Thank you for coming. My name is Kunal Madhukar. I'm the SMID Cap tech analyst at UBS. It's a pleasure to host a fireside chat with Erica Gessert, CFO of Upwork. Erica, thank you so much for coming to the conference. Thanks for having me- Absolutely. Great to be here. Great. This is a fireside chat, so I'll be asking some of the questions. You're free to raise your hand and ask a question, or you can log the question into the online system. Either way, it works. So, Erica, let's start with diving into the drivers of demand. In 2019, GSV growth was mid-teens and decelerating. There is a significant acceleration that we have seen since. How much of that was, you know... How much of the demand during the COVID period was more related to businesses going online versus a general secular trend that kind of helped support it? It's hard to pull that apart, Kunal. You know, what I would say is the, you know, the pandemic years weren't, for a business like ours, weren't like a pull forward in demand. They were really a wholesale change in how people thought about work, right? And so, you know, look at, you know, for all of us, right, we all changed. We were just talking about it before we came on stage. We all changed the way we were working during the pandemic, and this was really an enabler for a business like ours. You know, it created more freelancers, it created more demand on the business side. And so that was really a wholesale change. Any time that, you know, people are rethinking, modernizing, and changing the ways that they're working, Upwork stands to benefit from those changes. So, you know, we are, you know, really excited about the future. We've, you know, we've been able to, during the more stable, I would say, you know, current macroeconomic trends, time when, you know, in the changes in an interest rate environment, other things are sort of working and they're, you know, causing a pullback on business demand, we've been able to untether our, you know, the rest of our financial results from kind of the macroeconomic environment and grow revenue and EBITDA really, really well during this period, so. Great. So when you think about SMBs, over 80% of your revenue probably comes, or your GSV comes from SMBs. Yeah. SMBs have probably slowed, at least slowed or maybe stopped hiring, and even hiring on the freelancer basis. As you think of, like, growth going forward, what is going to drive your growth, you know, faster than, say, GDP? Right. Well, look, I mean, there are 33 million small businesses in the United States alone. Last quarter, we served about 836,000 clients or businesses, only a portion of which are small business. So, and these businesses have myriad use cases for our platform. They need to build websites, they need accountants, they need all kinds of services, design, logos, other things, right? And they need our services from our platform to do it. So there's a tremendous amount of kind of latent demand out there. Like, you know, like I said, I think that in many ways, the sort of, you know, heightened interest rate environment is working and businesses aren't spending as much, right? They're making money on the cash in the bank. And so it's a more kind of sideways trend in terms of growth right now. But there's certainly latent demand out there. All these services need to get fulfilled. And there's a tremendous amount of, you know, just volume of businesses that need it. So I think, like I said, you know, as businesses continue to modernize and continue to rethink and identify new ways of fulfilling this demand, our platform offers the fulfillment of these- this work faster, cheaper, better. And so that's where the growth will come from. It's interesting that you talk about, you know, accounting and other things out there. So can you talk about the different services that SMBs take, and what kind of, like, length of project do they have? Is that like, you know, maybe a one-day thing, or is there an ongoing kind of a relationship that builds up? I mean, our platform is incredibly diverse, so it's really hard to kind of pigeonhole, you know, millions of you know, SMB customers into, or, you know, SMB projects into a single use case. We tend to have larger, more complex projects on our platform in general. Yeah. And so, you know, our average GSV per client is $5,000. You know, and so this means that, you know, in general, our customers, and as you say, 80% of our GSV is coming from small business. So, you know, this means that our customers are, in general, hiring freelancers for longer-term projects. That said, there are certainly spot projects as well, and we have a good balance between long-term, you know, fixed-price contracts and hourly wage contracts as well. Okay. And then, you know, one of the things that people talk, at least on the enterprise side, is land and expand. So at least for the SMBs, it's slightly different, but the thing is, when you look at, like, repeat rates, how has that kind of trended in terms of, you know, SMBs coming back with, like, bigger jobs that they want to get done after the first experience was good, or maybe a slightly different thing? So they came in to build a website, and now they are coming back because they want to do accounting, they want to do maybe legal work or something else. Right. Well, so it's a very, very typical. I mean, it's a trend on our platform, and this is something you, that you can, can generalize about. You know, new customers coming onto the platform tend to ramp over time. And so they'll, you know, come on the platform, they'll, they'll kind of dip their feet in, and then over time, start to ramp up longer-term projects. So that we've seen very clearly. Now, in this most current environment, we've actually seen, I guess, really in the past couple quarters, we started to see newer, newer clients coming on and not ramping as quickly as in previous years, and that's one of the things that we've seen as an impact from the external macro environment, is that people just aren't spending as much as quickly. But in general, that ramp progression continues to grow. And you know, underneath the covers on our platform, you know, one of the dynamics that we've also seen that we think is macroeconomic kind of associated is, we've actually seen the hours per contract grow year-over-year, but typically, each year, we would also see some wage accretion each and every year, and this year we did not. We saw our wages be relatively flat to even down a little bit on an hourly basis. Okay. So that tells us that there's. You know, again, you know, there's actually some good growth dynamic in terms of hours per contract, and we're seeing that grow. But we need, we want to see some of the, you know, wage accretion come back, too. And then on the enterprise side, you did a change in the sales force earlier this year. Yeah. and you, on the 3Q call, kind of reported enterprise customers grew 43%. Yes. I think- That was on the expand side. Yeah. Okay. Uh. Okay, okay. Yet your enterprise revenue was kind of flattish year-over-year. So what will make that grow? Yeah. So there's, you know, one of, you know, we certainly have talked about, and and, you know, in Q1 was when we made the decision, because we saw a real tightening. Look, and it, it's hard to remember two quarters that feel so long ago, but, you know, back in Q1 was when all, you know, there were huge numbers of, you know, headcount reductions, FTE reductions, and, you know, severe tightening of spend across all, you know, large, many, many, many large corporations. So we certainly felt that, that the reduction in vendor spend, and just overall cost reduction is sort of like slash, slash costs first, ask questions later. And so, you know, we made the decision at that time to make reductions in our own sales, you know, enterprise sales force, which we had ramped quite quickly, to keep up with demand. That was really the right thing to do for us, and I've been super proud and impressed to see that despite the reduction in our sales force, each and every quarter since Q1, we've actually increased the number of logos that—logos that we've added on the land side of the house. Last quarter, we improved our new logos by 21% quarter-over-quarter. So that's been really, really great, and we'll continue to work on the optimization of that sales force. We really think that we can continue to get more with less, and that's, and, you know, with our team, and improve the productivity there. I will say, to your point, you know, we're not seeing growth on, in revenue on the enterprise side, and, and that business is not where we want it to be. We wanna, we want to- we wanna see continued growth there, and quite frankly, we do not have any, you know, significant share of wallet on the enterprise side. That means that there's a lot of growth opportunity on, on that side of the business, and so we're gonna continue to invest in the product, continue to differentiate the product from, from our, our kinda core marketplace product, and, you know, expect that there will be, you know, growth to come there. Great. And so the 21% Q-over-Q increase in logos- Mm-hmm In the last quarter, were these logos already using freelancers, or were they only already using maybe traditional freelancing services? How do you get them? Yeah, I mean, our biggest competitor, we always say, is, you know, convincing people to stop doing things the old way, and start, you know, and start modernizing. It's. I come from large enterprise myself, you know, like, I in my previous life, and so I really know how these organizations run their alternative workforce programs. And they're using a lot of the kind of old ways of working, and, you know, when we go in and we sell to these, these large enterprises, I think it's, you know, it's quite eye-opening, the fact that they can, you know, they can quickly self-serve, they can identify cheaper, faster, they can onboard labor, you know, alternative workforce super, super quickly. And so all of these things are benefits. And you know, by and large, when we go into these guys, they, you know, this is sort of a new way of looking at alternative workforce for them. So then, effectively, your competition would be companies managing their own freelancing efforts, or would that be- No, I mean, on the enterprise side, it's sort of using some of the legacy suppliers, yeah. Okay, okay. Yeah. Is there a way to kind of go in and target some of the enterprises that are already using legacy suppliers? I mean, you know, we are, we are going in and, and, you know, talking to, you know, talking to everybody. Okay. You know, we have both inbound and outbound on the land side, and you know, identifying the most qualified prospects like anyone else. Can you talk about, like, within your enterprise customer base, how much of that is, like, tech versus maybe finance, maybe some other industry? Is there- Is there- I mean, I don't think we've ever broken out the exact balance of industry on the enterprise side. Traditionally, we've had a concentration on in tech. Of course ... for sure. Yeah. And that makes sense, obviously, because of the nature of our platform. Most recently, if you look at the logos we've added in, you know, in most recent quarters, it hasn't been heavily tech focused. It's been very diverse. We've had, like, Las Vegas Sands, R.R. Donnelley, Mastercard. You know, we've had a number of, you know, various different industries. So we're definitely seeing demand and interest across the board, in, you know, across industries and enterprise. Great. And as you look at these cohort of enterprises, coming back to the land and expand, so, is there a way in which you've been able to kind of measure how much share of total freelancing business you have and how that kind of matures over time? I mean, our reality is that, you know, right now, we have a quite low share of wallet. I mean, if you just look at our total enterprise business, you know, it's about 20% of our revenue. You know, you can infer, you know, somebody you can kind of infer the GSV, although we don't break it out. You know, we have enterprise clients on our platform whose total spend in alternative workforce space is equal to our total GSV. You know, we've got some of these huge tech partners and other things like that. So, you know, there's a tremendous amount of more growth to come and opportunity for us as we continue to kinda grow and grow up with these businesses. One of the things that, you know, becomes a gating factor with enterprises is, a lot of times it so happens that the accounting guys might be using freelancers- Yeah. but the finance guys may not, or, you know- Well- Somebody else in the organization may not. Is there a way to kind of propagate it across enterprises so that you can get that expand part of the business? Yeah. It's very true that quite frequently within large enterprise, different departments do not talk to each other, and we offer. You know, part of it, especially with the use of alternative workforce, part of that is because of, again, the old ways of working traditional specializations in these areas, whereas we can offer a very diverse set of alternative workforce opportunity and usage. So there are ways that we are exploring, you know, some of the product investments that we're making, more to come in that space, that will help enable sort of cross-pollination there. Got it. And then, you know, we are in a cycle where there has been a lot of uncertainty, there has been a lot of slowdown, a lot of risks across the board. So as you think of at some point in time, macro and confidence will increase in the economy, but it might take some time. There will be a period when things may be still mixed, and maybe enterprises may not want to go and invest in a full-time employee. Uh- But look at freelancers. So- I could not agree more, Kunal. I say this all the time, which is, you know, and having observed, again, coming from large enterprise myself and observed the pendulum swings in hiring over the years, for many, many years, the reality is that when companies pull back dramatically on kind of their workforce in a very, very, you know, rushed fashion, there's still a tremendous amount of work to get done that is now latent work in the system and waiting for workers to produce it. And you're right, as the pendulum swings back, companies should be, you know, looking much more at alternative workforce. One, just to bring people on the platform faster, right? Because it takes... The hiring time to get an FTE into someone's company is much, much longer than alternative workforce. So it's both speed to hire as well as, you know, lower risk in terms of getting the work done that is waiting there to get done. Got it. And then from a freelancer perspective, your Take Rate is 10%. And then, of course, there is, you know, value-added services, advertising, whatever else that you can kind of put on top of that. Right. So, in the traditional freelancer space, how much are they paying to traditional freelancing companies? Oh, so, well, how much do our- So if I'm a freelancer- Yeah. Sorry. If I'm a freelancer and I'm looking at different alternatives, you know, why would I come to Upwork versus go to one of the traditional freelancing companies? Well, I mean, you know, there are many, many reasons that you know, a freelancer would want to come to Upwork: the diversity of projects, diversity of clients. You know, one of the things that we... You know, talking to some of our most valuable freelancers on the platform, which we do very frequently, that we hear from them is, one of the things they like about working on Upwork is they have a diversity of jobs that they're fulfilling or have a diversity... you know, they have a suite of clients. Whereas like in a traditional, you know, services firm, they're essentially working for the firm, right? And then they're outsourced to a company. The diversity that we provide means that they can't get... you know, they can't get fired, right? They may have three or four jobs going at once, and so, you know, if one ends, they can start another one. And so it's actually, in many ways, in an uncertain, you know, kind of job market, the way that we're kind of all working through right now, it actually provides a little bit more stability for some of these guys. Interesting. One of the things that you mentioned earlier was, you've noticed that the, the dollar per hour has been declining? Just... I mean, what we saw, what we really saw was a lack of growth on, on- Okay, okay ... on the wage per hour, on the hourly wages. Okay. You know, little ever so slight declines. It's really, I would say, more flat than anything else. And then the other thing that has happened is, you've reduced your take rate from 20% to 10% for a number of your freelancers. So it is possible that maybe, you know, instead of charging $105, now they can do with $100, simply because they're paying you 10% now. Yeah. How much of that, you know, wage decline or wage flattening is because of a take rate decline? Oh, so this, you know, I was referring to just hourly wages. Okay ... and we also have fixed price contracts. Okay. So there's, it's a very diverse network that we are running. But yes, so in May, we formerly had a tiered pricing structure for those who aren't aware, where we, you know, projects that were priced, you know, for $500 or less were at a 20%, and then 10% for, you know, kind of, $501-$10,000, and then 5% below that. We've now evened it out. We have a flat fee pricing structure. It's much, much simpler for, you know, for our freelancers, and for our clients in terms of how they can bid and price on projects. That said, to your point, there you know when we announced the change in May, there was an immediate price down of those 20% projects down to 10%, and so there would be some impact to GSV, you know, some limited impact to GSV. It wouldn't be huge, though. ... And then when you look at the other side, so when you did the rate changes in earlier this year, you deferred some of the rate changes, especially for the people at 5% levels, going to 10, to maybe next year or whenever the project ended? That's right. So when that starts happening, when those people go to the 10% level, at that time, do you think they will increase their pricing and so that could potentially affect demand? So, you know, it's a marketplace, right? And so, you know, the supply and demand dynamics and pricing dynamics should even out and should, you know, be self-correcting in many ways. But, you know, these things do have effects. And the reality is that the price increase from 5% to 10% on the freelancer side, that's happening. These are for our, you know. These are very high-earning freelancers. They're in many ways the, you know, most attractive freelancers on the platform. They're experienced, they have long-term contracts, $10,000 and more. And so, you know, there should be some room there for them to, you know, kind of price up in that 5% in order to, you know, in order to take home the same amount. And so we're, you know, working with them. And as I'll tell you that as the, you know, 5% price change has started, or the 10%, 5%-10% price changes start to come through, which it has, as contracts expire, we've seen very, very good performance on the platform, and in fact, probably a little bit less churn than what we had modeled, coming into it. Great. And so your take rate is mid-teens? Yep. Uh, so- 17% 17%. 17%. So between the 10% and the 17% is a bunch of advertising and, you know, there is, there would be other elements of that take rate. Well, we have client-side fees and- Client-side fees, totally. Yeah, so. So when you think of, like, the five going to 10, and you think of potential, you know, advertising opportunities kind of improving take rates, how do you think about take rates in, say, 2024 and 2025? So we have a guideline on take rate, but I'll give you a few thoughts. We do—as we articulated, we do have more take rate accretion to come from the pricing changes that we've just made. And so on January—you know, at the end of this year, all 5% contracts that haven't already shifted to 10 will move up to 10%. We have also seen very strong, you know, good growth in some of our ads and monetization products. Ads products like, you know, it's Boosted Proposals, which means that freelancers can boost their proposal up for better visibility by clients. And also subscription products, you know, value-added services for freelancers, we've seen some good growth this year. So actually, these ads and monetization products are one of our fastest, really, our fastest-growing revenue stream, and we expect to continue to see that into 2024, for sure. Great. Coming to margins. So you have a long-term target of 30%-35% EBITDA margins. You delivered a significant beat in 3Q- Yeah ... but that was on the basis of, you know, lower sales and marketing spend. So as we think of the future, and at some point in time, the macro will improve, and you would probably wanna spend more on sales and marketing. So how should we think of EBITDA evolution, and how you're thinking of balancing growth and profitability? Yes. Thank you for asking this question. I, I love this question. We are very focused on both, EBITDA margin accretion and top-line growth, and we intend to produce both. The previous, you know, we published this kind of long-term margin target of 30%-35% back in 2021. You know, we are due for a refresh on that, which we would expect to provide next year. And we are really thinking about, you know, the management of this business more on a Rule of 40 basis, and really making sure that, like I say, we produce both top and bottom-line growth. I will say, you said that we produced an 18% EBITDA margin, just based on sales and marketing reductions. Okay T hat's not totally accurate. We also did reduce G&A as well. We've also, under the covers, it's hard. You can't see it in the published numbers, but, you know, it's not—this is a. You know, as I came into the business seven months ago, this is really a wholesale look at how—at our investment portfolio. And, you know, even underneath R&D, you know, we have been looking at our, you know, our portfolio of projects, reducing spend, cutting, cutting projects that we think are non-producing or non-producing over or or will be productive, but in longer term time horizon, and reinvesting in kind of near-term time horizon projects. So there's a lot going on underneath the covers. I think that there's more, there's more we can do on the cost optimization side, you know, to enable both top and bottom-line growth. Last thing I'll say on this topic, of course, I can go on forever, but. Like I said, on the sales side, you know, I think we have pretty strong conviction that we can, you know, now we, we focused on efficiency first. We can now focus more on productivity of the sales force, and we can kind of produce more with less. On the marketing side, I do think, as you know, we have nice, strong, healthy gross margins in this business, 75%. And so I do think going forward, you know, that there will be a time and place as things come back, where we'll want a little bit more share of voice out there, but we'll always balance making sure that we're, you know, growing EBITDA margin with investments like that. Interesting. You talked about efficiency, and then you talked about productivity. How should we think of, you know, your focus on enterprise versus SMBs, and how you're guiding your sales force to kind of target both sets of opportunities? Well, our sales force is really focused on the enterprise side. Okay. So the marketplace, we really focus more performance marketing on the marketplace side, which we've actually seen some very good productivity in Q3 on the performance marketing side, which has been encouraging, and produced, you know, some good client growth in Q3. And so, you know, starting to see some bright spots there. In terms of the focus of you know, the balance of GSV, I suppose growth between enterprise and marketplace, we're focused on both, to be honest. I mean, enterprise is a smaller base, and so... And, you know, has a very, like I've as we've already talked about, kind of a large share of wallet available to us, and so, we'll see, but we're focused on both. We'd be remiss not to talk about TAM, and one of the numbers that you've kind of talked about in the past is $1 trillion. Yeah. Can you help us understand how you got to the $1 trillion? What does this TAM kind of represent? Well, the TAM represents really the kind of number of freelancers, you know, kind of, you know, in the U.S. and globally, you know, kind of multiplied by you know, the average wage per year, right? And so it's sort of a quite simple TAM number- Okay ... that was produced previously. But, you know, actually, I was just reading some of the new data that has been published on this topic, and, I mean, actually, the publish of the trillion-dollar number is kind of before my time. But one of the latest numbers that's come out of, you know, total, what they're calling the, you know, gig economy work is around $4 trillion, right? But I think what, you know, the accessible TAM to a business like ours is actually, you know, as I was looking at it, you know, these are, you know, independent contractors that are, you know, that have no employees. That global market is $1.9 trillion, just that. So, you know, I think this continues to be a TAM, you know, an addressable market that is growing and growing. Like I said, you know, the pandemic, what it did was it produced more freelancers, it produced more businesses that were thinking about how to get business done remotely, and that's only a good thing for us. Totally. Some of those freelancers that already have been doing freelancing, some of them have been doing it because, you know, they don't come to a marketplace. They are basically just doing it based on their network and what have you, and existing relationships. So what gets them into a marketplace? Yeah, I mean, this is one of the things that we're at, you know, really investing in right now as a business, which is producing, tools, other talent enablement things on the platform, certification, education, other things like that, accessibility to, AI tools, that can enable them to do their work better, faster. We're really building out this true partnership ecosystem on our platform, both to enable you know, talent and clients. And so, you know, more and more to come here, but, you know, we wanna be the, you know, the destination for AI-empowered talent, in the world. And, you know, with all the partnerships ecosystem we're building out, we think we will be. The other thing is, I think that, you know, as we continue to build this ecosystem out, the value that we're gonna be delivering to our freelancers and to our clients is gonna be tremendous. As I said, you know, we've got kind of these very nascent subscription products right now, and we'll, you know, continue to think about how we balance, you know, kind of the free, versus freemium, versus premium, for some of the things that we're delivering. Great. I know we can continue with those questions for a long time. In the interest of time, one question that has been, we've been getting from investors is about free cash flow, and you are now free cash flow positive. So- We're not just free cash flow positive, we're also GAAP EPS positive. Okay, great. People forget it sometimes. So when you become free cash flow positive, the question that people start asking is: Okay, so what are you going to do with the cash? So can you talk about capital allocation, M&A, share buybacks? Sure. You know, reinvestment, maybe? Yeah, absolutely. We're super excited about the, you know, all of the profitability and cash that we're producing as a business, an inherently profitable business. We expect to see very strong growth next year in free cash flow. So yeah, so what are we gonna do with it? I was really excited in Q3 to get the company's first share buyback authorization approved by our board. And so we certainly intend to now start to utilize that going forward. And, you know, we haven't released exactly, you know, kind of a defined capital allocation strategy, but we do intend to use a portion of our free cash flow going forward to buy back stock. Obviously, right now, we're gonna be thinking of it a more on an opportunistic basis. And, you know, going forward, we'll be thinking about that. We do think that there are inorganic growth opportunities for this business as well. And so that is another place that we're gonna be looking at and thinking about, particularly as, you know, hopefully, valuations in some of these areas continue to come down. So when you think of M&A, what would you be looking for? Would you be looking for, like, smaller marketplaces within the same space, or maybe expanding services, or how would you be kind of looking at that? I mean, it's tough to get too specific there. We sit at a crossroads between so many different areas, and with a large TAM, you know, opportunity like ours, our business has, there are just a tremendous number of vectors and places that we can go. So, you know, that's probably all I can touch on there. Great. Hey, we are at time. Thank you so much, Erica. Thank you, Kunal. This has been very helpful. Yeah, it was great. Thank you for coming to our conference.