Good day, ladies and gentlemen, and welcome to the Upwork Q2 2019 Earnings Question-and-Answer Session Conference Call. At this time, all participants are in a listen-only mode. Shortly, 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.

Good afternoon and welcome to Upwork's discussion of its second 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 Stephane's introductory 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, reference will be made to non-GAAP financial measures, information regarding reconciliations 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 stockholder letter is currently 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.

Hello and thank you for joining the call. Earlier this afternoon after the market close, we released a stockholder letter as well as quarterly per share offering a detail look and our results. We will get into Q&A shortly, but I wanted to cover some brief highlights first. We had a solid second quarter. Total revenue increased by 18% year-over-year to 74.3 million in the second quarter of 2019, which was approximately $800,000 above the top end of our guidance range and we had an increase in our gross margins. We have a large bucket of opportunity deriving primarily from three categories of product work; agency engagements which is any spend with an agency, longer engagements which is any spend with an individual financer over $1000 and not performed by an agency; and gig works which is project spend under $1000. The vast majority of our gross services volume or GSV comes from the first two categories generally associated with larger more enduring contracts. This quarter we added products and features with a goal of enhancing our market place with the highest quality talent to help larger companies solve their skill gap and meet their business needs. In the first half of 2019 our sales team exceeded this overall new business goal closing a record number of business and enterprise deals. We will continue to invest in creating right brands and healthy market place for the long term and with that in mind I look forward to discussing our results further in Q&A. Operator, Brian and I are now ready to take questions.

Thank you. [Operator Instructions] And our first question is coming from the line of Ron Josey with JMP Securities. Your line is open.

I just wanted to go through two questions. The first one, I wanted to ask about the salesforce and Stefan you talked about how I think you closed 4x deals in 1H versus -- 1H ’19 versus ’18. So can you talk about the tenure of the salesforce, how that’s grown? And really how more experience in salesforce is helping to you to close that? And then I’d also like to talk just questions about the take rate, I think you gave some good color in the several letter in terms of the components of take rate, but just talk about maybe the benefits from Upwork Plus and business in that take rates? Thank you.

Sure, great questions, thank you. So, the 4x that you look, H1 of 2019 over H1 of 2018, we closed 4x more deals, and I would combine this into maybe three buckets. One is, we increase the size of the sales team, right. So, we've hired a lot of people over the last 12 months, and along with that what you were hinting at, some of the people we hired in 2018 were still ramping up in the beginning of the year and now fully ramped, right. So, there's a pure number of sales people have increased. Multiple that by the productivity of the sales reps is increasing due to specialization, due to scale, due to maturing of the team. So, that's part of it. And then the second part of it was the launch of Upwork Business, and this was something that we had known for a while and I mentioned this on the last call. Upwork Enterprise was too complex for the mid market clients. And what used to be called Upwork Standard, which we are now sunsetting, was on the opposite scale, true simple meaning, it wasn't meeting all of the needs of mid market clients. And so, we've build Upwork Business precisely to be able to be a simple sale, higher velocity, shorter sale cycle and more adapted better priced for those mid market type of customers. So, I would say the acceleration the 4x in a year is the combination of those three things more sales people, more productive and a better product market fit, thanks to the launch of Upwork for business. The second question on take rate, so if you look at take rate, it's now been like the overall total take rate for the business, which is about 14.3%, has now been…

And our next question is coming from the line of Brent Thill with Jefferies. Your line is open.

This is a [indiscernible] for Brent Thill. Actually, I wanted you to go back to the previous question as well. Is there any more color between Upwork Business and Enterprise since the launch of business? And is hitting kind of an unmet demand? Or is it fairly similar traction with both of those?

They have different dynamics. I would say the length of the sales cycle part of business is much shorter when it is for Upwork Enterprise. And the type of clients as a result is also fairly different. We do see some very large companies adopting Upwork Business because they’re buying at the team level and at the shorter pass for them rather than goes through the whole process of legal and procurement and things that typically takes six months or more. But generally, we try to mostly target the mid market clients for business, so typically companies that have between a 100 and a 1000 employees more or less. And big chunk of those is coming from customers who have been using the Upwork Standard product historically. So, we have a -- if you look at the bucket of companies that are in that mid market range that have used Upwork in the last 12 months typically using standard. We’re talking about tens of thousands of customers and a handful of them are converting to Upwork Business every month now. So we’re still just scratching the surface. The good news about this is not only we're seeing the adoption ever that we wanted, meaningful, the sale cycle is roughly what we wanted it to be and the sale graphs are hitting the quarter. But on top of that what we are seeing is that, existing Upwork Standard customers when they are going to Upwork Business end up spending 25% more after the upgrade compared to what we did before. Now mind you this is early days, right. I mean it’s relatively small number of amount and relatively small number of clients, but it's very encouraging to see that, not are they're paying us more at the take rate for Upwork…

That’s very helpful color. Just one more question on the metric. The client spend retention rate of 105 is a little bit lower, I guess, in the past it was there anything to read in there as to why that might be -- I know, you’ve been outperforming on that just curious? Thank you and that’s it.

Sure, I mean, it’s a combination of -- it is a little bit lower than last quarter. I think we’ve always said it’s going to be fluctuating from peer to peer. I would say there is two things going on here, I know it’s early days to impact what the real trend is, but one is the domestic market place continues to grow nicely, it’s growing at about 35% right now. And the dynamics of the domestic market rates are different from the dynamics of the cross-border global market rate, if you will. So that can have an impact on the client spend retention positively or negatively. The second thing is. We’ve made a lot of changes here, right. We’ve changed the pricing for Connects and we’ve changed the pricing for the vast majority of our clients that used to use Upwork Standard, and that is no longer an option for them. And if you go online and you see what people are saying about this. People don't like change. I mean, they're happy people tend to be very quiet. So you don't hear a lot about them. But the unhappy people are very vocal about it. And we've seen this the last time we did a pricing change as well. In late 2016, this quite often we see a short-term view, because people overreact and they think that they don't need us anymore and they're going to go somewhere else. And then a few months later, people become rational, they realize that it's still a very good deal for them to do business without on both sides. And the numbers get better as a result. I would say that there's a little bit of a trade-off between GSV and take rates, right. Part of the reason why the take…

Our next question is coming from the line of Marvin Fong with BTIG. Your line is now open.

Just a follow-up, just like you're saying on how some clients are going to be unhappy whenever there's a change in pricing. But just could you help us understand, if you're seeing more churns than you might have been expecting based on your plans or compared to the last time it is three? Just help us think about client churn?

Yes. So, usually, we talk about clients spend retention, which is the GSV dollar number as opposed to logo retention. And if you remember back in the S-1 that we've published now awhile ago, we did this close to the total logo churn because we wanted people to know what the number looks like. But in practice, it doesn't really mean much in terms of GSV. And the reason is we have close to half of the sign ups on our work. Every day, there is about 2,500 sign ups on the buyers side, close to half of them are people that sign up with a personal e-mail address, like a Yahoo or Gmail address. And as you can expect, those are not likely to spend a lot of money, they're not likely to retain for a long time. And overall, they don't contribute to a meaningful part of the GSV. So they represent a lot of the sign-ups, but a very small part of the business. Conversely, they are -- as we mentioned in the stockholder letter, there is now over 50 companies that spend more than a $1 million a year on the platform. And even though, 50 times a 1 million does not end up being a huge part of the $2 billion either low concentration. But nonetheless, a $1 million client is much more valuable to us than a somebody that signs up with a Yahoo e-mail address. So, we we've always had very high logo churn, if you will. That's why we introduced this notion of core clients, who are the clients who have spent more than $5,000 in their life time, since they've signed up and are still active today. And that's a number that we're disclosing every quarter and you've seen it grow again by about 5,000 this quarter compared to last quarter, so growing about 21% year-on-year. So, it's really the combination of those two numbers. The number of core clients and clients spend retention that together, how we look at the business internally and our best attempts that providing data that helps people understand what the future of the business looks like.

Just a follow-up, if I may. Just on gross margin, it was very strong performance. And I read the comments in the letter. Just hoping you could help give us some sense of what was driving that more. Was it the ACH adoption, kind of give us a sense of the magnitude of what drove that cross compared to the hosting -- leverage premium hosting costs? And second part of the question is just. Do you think you can kind of hold or build on top of this 31% margin? I know you guys are taking off for instance, the payment processing on basic to the 3%. Can we expect gross margin to continue to expand from here?

Yes. So on the road show, if you remember, we talked about gross margin 80% to 85% range on the long-term target model. And so it's progressing towards that. And that is obviously the impact of the managed services, business versus the marketplace business where the managed services obviously has a different gross margin that the more marketplace we have the more will grow. So, that's one element of it. The biggest piece of that component of cause is the payment cost, right. And so, more people adopt ACH that helps with leverage, and obviously with a 3% here you now, we get a little bit more lift on that from the gross margin perspective. The other piece of it which we've been really focusing on is on the hosting costs with regards to Amazon Web Services. And that has been growing slower than revenue for several quarters. Now, we feel like we've got that manage. Now, I think it's sort of stable from here from the rest of the year because we've got some work that we're doing on moving to another location and Oregon, which will again cause us to have some savings in the future. But in the interim, it may have some double costs but we will continue to focus on. So, I think in the short-term what you'll see is sort of that gross margin in that range. And then, we'll be focusing on growing that gross margin overtime towards that long-term target model.

Our next question is coming from the line of Drew Kootman with Cantor Fitzgerald. Your line is open.

I wanted to touch on the enterprise business here. Any kind of feedback that you're getting from those larger Enterprises, and I know it's early, but how's the retention of those companies?

Yes, so the client spend retention for enterprise is much higher than it is for the marketplace. I would say in general, the bigger the Company, the more they end up spending on the platform. And the money spent on the platform, the more value they get from it. So, it's always been much higher, and it continues to do well. I would say in terms of for feedback to answer your question. We just did our annual executive summit with our top clients. So we do a lot of small events throughout the year. But once a year, we host this event that we go work without limits on WWL. This one was in Chicago. It was about 100 different attendees represented mostly from Fortune 1000 type of companies. And frankly, the best out of it was not the speakers that we had or the announcements that we made. It was just our customers talking to each other and sharing their best practices and it’s always surprising I think to them maybe lesser to us how differently different companies are using us and so in a way it’s the best cross selling opportunity in the world. You've got companies some of which are the right competitor which is also interesting, but companies that would say, well, here's how we use Upwork and the other company taking notes and hopefully experimenting with different categories, different ways of engaging with the freelancers on the platform. And we’ve seen that to be extremely effective in the past, and I think this year was another addition where it seems like, the best sales pitch ever was just to put our customers on the panel and have them talk about the instance.

Got it, and then just a quick question on how the domestic market places are going and any updates on when those will start impacting revenue?

I mean I would say they're impacting revenues today, right. So, the biggest one right now is the domestic, the U.S. domestic marketplace, and that’s now of 20% of the business, and it’s growing at about 35% year-on-year. At some point, it’s going to stop going down right because ultimately we don’t wanted to be cannibalizing the international marketplace either, but right now it’s still going significantly faster than the rest of the business. So, it’s going to continue to get gain share. I would say the next ones after that the UK experiment that we have, the Chicago, the New York and San Francisco, I would say the main thing that’s happened over the last couple of quarters is. We really ramped up the amount of brand marketing that we do. Probably, the biggest empty widespread first at this stage is the time that we still have extremely lower awareness within the traditional buyers of staffing services. The traditional staffing incomes don’t have a high Net Promoters Score. A lot of their buyers are not very happy, but they don’t consider us as an alternative to it. So, you may have seen some of our local radio and TV advertising in the last few quarters. And if you look at them, really what we’re trying to say instead of talking about how we have the future of work and we are platform and we are disruptive and all of the stuff that we think is cool, but frankly buyer don’t care about instead we really are going to talk about used cases. So and so went on parental lease and during that time, you’re really struggling to figure out how to get the public done rather than go next door and talk to your staffing firm, which is going to take a months to fill the rank with somebody who’s not very qualified, go online and find great talent within a couple of days. And you’ll see more of us trying to explain to companies that otherwise would be using a very traditional service, how and why they should be using Upwork instead.

And our next question is coming from the line of Nandan Amladi of Guggenheim Partners. Your line is open.

Thanks for taking my question. So, on the branding front I know you touched on radio and so on, but how about online advertising? And as you approach enterprise customers, do you have to move to a different approach to marketing or use different channels?

Sure I mean that’s a great question. So, I would say at this stage we use every channel that we are aware of. Maybe one of the biggest changes in terms of how your question is directly is we've hired, and I think I mentioned this on the last call, last who is our SVP of Marketing who previously had been at Robert Half for the last 17 years in particular leading the Digital Marketing efforts. So, we’re trying to from a D&A standpoint, we're trying to having the Company people that come from the tech industry and really know how to and move fast and disrupt things, but also people that come from the traditional world that are disrupting their agency, consulting and fasting world. And that is a perfect example of that, so around those, we’re building marketing programs that are cross functional that include marketing itself operation sales and products, and trying to have a very end to end view on the different types of buyers that we are targeting. As you know this platform is mostly demand constraint, like for the most of we’re now trying to get more freelancers to sign up. We’re really trying to get more companies to sign up. And there are very different types of companies signing up on our Upwork today. So, the channel to acquire people with a very small business, ideally, it's is a free channel. So it’s a lot of search engine optimization, it’s a lot of owned content like PR and other things. If you look in the SMB segment, you really want to have a go to market strategy that is ad sale service as possible because you don’t want to have an expensive sales team touching everything on the wheels. So, we’ve always had…

Thank you very helpful.

And I'm not showing any further questions at this time. Ladies and gentlemen, thank you for your participation in today’s conference call. This conclude today’s program. You may all disconnect. Everyone have a great day.