Good day, ladies and gentlemen, and welcome to the Upwork Q4 2018 Earnings Conference Call. At this time all participants are in a listen only mode. Later we will conduct the question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Palmira Gerlach, Director of Investor Relations. You may begin.

Hi, and welcome to Upwork's discussion of its fourth quarter and full year 2018 financial results. Leading the discussion today are Stephane Kasriel, Upwork's Chief Executive Officer; and Brian Kinion, Upwork's Chief Financial Officer. Following management's prepared remarks, we will be happy to take your questions. But first, let me review the safe harbor statement. During this call, we may make statements related to our business that are forward-looking statements under the 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. 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's website and on our Investor Relations website as well as the risks and other important factors discussed in today's press release. In addition, references 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. Please note that the prepared remarks corresponding to the information reviewed on today's conference call will also be available on our Investor Relations website at investors.upwork.com shortly after this call has concluded. Now I'll turn the call over to Stephane.

Good afternoon, and thank you for joining us to discuss our fourth quarter and full year 2018 results. We are excited to have finished the year with a solid performance. I want to thank our employees and incredible community of skilled freelancers and clients, working together at the Upwork. Your loyalty and forward thinking is at the core of everything Upwork has accomplished to date. Together, we are fueling our vision of work without limits. We are truly grateful for your role in our journey as Upwork drives positive change. Successfully completing our IPO and transitioning to being a public company was, obviously, a highlight of 2018. We graduated from our chapter as a private company to the next level and gained more momentum than ever to lead our industry forward. We closed a pivotal year for Upwork, punctuated by exceeding our fourth quarter expectations for both revenue and adjusted EBITDA. I'm proud to have met our objectives for both the quarter and the year. We continue to invest in our platform to add innovative and dynamic options for our users. With a guiding principle of driving long-term growth with sound unit economics, we are committed to executing on our strategic priorities to better capture our large market opportunity. Upwork continually seeks to enhance the customer experience for both the freelancers and the clients that use our platform. The partnerships and product updates we have implemented and those that we will continue to roll out to support this goal. I want to take a moment to highlight some of our accomplishments in 2018 that I believe will contribute to our future growth. In December 2018, we announced the partnership with Microsoft to empower enterprises to embrace flexible teams. For context, enterprises increasingly recognize the need to transform the way they…

Thank you, Stephane, and good afternoon, everyone. My remarks today will start with a brief update on our key operating metrics. Then turn to the financial results and our guidance for the first quarter and full year 2019, which we provided in our earnings release filed earlier today. Numbers are rounded for the sake of convenience. And unless noted otherwise, comparisons for the full year 2018 are on a year-over-year basis, while comparisons to the fourth quarter of 2018 are to the fourth quarter of 2017. I'll be referring to GAAP measures unless explicitly cited as a non-GAAP measure. We monitor and measure our business performance using the following key operating metrics: gross services volume or GSV, core clients, and client spend retention. We believe these metrics are key indicators of our growth and the overall health of our business. GSV, which includes both client spend and additional fees we charge for other value-added services, increased by 25% in the fourth quarter to $472 million, an increase of 28% year-over-year to $1.76 billion. Growth in GSV was driven by an increase in both core clients and an increase in our client spend retention. Core clients defined as a client that has spent in aggregate at least $5,000 in their lifetime on our platform, and their spend in the last 12 months increased by 22% to over $105,000 as of December 31, 2018. Client spend retention was 108% on a trailing 12-month basis at December 31, 2018, compared to 99% at December 31, 2017. Based upon our analysis of our current cohorts, we continue to expect client spend retention to stabilize in the 106% to 108% range for the near term. With these key operational metrics in mind, I will now turn to our financial results. Total revenue increased by 23%…

Thank you, Brian. We are really excited about our 2019 outlook and strategy. Our marketplace is truly a place where high quality work is done and freelancers can earn a meaningful living. At Upwork, we ourselves practice a work without limits model that includes a distributed team of on-site and remote employees and we also engage with over 1,000 freelancers all over the world for our own specialized projects. It is amazing to have access to this highly skilled global workforce, which we believe to be a key component of our business success. With macro trends at our back, we're investing in our products, our brand and our sales capabilities to go after our long-term addressable markets. Again, thank you to our employees, the freelancers who provide services to us, the freelancers and clients who use our platform, our partners and our investors. We are looking forward to success in 2019 to build a company for the ages. With that, we will be happy to take your questions.

[Operator Instructions] Our first question comes from Mark Mahaney with RBC Capital Markets.

Two questions, please. The partnership with Microsoft, Stephane, you started off the call talking about and you announced in December, could you help us think through the -- how to -- the financial implications of that? That's obviously a very large potential partner or current partner now. So just help us to think through the implications there. And then on the domestic marketplace, could you quantify the contribution? And I think you are also expanding that to other international markets, I believe, the UK. Just talk about the success you've seen with that here in the U.S., it looks promising. How much potential do you think that has in some of your international markets?

Sure. So I would say the answers to the first question is, it is very early days with Microsoft. We have very ambitious goals I would say to integrate further our product suites with Microsoft and would say more generally we want to be available wherever people use the types of services that Upwork provides. So think of, you're inside of Microsoft SharePoint, you need help to build a SharePoint website. Historically, the experience would have been that you needed to think, oh, there's this thing called Upwork. You go to upwork.com, you post a job, hire a freelancer, you may not know how to hire freelancers through a SharePoint, that's why you need the help. Then you need to give them access to the SharePoint sites, et cetera, et cetera. So, it's a very disjointed experience. The idea here is to build integration so that you can have access to preapproved veteran freelancers that in this case would have been pre-approved by Microsoft. And you can hire them on the spot, while using the tool. What we've announced to date is a, I would say, an early phase of this integration, which is mostly targeted at allowing other enterprises to use Upwork the same way Microsoft has been using Upwork internally. So Microsoft has been using Upwork, obviously, also using their own products for a while and they wanted to document the types of technical integrations they have done between our two different products as well as the work process itself. How do they use Flow, SharePoint, Teams, GitHub and a bunch of other pieces of software with external freelancers that they hire through Upwork and make that available to large enterprise customers that may already be using Upwork today, but typically already using Microsoft today. To the second…

Thank you. Our next question comes from Mark May with Citi.

I had a couple, please cut me off if I ask too many, but actually following up on Mark's question about domestic-to-domestic. When you first launched the domestic marketplace, you saw a nice bump in the business it seems, and now you're talking about what seems to be some new initiatives to further enhance growth from the domestic marketplace. Should we think of those as potentially pretty meaningful incremental drivers of growth for the business? Or just more kind of incremental type of things that you're doing there? Just trying to get a sense of how excited or the magnitude of some of the things that you have on the plate for this year. I had a couple of others, but maybe just not to want too many at once. But next question would be on take rate. You talked about why the reported take rate, which is obviously a blend is declining. Is there more clients at freelancer repeat business that kind of drives that takes it down, but how much will that continue to weigh on the average take rate, like the mix shift their driven by repeat business? Or will -- like new features in the Enterprise segment and other things that are offsetting, are those things enough to kind of fully offset that mix shift? Just trying to get a sense of the mix dynamics you see going forward.

Sure. So like the question on domestic, I think the way I would look at it is to look at S curves, right. So we have this core business today, which is mostly SMB, mostly cross-border and a big part of it in IT. And we are building these long-term S curves that are enterprise, that are non-IT, that's what this category expansion and verticalization is about and domestic, right. So these are three different directions that the business is going into. In the long run, each of these will be bigger than the core marketplace that we have today. But they start from different sizes initially, right. So if you think about U.S. as an example, I think we disclosed this in our S-1, right. The U.S. was already the number one source of clients and the number one source of freelancers. So we are starting from a base that is substantial, when we launched the domestic marketplace, we got an instant bump. If you look at the UK, UK to UK is a lot smaller than U.S. to U.S. was. And so while it's a nice bump, it's not a meaningful bump from the standpoint of the overall business. However, if you think about the underlying addressable markets, right, I mean, if you think about the larger staffing firms in the world do revenue in the UK, that is similar in absolute terms to what they do in the U.S., right. So there's a really big underlying market but because we're starting from a smaller base, the impact in 2019 will be lesser and you'll start seeing some of these impacts in 2020 and beyond. Your question about take rate. I would say, we really tried to focus on building long-term sustainable growth for this business. There's a…

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

Stephane, I'm curious if you could just talk a little bit about some attraction with the larger enterprises? And as you progress through '18 and '19, did you notice any interesting trends that maybe you had seen historically that you think carry into '19? And I had a quick follow-up for Brian.

Yes. I mean, I think what we're seeing is, increasingly people considering this as a normal way of conducting business. When we started talking to very large companies two or three years ago, obviously, the first question they would ask is, who else is using it. And the answer at that time was, well, not a ton of people. Now we're getting to the stage where a lot of the people we talk to came from other companies that were already using Upwork or other similar platforms come from a generation in the workforce for whom this is totally obvious and totally logical thing to do. And generally, they read reports online from various research firms that are saying that they're not alone and other companies are doing this. And so I would say increasingly people are excited to start proofs of concepts and pilots with us. And some of the ones that started pilots 2 or 3 years ago are starting to spend meaningful amounts of money on the site. It's still very early days, right. Our enterprise business remains in the 15%, 20% range of our business as we disclosed during the IPO. And even though I fully expect it to grow faster than the rest of the business, it's going to be many, many years before it's more than 50% of the business.

Okay, great. And Brian, you grew 25% in '18, you're guiding 18% to 20% growth in '19. Can you just walk through a bit of the assumption of the deceleration, obviously, coming off larger numbers. But is there anything that's different as you go into this year that would point to that deceleration?

Well, I think we've been consistent since the IPO when we talked to you when we were on the road show and things like that. We're confident in the long-term and the full year we're guiding to. In the first quarter what you're seeing is, the lapping of the U.S. to U.S. marketplace, which we had known about. You're seeing more ACH adoption and that's part of what we're seeing in the business now few months in, which is -- obviously, helps our gross profit, but does take -- effect our take rate as well as revenue growth. And then what you're seeing also is the impact of this cyclicality in our business cycle, where the number of Mondays impacts our business. And so for instance, in Q4, there was 14, in Q1 there'll be 12, Q2 they'll be 13 and Q3 will be 14. So there's a little bit about that goes for the year. And as we guided during the road show is that we would see a little bit deceleration in the first half of the year because of the lapping and then we will see acceleration in the back half of the year as we continue to grow the business. Another thing I'd add -- sorry, I'll add, Brent sorry. The one thing I did mention on the call was we did smooth out our online performance marketing investment throughout 2019. In the past, we had spent most of this in the first quarter and we felt like it was prudent for us, one is, to smooth out our EBITDA, but also to smooth our acquisition cost at a lower cost.

And our next question comes from Ron Josey with JMP.

This is David, on for Ron. I wanted to follow up on client retention, I thought it was pretty good this quarter at 108%. Can you talk about what's driving that? And how sustainable is it going forward? And number two, on enterprise sales build-out. Can you talk about where you are in terms of hiring relative to expectations? And how is the ramp going to do a full productivity?

I'll take client spend retention, and then Stephane can talk a little about the sales. I mean, as I mentioned on the call, based on our current cohort analysis, we expect that to be in the range of 106% to 108% for the near term. We are focused on increasing our client spend retention from existing clients, by building these new features and functionality in products. So based upon what we can see, it's sort of that 106% to 108% range.

Yes. And then, your question about sales. As I think I may have alluded to in the last call, we just signed a lease for a new office in Chicago that is designed to, at full rollout, host about 500 people, not all of whom will be in sales, but many will. And so we are continuing to aggressively hire. We are very comfortable with the sales productivity numbers. People are hitting numbers that we are comfortable with. And in terms of actual headcounts, we've tried to hire as aggressively as we could absorb in the team. I would say we've been a little bit slower than what we expected, but nonetheless, we are doing good compared to what we were expecting for the overall revenue from the business.

Our next question comes from Scott Devitt with Stifel.

Two questions, if I could. There was minimal GSV deceleration in the quarter and the comp was considerably more difficult. So I was wondering if you could just provide any detail in terms of maybe verticals or GOs that you'd call out in the quarter? And then secondly, Stephane, you mentioned the four key product investments for 2019. Just wondering if you could talk through potential contributions from the introductions of those product offerings throughout '19 that you think could potentially benefit either GSV or monetization?

Sure. I'll take the first one? All right. Well, so I think like, I mean, ultimately, we did better than I think we had expected in both spend retention. If you remember, we had said it's 108% last quarter, but we think it's going to go down to 106% and it stayed at 108%, so that naturally creates more GSV. And then our core clients' spend was pretty strong. And I would say, some of the features that I highlighted during the call, the Help Me Hire, when I said we added more than 10,000 hiring managers, that goes to both of these numbers, right. When you have additional hiring managers on a given account, the account is more likely to hit that $5,000 threshold mark faster and, therefore, become a core client earlier as well as it obviously increases client spend retention, a client that might have spent X with one hiring manager, when there's two hiring managers might be spending 2x. So that's what's been driving it. And then the second question was?

Relating to just the product initiatives in 2019.

Right. Related to contribution?

Yes.

Well, I think, in 2019, I would say, the way we tend to look at it is, these features rollout through the year and the ability to have a major impact in the year itself is somewhat tied to when in the year they launch. And so I would look at it more as on a multiyear cycle, if you will. Typically, things that are driving more acquisition will take longer to mature, right. So things that would make it easier for us to sign up new enterprise clients as an example are long-term bets for the business. Whereas things that helped increase the spend of existing clients tend to be a faster impact to the business. So to give you an example, when we talk about category experience optimization, we already do a lot of work in graphic design. We think that the new experiences that we're building will make those transactions convert at a higher rate. And so because this is not net new acquisition, this is just changing the existing behavior that happens on the site. Those tend to have a faster payouts than things that might be more about customers that we don't have yet. So I would look at it as -- and that's how we look at it internally as the portfolio of bets, some of which are more incremental and with a more certain faster payback and others that are more experimental and may have higher impact overall, but might be taking longer to mature.

Thank you. I'm showing no further questions at this time. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone, have a great day.