, ma'am..

Thank you. Welcome to Upwork's discussion of its Fourth Quarter and Full Year 2020 Financial Results. Leading the discussion today are Hayden Brown, Upwork's President and Chief Executive Officer; and Jeff McCombs, Upwork's Chief Financial Officer. Following management's prepared remarks, we will be happy to take your questions.

But first, I'll review the safe harbor statement. During this call, we may make statements related to our business that are forward-looking statements under 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.

In addition, any statements regarding the current and future impacts of the COVID-19 pandemic on our business and current and future impacts of actions we have taken in response to the COVID-19 pandemic are forward-looking statements and related to matters that are beyond our control and changing rapidly.

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 website and on our Investor Relations website as well as the risks and other important factors discussed in today's press release.

Additional information will also be set forth in our Annual Report on Form 10-K for the year ended December 31, 2020 when filed. In addition, reference 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 at investors.upwork.com. As always, reported figures are rounded, unless otherwise noted.

Comparisons of the fourth quarter of 2020 are to the fourth quarter of 2019, and comparisons for the full year 2020 are to the full year 2019. All measures are GAAP unless cited as non-GAAP.

The prepared remarks corresponding to the information reviewed on today's conference call will also be available on our Investor Relations website shortly after the call has concluded. Now, I'll turn the call over to Hayden..

we are innovating, scaling, and evangelizing the work marketplace for the world. With that perspective, let's step back and take a look at our fourth quarter performance, focusing on the key drivers of our growth, namely new client acquisition, client retention, product, and sales. I'll start with new client acquisition.

We started the year with an aggressive plan for growth in SEO, SEM, mobile and international, and we executed strongly against that plan, adding a record number of new clients at attractive acquisition costs.

We acquired new clients at a faster clip and with greater efficiencies during the fourth quarter than in any of the previous quarters since becoming a public company. The efficiencies and success of the programs we had been building with discipline throughout the year were evident.

For example, new clients from SEM grew 86% year-over-year in Q4 and 50% for the year as a whole. Our laser focus in 2020 on tuning our marketing programs around lifetime value was also apparent, as the new clients we acquired in Q4 spent over 10% more per client than new clients in the same quarter of the previous year.

We saw our best quarter of growth in both international and mobile client acquisition, with further runway ahead. In 2021, we will increase our SEM spend, given these strong signals in order to drive additional new customers to Upwork and help them see the value of our expanding work marketplace.

Moving to client spend retention, we were pleased with an acceleration to 102% in the fourth quarter, as our core clients increased by more than 6,400, 64% more than the increase in Q4 2019.

GSV from clients acquired before Q4 was up 30% and GSV from clients acquired before 2020 was up 27%, as existing and new clients deepened their usage of Upwork to build, operate, and grow their companies.

I'd like to now talk about some of our fourth quarter product developments, which are being led by our new Chief Product & Experience Officer, Sam Bright, who joined us from eBay in November. Last quarter, we announced Project Catalog, a brand-new way to use Upwork.

We launched Project Catalog a full month earlier than planned, across 300 marketplace categories. The customer response has been positive. Project Catalog allows clients to immediately understand the massive breadth of talent on Upwork through pre-defined, ready to purchase projects.

Not only does it create a powerful new client pathway into Upwork, it allows existing clients to augment larger and more complex role-based work with smaller, well-defined projects and serves as a strong discovery engine for the rest of the platform.

We see Project Catalog as an ideal complement to our other offerings, together broadening the spectrum of pathways to get work done in our work marketplace.

In the quarter, we expanded our direct contracts offering for freelancers to enable them to invoice and bill their clients for hourly work in addition to using our escrow protections for fixed-price jobs.

While this offering is still nascent, we see freelancers continue to grow the portfolio of clients and work they are billing through our platform, as they consolidate more of their freelance work on Upwork.

Throughout the course of 2020 we saw increased demand from clients wanting to onboard their various team members and agencies onto Upwork for easy and unified billing, program management and collaboration, and competitive bidding in our marketplace.

Our larger clients are enthusiastic about our Bring Your Own Talent, or BYOT solution, not just because we automatically handle all of the money movement, local currency payments on a global scale, and associated paperwork, but also because, for our enterprise compliance clients, we solve the worker classification and other headaches normally associated with these tasks, which are increasingly daunting for many companies in a fragmented and distributed work landscape.

To enhance this experience, we launched an integrated-onboarding process in Q4 that reduced our industry-leading start time on payroll contracts from nine to 2.5 days. This past quarter we landed a global tech firm that onboarded over 1,000 freelancers, running over $1 million through this BYOT product all within Q4.

We are bullish on the prospects that our highly-attractive offering has for the expanding set of clients seeking solutions for their challenges paying and project managing distributed teams. Building the world's work marketplace means both developing and integrating best-of-breed tools that customers love to use for their work.

During the fourth quarter, we announced a partnership with Zoom that integrates Zoom's video and voice communication tools into Upwork. This provides our customers a frictionless and secure communications experience for interviewing candidates, vetting opportunities and collaborating on projects.

The customer feedback has been phenomenal, resulting in a significant increase in calls and collaboration activity on our platform, and is an example of the types of further integrations we have in the pipeline.

Our sales team has fully implemented the changes we announced last quarter and has been making progress against our sharper go-to-market strategy. Our team is engaged in strategic conversations at the highest levels to help clients implement and manage their remote and independent talent programs and is pleased by the reception in the market.

One example was recent work we did for a leading global technology conglomerate. The client needed a solution that would enable them to continue working with their existing independent talent while aggressively scaling their team.

We seamlessly onboarded more than 30 freelancers in five countries in the first day, and now serve as the operational backbone of their globally distributed team, spanning 30 sub-categories of work. Since inception, the account has seen 400% growth in new projects. 2020 was a watershed year for Upwork.

We understood early on that although the tide of remote work was rising, it was imperative to create long-term strategies that would retain customers on our platform and grow their value over time, well after COVID passed, laying the foundation for Upwork's durable, long-term growth.

As we look to 2021, our focus is clear, we have a single strategic priority, innovating, scaling, and evangelizing the work marketplace for the world. We are humbled and excited to be in a position to transform work so positively for so many people, pursuing with purpose our mission to create economic opportunities, so people have better lives.

I'll now turn the call over to Jeff to discuss our financial results in more detail..

Thanks, Hayden. Our fourth quarter and full year financial results were strong, and I'm looking forward to the year ahead. I joined Upwork to be part of a team passionate about our mission, and I am proud to see that we are executing strongly against our strategy, increasing efficiencies in our business, and delivering products ahead of schedule.

Now, I will discuss the financial results for the fourth quarter and full year 2020 and provide our revenue and EBITDA guidance for the first quarter and full year 2021, which we included in our earnings release filed earlier today.

GSV in the fourth quarter and full year was $728 million and $2.5 billion, respectively, and represents strong year-over-year growth of 33% and 21%. Revenue grew 32% year-over-year to $106 million in the fourth quarter and grew 24% to $374 million in the full year 2020.

Marketplace revenue for the fourth quarter was $97 million, reflecting a year-over-year increase of 34%. For the full year 2020, marketplace revenue was $338 million, an increase of 26% from 2019. Managed services revenue grew 15% to $9.3 million in the fourth quarter and was $35 million for the full year.

I want to touch briefly on our strong revenue guidance. Our business typically experiences a seasonal slowdown starting in November and peaking in the last two weeks of the year. This year, the seasonal slowdown was virtually non-existent, which we had not assumed in guidance.

In addition to particularly strong acquisition and quarter-over-quarter retention, this atypical seasonality was a key driver behind the revenue beat in the fourth quarter.

We hypothesize that this was due to COVID and COVID-related restrictions reducing holiday travel and social gatherings and increasing the amount of work that was being done during this period relative to prior years. We wouldn't anticipate this atypical seasonality to repeat in 2021.

Total core clients grew by approximately 17% year-over-year or 6,460 in the fourth quarter to 145,400, with gross new core clients in the quarter growing 36% year-over-year and net additions of core clients up 64% year-over-year.

Client spend retention accelerated from 100% in Q3 to 102% in Q4, as the spending strength of clients acquired in 2019 and earlier performed well. Our overall take rate in the fourth quarter was 14.6%, in line with Q4'19, but down slightly from the 14.8% we saw in Q3.

This decrease was driven primarily by a higher percentage of revenue being earned in the lower pricing tiers due to clients spending more with their freelancers, as well as changes we made in connects to improve liquidity by better balancing the number of job posts and proposals.

Non-GAAP gross profit was $78 million for the fourth quarter, or 73% of revenue, and $270 million for the full year, or 72% of revenue.

With respect to the fourth quarter, non-GAAP operating expenses were $70 million, representing 66% of revenue, down from 69% in 2019, with G&A decreasing from 19% to 15% and transaction losses remaining flat at 1%, while sales and marketing increased from 31% to 32% and R&D increased from 18% to 19%.

With respect to the full year, non-GAAP operating expenses were $264 million, representing 71% of revenue, up from 70% in 2019, with sales and marketing increasing from 31% to 34% and R&D increasing from 19% to 20%, while G&A decreased from 18% to 15%.

Non-GAAP net income was $7.8 million in the fourth quarter of 2020 compared to $3.4 million in the fourth quarter of 2019. For the full year, non-GAAP net income was $6.1 million compared to $5.5 million for 2019.

Our basic and diluted non-GAAP net income per share was $0.06 in the fourth quarter of 2020 as compared to $0.03 in the fourth quarter of 2019. Our basic and diluted non-GAAP net income per share was $0.05 in both the full year 2020 and the full year 2019.

Adjusted EBITDA was $9.6 million in the fourth quarter of 2020, compared to $3.5 million in the fourth quarter of 2019, and materially above our guidance, primarily the result of the flow-through of the revenue beat. For the full year 2020, adjusted EBITDA was $14 million, compared to $7.4 million for 2019. Now, let's move on to guidance.

We are guiding first quarter revenue between $107 million and $109 million, and full year revenue between $460 million and $470 million, representing 24% year-over-year growth at the midpoint.

We expect GSV growth to be slightly stronger as marketplace revenue will likely grow faster than managed services revenue and due to changes, we have made to our Connects program, that are driving better liquidity in the marketplace and higher GSV while lowering Connects-specific revenue.

We remain bullish on the investment opportunities in front of us and will continue funding growth initiatives while closely monitoring our performance to achieve our return thresholds. As such, we expect first quarter EBITDA to be between $2 million and $3 million and full year EBITDA to be between $12 million and $16 million.

We will continue to manage costs with discipline while preserving our cash and maintaining our strong balance sheet, which included cash and marketable securities of approximately $170 million at the end of the fourth quarter.

While the unique macro environment continues to make forecasting this year more challenging than usual, we expect the strength we have seen in our business to persist, and our current outlook calls for relatively consistent quarter-over-quarter growth throughout the year. We remain committed to a long-term revenue growth rate of 20% plus.

We ended the year with solid execution across all areas of the business, and we enter 2021 well-positioned to drive growth as we continue to execute on our plans and capture an even larger share of our market opportunity. On a final note, we are hosting a virtual Investor Day June 15 and would like to personally invite all of you to join us.

We will provide registration information on our IR website soon. Thank you. We will now take your questions..

[Operator Instructions] Our first question comes from the line of Nick Jones from Citi. Your line is now open..

Thanks for taking the questions. Two from me. I guess first can you expand a little bit, Hayden, on Project Catalog, and what the early traction is in beta? And now what you're saying, once it's launched.

And then I guess a follow-up on that is, how should we think about Upwork's take rate as the project catalog gains traction? I think the price points that could potentially increase take rate over time is more transactions funded through there. Thanks..

Thanks, Nick. Yes, we've been really gratified by the response to the market to catalog so far.

It's really a great way for new clients to discover what's possible on Upwork and really dip their toe into freelance talent overall, and it has a fantastic discovery engine aspect to it, and then they can use catalog as a way to then graduate to some of our larger, more complex project-based work with freelancers on the platform.

It's also shown to be a nice way for clients who are already using Upwork for larger complex projects to round out and add-on additional small projects to complement the work that we already doing in the marketplace. So, it's still really early in the offering.

We launched it a month early in January, but the signs are very positive and we see it as complement as we build out the single work marketplace that really provides our clients and our talent, all of the ways that they want to work together and collaborate inside the ecosystem.

And Jeff, I don't know if you want to address the points on take rate?.

Sure, Nick. So on take rates, as you know our pricing for Project Catalog is the same model that we have for Talent Marketplace. However, given that the average size of the projects on project catalog, we would expect to be smaller, more of them will end up in the higher price tiers.

So on average we would think that, will have a higher take rate there and as project catalog represents a larger and larger percentage of the overall market, it will drive upward pressure and take rate as it does that..

Our next question comes from the line of Ron Josey from JMP Securities. Your line is now open..

Thanks for taking the question and Happy New Year, Hayden, I wanted to ask a little bit more about the cohort spend, I think you mentioned pretty strong growth across GSV for both 2020 cohorts and cohorts prior to 2020 and client retention rates reached 102.

So can you talk just about the drivers here of cohort spend and obviously the main question is sustainability and I think one of the - my second question here Hayden and Jeff, I think one of the core imperatives last year, Hayden, was to generate more high quality matches.

And I wanted to hear the progress there and maybe Jeff, as that relates to your comment on the changes on the Connects program, if you can just elaborate a little bit more that'd be great. Thank you..

Thanks, Ron. What we've seen has been really strong broad-based acceleration of spend across pretty much every client cohort, both from new clients and retained client.

So GSV from clients acquired before Q4 was up 30%, GSV from clients acquired before 2020 was up 27%, and that was part of what drove our CSR to 102% this past quarter with that 6,400 increase, which is you know the largest [indiscernible] we've seen since being a public company.

So our view is that, this is an increase that is certainly not just related to pandemic related work. What we're hearing from clients is they're really shifting workloads to freelancers that are part of their core operations, deepening their relationships further with the freelancers on the platform. And our view is that, this is really sticky.

As we hear from customers, they don't want to go back to the ways that they're working pre-pandemic, they see Upwork as a continued part of their ongoing operations.

And so our expectation is that, this higher spend retention in many cases really will stay and stick well after the pandemic recedes, because the client behaviors themselves are changing and the value they're seeing in these relationships is really long-term. So this is a highly sustainable model for them.

In terms of your question around about high quality matches in that focus last year, I'd say we've been making really good progress there.

Some of the dynamics we've mentioned around Connects revenue and some of the changes to that program has been part of powering more and more matching on the platform, especially as you've seen the influx in freelance talent over the last year continue to be so strong.

We're very focused on making sure that every job that's posted, every client is finding exactly [indiscernible] talent match for them.

And so that Connects program is just one piece of the puzzle, along with a lot of the data science changes and tactical changes on the platform that we've been making, to continue to improve fill rates, accelerate the time that clients and freelancers are finding to actually get matched up on the platform, et cetera.

And so we feel like the progress there has been really positive and actually has been one of the pieces of the puzzle, in terms of making sure that matches are happening quickly, spend is happening. And that is showing up in both the acquisition spend numbers and the retention spend numbers..

Our next question comes from the line of Marvin Fong from BTIG. Your line is now open..

Great. Thanks for taking my questions and congrats on the great quarter. Just a question, couple of questions. So last quarter you talked about the targeting 20% growth. And in 2021 and now you've actually given us guidance, it looks like it's a little bit above that maybe 23% to 26% growth.

Just curious if - you could talk about the KPIs that you're tracking. Are you seeing actually stronger growth in that, than where we stood three months ago? Just talk about your optimism there.

And then my second question is just on enterprise, so, if you can just kind of elaborate more on how the salesforce performed there and what might be embedded in your guidance for 2021? Thanks..

Sure. Thanks, Martin. Appreciate it. With respect to guidance, as we looked at Q4, we saw really strong performance really across all dimensions of the business, including acquisition and spend per client both setting record levels for us.

And as we think through the year ahead, we're assuming that we're able to - our guidance reflects, we are able to continue to build on those elevated levels and acquire new clients. And you're right that does reflect 23% to 26% growth for the year, ahead of what we had guided last quarter to 20%.

And we really, we saw a inflection point change in - in the performance of our cohorts in Q3 and Q4. It does make it really tricky to forecast that going forward, because the predictability of customer behavior in the past is, it's a little bit less, given that it improved so much.

But we're assuming that we can hold on to that higher level performance, given that we really do think that the changes that are happening are permanent and structural in nature and all that's reflected in the guidance going forward.

And so those numbers, the performance we saw both in acquisition, retention inform our retention curves and acquisition forecast that are included in the guidance. And then with respect to sales, we will be currently - sales represents 10% to 20% of our overall economics of the business depending upon what metrics you look at.

The team is - has done great work [to digest the] [ph] changes that we announced in Q4 and are continuing to execute against the strategy and we’ll evaluate in the future when we want to increase our investment there, as we get more and more data in terms of the overall performance..

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

This is John, on behalf for Brent Thill. I had two questions on Project Catalog, and I realize it's early, but if you could talk about maybe how much you assuming, this year's 2021 guidance. And then, if you could give some color on year-to-date trend. Obviously, we're almost at the end of February.

I mean, it sounds like all the strength from Q4 has sustained, but any sort of color you could add would be great. Thank you..

Sure. So, with respect to project catalog, as we mentioned in the script, is included in our overall guidance. It is early, so we don't have a ton of great data to forecast a rapidly growing project like Project Catalog, but we've taken our best guess is reflected in our overall guidance.

In terms of January performance and how we're trending for the year, obviously, we've taken that into consideration, in terms of the guidance that we provided. We've seen good strengths continue across the business and that's reflected in the guidance..

Our next question comes from the line of Logan Thomas from Stifel. Your line is now open..

Hi, Hayden, Jeff. I was wondering if you can talk about the enterprise segment drill down on that a little bit more, given the changes that you're seen in talent procurement in organizational behavior, and the benefit that's having on the platform.

I guess, specifically as it relates to enterprise, if you could just talk about sales productivity and maybe how conversations you're having or what you're seeing in the sales cycle, which can tend to be longer and how you're thinking about that year-to-date? And then the second piece would just be, if you could just address your views on competitive intensity in your key markets.

How you're thinking about competitive interest and the opportunity and your position against that? Thanks..

Sure. I'd say our client mindsets, as we talk to folks in the market are really evolving rapidly in our favor. We talk to enterprise customers all the time, who are increasingly creating their virtual talent ventures on Upwork.

Moving more organizational capabilities to use independent talent in more and new ways, and that's really where the conversations with clients are shifting. From last year, I think, they were really focused on how do we work remotely, and now we're starting to have more conversations around.

We work remotely now by default, how do we use that as a real tool to tap into this independent talent workforce, which is out there, all around the globe ready to work for us.

And that's where we're hearing conversations with clients right now, shifting from the where to the who and how element of really how Upwork can be part of their talent strategy is going forward, and understanding that has to be, how they stay competitive in the market, well, after this pandemic recedes.

In terms of the competitive intensity, we know this is a big attractive market and so competition never surprises us. We also know from experience that competitors can really struggle to build big successful businesses. So, be stay very focused on our strategy, investing in and maintaining the advantages that we have.

I think, some of the big ones that we focus on our scale, we know we already have more than 3.5 times the gross services volume and more than approximately two times the revenue of the next largest player in our space.

And that means we have the deepest, highest quality talent network, which is a huge differentiator for clients of all sizes, as they're contemplating how to engage with independent talent at scale. They want high quality talent that is highly reliable and we offer that in a way that no one else does.

I think the second thing we really focus on is the trust and safety element of our platform, where we know companies are very concerned about how do they find people they can trust, that are highly reliable and how clients and talent want to know that their money is safe, that they can use this model at scale and that is something that we've had to build up over many years and it's very hard for another competitor to replicate.

I think, the last thing around our strategic focus is really the focus on building the work marketplace, where we know that to win in this space requires not just having one offering or one capability, but really serving clients and talents with a spectrum of ways that they cannot just do small project work or larger project work, but actually do both.

And that is where we are uniquely differentiated and how we can serve our customers with a small through to the very large project needs that they have. And I think those things are the things, where we are executing very rapidly, continue to innovate and really be the pioneer.

And as I look forward, I really couldn't be more excited about what's ahead for Upwork and for our customers..

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..