Good day, ladies and gentlemen, and welcome to the Upwork Q1 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a 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 first quarter 2019 financial results. Leading the discussion today are Stephane Kasriel, Upwork's President and 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 the 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, reference will be made to non-GAAP financial measures, information regarding reconciliations of non-GAAP to GAAP measures can be found on 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 and investors.upwork.com shortly after this call has concluded. Now I'll turn the call over to Stephane.

Thank you, Palmira. Good afternoon and thank you for joining us to discuss our first quarter 2019 results. We had a solid start to the year with continued GSV growth and margin expansion, and we are excited to share our detailed results with you. What drives us day-in and day-out is our mission to create economic opportunities, so people have better lives. We continue to make progress in launching new products, features and enhancements to our online talent marketplace. We do this to improve the quality of the marketplace, to capture more of our large addressable market opportunity, and to address the needs of our most important constituents, the freelancers and clients who work together on our platform. On the product front we now have four marketplace offerings to help better serve the needs of our different clients, Upwork Basic, Upwork Plus, Upwork Business and Upwork Enterprise. As background, historically we had two marketplace offerings, Upwork Standard and Upwork Enterprise. Upwork Standard was a self-service offering targeted at sole proprietorships and small businesses, while Upwork Enterprise is sold by our sales team and targeted at mid-market and enterprise customer. It became evident over time that we needed to have additional offerings to better address the needs of our diverse client base. Therefore, in late Q1 we remained Upwork Standard to Upwork Basic and launched Upwork Plus and Upwork Business. I will now describe which clients each of these products is targeted at from most entry-level products to our most advanced products. Upwork Basic is targeted at very small businesses, giving them access to our marketplace to find, engage and collaborate with talents. Upwork Plus is targeted at small businesses that wish to engage freelancers in a self service way and need the tools to stand out from the crowd and…

Thank you, Stephane and good afternoon everyone. I will start with a brief update on our key operating metrics. Then I will discuss both our financial results for the first quarter of 2019 and our guidance for the second quarter and full year 2019, which we included in our earnings release earlier today. Please note that numbers are rounded for the sake of convenience and unless noted otherwise comparisons of the first quarter of 2019 or to the first quarter of 2018. I will 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 client 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 21% in the first quarter to $487 million. We continue to drive GSV with year-over-year increases in both core clients and client spend retention. The number of core clients increased by 22% to approximately $111,000 as of March 31st 2019. Client spend retention was 107% on a trailing 12 month basis as of March 31st, 2019, compared to 103% as of March 31st, 2018. This is consistent with our expectation that client spend retention will stabilize in the 106% to 108% range for the near term. We continue to focus on increasing spend from our expanding base of clients on the platform. These key operational metrics in mind, I will now turn to our financial results. Total revenue increased by 16% to $68.9 million in the first quarter. Marketplace revenue increased by 17% to $60.9 million, representing 88% of our total revenue for the first quarter.…

Thank you, Brian. Our first quarter performance puts us on a solid trajectory to achieve our plans for 2019 and beyond. We continue to lead both our business and our industry ahead as we fulfill our vision to connect businesses with great talent to work without limits. We are confident in the strategic initiatives we've set for long-term growth and pleased with our progress against them. And with that, we will now take your questions.

Thank you [Operator Instructions]. Our first question comes from Mark Mahaney with RBC Capital Markets. Your line is open.

Hey guys, it's Zac Schwartzman on for Mark. Stephane, I saw you exchange some comments on Twitter responding to VC about the growing opportunity of hiring tech talent outside the Bay Area, especially for newer private companies. How do you see Upwork Plus and Upwork Business addressing those opportunities that Jack Dorsey, Bill Gurley and you were tweeting about this weekend? And a follow-up for Brian on the core clients. This is the highest quarterly sequential increase we've seen with 6,000 core client net adds, is there anything in particular there that team has been focusing on or is this just in the natural progression of the business. Maybe anything from early adoption of Upwork Plus or Upwork Business? Thank you.

Thank you for the question. I'm happy to take the first one. There has been a growing trend of what some people in the industry call distributed companies or remote first companies, which in some cases don't even have an office anymore. And we've always thought this was a big part of the destiny of this company was to enable businesses that are based in New York and Silicon Valley, which are two of our top cities in the world, who really struggle to find good talent locally, because the competition is so high to be able to hire great talent from elsewhere in the U.S. and globally. And what's been happening over the last few years is the cost of living in the Bay Area in New York and in other places continues to grow faster than most people's income and so increasingly, people are struggling to move to San Francisco, move to the Bay Area, and companies conversely are increasingly really struggling to find the talent in the Bay Area. So, a few years ago when I talked to VC is part of the reason why I replied to Bill, I mean Bill is a VC benchmark who happens to be one of our biggest [Technical Difficulty]. Historically, when we would have these conversations with VCs years ago, they would say, well, that's crazy, how could you possibly find great talent, how could you possibly build a good culture, how could you be productive, et cetera, et cetera, if your company is distributed, this doesn't this doesn't scale, that's not how Google operates, that's not how Microsoft operates, therefore, that's not how portfolio companies are going to operate. But now you're at a stage where you have companies like us, about 1,500 people globally, only 400 or so…

And then Jack your question on core clients. The core clients has actually grown 22% year-over-year for the last four quarters, we've been quarter-over-quarter about 5% growth rates. We've been adding about 5,000 every quarter over the last year. It's too early on the Upwork business to see anything there because it was launched in Q1. So you'd hope to see that come throughout the year though.

Thank you. And our next question comes from Brent Thill with Jefferies. Please proceed.

Thanks. Just in terms of the back-end loaded year on revenue. Can you maybe just talk through what you're seeing there? And just from the mid-market products can you just maybe address what you're seeing, I know its super early, but the talk through trajectory and that adoption what you see currently? Thank you.

Sure. Yes, I mean there is a combination of a few things, right. I mean, some of which is just this whole thing about number of Mondays. I mean there's nothing really magical about this other than we make more money on Mondays and so when there's more Mondays in a quarter we make more money and when comparatively to the previous year or the previous quarter, if you're looking at quarter-over-quarter or year-over-year, the number of Mondays changes, it also has an impact on the numbers. So that's one thing. Second one was a decision we made which I mentioned on the previous call, a decision we made to spread investment in marketing more evenly throughout the year and the rationale behind this being that the lifetime value of accounts that we signed in Q2 or in Q3 is similar to the lifetime value of accounts that we sign up in Q1. Meanwhile, if we spend more money Q1 and Q2 or Q3, then the cost of acquisition ends up being higher. So the CAC to LTV ratio we believe is going to be maximized by spreading marketing investments through the year. Unfortunately, in the short term what that does is depressing the numbers a little bit because instead of acquiring tons of clients in Q1 that would then spend through the year, we're going to be -- we acquire fewer clients in Q1 and relatively speaking we're going to acquire more clients in Q4. And so that's leading to a progressive acceleration of the business through the year. The same thing which we mentioned last time is the lapping of a great year last year with the the domestic launch, and so this really hurts us more in Q1 and Q2 and less in Q3 and Q4. But…

Thank you. And our next question comes from Mark May with Citi. Please proceed.

On the client side, the hiring side, any interesting changes and the type of clients maybe on the new client side that you're seeing from a mix perspective, maybe not but just curious if you are. And then I know you provided revenue retention growth rate of course, but just wondered if there's anything else that you'd add in terms of client retention trends that you're seeing recently. Thank you.

Sure. So I would say we have a deliberate effort in the company to try to go after bigger companies. So historically, if you go back three or four years ago before we had a way of segmenting our user base, if you signed up with a Yahoo, or Gmail address or if you signed up with an email address that matched a Fortune 500 company, we would treat you the same and because we didn't know the difference from an acquisition marketing standpoint, we would spend the same amount of money to acquire both. As we became more sophisticated it became clear that having a good segmentation was really essential and we are spending much more time thinking about the larger companies. I mean, definitely the ones that are 10 employees and above, but frankly mostly the ones that are 50 employees and above then the people that sign up with Yahoo and Gmail address, so yes, overtime, we see fewer individuals and fewer sole-proprietors and a smaller contribution of them to the overall business, which is part of the way we've improved client spend retention as you can imagine bigger companies tend to retain significantly better than very small businesses. So that is a very deliberate approach. The other thing that's been happening over the last three years or so is a shift from more of the business being cross border to more of the business being domestic and that's been this success that the domestic marketplace has been and it's been really good for everybody because freelancers in the U.S. no longer compete against freelances overseas. So they're able to have higher rates. Clients in the U.S. that otherwise would not be interested in Upwork because they felt it was risky to hire people overseas are now spending incrementally, and then for us because the hourly rates tend to be higher, and our take rate is the same, we end up making more money for the same project, right. So it's been a pretty big win all around. And then overall, I mean, what you see in the numbers also is our international business on the client side is growing faster than the U.S. business, so progressively we are becoming more distributed even on the buyer side not just on the freelancer side.

And on your question for clients' retention, I just would say it's in the expected brand that we highlighted the 106 to 108 range, nothing out of the ordinary for Q1. Obviously, we want to increase that rate over time and a lot of what we're doing with these new products and functionalities to drive those up, but this is based upon current cohorts of information we have today.

Thank you. And our next question comes from Ron Josey with JMP Securities. Please proceed.

Great, thanks for taking the question. I just wanted to maybe just a quick follow-up and then another question on the local freelance search. So Stephane I think in the opening remarks you were talking about the build out of the enterprise sales force and thought I heard you say you're seeing traction in the Upwork Business post launch, Upwork for business new marketplace. So can you just talk about how the sales group is grouped together whatever focused on each one of these marketplace understanding that probably more on business and enterprise. And then the second part of the question. Just with the local freelancer search options test great to see it expanding to newer markets, but can you just talk about maybe the KPIs here that give you confidence to expand to these newer markets? Thank you.

So maybe starting with the first one. The way the sales team is organized is by segments, not by products, reps only book of business. So we have mid market reps that manage companies between 100 and 1000 employees. We have large account reps that manage a book of business of companies from 1,000 plus, and then we have strategic reps that handle a subset of the Fortune 500, if you will. As you can imagine the strategic reps are much more likely to be selling Upwork Enterprise and the mid-market reps are now much more likely to be selling Upwork Business, but the goal of the rep is to identify what is the best solution for the customer, we just gave them more options to choose from. And I think what we'll see, because we believe the sales cycle is going to be a lot shorter and the price is obviously a lot lower. I think we'll see increased adoption by the mid-market segments of the Upwork Business solution even if later once they've grown to a certain scale they decide to upgrade to Upwork Enterprise. And then for freelancer search, I mean, I would say at this stage, it's a combination of the data that we have, if we believe we have enough density of supply and demand in a given metropolitan areas then it makes sense to launch it, but it's also our ability to test and run multiple experiments at the same time. So we started, maybe a little bit conservatively with just a handful of cities and given that the KPIs we're looking at right now, which are things like, do we get incremental post that we're not getting before. Are they getting filled? Do the jobs tend to bill as much as we think they would bill, for instance, do we get disintermediated, would be an example question we would look at. And generally does this almost micro marketplace look healthy? Does it have liquidity? Are the buyers finding what they want? Is the quality high? Just the repeat business happen the way we would expect it to, and if so, then we go and expand it.

Thank you. And our next question comes from Nandan Amladi with Guggenheim Partners. Please proceed.

Thanks for taking my question. So as you roll out these new marketing plans. How much effort are you spending on attracting freelancers versus businesses and enterprises. You talked about how your sales teams are structured. Can you talk a little bit about your efforts from the freelancer side?

I mean, overall if you look at the macro level we remain very demand constraint, very oversupplied in terms of number of freelancers. Every day there's over 10,000 people who apply to join Upwork as freelancers, and we only have jobs for about 2% of them. And so in some emerging categories we may find that the supply level is not high enough, the way we see it usually is because the fill rates on those jobs is low. For the most part existing freelancers will have adjacent skill to figure this out on their own, and they teach themselves the skills. If they don't figure this out on their own, then we may nudge them a little bit to acquire the skills, but it's very rare that we'll have a dedicated sales and marketing effort to try to get more freelancers on the platform. It's happening organically through word of mouth, right, I mean fundamentally if you are a freelancer in the middle of the country in the U.S. or abroad, you have access to better jobs that pay a lot more money, that give you more flexibility and more freedom has really not to like about being successful on Upwork. The tough thing, the thing that keeps us up at night is we just don't have enough jobs for people, which is why we turn down 98% of people, and these are people with a college degree, right. Over 80% of our user base, our freelancers that have a college degree. So if you just look at the U.S. alone, we'll have close to a million co-educated Americans that will try to join Upworks this year, and we don't have jobs for the vast majority of them. So the reason why we spend a lot of money on sales and marketing, relatively speaking on the client side compared to the freelancer side is because of the imbalance between supply and demand.

Thank you. And anything to note with your partnership with Microsoft that you launched last quarter?

We're getting a lot of really, really good traction with it. I would say existing Upwork Enterprise customers are really interested. I mean, as you can imagine, many large enterprises are Microsoft customers. And so they're very interested in essentially taking all the best practices that Microsoft had internally in learning how to use Upwork, as well as the integration which deals with Power BI and Microsoft teams and Microsoft Flow, etcetera, etcetera. And they're getting deployed at an increasing number of our enterprise clients, as well as I would say the other happy thing that's been happening is Microsoft has been also sending us a lot of leads that they get on their end from Office 365 customers that are saying, Hey, we've been thinking about using Upwork for long time, can you get us connected with their freelancer toolkit to the Upwork product. But it's early days, right, this is going to be a very long journey, hopefully, full of other product integrations and a lot more joint marketing and joint sales opportunities.

Thank you. And our next question comes from Marvin Fong with BTIG. Please proceed.

Good afternoon. Thank you for taking my questions. So, two questions, I guess the first one, Brian, if you could just help us on the shape of the potential pressure on take rate, do you think that the first quarter, we have seen the worst of the pressure or do you have a view on that? And then the second question is just on the new products, if you can give us some additional color on how you think about the opportunity between Basic and Plus, like how much of the client base that was formerly on standard might be addressed by the Upwork Plus product, and just as a second follow-up on that. Are you guys now set with your go-to-market with these four different membership plans? Thank you.

So, on take rate there's multiple elements that impact take rate. So, the freelancer tiered service fee as more people get to the 5%, that's still a pressure but it makes it much more secure than the platform, which helps our client spend retention than our core clients. You've also got the ACH adoption as another option that's pressure on take rate as well as revenue, but again drives GSV on the platform. So these new products have different take rates from the perspective of obviously a Plus having a 3% is a little bit of a lift. The business is a higher take rate. And so as a result we implement these things to try to stabilize take rate, but there's always a lot of moving parts in here and as more customers get to the enterprise that's also got a higher take rate as well. So, I would say, you probably see a little deceleration, but we're working on trying to stabilize it, but our focus really is on driving GSV growth and being profitable and being able to take the product. Question is on the products, Basic and Plus.

The adoption of Basic versus Plus. I mean like in an ideal world, I mean, the way we've tried to build a product is that we have four segments of customers, four products and everybody selects exactly the right product for them. Obviously we can't possibly know exactly what every customer is unique and every need is unique, and so the mapping may not be exact. But nonetheless, I think what we said at the time of the IPO, about 80% of our business is done with companies that are 100 employees or less, many of them in that Plus segment, a big part of the GSV is there and so we think progressively we are going to see people that are currently on Upwork Standard, which eventually will be discontinued as a product. They'll have to choose whether they get the Upwork Basic product, which is a scaled down version of Upwork Standard or whether they upgrade to Upwork Plus, which is a scaled up version of Upwork Standard. So we're going to have people make an explicit choice and obviously they can upgrade or downgrade from there. I think over time we'll get massive adoptions of Upwork Plus, but this is early days and we'll probably need to have quite a few iterations from a product standpoint and possibly from a pricing standpoint before we completely get it right. And I would say the go-to-market itself is in Version 1.1 and that's going to be many iterations of that as well.

Thank you. And this concludes our Q&A session. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone have a great day.