Upwork:Quarterly Results/2024 Q1

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Earnings Call Summary

Video: Upwork Q1 2024 Earnings Conference Call | Transcript: Upwork Q1 2024 Earnings Conference Call

GSV, active clients, revenue and take rate

• Historically, addition of new clients has been of the most leading indicators of GSV growth.
• They anticipate GSV growth will accelerate aided by growth in active clients and investments in AI products and partnerships.
• Revenue from Freelance Plus subscription has grown by 76% y/y.
• They added 28 new enterprise clients in Q1 (WPP, Unisys and Ansys), growing revenue in this segment by 28%.
• Revenue growth in Q1 was driven "in part by the final transition to the new flat fee pricing structure we started last year," CFO Erica Gessert said.
• Growth in active client base was driven by activations and reactivations.
• They added 20,000 new clients in Q1.
• "Excluding the impact to GSV growth rate from the pricing change, we estimate Q1 GSV growth would have been approximately 3% year-over-year. While GSV grew approximately 1% year-over-year, this included some temporary headwinds associated with the final transition to our simplified flat fee pricing structure, which occurred on January 1," CFO Erica Gessert said.
• The 2% impact on GSV growth by the pricing change will impact them throughout the year. "We estimate that at about 2% of GSV growth and it impacts us in Q1 and throughout the year. From there, we'll lap that. And I think for all the reasons we've talked about expect to see GSV continue to step up."
• They view the pricing changes as positive despite it causing some headwinds to the GSV.
• The said their marketplace take rate is still lower than that of the peers. "Even after these changes, our marketplace take rate at 17.7% remains one of the lowest in the industry, which means that we have the capacity to continue to develop targeted monetization opportunities on the platform that will bring value to our customers," CFO Erica Gessert said.
• They have seen some stabilization in terms of newer cohort spend in 2024.
• GSV growth in 2024 and 2025 leading indicators include strong demand for the ads, nice strength in the enterprise business and client growth. Q1 client growth was already 5%, which to them is encouraging. "And client growth, I mean, things are going really nicely with our client acquisition engine as we've kind of emphasized a few times on the call. Both activations and reactivations are doing nicely. So we do expect client growth to continue each quarter through the year," Erica Gessert noted.
• Their new clients do look like past clients (coming in and ramping spend) and they have been driven by sales and marketing spend they made in the past quarters. New experiences on the platform are also accelerating activation of new clients.
• They continue to see good growth among SMBs and macro impact on large businesses is moderating. "More broadly, I think if any kind of underlying detail, I think we, like I said, I think we continue to see very good growth in kind of the small business side, very small business side of our platform. And some of the negative kind of impacts from large business from last year is moderating in the current environment." CFO Erica Gessert said.

• Hayden said they are going to continue to make more progress around take rate by creating more value to customers. " And I think examples of that span everything from enhancing memberships on the platform to continuing to price connects more accurately to continue to bring in revenue from new streams like our partnership program. So there's really a lot of runway here. And I think, again, our goal is going to be governed around enhancing our take rate, but doing so in a way that really is creating more value for customers and getting them to spend more overall with us, which is really the ultimate goal."
• They do not expect take rate to have a big step up as seen in Q1. But they expect ads and monetization to aid in continued advancement of the take rate.
• Gessert noted that activation of lots of new clients is a drag on GSB for Active Clients.
• Gesert also noted that spend by retained clients has started to stabilize compared to what they saw last year.

AI

• Upwork is developing UMA (Upwork Mindful AI), a large language model that uses trillions of Upwork data to best match freelancers and clients faster.
• UMA's capabilities is used by the likes of Best Match Insights, Upwork's Job Post Generator, Proposal Tips and Upwork Chat Pro.
• UMA has started rolling out in Upwork's homepage and first tests on it are positive. "Clients who used Uma started spending on Upwork in their first month at a 7% higher rate than non-users," Hayden Brown noted.
• UMA is being developed by its AI startup, Headroom which they acquired at the end of last year.
• They saw a 50% y/y growth in AI services category in Q1.
• They indicated that data shows 9% of internal employees are using AI compared with 20% of freelancers and 50% of Upwork talent.
• Hayden signaled that clients are turning to Upwork to find AI talent.
• Hayden said wages for AI jobs are still higher than for regular jobs though not as strong as in the past three or four quarters.

Products

• They noted that ads and monetization products have displayed impressive performance and stood out as fastest growing revenue stream for Upwork.
• Freelance Plus subscription had over 100,000 active subscribers in Q1, up 60% y/y.
• Freelance Plus now includes Upwork Pro, powered by GPT-4 and customized with Upwork data.
• They premiered instant consultations that enables clients to get advice within minutes from professionals.
• They have noticed that the repeat usage rate of regular consultation clients is 50% more than that of clients who start with a standard marketplace engagement.
• They saw good demand for their Upwork Partner Experts Program, with the joining of GoDaddy, BigCommerce and Constant Contact in Q1. The program enables this partners to connect their clients with freelancers directly, hence enabling them to increase usage of their products.
• They are rapidly expanding the workforce management system, bringing in Workday, VNDLY and KellyOCG as enterprise suite partners.
• They have launched Upwork Updates which will be used to update customers of new offerings and products in the marketplace.
• Hayden said they still see opportunities to enhance value in Freelance Plus. "We added Upwork Chat Pro very recently and that has generated a lot of excitement, but we also see opportunities to continue to enhance value there and with other aspects of how we build memberships and membership value on our platform." " If you look at other marketplace models out there, companies like Airbnb, Instacart, others, see upwards of 25% of their revenue coming from ads and monetization, and we're nowhere near that today."
• Over 70% of new customers are using the job post generator they launched last year.

Outlook

• They said they are committed to continuing growing operating leverage to 2025 and beyond. "So I think that we can certainly continue to gain operating leverage, even in a relatively lower growth environment," CFO Erica Gessert said.
• CFO Erica said they are now in a position to commit to hit 35% adjusted EBITDA margin in the next 5 years.
• As said last time, they expect y/y revenue growth to moderate in the second half as they lap pricing changes implemented in 2023.
• They expect to increase operating margin q/q this year through efficiency efforts.

Share repurchase program

• The completed the purchase of $100 million shares this month. "In the first quarter, we repurchased approximately 5.2 million shares and as of April 23rd we have completed the entire $100 million repurchase program, repurchasing approximately 8.1 million shares. "