Hayden Brown - President, Chief Executive Officer Jeff McCombs - Chief Financial Officer Denise Garcia - Investor Relations.

Good day and thank you for standing by. Welcome to the Upwork’s First Quarter 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Ms.

Denise Garcia, with Investor Relations. Please go ahead..

Thank you. Welcome to Upwork’s discussion of its first quarter 2021 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 Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 when filed. In addition, reference will be made to non- GAAP financial measures.

Information regarding a 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 first quarter of 2021 are to the first quarter of 2020.

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..

Our single strategic priority for 2021 is innovating, scaling and promoting the work marketplace for the world. I’ll now turn the call over to Jeff to discuss our financial results in more detail..

Thanks Hayden. We are off to a great start to the year with Q1 results exceeding our expectations on both the top and bottom lines. The business continues to perform strongly across virtually every client-related dimension, from categories to geographies, to tenures of clients, to acquisition and retention, to sales and marketing.

On the talent side, we were also very excited to see the strong year-over-year growth in the number of freelancers who were active in the quarter, which accelerated for the fourth consecutive quarter.

Now, I will discuss the financial results for the first quarter of 2021 and provide our revenue and EBITDA guidance for the second quarter and updated guidance for the full year 2021, which we included in our earnings release filed earlier today. GSV in the first quarter was $787 million with strong year-over-year growth of 41%.

Revenue grew 37% year-over-year to $114 million in the first quarter. Marketplace revenue for the first quarter was $105 million, reflecting a year-over-year increase of 40%. Managed services revenue grew 6% to $8.9 million for the first quarter.

Total core clients grew by approximately 18% year-over-year or 7,000 in the first quarter to 152,000, with gross new core clients in the quarter growing 46% year-over-year and net additions of core clients up 61% year-over-year. Our overall take rate in the first quarter was 14.4%, down from 14.9% in Q1’20 and down slightly from 14.6% in Q4.

This decrease was expected and driven primarily by the fact that marketplace revenue grew faster than Managed Services Revenue, which has a 100% take rate.

Normalizing for this mix shift, our marketplace take rate in the first quarter was 13.5%, down just slightly from 13.6% in Q1’20 driven by the changes to our Connects program which we implemented in Q4 and are performing well. Marketplace take rate for the quarter was in line with the 13.5% in Q4’20.

Non-GAAP gross profit was $83 million for the first quarter or 73% of revenue, compared with 72% in the first quarter of 2020.

Non-GAAP operating expenses for the first quarter were $79 million, representing 70% of revenue, down from 75% in the prior year, with G&A decreasing from 17% to 14%, sales and marketing decreasing from 36% to 34%, R&D remaining flat at 21% and transaction losses remaining flat at 1%.

Non-GAAP net income was $4.2 million in the first quarter of 2021 compared to non-GAAP net loss of $3.6 million in the first quarter of 2020. Our basic and diluted non-GAAP net income per share were $0.03 in the first quarter of 2021 as compared to non-GAAP net loss per share of $0.03 in the first quarter of 2020.

Adjusted EBITDA was $6.9 million in the first quarter of 2021, compared to an Adjusted EBITDA loss of $1.0 million in the first quarter of 2020. Now, let’s move on to guidance.

We are guiding second quarter revenue to between $119 million and $121 million and are increasing our full year revenue guidance to between $480 million and $490 million, representing 30% year-over-year growth at the midpoint.

We continue to expect GSV growth to be slightly stronger than revenue growth 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 are bullish about 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 second quarter EBITDA to be between $2 million and $3 million and are increasing our full year EBITDA guidance to $16 million to $20 million.

We also anticipate a $7 million to $8 million G&A expense in Q2, which is an impairment charge we expect to recognize pending the completion of the subleasing of our Santa Clara facility to a third party. This will not be reflected in our EBITDA calculations and as such is not reflected in our EBITDA guidance.

Cash and marketable securities were approximately $170 million at the end of the first quarter. We hope you can all join us for our virtual Investor Day on June 15. We look forward to sharing more details about our plans for the future and potentially new metrics, as well as introducing our extended management team. Thank you.

We will now take your questions..

Thank you. [Operator Instructions]. And our first question coming from the line of Marvin Fong with BTIG, your line is open. .

Great, thank you for taking my questions.

My first question is just, if you could just provide us a little more granularity maybe on how project catalog has started? Have you found any surprises compared to your initial exceptions? And specifically, do you think that you're seeing any cannibalization from the core market place, that would be great, and I have a follow up after that. .

Sure Marvin.

So the finding on catalog so far, it’s definitely still early days, but what we're seeing is this is additive to the business, and certainly its underscoring the power of our work market place strategy, because even though this is early, what we're seeing is great signals that customers who are attracted to Upwork based on seeing SEM or other campaigns around catalog, sometimes they convert for catalog and sometimes actually they end up converting to do talent market place as their first project.

We're also seeing for existing customers and account marketplace, that they are responding really well to cross sell promotions and placements we are doing to educate them, but now they can also add on with project catalog as an additional way to transact inside the marketplace.

So we're actually seeing a lot of great signs that customers are interested in not just adopting one way of Upworking so to speak, but really are excited at the idea that maybe the interest around catalog might get them in the door, but then the better fitting offering might be talent marketplace or vice versa and so giving them more ways to operate within our ecosystem is actually unlocking more engagement, more interest, more spend, more marketing channel for us, etc.

And so while it's still early, and we certainly have a lot more work to do to really tap into the full potential that’s offering, the signs are actually there that this is additives to the market place as a whole. .

Terrific! And my follow-up, just wanted to see you drill a little deeper on the great wall of retention spend metric. What do you attribute that to? Are clients expanding into more categories or they are just raising the size of their projects? Any additional insight into that would be great? Thank you. .

Marvin, were you asking about client spend retention?.

Yes, sorry yes, that’s client spend retention, yes. .

Yes, absolutely. We saw the really quick acceleration from the 102% to 106%, which is the fastest I think in the last five years or so and probably longer going back before them. And as we mentioned in the past, one of dynamics with the metric is that it's fairly lagging in nature.

So as the momentum that we've been seeing over the last five quarters or so has built, it's continue to put that upward pressure on the metric and we think a lot of that comes from both, the really strong execution that the team is doing across products and marketing in particular.

And also the fundamental changes are happening in terms of client behaviors, where they are seeing – they are understanding the benefits of putting independent talent at the heart of their strategy, and we’re seeing that across, as we mentioned virtually every dimension.

So every category has accelerated, every tenure of cohort has accelerated in terms of year-over-year growth.

The spend per client has gone up and the client retention has gone up, which then yields nice benefits from a marketing perspective with that increase to the LTV and we have a great efficiency from a marketing perspective where we're able to bring down our tax, which then allows us to invest more in our performance marketing dollars, so all around just a great story.

.

Great, thanks Hayden and Jeff. Congrats on the quarter, thank you. .

Thanks. .

And our next question coming from the line of Nick Jones with Citi. Your line is open..

Great! Thanks for taking the questions. I guess first, can you just expand a little bit on the work market place announcement today? Maybe it's not totally clear to me I guess on how this will change the experience; I guess like a business who is using the platform.

So if you could expand a little bit on kind of, what kind of improvements you expect us to add to the experience and then I have a follow-up, thanks. .

Sure, Nick. So it’s really clear from our Q1 results that are current strategy is winning and we are not changing the strategy that we've been executing on since I became the CEO.

But we are launching this work marketplace to really define our category and raise awareness around the breadth of our offering, which really addresses all the ways that clients and freelancers seek to work together on Upwork.

And the research that we've done over the last few quarters has made it apparent that this breadth as a differentiating factor on our platform is not well understood.

People too often think that Upwork is only about really small gig project or only about large complex projects work, and they don't really understand that they can do both and more on our platform.

So it was time to really shine a light on the fact that they can do all of these things in our platform, because we understand that there is a big awareness gap in the market that we need to close to reach our full potential and really unlock that full trillion TAM [ph] that we're going after.

So building awareness for our category and the solution is really how we plan to become this always on solution that really is part of the dynamic workforce strategy that companies of every size are utilizing to stay competitive.

So it's not shifting our strategy; it’s really educating the market around the full breadth and potential that exists on Upwork for them to stay competitive. .

Got it, that's helpful, thank you.

And then on SEM and SEO, really great improvement here that you know each quarter – you know how much of this is a function of, there's just more impression that people are searching the category more versus an improved SEM, bid strategies, you know bidding on the right key words, things like that or is there a little bit of both.

I guess I’m trying to you know understand how much more room there is for again to see continued improvement. Thanks. .

Yeah, there is absolutely a benefit from both the overall market conditions and significant benefit from bidding strategies, backend infrastructure, international expansion, moving into having a broader mobile strategy, and the team has executed incredibly well of rolling all that stuff out at a moment in time where there's more interest and opportunity to capture that demand.

And as such the numbers are really great, because we mentioned, the client starts from SEM are up over 100%, and while doing that we were able to bring down our cost per acquisition meaningfully, allowing us to significantly increase our spend.

So it's that combination of really, really strong execution across the team combined with good market conditions. .

Great, thank you. .

[Operator Instructions]. And our next question coming from the line of Brent Thill with Jefferies, your line is open. .

Hi! Thank you. This is John here on for Brent Thill. I had two questions, one on investment and go-to-market. I was wondering how you’re changing that at all this year, especially toward the enterprise and whether you had any sales rework or quota changes.

And then on the enterprise clients, just wondering about their behavior, how that has changed now that we're more than a year since the onset of COVID. I mean it’s the way that they are using Upwork to change meaningfully at all; any more categories that have emerged? Thank you. .

Sure, I'll start. With respect to the sales side, the enterprise side as you mentioned, well we’ll maybe take a step back. You asked first about go-to-market.

So we've seen an increase in sales marketing spend, in-line with probably overall revenue growth rate which was driven by more of an expansion in our marketing spend than our sales spend for all the reasons that we’ve talked about in the past, which is that we make the change to our sales force in Q4 of last year and have been rolling those out in the end of Q4 and the first quarter, and the team has done a great job of doing.

It really hasn't been that long since those changes were made and the numbers that Hayden mentioned on the call, we’re extremely pleased with it.

You know they have a 40% quarter-over-quarter improvement in terms of the number of deals that they closed, sales cycles are shortening, the number of our large vendors is increasing materially, and so we feel good that we've now – we're in a good position with respect to the unit economics of the scale that we’re at and really now we want to turn our attention to how do we scale that in an operationally balanced manner.

And so you know we’re considering increasing investments there as early as Q3 as Hayden mentioned. And we see a significant opportunity there. Just want to be balanced in terms of how we do it. With respect to the second question on overall client's behavior. I guess I'd say, I'll start with the enterprise client behavior.

I’ll hit a few tactics and maybe Hayden can add in. Clients throughout the pandemic, clearly any misconceptions the clients has about their inability to grow and build their businesses with a remote workforce have been fundamentally altered.

They now see that this is a way that they can absolutely take their company to the next level and deal with all sorts of dynamics that hardships and rapid expansions impose on their companies.

And so during this period we've seen across the broader business, increase in retention rates, increase in spend per clients, and we've seen that across virtually when you look beyond enterprise, virtually every category is a business.

So it's not that it's simply happening in web mobile software development or sales and marketing or design and creative, but really across the board in every category. I think, Hayden anything to add to that. .

I’d add, I think numbers are really reflecting a broader narrative that we're hearing as we talk to CEOs and other executives who are universally just much more open minded and curious than ever before about finding new solutions to old problems, and the two problems that they have constantly been banging their head against the wall about are how do they compete in the work for talent and take advantage now of the remote work skills they've gained to compete for talent in this New World of work that they are finding themselves in.

And the second old problem they've had, that now they're trying to find new solutions for are getting more out of their teams without burning them out and how do they increase efficiency and agility in their businesses without burning everyone out, and kind of getting into a problem there.

And so those two challenges really converge at Upwork where we offer them access to talent that they absolutely need, and a pass to augmenting their workforce strategy that is actually critical with our work marketplace offering, in a way that kind of unlocks all of these things that or problems that they had before the pandemic, problems they are facing today, problems they know they will face going forward, even after the pandemic is behind them.

So we are having a lot of success right now. It's evidence in our numbers with these conversations and with the kind of evolved mindset of so many executives who are trying to solve these problems with new tools like Upwork. .

Very helpful, thank you. .

And our next question coming from the line of Logan Thomas with Stifel, your line is open. .

Hi Hayden and Jeff. Just a question on the advertising and marketing around the rebranding campaign. You know I think the release mentioned some broadcast and video spots along with other supporting channels.

Are you sharing how much incremental investment you're anticipating to put behind this campaign, to the extent that it's worth noting, and is this reflected in the updated EBITDA guidance would assume so, but just want to ask.

And then, is there a level of pay back on this that investors should be thinking about or are we more focused on awareness and branding at this point. .

Great, thanks for the question. So we are not disclosing the amount right now. We are looking to growing our awareness of Upwork, of our brand, of the value proposition to our clients and freelancers is critical. We see a significant opportunity and this is an important way to do that. We are not disclosing the specific numbers.

It is obviously reflected in our guidance. We absolutely are staying close to the performance.

Clearly these are not all performance marketing dollars, but we'll be looking at what is the return that we're getting across every dimension that we possibly can, and would love to find opportunities to continue to grow that awareness and doing so in a financially prudence manner.

And we’ll continue to look for those opportunities in the future, but it is all reflected in both the Q2 and full year guidance we provide. .

Okay, I appreciate that Jeff, and one follow-up if I can. Is that a U.S. focused, you know will that be U.S.

focused spend, particularly around branding? Are there other kind of key markets you're thinking about and then in hand with that, could you maybe update us on just how you're thinking about the international strategy? You know just a general update, but also you know how you are thinking about gaining market share and with some of the larger international markets where you might be relatively even less penetrated.

Thanks. .

Yeah, our focus right now is on the U.S., because we still feel like we have a ton of runway in the U.S. and that we are trying to unlock the U.S., market, but we're also doing some global and international advertising as well.

Predominantly places that are English speaking is a big focus for us, because you know today that's where our website is focused on. We are kind of still unlocking that opportunity, but we have seen a lot of traction with English speaking folks globally even in non-U.S. and non-English speaking markets traditionally.

So our marketing focus is distributed with a heavy focus on the U.S. right now, and a lot of runway in other markets over the next couple of years. .

Okay, thanks Hayden. .

And our next question coming from the line of Ron Josey with JMP Securities, your line is open. .

Great, thanks for taking the question. Hi Hayden! Hi Jeff! I wanted to ask maybe a little bit more on just two things really. The growth that you're seeing in GSV, Jeff can you just talk about revenue visibility as more clients come on, the 2020 cohort spends more and basically just repeat buying.

I know you talked about that earlier on the call, but just any insights on visibility going forward would be helpful. And then on project catalog, I know we're early into your comments earlier on.

But maybe Hayden, it would be great to maybe here a little bit more about, are you seeing any sort of integration between you try-out product catalog and more users are using other services on Upwork or graduating up to Upwork or anything along those lines between the two services. Thank you. .

Sure, thanks Ron. I'll start with the revenue visibility question. So as you know our clients attention has been historically around 100% and has been trending upwards, which indicates a good visibility into what our future performance will be based upon prior cohort spend and our forecasts were absolutely based at the cohort sort of level.

You know we look for attention curbs of each of those cohorts. We forecast out what sort of acquisition we think will come in.

And so we have good confidence in the numbers that we provide, with the caveat around that being that obviously these are periods of dramatic change in customer behavior, which introduces new volatility or higher volatility into the forecasting than we otherwise would have.

We think all of these changes have great, long term benefits for the business where customers will be using remote freelancing platforms like ours much more so than they did in the past, and trying to predict what exactly they're going to do in the next quarter can be a bit trickier, but we feel good with our assumptions and the guidance that we have and all that's reflected in the updated guidance.

.

To your question around project catalog, we're definitely seeing some early signs around those graduation opportunities between existing talent marketplace offerings and people wanting to then go on and buy a project catalog. But I’d say, it’s still really early in the sense that there so many pathways from that we haven’t even built out yet.

So the first phase of project catalog has been around building the basics of the experience, building out SEM programs to educate and convert into those experiences and that’s been kind of phase one.

There is still a lot of runway for us to integrate project catalog into many more of the existing work marketplace experiences that we have, and so I think we've seen great signals that customers are doing some of that behavior or want to do even more of that behavior and there's so many touch points between existing experiences and the talent market place side for example and more of the integration opportunities for project catalog.

So there's really a ton of runway for us still, and it's been incredible to see the execution by our team in identifying those, building those out, building a road map for further integration of those different types of opportunities over time.

So I’d say, we are still in inning zero or inning one of a really exciting pathway of innovating on that solution and we've gotten so many exciting ideas as well for customers, both freelancers and clients who are saying, ‘Hey! Here’s how I want to do the things together.

Here's how I would love to work across different parts of the work marketplace that you at Upwork have.’ And I think that’s again been a really exciting time for us that we are exactly on the right path and the strategies being validated, that people really want to participate in multiple of these ways of Upwork. It’s not about just doing one.

So we're building these things as fast as we can, you know to really live into customers’ expectations around how they want to do this. .

Thanks guys, very helpful. .

Thanks Ron. .

And that's all the time we have for questions today. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect..