Ladies and gentlemen, thank you for standing by and welcome to the Upwork Q4 2019 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ms. Palmira Gerlach, Director of Investor Relations. Please go ahead.

Hi and welcome to Upwork’s discussion of its fourth quarter and full year 2019 financial results. Leading the discussion today are Hayden Brown, 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 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 of the 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 under the SEC 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 reconciliation of non-GAAP to GAAP measures can be found in the press release that was issued this afternoon on our Investor Relations website at investors.upwork.com. As always, reported figures are rounded, unless otherwise noted, comparisons of the fourth quarter of 2019 are to the fourth quarter of 2018 and comparisons for the full year 2019 are to the full year 2018. All measures are GAAP unless cited as non-GAAP. As we have disclosed previously, we adopted the new revenue recognition standard, Accounting Standards Codification Topic 606, ASC 606, on December 31, 2019 on a modified retrospective basis effective January 1, 2019. This primarily affects our tiered pricing program for freelancer service fee, which results in a deferral of revenue. Financial results for the reporting period during 2019 are presented in accordance with the new revenue recognition standard. Although for purposes of comparison to our prior guidance and our fiscal year 2018 results, we will also be discussing certain of our 2019 results under ASC 605. Our press release filed today includes for the first time the additional information to reconcile the impact of the adoption of this revenue standard on our financial results for reporting periods in 2019. Additionally, we have posted a presentation on the investor section of our Investor Relations website with details regarding the impact of ASC 606 adoption on our reported financial results. 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 shortly after the call has concluded. Now I will turn the call over to Hayden.

Thanks, Palmira and thanks everyone for dialing in today. When I joined Upwork 8 years ago, it was clear to me that this company is positioned at the crossroads of four major secular trends: first, a planet blanketed by internet access, offering the potential to connect people across the globe like never before; second, better and better collaboration tools, making remote work increasingly comparable to being face-to-face; third, shifting sands in the labor force, in which people increasingly demand to work differently, seeking freedom from the traditional 9 to 5 workplace and greater autonomy in when and for whom they work; and fourth, an increasing war for talent, with companies running out of options for how to attract and retain the types of workers that they need to be competitive. This company was founded on a transformational idea that today seems like an inevitability, high-quality work and workers available on demand at the touch of a button. While this is a future that we have envisioned for quite some time, the signals I see within our business today suggest we are close to reaching a tipping point. While demand for our services from small businesses has always been and continues to be strong, today we are seeing the tides turn in larger company contexts. We have gained evangelists at midsize to Fortune 500 companies, one-third of whom are our clients. This is igniting new conversations amongst executives in corporate America about how broken today’s models are for sourcing and working with skilled talent. These companies increasingly recognize that the so-called skills gap can be bridged by leveraging talent from beyond their local regions and from sources outside of their traditional staffing vendors. These larger companies now realize that Upwork’s on-demand talent solution is a critical pathway for them to not…

Thank you, Hayden and good afternoon everyone. My remarks today will start with the impact on our financial results from the adoption of two accounting standards we were required to adopt in 2019. Then I will discuss our financial results for the fourth quarter and full year 2019 and provide our revenue guidance for the first quarter and full year 2020, which we included in our earnings release filed earlier today. We adopted ASC 842 which is the new leasing standard as of January 1, 2019 using the effective method. We recorded a right-of-use asset and corresponding lease liability in our consolidated balance sheet for approximately $22 million. The impact to our consolidated statement of operations was immaterial. As we have previously disclosed, we were required to adopt ASC 606 which is the new revenue recognition accounting standard. We adopted 606 on December 31, 2019 on a modified retrospective basis effective January 1, 2019. The amount and timing of revenue recognized during 2019 remains largely unchanged across our offerings as a result of this adoption. However, the most notable impact relates to our tiered pricing program for freelancer service fees. For freelancers working with clients that are on our Upwork Basic and Plus offerings, we have a tiered freelancer service fee schedule based on cumulative lifetime billings by the freelancer to each client. Under the new standard, we will effectively defer a portion of the higher upfront fee and then recognize it ratably over the estimated time that we receive the lower fee. The impact on the adoption was to record $11.8 million of deferred revenue with a corresponding entry to accumulated deficit, which represents the net impact of our tiered freelancer services schedule from the inception of its implementation in 2016 to the end of 2018. The net impact…

Thanks, Brian. Above all else, I want the takeaway of this call to be that Upwork is incredibly well positioned to capture a huge market opportunity, executing on a focused strategy that will deliver 20% growth and increasing profitability over time. We see critical secular trends converging and we are ready to take advantage of the changing landscape of how we work. We have a unique leadership position and know-how in digital and remote work, a technology platform with incredible scale, a data asset including millions of users and trillions of unique matching data points, which together enable us to deliver better quality talent, faster, more effectively and at higher scale than any other solution that exists. We are well positioned to own a significant share of the large and growing market for contingent professionals, with early success and growing penetration of both the self-service market as well as the large enterprise space. My number one priority is to make our potential as a market leader and a higher growth business a reality. While 2020 will be a transition year as we lay the foundation for the future, I am confident that our efforts to strengthen our core self-service business and expand the impact of our sales team will yield results. I appreciate the continued confidence of our investors who share our vision and who I believe will be rewarded. One of the best things about my job is that I get to see and hear from our customers every day both those at giant corporations and those at small mom and pop shops. In recent conversations, Upwork clients and freelancers used words like superhuman and Batman to describe how they feel when using our product. Our customers speak with awe about how our company has truly changed what they thought was possible for themselves and their businesses. Our tremendous opportunity to be a generation-defining company that changes people’s lives for the better motivates me and all of us at Upwork every single day. We are confident in the future and excited about the opportunities ahead. We look forward to answering your questions about our results and our outlook. Operator, we are ready for questions.

[Operator Instructions] Your first question comes from the line of Mark Mahaney from RBC. Your line is open.

Thanks. I would like to ask two questions please. Hayden, thanks for laying out the three initiatives to accelerate growth going into 2021, which of those three or can you just rank order them in terms of which those three you think will be easiest and which of the three will be hardest to achieve? And then Brian, will you ring-fence at all the bottom line for us in ‘20 like what you are willing to accept and what you aren’t willing to accept? Would it be – could it be your steep EBITDA losses, do you want to run at a breakeven, I am sorry you may have covered that, but I think I may have missed that? Just if you are not giving specific guidance that you at least ring-fencing it to levels that we should at least not expect, we should not be surprised by or we should not expect as investors? Thank you.

Thanks for the question. In terms of ranking our priorities, I think the number one focus for us is really around increasing our client spend retentions and that metric is driven by really all three of the priorities I outlined. In particular and priority number two where we are talking about increasing the efficacy for clients to do longer term solutions on our site like payroll and temp to hire offerings in objective number one, where we are tackling larger clients who typically we have seen have a lot more to spend and also have better retention characteristics for us. I think those are some examples of how really all three of the pieces are critical to driving that overall growth, but the umbrella that we are really focused on is how do we improve client spend retention over time, because there is a lot of runway there and we think we can do it with the strategy we have laid out.

Yes, thanks Mark for your question on EBITDA. So our goal is to make the company a higher growth business sustaining 20% year-over-year over the long-term. And so with that in mind, we plan to operate with cost discipline as we have done in the past. We will look to redeploy capital to the highest growth opportunities, especially in sales and marketing as we see clear LTV to CAC hurdles. We continuously are evaluating those best options and we wanted optionality in order to drive that growth without being constrained by a profitability target this year, but I would say that both Hayden and I will manage this business accordingly and not – it’s not a growth at all cost kind of conversation.

Okay, thank you.

And your next question comes from the line of Ron Josey from JMP Securities. Your line is open.

Hi, this is David on for Ron. Can you talk about your sales hiring plans for 2020? And then for Brian, under 606, you deferred more marketplace revenue in 3Q can you provide some color on that please? Thank you.

Yes. So, David, our focus is definitely on capturing long-term value and creating that long-term value. And so sales is important part of that strategy. We saw really good performance last year from our sales team on a number of metrics, including the 18 to 24 month payback period, but also exceeding some of our targets around new deals as an example. And so as we look towards the rest of this year, we have a hiring plan around sales, but really have identified a number of gating metrics. But as we see the sales team achieving that will trigger more or less hiring based on the performance. And so we are expecting continued consistent hiring within the sales organization, but we will dynamically make decisions around that based on the team’s performance.

Yes. Thanks for your question on 606. It’s based upon the build of our freelancer service fee over time. And so it can vary a little bit quarter-by-quarter. And what we guided was basically around $7.50 a quarter going forward in 2020. But if you look back historically at some of the numbers there, they do move around a little bit on a quarter-to-quarter basis. But based on our forecast going forward, it looks like it’s fairly even and that depends on again the estimated time of when freelancers can move around from the 2010 five buckets. And so it’s basically more of a timing issue than anything else. And we will have to continue to assess the estimated time of when they will get to that 5% tier on the go forward basis which could move numbers around, but it won’t be that material.

That’s helpful. Thank you.

Yes.

And your next question comes from the line of Brent Thill from Jefferies. Sir, your line is open.

Hi, thanks very much. This is Sang Byun for Brent. Thanks again for following out the strategy. In terms of returning to 20% growth, I mean, I know you can’t give guidance, but how – what is the timeline and what is required to do that? Is there a certain milestone you have to hit in terms of the mix from larger companies or any specific achievements that you need to hit to return to that level?

Absolutely. So the fundamentals of our business, I want to emphasize are really strong. And as we are looking ahead over this year, as Brian mentioned, we are seeing the expectation of consistent quarter-over-quarter growth in the business. That being said, the 20% target is what we are aiming for and we want to get there as soon as possible. It’s going to take some time as we layout the – as we continue with the investments that I outlined in terms of the strategy around driving more larger clients into our product helping them spend more on bigger and more programmatic efforts as well as with our focus on the technical category and really acceleration there. So we want to be realistic as you look forward around how long those things will take. I can tell you that my experience in this business is that there is two different type of changes we can typically make. One category of changes are things that are around pricing or monetization that often we introduced in that 10b more of like a systemic shock and have a material impact immediately for better for worse. The other type of changes we make are usually introducing new features, new offerings, things like that, but given the recurring nature of habitual behavior that drives so much of any single year’s performance, it will take the next year or the third year for those impacts to fully scale out to the full business. And so we are working hard to get to that goal as fast as possible, but we are realistic that some of these investments will take a little bit of time to materialize.

Okay, thank you.

And your next question comes from the line of Marvin Fong from BTIG. Sir, your line is open.

Great. Thank you for taking my questions. I just want to drill down on that wallet retention target at 98% to 100%. I was just curious if that – what degree is that being impacted by I guess the idea that some people might be hired full time off the platform? If not for that, would wallet retention be above 100%? And then I do get questions on just that what are the potential economics to Upwork when freelancers hired off the platform, is that – how material can that be?

Client spend retention is the big focus for us. And so we are really working to not just watch that number hit the historical levels which is the number we shared 98% to 100%. That’s a pattern we have seen in the business for a long time. And so the reversion to that number is something that we could foresee. But that being said, our priority is to try to make that not happen and try to increase client spend retention through the strategies around it pursuing larger clients, getting larger projects on the site. And so I think to your question around taking freelancers off the site which certainly does happen every marketplace has some of that behavior kind of endemic to it. One of the focus areas that we are working on this year is lot of clients have said hey, I really want to work with this amazing freelancer I found, help me figure out how to do that in a different way like I want to payroll them. This is a long-term relationship. And a lot of the solutions that we have there including our payroll solution haven’t been that prominent in front of users and not easy for them to identify and start using. And so one of the things we are doing to help with client spend retention, but more fundamentally also just serves kind of the needs of the customers out there telling us what they want is make that the offerings around client spend around payroll and around employment of record services and around scenarios like temp to hire. Things that people can much more readily do directly inside of our current product experience and that way they have an option to do that without having to basically circumvent our platform. And so those are the types of investments that I think really create more value for users in terms of expanding our offering in the way that they can use us and also come back to improving that client spend retention number over time. And so that’s a big focus for us this year.

Great. And then the second one if I may. Just Brian you alluded to the change in the Connects policy starting in the second quarter, could you maybe elaborate on that? And then give us some sense will that move to take rate measurably as we think about interplay of revenue and GSV for 2020? Thanks.

Just to chime in on the Connects question, one of the things we changed last year around Connects was introducing more of a strong payment model around Connects for freelancers. And that was really aiming at how do we improve the quality of the proposal that freelancers are submitting and save them more time from submitting many, many proposals that ultimately were not going to be successful with clients? And so that was the change that we introduced last year and that really did help with monetization in the back half of the year. As byproduct of that, it was more successful even though we expect on monetization. And this year, I want to be really clear that we are focused on growing the business over the long-term, including really healthy GSV growth and not making decisions that increase in-year revenue, but are not driving sustainable healthy marketplace characteristics. And so as we look at that Connects framework that we introduced last year, there is room to optimize the pricing inside of that framework. So as we get more high quality proposals, increase match rates with clients and that does help us over the long-term in terms of having really healthy recurring usage. But in the short-term that will mean some monetization reductions as we – to optimize the pricing in that program. So that’s kind of the context on the changes we are making and why? I think this is part of again really focus on long-term health of the business. Do you want anything on the quarters, Brian?

No, I think, I mean, Marvin, you might have got it, I mean we said this in the prepared remarks that we are anticipating the Connects adjustments to reduce revenue in Q2 and throughout 2020, but it’s all for long-term growth. It’s all about driving quality proposals and more fill rate improvements. We want to make sure that you took that into account building your models and part of what we said as well is the sequential quarterly growth you can kind of see that being consistent throughout the year and you can take that into account in your models.

Great. Thanks a lot both of you and congratulations again, Hayden.

Thanks.

Moving on, we also have a question coming from Nandan Amladi from Guggenheim Partners. Your line is open, sir.

Thank you. Good afternoon. Thanks for taking my question. I wanted to ask about the composition of the sales team. I know you staffed up and you said about half of the sales team is now productive. Can you talk about your emphasis on the mid-market versus large enterprise and new versus up-sell?

Yes. So right now, the team is structured to cover all the sizes of accounts kind of inside of our segmentation. So we have got a large accounts team, strategic accounts team as well as mid-market. And the volume of opportunities right now is certainly in the mid-market team, because they are really the ones pulling from the broader marketplace and a lot of the customers that have started to reach the limitations of the lower price plans that we offer and really are needing to scale up and use Upwork Business and Upwork Enterprise. So from a sales team standpoint, certainly, there is a lot of personnel in that part of the team, but we are still really focused on making sure that we have strength with our enterprise on larger customers, because they have such large programmatic spend and we can offer them the scale that they need to deploy that spend and to really use us in a systematic way is the goal. So we are not – we are kind of covering all our bases there in terms of the reps kind of working on each part of the market. In terms of land versus expand kind of within that structure that’s focused on the different client sizes by segment. There are land teams and expand teams that really are focused on generating that activity. And as I mentioned, the investments we made last year in specializing those rules have been really successful and in both sides expanding new deals as well as drawing within the existing customers we have.

Yes. And I would just say the scale and specification of our clients means that being touched by both sales and services as a significant accelerator to unlock that spend that they have. And so once we do land them, then it’s critical for us to unlock that project and staff augmentation costs. The other thing I would add is we see pretty solid payback period of 18 to 24 months on our enterprise deals, which we feel we can improve over time as we ramp more of that sales force.

Thank you.

And your next question comes from the line of Drew Kootman from Cantor Fitzgerald. Your line is open.

Hi, thanks for taking my call. Brian, I know you touched on all the quarterly impacts that are happening this year and the tough comps in the second half, but I was just curious if you could discuss where you see the year-over-year growth rate maybe bottoming out or do you think that’s more of a 2021 thing on the way to 20%?

Yes. So great question. I would anticipate based upon what we gave you guys in the sequential growth periods and the year-over-year comp periods that we have is that you will see the growth deceleration to basically stabilize or bottom out in the back half of the year with acceleration expected in 2021 as we do a lot of these investments and it takes a while as having said for us to see the results of some of the investments, they take a while to move through the marketplace and things like that, but that would be where I see the year going.

Great. And then just with recent market volatility, just curious how much volatility you guys assume for the economy and guidance?

Yes. I mean, our marketplace is fairly predictable based upon spend and retention and things like that. I mean, there are always macroeconomic things that are going on and we were discussing this morning with coronavirus and like how would that impact us. But we don’t have a big supply chain in China. This is remote work. And so people can get work from that perspective. And so I would say, there is not a lot of macroeconomic things that we are factoring into our guidance right now but we do monitor those things.

Perfect. Thank you.

Yes. I think I would just add to that, I think we have seen in the past and would expect in the future some degree of competing, countervailing factors, if there is a downturn, certainly, a lot of customers may pullback spending in a lot of places, but often, we have seen there is a flight to value. And I think that’s where our solution is fairly valuable as well as it really let people tap into kind of distributed teams and things like that, but they maybe more interested in briefing when there is kind of lean times and they have to reassess their workforce. So we had a really successful year back in 2008/2009 and we haven’t baked into the future for current forecast any specific impact from market volatility.

Makes sense. Thanks.

And your next question comes from the line of Corey Greendale from First Analysis. Your line is open.

Good evening, guys. Thank you for taking my question. This is Logan on for Corey. Maybe a question on marketing spend in 2020, you mentioned awareness earlier, should we anticipate materially higher marketing spend in 2020 or how should we think about that expense going forward?

We are definitely focused on closing the gap around not just awareness, but more the realization and consideration of Upwork from more of the strategic larger projects, comp projects. And I think that’s where we are seeing an opportunity in the market today, where a lot of customers who maybe do know about us don’t have the right perception about how strategically we can help them out. This year, we are maintaining our brand investments in a similar way to last year and we have rebooted the campaign starting in January with sort of updated messaging that really goes after closing that perception versus reality gap. As we look out over the year, we are still focused on maintaining healthy CAC to LTV ratios. I think it’s really critical that we do not adopt any kind of strategy that some other companies do around kind of growth at all costs or growth at the expense of really sensibility. So right now, we are investing in the areas where we feel like there is a profitable return and we are doing some amount of brand spend there. But compared to folks like Indeed and ZipRecruiter, our investments there are on order of magnitude smaller. And we think that’s the right thing for right now. We are not ready to go, pull the trigger on some giant increase in brand spend. So right now, we are evaluating the opportunity looking at the economics and continue to optimize our marketing spend as we see it perform.

Okay, great. And then maybe a product functionality question for you, Hayden, what are you hearing from your customers? Are some of your large customers that maybe aren’t spending as much as you think they should? Are they giving you the feedback that you lack this XYZ functionality and this is a must-have, a need to have, a nice to have, what’s that discussion look like?

Yes. So customers always have a long list of requests as you know, but we have incredibly great feedback from customers, I mean, just two weeks ago, I was meeting with our Customer Advisory Board which includes some of our representatives from some of our biggest companies that we serve today. And I’d say it really depends on the market segment. I think we have really strong product market fit across the board. And we are just kind of dialing the features and functionality based on certain requirements. I think that’s where one of our advantages is when you go to a large customer, a lot of the times the changes they need around governance and reporting, security and compliance. Those are really unique needs and we have been investing for years in building out solutions that serve those needs. And I think those are the types of things that really will continue to be differentiators for us as we continue to attack larger parts of the market and sell into larger companies. So I am excited about the foundations that we have built on, and certainly we will continue to innovate the product offering to serve our customers.

Fantastic. Thank you.

I am showing no further questions at this time. I would now like to turn the conference back to our presenters for any closing remarks.

Thank you all for joining the call today and you can hang up operator.

Ladies and gentlemen, this concludes today’s conference call. Thank you all for joining. You may now all disconnect.