Upwork Inc. (NASDAQ:UPWK) Q4 2022 Earnings Call Transcript

Upwork Inc. (NASDAQ:UPWK) Q4 2022 Earnings Call Transcript February 15, 2023

Operator: Thank you for standing by, and welcome to Upwork’s Fourth Quarter 2022 Earnings Call. . I would now like to hand the call over to VP, Investor Relations, Evan Barbosa. Please go ahead.

Evan Barbosa: Thank you. Welcome to Upwork’s discussion of its fourth quarter and full year 2022 financial results. Leading the discussion today is Hayden Brown, Upwork’s President and Chief Executive Officer. Following management’s prepared remarks, we’ll 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 Russia’s invasion of Ukraine and our decision to suspend business operations in Russia and Belarus and the COVID-19 pandemic on our business and current and future impacts of actions we have taken in response to Russia’s invasion of Ukraine and the COVID-19 pandemic are forward-looking statements and related to matters that are beyond our control and changing rapidly.

For a discussion of 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 shareholder letter. Additional information will also be set forth in our annual report on Form 10-K for the year ended December 31, 2022, 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 shareholder letter that was issued this afternoon on our Investor Relations website at investors.upwork.com. As always, unless otherwise noted, reported figures are rounded and comparisons of the fourth quarter of 2022 — or to the fourth quarter of 2021 and comparisons to the full year of 2022 or to the full year 2021.

All measures are GAAP unless cited as non-GAAP. Now I’ll turn the call over to Hayden.

Hayden Brown: Thanks, Evan, and thank you all for joining us today for our fourth quarter 2022 earnings call. In 2022, in the face of a dynamic environment, we made meaningful progress executing on our strategy to innovate, evangelize and scale our work marketplace. We delivered innovative new products and features, including Project Catalog Consultations and Project Tiers, Upward Academy and our new Client Marketplace Plan for client pricing. We continued strengthening our Enterprise Suite, and our investment in brand marketing delivered measurable results. Through these innovations and investments, we made it easier and more productive for clients and talent to connect and manage their work and relationships on Upwork. For the full year 2022, GSV grew 16% year-over-year to reach $4.1 billion and revenue grew 23% year-over-year to reach $618 million.

Our full year adjusted EBITDA came in at negative $4 million. In the fourth quarter of 2022, GSV grew 5% year-over-year to once again exceed $1 billion and revenue grew 18% year-over-year to reach $161.4 million. Fourth quarter adjusted EBITDA reached $1.1 million. The fourth quarter demonstrated a continuation of the macroeconomic trends that we saw in the third quarter. We observed corporate caution during budgeting and planning cycle, leading to softer client acquisition and retention trends across our customer base. This behavior is consistent with our experience in past uncertain macroeconomic environments, in which we have typically seen companies moving through a sequence of phases. In the first phase, companies will reduce their costs and freeze hiring budgets as they grapple with uncertainty or the onset of macroeconomic weakness.

This is when we may see a headwind from customers reducing overall budgets. As they move into the second phase, companies realign their cost structures in a more efficient manner and start to redeploy resources to solutions such as Upwork, where they have confidence they can deliver the best returns. This is when we have typically shifted from being a headwind to a tailwind. In the final phase as the economy shows definitive signs of improvement, companies ramp up budget and seek to aggressively hire, characteristically turning to our solution more than others because of the speed and flexibility we offer. This is when our momentum gathers further. Today, we see many of our customers are in the first phase, realigning their budgets, with some moving into the second phase.

Although this dynamic is creating near-term headwinds in our numbers, we have our eyes on the opportunity ahead of us. We are taking proactive steps to position Upwork for the full benefit the second and third phases can offer as we provide companies with rapid access to cost-effective, highly skilled, global talent and flexible solutions to meet their workforce needs. To capture the opportunity ahead of us, we continue to innovate to advance Upworks’ evolution from the largest global freelance marketplace to the world’s work marketplace. Earlier this week, we announced our end-to-end solution for full-time hiring. This is the next step in the journey we started in 2021 to expand our offerings to support all the ways our customers want to work on Upwork.

With this launch, we are bringing to bear more than 20 years of worker classification expertise as well as existing and new technology solutions to enable our customers not only to form the trusted long-term working relationships that Upwork is known for, but to do so via a complete set of full-time hiring solutions now available to all our customers, enterprise clients and marketplace clients alike. This strategic expansion affords both clients and talent further flexibility and choice in how they work together and delivers a first-of-its-kind end-to-end solution that enables businesses to easily, quickly and cost-effectively find, vet, hire and pay talent who are interested in full-time work from all around the world and offering more than 10,000 skills.

Addressing global full-time work is a natural extension of our existing work marketplace and supports both our mission and the natural progression of work behaviors we see on Upwork today. Embarking on a brand awareness campaign to introduce ourselves to the many companies and hiring managers who have not been previously aware of Upwork has been an ongoing priority. Our goal has been to raise unaided awareness across a broad audience and ensure that companies and hiring managers understand our compelling value proposition. As companies are increasingly scrutinizing their internal resources and costs, we believe now is the right time to educate them about our solutions. We are pleased with the results thus far. With our This Is How We Work Now campaign, which we launched in September of 2022, we have seen greater progress increasing brand awareness than we expected.

Since the September launch of our new campaign, unaided awareness has grown more than 30%, with unaided awareness among large businesses, which represent the biggest segment in our TAM, growing by more than 140%. From the third quarter to the fourth quarter of 2022, ad recall, which measures the impact of brand campaign messaging on our chosen target audience, grew 45% among large businesses, and we saw 58% growth in top-of-mind awareness, which is a measurement on being the first brand mentioned in a category. Looking at the year ahead, we also recognize the macroeconomic climate has changed rapidly, and we are moving to reduce our brand working media spend by approximately 12% in 2023 compared to 2022. Given the strong focus on measurability and testing that we have deployed to date, we are able to make this reduction in costs while still driving the outcomes we are seeking with our investment in campaigns in 2023, targeting significant continued growth in unaided awareness as well as delivering insights into how this investment impacts our downstream metrics and overall marketing efficiency as our campaigns evolve and our data sets mature.

This approach is tailored to achieve our customer- and business-impacting goals while giving us more room to respond to new macroeconomic realities and continue to make strongly data-informed decisions about this investment area in the future. In our Enterprise business, revenue grew 22% year-over-year. We continued to make progress in ramping our sales force and educating our prospects and customers on the new features and enhancements we launched in the year, including flexible approval workflows, talent performance reports and user activity reports. In the fourth quarter, we signed 26 new enterprise clients, as we saw the average length of the sales cycle extend by nearly 20% as corporations made changes to and delayed their budgeting and approval processes.

In the fourth quarter, this also resulted in an unprecedented increase in customers pushing their late-stage deals into 2023 as they work through these changes. Our new enterprise clients included high-quality companies like HTC, JLL, Maaco, Lucid Motors and Sweetwater Sound, who have turned to Upwork to help them solve their workforce needs in this evolving work environment. The decision of these leading companies to source talent through Upwork is a testament to the real value we bring through both the quality of talent on Upwork as well as the ease of use and cost efficiency we provide. We are making strong progress addressing the internal enterprise sales operational growing pains we experienced last quarter. Our efforts to close the gap on them has started to fuel improvement in top of the funnel activity late in the fourth quarter, and we expect to see our sales reps’ productivity normalize as we move into 2023.

Barring further deterioration of the macroeconomic environment, even with the elongated sales cycles we have experienced recently, we expect to be back on track with our land team at full productivity and performance by the third quarter of 2023. We see a clear path to reaccelerate our momentum in enterprise and believe the enterprise opportunity remains as attractive as ever for Upwork. In 2023, we are proceeding in a balanced and nimble manner and focusing on the things that we can control while being ready to make the most of any opportunities that may arise. For example, in December, we made a significant change to our organizational structure, moving from a purely functional to a business unit composition. With this new organizational framework, we have been able to strategically reallocate resources from a broader, more fragmented portfolio of investments that at times represented incremental opportunities to a more concentrated set of resources in all of our key business unit areas, each helmed by a leader laser-focused on delivering customer and business outcomes with attractive growth and return opportunities.

As a result, we have set ourselves up for the future with increased efficiency, agility and accountability throughout the organization. We remain committed to achieving our goal of adjusted EBITDA profitability in 2023 and aim to increase our adjusted EBITDA margin by a few hundred basis points per year as we progress toward our previously communicated long-term target of an adjusted EBITDA margin of 30% to 35%. A critical part of our strategy is to remain disciplined with regard to our cost management, and we are focused on increasing our operating leverage, targeting 2023 revenue growth in excess of operating expense growth. We are entering 2023 on offense, ready to capture the opportunity ahead of us. With our leading cost-effective solutions, we are uniquely positioned to meet customers where they are and benefit as customers learn about and turn to Upwork for their full range of talent and work needs.

We remain steadfast in our long-term vision, and we’ll continue to innovate, evangelize and scale Upwork as the world’s work marketplace in 2023 and beyond. We will now open the call to your questions.

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Q&A Session

Operator: . Our first question comes from the line of Matt Farrell of Piper Sandler.

Matthew Farrell: You mentioned that many customers are still kind of in the first phase of the macro planning process, but some are moving into the second phase. Maybe just help us understand how you’re thinking about the transition to each phase as we move throughout the year. And what is embedded in guidance from a transition perspective? And is there anything that Upwork can do to push customers from one phase to another amid the uncertain macro?

Hayden Brown: Sure. Let me frame first how we formulated our guidance, Matt, which I think will help answer those questions. So we did see a softening of certain acquisition and retention trends in the back half of last year, and that informed how we thought about this year, as we’ve seen customers coming out of the gate, in some cases, slower than we would see in a normal year and in line with the trends we saw in the back half of last year. So that is really informing how we’re thinking about the year ahead and has baked into our guidance the trends that we are seeing in the business right now. And our view is, talking to customers, that a lot of them in Q4 and coming into Q1 have really been reevaluating budgets, looking at their spend levels kind of based on the macro uncertainty ahead, and that showed up with things like elongated deals and things getting pushed for some customers from Q4 to Q1.

In terms of transitioning to the second phase, we do see some customers leaning into the solution with Upwork more heavily, but this is still outweighed by, I think, some of the headwinds that we’ve seen from that first phase for some customers. And so we’re really doing what we can do to control, as you asked about, the outcomes here by doing a few things. One is we’ve addressed the issues on the sales side that were holding us back at the end of last year in the top of the funnel. And it’s going to take a little time for those to flow through, but that work has already happened. The second thing is we’re focusing our attention on the sales team on the accounts that have the highest probability of spend and expansion, which we are doing actively and evaluating constantly where to spend time and effort.

And then overall, our sales and marketing activity at this moment is really laser-focused on spreading the message around Upwork’s benefit and value proposition at a time when our cost savings options, the agility that we offer customers, those aspects are so resonant in the landscape. And that’s one of the reasons we are continuing to invest in our brand marketing this year because this is something that most of our target market just doesn’t know they can get from Upwork. So all of those things help connect customers into what Upwork can offer and get them out from Phase 1 of being a little scared of the environment to Phase 2, seeing how Upwork can be the solution in this environment.

Matthew Farrell: And maybe a follow-up on your announcement earlier this week moving into the full-time hiring. It makes a lot of sense based on your mission. What has been the initial feedback from both buyers and talent? And how should we think about this expansion impacting 2023 from a financial perspective?

Hayden Brown: This is something we’ve gotten a really positive reception from customers around. And as we mentioned earlier, we’ve seen — I think in our release, we mentioned that we’ve seen over 2 million talent already raised their hands to say they want to be part of this contract to hire option, and they’re interested in those types of work opportunities. We’ve also seen really strong demand on the client side with over 40,000 jobs posted year-to-date since we’ve been opening up this option progressively to customers. So already, the reception has been really positive. I think customers see this as something they’ve been either trying to do with Upwork for quite some time, or in the case of some of our larger customers, they have been doing this.

And so this is something that is, in a way, familiar and a natural extension of the places where we play with customers because they do come to us for these longer-term projects and relationships that do progress to needing at times to be converted into payroll and FTE-type relationships. In terms of the impact of that offering for 2023, we really — it’s early days in terms of what that would look like in our numbers. And so I’d say our outlook for this year is really based on things that we know about today in the existing business more than specific upside that we would expect from that offering. I think we’ve seen in the past that new offerings get a strong reception, but it does take time for those to flow through to our numbers and that may well be the case here as well.

Operator: Our next question comes from the line of Andrew Boone of JMP Securities.

Andrew Boone: Hayden, I want to go back to full-time hiring. As you think about a more complete offering just with product catalog, with full-time hiring, with the core marketplace, can you talk about just how we think about this as an on-ramp for more clients versus just additional cross-sells and upsells into existing clients? How do we think about that? And then just as a tag along with that exact thought, can you just run through the net adds in the quarter? This is kind of the second quarter and understood the softness that is — that’s taking place across macro. But is there anything else you can help us think about as we think about net adds for 2023?

Hayden Brown: Sure, Andrew. In terms of the full-time offering, I’d say this is definitely just the next step in us delivering on the vision we shared a couple of years ago around really becoming the world’s work marketplace and giving clients all of the ways that they want to hire and talent all of the ways that they want to work. And so you’re absolutely right that we have opportunities both to essentially cross-sell our existing client and talent base into this offering as well as market this to new customers who might not have considered Upwork before because we didn’t have this as something that we were going and putting in front of them at the outset as part of our acquisition strategy. I’d say our focus for the near term is really around the first opportunity, which is around existing customers, more than going out and building new channels with new customers just because we think there’s such a rich opportunity to leverage what this can do for existing customers that are already in our marketplace.

But certainly, we have our eyes on both of those things, and we’ll be moving on both of those opportunities when the time is right. In terms of the net adds for the quarter, certainly, there are some — a couple of things impacting those metrics. We’ve seen a few headwinds in acquisition last year, particularly in the performance marketing area of the business. The other channels actually performed really well, but that one was softer than we would have seen, largely due to issues around just what was available to us in that environment, and we’ve been moving to really realign some aspects of our performance marketing strategy, knowing what we know now that we didn’t know at the back half of last year. The other factors around active clients have really been just lapping issues around larger cohorts that were very strong from tailwinds that we had in previous quarters.

And now that’s kind of flowing through the business as we’ve had some smaller acquisition customer cohorts more recently, meaning that in aggregate, there’s a larger base of eligible customers to churn. And as you know, this is a trailing 12-month metric. So those are some of the key things I’d highlight on there. We are lapping just more challenging comps there. But we will be focused this year on both new client acquisition as well as getting existing customers to be even more successful with things like the full-time offering we talked about.

Operator: Our next question comes from the line of Ron Josey of Citi.