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Upwork, Inc. (UPWK) Q1 2023 Earnings Call Transcript

Upwork, Inc. (UPWK)

Q1 2023 Earnings Conference Call

Corporate Participants

Evan Barbosa - VP, IR

Hayden Brown - President and Chief Executive Officer

Erica Gessert - Chief Financial Officer

Conference Call Participants

Eric Sheridan - Goldman Sachs

John Byun - Jefferies

Nat Schindler - Bank of America

Matt Farrell - Piper Sandler

Logan Reich - RBC Capital

Bernie McTernan - Needham

Marvin Fong - BTIG

Andrew Boone - JMP Securities

Rohit Kulkarni - ROTH

Presentation

Operator

Thank you for standing by, and welcome to Upwork's First Quarter 2023 Earnings Conference Call. [Operator Instructions]. As a reminder, today's call is being recorded.

I would now like to hand the conference over to your host Mr. Evan Barbosa, Vice President of Investor Relations. Please go-ahead sir.

Evan Barbosa

Thank you. Welcome to Upwork's discussion of its first quarter 2023 financial results. Joining me today are Hayden Brown, Upwork's President and Chief Executive Officer and Erica Gessert, Upwork's Chief Financial 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. Forward-looking statements include all statements other than statements of historical fact. 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 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 quarterly report on Form 10-Q for the three months ended March 31, 2023, when filed.

In addition, reference will be made to certain 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 to the first quarter of 2023 or to the first quarter of 2022. All financial 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 first quarter 2023 earnings call.

Before we dive into our results, I would like to take a moment to introduce all of you to our new CFO, Erica Gessert. She started her new role last week, and I'm thrilled to welcome Erica to Upwork. Erica joins us from PayPal where she previously served as Chief Transformation Officer. And before that SVP of Finance and Analytics. She has had an extensive track record of driving operational and financial excellence and is a tremendous addition to our team.

Erica Gessert

Thank you, Hayden, and hello, everyone.

Let me start by saying I am delighted to join Upwork at such an important time in the company's history. I'm inspired by Upwork's mission and vision, and I'm deeply compelled by the tremendous growth potential ahead of us. My first week has been busy and energizing. There's clearly a lot going on in the business and we're not immune to the macro0economic environment affecting so many companies right now. Just a week in, I've been very impressed by Hayden and the team here, and their commitment to making the difficult but responsible decisions for the business in this environment.

I spent a lot of time over the past week diving into the details of our business and engaging with the organization on key growth and profitability initiatives. There's a lot of important work ahead of us, but the long-term opportunity is significant. And Upwork is well positioned and committed to delivering sustainable and profitable growth.

I look forward to partnering with Hayden and the rest of the leadership team, as well as continuing our transparent relationship with our investors, analysts and other key stakeholders.

Now I hand it back over to Hayden.

Hayden Brown

Thanks, Erica. I'm looking forward to partnering with you as we continue to innovate, evangelize and scale our work marketplace. We spent the first quarter of 2023 moving swiftly to adapt to new realities as we saw the economy further impact our customers and our business. We delivered a better than expected first quarter with GSV exceeding $1 billion for the fifth straight quarter and first quarter revenue growth of 14% year-over-year to 160.9 million. We had adjusted EBITDA of negative 2.9 million in the first quarter. We also surpassed an exciting milestone in the first quarter $20 billion in lifetime of Freelancer earnings on Upwork, which doubled from $10 billion in only three years. This milestone is a testament to the incredibly diverse high-value work happening on our platform every day, as well as the abundance of highly skilled talent with which hundreds of 1000s of clients build long-term trusted relationships on Upwork. We're building this business to achieve the next milestone of $40 billion in Freelancer earnings and beyond.

At the same time, we saw some unanticipated deterioration in certain client metrics due to macroeconomic uncertainty, which was most pronounced with our enterprise customers and large businesses in the self-service marketplace. This caused us to lower our top-line revenue growth expectations and proactively take cost reduction measures to increase our profitability outlook for the remainder of the year and significantly accelerate our progress towards long-term profitability. The opportunity ahead of Upwork continues to be significant. And we're moving aggressively and intentionally to advance both our profitability and growth goals via a three-part framework.

First, running a lean and efficient organization. We remain unwavering in our commitment to building an efficient, profitable business; steps we have taken to streamline our operations include a workforce reduction, a pause on our second half brand media investment, considerable revisions to our hiring plans, and reduction of vendor related expenses.

We reduced our workforce by 137 roles or approximately 15% of full-time employees and have also reduced positions of independent team members. We're also pausing our brand media investment indefinitely and reducing our brand working media spend by more than $22 million in the second half of 2023, representing a reduction of 94% versus the prior plan for the second half of 2023.

Our team has done a phenomenal job increasing our unaided brand awareness, and our brand campaign is resonating with customers. However, in the current macroeconomic environment, we do not have enough visibility into exactly when we will see brand awareness translate into client conversion to continue prioritizing the investment at this time.

In total, the measures announced today are expected to drive over $80 million of annualized net cost savings and deliver approximately $40 million of net cost savings in 2023. Our second quarter 2023 adjusted EBITDA guidance of zero to $2 million, representing a 0% to 1% adjusted EBITDA margin includes approximately $4 million of non-recurring severance related costs, excluding these non-recurring severance related costs, our second quarter 2023 adjusted EBITDA margin would have expected to be 3% to 4%. These actions put us on a course to deliver fourth quarter 2023 adjusted EBITDA margin of approximately 16%, while remaining consistent with our ongoing commitment to drive durable growth and invest for strong returns.

Our cost discipline, agility and focus on cost optionality in our operations will continue under Erica Gessert who we are thrilled to announce as our new CFO during the first quarter. We will share more about her long-term outlook and targets over the next several quarters as Erica settles into the role.

We were also pleased to announce Sunita Solao as our new Chief People Officer shortly after quarter end and look forward to her leadership of our people team. Second, optimizing our growth portfolio. Growth continues to be a major priority, and we are focused on two main areas right now. Over the last few years, we bolstered our product lineup considerably with key enhancements and expansions, including integral improvements to our enterprise suite, the addition of new products like product catalog consultations, and our recently announced end-to-end solution to support full time hiring.

As the category leader in our space, we know that our opportunity to offer customers a singular destination capable of serving the full breadth of their hiring and work needs is critical for clients spend, lifetime value and retention. Now that we have such a robust product lineup, we're in a strong position to drive the adoption of our product portfolio and deliver even more delightful experiences to customers. This means we're going deeper rather than broader with our R&D, narrowing the scope and focus of the projects on which our team will work.

Another major focus area for us continues to be generative AI. We are establishing Upwork as a pre-eminent option for finding and hiring specialized, skilled talent for the full range of generative AI related work. We have identified and are pursuing multiple dimensions of this opportunity for talent, clients and our own teams through our own product development, unique research and partnerships. Both supply and demand for work and talent related to generative AI tools and technology implementations continue to climb. The average weekly number of search queries related to generative AI in the first quarter increased over 1,000% compared to the fourth quarter of 2022. And the average number of weekly job posts related to generative AI increased more than 600% over the same time period. To serve this explosive demand, we have continued updating our talent marketplace to reflect exciting new skills and roles, like prompt engineers, and added new project catalog categories of work, bringing the total number of categories on Upwork to over 125.

Our own development team have also been innovating and testing new interfaces and experiences made possible for our customers by generative AI technology, and large language models. We are testing generative AI powered solutions for transforming core customer experiences. Like getting started, posting jobs, receiving support and having questions answered. We are working around the clock to bring the benefits of these new technologies to talent on Upwork in every category we serve.

Generative AI as it emerges into the mainstream has us excited, we know that it is going to be a force multiplying tool for talent, and a cost saving advantage for clients. And we are committed to fully exploring and harnessing its power and efficiency....

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