Upwork Inc.

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Thank you for standing by and welcome to Upwork's fourth quarter 2022 earnings call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. I would now like to hand the call over to VP Investor Relations, Evan Barbosa. Please go ahead.

Thank you. Welcome to Upwork's discussion of its fourth quarter and full year 2022 financial results. Leading the discussion today is Hayden Brown, Upwork's President and Chief Executive Officer. Following management's prepared remarks, we'll be happy to take your questions. But first, I'll 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 forward-looking statements. In addition, any statements regarding the current and future impacts of Russia's invasion of Ukraine and our decision to suspend business operations in Russia and Belarus and the COVID-19 pandemic on our business, and current and future impacts of actions we have taken in response to Russia's invasion of Ukraine and the COVID-19 pandemic, our forward-looking statements and related to matters that are beyond our control and changing rapidly. For discussion of material risks and other important factors that could affect our actual results, please refer to our SEC filings available on the SEC website and on our investor relations website, as well as the risks and other important factors discussed in today's shareholder letter. Additional information will also be set forth in our annual report on Form 10-K for the year ending December 31st, 2022, when filed. In addition, reference will be made to non-GAAP financial measures. Information regarding a reconciliation of non-GAAP to GAAP measures can be found in the shareholder letter that was issued this afternoon on our investor relations website at investors.upwork.com. As always, unless otherwise noted, reported figures are rounded and comparisons of the fourth quarter of 2022 are to the fourth quarter of 2021. And the comparison to the full year of 2022 are to the full year of 2021. All measures are GAAP unless cited as non-GAAP. Now I'll turn the call over to Hayden.

Thanks, Evan, and thank you all for joining us today for our fourth quarter 2022 earnings call. In 2022, in the face of a dynamic environment, We made meaningful progress executing on our strategy to innovate, evangelize, and scale our work marketplace. We delivered innovative new products and features, including project catalog consultations and project tiers, Upwork Academy, and our new client marketplace plan for client pricing. We continued strengthening our enterprise suite, and our investment in brand marketing delivered measurable results. Through these innovations and investments, we made it easier and more productive for clients and talent to connect and manage their work and relationships on Upwork. For the full year 2022, GSV grew 16% year-over-year to reach $4.1 billion, and revenue grew 23% year-over-year to reach $618 million. Our full-year adjusted EBITDA came in at negative $4 million. In the fourth quarter of 2022, GSB grew 5% year-over-year to once again exceed $1 billion, and revenue grew 18% year-over-year to reach 161.4 million. Fourth quarter adjusted EBITDA reached 1.1 million. The fourth quarter demonstrated a continuation of the macroeconomic trends that we saw in the third quarter. We observed corporate caution during budgeting and planning cycles, leading to softer client acquisition and retention trends across our customer base. This behavior is consistent with our experience in past uncertain macroeconomic environments in which we have typically seen companies moving through a sequence of phases. In the first phase, companies will reduce their costs and freeze hiring budgets as they grapple with uncertainty or the onset of macroeconomic weakness. This is when we may see a headwind from customers reducing overall budgets. As they move into the second phase, companies realign their cost structures in a more efficient manner and start to redeploy resources to solutions such as Upwork, where they have confidence they can deliver the best returns. This is when we have typically shifted from seeing a headwind to a tailwind. In the final phase, as the economy shows definitive signs of improvement, companies ramp up budgets and seek to aggressively hire, characteristically turning to our solution more than others because of the speed and flexibility we offer. This is when our momentum gathers further. Today, we see many of our customers are in the first phase, realigning their budgets with some moving into the second phase. Although this dynamic is creating near-term headwinds in our numbers, we have our eyes on the opportunity ahead of us. We are taking proactive steps to position Upwork for the full benefit the second and third phases can offer as we provide companies with rapid access to cost-effective, highly skilled global talent and flexible solutions to meet their workforce needs. To capture the opportunity ahead of us, we continue to innovate to advance Upwork's evolution from the largest global freelance marketplace to the world's work marketplace. Earlier this week, we announced our end-to-end solution for full-time hiring. This is the next step in the journey we started in 2021 to expand our offerings to support all the ways our customers want to work on Upwork. With this launch, we are bringing to bear more than 20 years of worker classification expertise, as well as existing and new technology solutions to enable our customers not only to form the trusted long-term working relationships that Upwork is known for, but to do so via a complete set of full-time hiring solutions now available to all our customers, enterprise clients and marketplace clients alike. This strategic expansion affords both clients and talent further flexibility and choice in how they work together and delivers a first of its kind end-to-end solution that enables businesses to easily, quickly, and cost-effectively find, vet, hire, and pay talent who are interested in full-time work from all around the world and offering more than 10,000 skills. Addressing global full-time work is a natural extension of our existing work marketplace and supports both our mission and the natural progression of work behaviors we see on Upwork today. Embarking on a brand awareness campaign to introduce ourselves to the many companies and hiring managers who have not been previously aware of Upwork has been an ongoing priority. Our goal has been to raise unaided awareness across a broad audience and ensure that companies and hiring managers understand our compelling value proposition. As companies are increasingly scrutinizing their internal resources and costs, we believe now is the right time to educate them about our solutions. We are pleased with the results thus far. With our This Is How We Work Now campaign, which we launched in September of 2022, we have seen greater progress increasing brand awareness than we expected. Since the September launch of our new campaign, unaided awareness has grown more than 30%, with unaided awareness among large businesses, which represent the biggest segment in our TAM, growing by more than 140%. From the third quarter to the fourth quarter of 2022, ad recall, which measures the impact of brand campaign messaging on our chosen target audience, grew 45% among large businesses, and we saw 58% growth in top-of-mind awareness, which is a measurement on being the first brand mentioned in a category. Looking at the year ahead, we also recognize the macroeconomic climate has changed rapidly, and we are moving to reduce our brand working media spend by approximately 12% in 2023 compared to 2022. Given the strong focus on measurability and testing that we have deployed to date, we are able to make this reduction in cost while still driving the outcomes we are seeking with our investment and campaigns in 2023, targeting significant continued growth in unaided awareness, as well as delivering insights into how this investment impacts our downstream metrics and overall marketing efficiency as our campaigns evolve and our data sets mature. This approach is tailored to achieve our customer and business impacting goals, while giving us more room to respond to new macroeconomic realities and continue to make strongly data-informed decisions about this investment area in the future. In our enterprise business, revenue grew 22% year over year. We continue to make progress in ramping our sales force and educating our prospects and customers on the new features and enhancements we've launched in the year, including flexible approval workflows, talent performance reports, and user activity reports. In the fourth quarter, we signed 26 new enterprise clients as we saw the average length of the sales cycle extend by nearly 20% as corporations made changes to and delayed their budgeting and approval processes. In the fourth quarter, this also resulted in an unprecedented increase in customers pushing their late stage deals into 2023 as they worked through these changes. Our new enterprise clients included high quality companies like HTC, JLL, Mako, Lucid Motors, and Sweetwater Sound, who have turned to Upwork to help them solve their workforce needs in this evolving work environment. The decision of these leading companies to source talent through Upwork is a testament to the real value we bring through both the quality of talent on Upwork, as well as the ease of use and cost efficiency we provide. We are making strong progress addressing the internal enterprise sales operational growing pains we experienced last quarter. Our efforts to close the gap on them has started to fuel improvement in top of the funnel activity late in the fourth quarter, and we expect to see our sales rep productivity normalized as we move into 2023. Barring further deterioration of the macroeconomic environment, even with the elongated sales cycles we have experienced recently, we expect to be back on track with our land team at full productivity and performance by the third quarter of 2023. We see a clear path to reaccelerate our momentum in enterprise. and believe the enterprise opportunity remains as attractive as ever for Upwork. In 2023, we are proceeding in a balanced and nimble manner and focusing on the things that we can control while being ready to make the most of any opportunities that may arise. For example, in December, we made a significant change to our organizational structure, moving from a purely functional to a business unit composition. With this new organizational framework, we have been able to strategically reallocate resources from a broader, more fragmented portfolio of investments that at times represented incremental opportunities to a more concentrated set of resources in all of our key business unit areas, each helmed by a leader laser focused on delivering customer and business outcomes with attractive growth and return opportunities. As a result, we have set ourselves up for the future with increased efficiency, agility, and accountability throughout the organization. We remain committed to achieving our goal of adjusted EBITDA profitability in 2023 and aim to increase our adjusted EBITDA margin by a few hundred basis points per year as we progress toward our previously communicated long-term target of an adjusted EBITDA margin of 30% to 35%. A critical part of our strategy is to remain disciplined with regard to our cost management, and we are focused on increasing our operating leverage, targeting 2023 revenue growth in excess of operating expense growth. We are entering 2023 on offense, ready to capture the opportunity ahead of us. With our leading cost-effective solutions, we are uniquely positioned to meet customers where they are and benefit as customers learn about and turn to Upwork for their full range of talent and work needs. We remain steadfast in our long-term vision and will continue to innovate, evangelize, and scale Upwork as the world's work marketplace in 2023 and beyond. We will now open the call to your questions.

As a reminder, to ask a question, you will need to press star 1 1 on your telephone. Again, that's star 1 1 on your telephone to ask a question. We ask that you please limit yourself to one question and one follow-up, then return to the queue. Our first question comes from the line of Matt Farrell of Piper Sandler. Your question, please, Matt.

Thanks, guys. You mentioned that many customers are still kind of in the first phase of the macro planning process, but some are moving into the second phase. Maybe just help us understand how you're thinking about the transition to each phase as we move throughout the year and what is embedded in guidance from a transition perspective. And is there anything that Upwork can do to push customers from one phase to another amid the uncertain macro? Thanks.

Sure. Let me frame first how we formulated our guidance, Matt, which I think will help answer those questions. So we did see a softening of certain acquisition and retention trends in the back half of last year. And that informed how we thought about this year as we've seen customers coming out of the gate, in some cases, slower than we would see in a normal year and in line with the trends we saw in the back half of last year. So that is really informing how we're thinking about the year ahead and has baked into our guidance the trends that we are seeing in the business right now. And our view is, talking to customers, that a lot of them in Q4 and coming into Q1 have really been reevaluating budgets, looking at their spend levels kind of based on the macro uncertainty ahead. And that showed up with things like, you know, elongated deals and things getting pushed for some customers from Q4 to Q1. In terms of transitioning to the second phase, we do see some customers leaning into the solution with Upwork more heavily, but this is still outweighed by, I think, some of the headwinds that we've seen from that first phase for some customers. And so we're really doing what we can do to control, as you asked about, you know, the outcomes here by doing a few things. One is we've addressed the issues on the sales side that were holding us back at the end of last year in the top of the funnel. And it's going to take a little time for those to flow through, but that work has already happened. The second thing is we're focusing our attention in the sales team on the accounts that have the highest probability of spend and expansion, which we are doing actively and evaluate constantly where to spend time and effort. And then overall, our sales and marketing activity at this moment is really laser focused on spreading the message around Upwork's benefits and value proposition at a time when our cost savings options, the agility that we offer customers, those aspects are so resonant in the landscape. And that's one of the reasons we are continuing to invest in our brand marketing this year, because this is something that most of our target market just doesn't know if they can get from Upwork. So all of those things help connect customers into what Upwork can offer and get them out from phase one of being a little scared of the environment to phase two, seeing how Upwork can be the solution in this environment.

And maybe a follow up on your announcement earlier this week, moving into the full time hiring, it makes a lot of sense based on your mission. What has been the initial feedback from both buyers and talent? And how should we think about this expansion impacting, you know, 2023 from a financial perspective? Thanks.

This is something we've gotten a really positive reception from customers around. And as we mentioned earlier, we've seen, I think in our release, we mentioned that we've seen over 2 million talent already raise their hands to say they want to be part of this contract to hire option and they're interested in those types of work opportunities. We've also seen really strong demand on the client side with over 40,000 jobs posted year to date since we've been opening up this option progressively to customers. Already, the reception has been really positive. I think customers see this as something they've been either trying to do with Upwork for quite some time, or in the case of some of our larger customers, they have been doing this. And so this is something that is, you know, in a way familiar and a natural extension of the places where we play with customers, because they do come to us for these longer term projects and relationships that do progress to needing at times to be converted into payroll and FTE type relationships. In terms of the impact of that offering for 2023, we really, you know, it's early days in terms of what that would look like in our numbers. And so I'd say our outlook for this year is really based on things that we know about today in the existing business more than, you know, specific upside that we would expect from that offering. I think we've seen in the past that new offerings get a strong reception, but it does take time for those to flow through to our numbers. And that may well be the case here as well.

Thank you. Our next question comes from the line of Andrew Boone of JMP Securities. Your question, please, Andrew.

Great. Thanks so much for taking my question. Hayden, I want to go back to full-time hiring. As you think about a more complete offering just with product catalog, with full-time hiring, with the core marketplace, can you talk about just how we think about this as an on-ramp for more clients versus just additional cross-sales and up-sales into existing clients? How do we think about that? And then just as a tag along with that exact thought, can you just run through the net ads in the quarter? This is kind of the second quarter and understood the softness that is the same place across macro. But is there anything else you can help us think about as we think about net ads for 2023? Thanks so much.

Sure, Andrew. In terms of the full time offering, I'd say. This is definitely just the next step in us delivering on the vision we shared a couple of years ago around really becoming the world's work marketplace and giving clients all of the ways that they want to hire and talent all of the ways that they want to work. And so you're absolutely right that we have opportunities both to essentially cross-sell our existing client and talent base into this offering, as well as market this to new customers who might not have considered Upwork before because we didn't have this as something that we were going and putting in front of them at the outset as part of our acquisition strategy. I'd say our focus for the near term is really around the first opportunity, which is around existing customers, more than going out and building new channels with new customers, just because we think there's such a rich opportunity to leverage what this can do for existing customers that are already in our marketplace. But certainly, we have our eyes on both of those things, and we'll be moving on both of those opportunities when the time is right. In terms of the net ads for the quarter, certainly there's a couple things impacting those metrics. We've seen a few headwinds in acquisition last year, particularly in the performance marketing area of the business. The other channels actually performed really well, but that one was softer than we would have seen, largely due to issues around just what was available to us in that environment. And we've been moving to really realign some aspects of our performance marketing strategy, knowing what we know now that we didn't know at the back half of last year. The other factors around active clients have really been just, you know, lapping issues around larger cohorts that were, you know, very strong from tailwinds that we had in previous quarters. And now that's kind of flowing through the business as we've had some smaller acquisition customer cohorts more recently, meaning that in aggregate, there's a larger base of eligible customers to churn. And as you know, this is a trailing 12-month metric. So those are some of the key things I'd highlight on there. We are lapping just more challenging comps there, but we will be focused this year on both new client acquisition as well as getting existing customers to be even more successful with things like the full-time offering we talked about.

Great. Thank you so much.

Thank you. Our next question comes from the line of Ron Josie of Citi. Your line is open, Ron.

Great. Thanks for taking the question. Hayden, I want to ask a little bit more just around the enterprise sales. I think in the letter you talked about, you mentioned the land team to be fully productive by 3Q. Is this basically saying you're able to hit your hiring needs by the end of last year, and so now we're just in execution mode and it takes about, call it, two to three quarters to get to overall efficiency, and then We've been talking about brand marketing for some time and building up the awareness of Upwork and we're seeing new products here. Just talk to us a little bit more about how awareness is coming along on Upwork overall as you do embark in all these initiatives. Thank you.

Yeah, thanks, Ron. The enterprise side, I'd say it's helpful to unpack kind of the two pieces that really drive that business. There's land and there's expand. And you touched on the land team a little bit. What I say there is our land number, which is really reflected in our new customer account that we report, is a function of the newly hired reps that are still ramping, and those reps will be fully ramped by the middle of this year. It's also a function of the operational fixes that we deployed at the end of Q3 and into Q4, which have been returning the expected improvements, and now those have to flow through our sales cycle. And then we're also seeing in this macro, demand is still there for our product. But what we are seeing is that at the contracting stage of closing deals, we've seen elongation there. And that's what pushed a number, a very large number of deals out from closing in Q4 into Q1. And so as all of this is happening, we do expect that those things will roll through our sales cycle and our team is adapting to things like process changes we need to make to close deals faster in this new environment. And that will mean that we can achieve that fully productive outcome for our team by Q3. And I would underscore that's not dependent on any specific macro conditions. These are just things that we are driving through our business. On the other hand, the expand business does have a little bit more of the kind of two drivers coming from it. One is The success of our land team in closing new deals, and so some of that results in a little bit softer numbers in Q4 because we hadn't done as much hiring earlier in the year, and that productivity just wasn't there for the team to execute against. And then the macro, we are seeing a little bit of customer pullback in some cases where they have budgetary concerns that they need to manage, and that is impacting certain accounts. So with that, we're really focused on driving activity in the accounts that have the biggest opportunities, continue to execute against the demand signals that we are seeing, which are very strong in the market. And all of this supports our view that the long-term opportunity is very much still intact, even if near-term revenue growth in the enterprise area is a bit more tempered. To your second question, which I think was about a brand awareness overall, I would say we did see some of those really positive improvements on awareness across different customer cohorts that are really important for us from an acquisition perspective. And that is, I think, giving us confidence that the creative that we're developing, the media strategies that we've been deploying, the measurability that we've put in place over the course of the last year plus is giving us the insights around how to continue to build on those strengths and optimize our campaigns this year to have even more effect on the audiences we care about most. What's, I think, exciting about that is we are able to bring down our brand marketing investment on the media side by 12% in line with achieving our profitability goals and other objectives we have in the business, while also continuing to execute around that broader awareness strategy, which is about bringing a bigger umbrella to all of our sales and marketing efforts to make them all more efficient and productive over time. And we knew this would take some time to play out. This is a year where we're going to see a lot more of the data coming in as data sets mature and as these campaigns continue to be executed to give us visibility into how those brand awareness numbers are translating into client performance deeper in the funnel.

Thank you. Our next question comes from the line of Eric Sheridan of Goldman Sachs. Your line is open, Eric.

Thanks so much for taking the question. We really appreciate the framing around the phases and how we should be thinking about that for the business. With that as a backdrop, was there any differential you want to call out in either certain pockets of the economy or certain geographies where maybe there was little differences in behavior between the phase one type of impact or the phase two type of impact that we should be keeping in mind from a business mix standpoint as we get deeper into 2023? And then maybe I've got a quick follow-up after that.

Sure, Eric. I'd say the trends that we saw in Q3 largely continued into Q4, where the impact was more noticeable in terms of the softness being more noticeable in Europe and amongst, although it was also in the U.S., but it was, again, more concentrated in Europe. And then we did see it not just in the SMB part of the business, but as noted earlier, the enterprise business did see that slowdown on new deals because of that contracting phase of our deal cycle being more prolonged. So those were some of the key elements that we saw that were maybe slightly different or kind of a continuation of, with a few nuances, what we saw in Q3.

And maybe just one follow-up on Ron's question there on the brand marketing side. How quickly should we think about you going from sort of – sort of being more balanced on brand marketing to maybe leaning back in to the marketing from going sort of a neutral stance to an offensive stance. If you see more clients moving into phase two and beyond, how should we think about the ability to turn that back on and get some of the return you're highlighting from some of the elements you feel good about that have been tested and proven out on the brand marketing side? Thanks.

We feel that we are on an offensive stance now with the investments that we're making and that it is going to give us the ability to reach the audience that we're seeking to reach with the frequency we want at the investment level that we're deploying this year. So I think I'm very comfortable that we are seizing the opportunity right now in that area. I think what will be different about where we'll be at the end of this year is the insights that we will have garnered through the progression of the next few quarters will put us in a much stronger position Because we'll be able to connect some of these metrics together around what's happening with awareness and how that relates to traffic and registrations and also reactivation of existing customers who might have registered before and now see an ad and become more active. All of that is going to be much more informed for us due to the experimentation framework and the measurement that we have this year. And so at that point, At the end of this year, we'll be in a very strong position to connect the dots even more precisely around ROI for the business and make a call then around what is the right level of investment going forward.

Thank you. Our next question comes from the line of Brent Thill of Jefferies. Your question, please, Brent.

Hi, this is for Brent Thill. Thank you. I had maybe a little bit more regarding the guidance and what's embedded in it from a macro standpoint. I mean, looking at details, you got it to 12% growth or so in Q1 and 13% for the four years. So it seems like you'll be fairly flat throughout the year. But I'm wondering how you're assuming in terms of macro progression. And a couple of details around that. Is there any contribution at all from the full-time hiring? And how do you think about the dynamics of the kind of marketplace plan anniversary and due to.

For John, so what we're seeing in terms of the kind of what's baked into the guidance around macro is. Basically, what we can see today from all of the trends that happened in the back half of last year, which you'll recall. In the middle of last year, we anticipated that we would see that $10 to $50 million negative impact in the back half of last year, and that is very much what we saw. Similar level of, I think, outlook in being informed by the same types of trends that we were using last year to inform that outlook are the ones we're looking at now to inform our expectations for the year ahead. And so that includes, you know, how customers are behaving coming out of the holiday period. Are they spending at the level of, you know, where they would have been in a non macroeconomic, you know, impacted year, et cetera. So, our guidance is not baking in any specific macro condition change. It's more based on the current trends that we see in the site as well as information we have from so many years of things like seasonality, how things tend to arc through the year as well as our plans in terms of what we will be doing to drive the business going forward. To your question about full-time specifically, I wouldn't say that we're expecting this to be a meaningful contributor this year. It's very early days in this product. We literally just got it out the door, and we need to do a lot to continue to optimize the experience, make sure that we're really looking to customers here rather than jumping to assumptions about what the revenue will be. at the back end. So, you know, not really baking in anything very specific around that. It's more one of the pieces of our entire mix as we look at the drivers of the business this year.

Thank you. Thank you. Our next question comes from the line of Rohit Kalkarni of Roth MKM Partners. Your line is open, Rohit.

Thank you. Just a question on this reorg from a functional to a business unit org structure. Just maybe just draw out your thinking there, like why, why now, and over the next year, what sorts of observable results do you hope to achieve from having this reorg done in late last year?

Yeah, this is an exciting change we made, something we've been contemplating for a long time as we've looked at how to most effectively drive this business. And I realized last year that we could be more effective putting leaders in charge of very discrete parts of the business with accountability to both revenue and over time cost components of their business. And these leaders have full stack ownership of different levers to drive those outcomes, whether it's products, marketing levers, sales levers, et cetera. So this is a big shift for us and is really intended to drive greater alignment internally around the key priorities that we're delivering against. Certainly, it gave us a chance to be more efficient with kind of how we're deploying resources across the business in those key priority areas. And ultimately, I think gives us a structure for giving different leaders the independence to be risk-taking, forward thinking and really kind of big picture owning as they move forward in their respective business areas. And it's different than what we had in a functional model. So this was the right time to do it. I think especially as we're heading into a more complex product mix, different customers that we're serving between enterprise and SMB, we just looked at the total picture. I feel like this is the time to give different types of ownership and responsibility to different leaders in the business.

Okay. And just to follow up on the pricing change you did and the GSV trend that we are seeing and the take rate trend that we are seeing, is there a point from the pricing change that you did was your hope that at some point GSV would start to stabilize while you start to get pricing leverage? And if so, at what point do you feel that the headwind or the incremental headwind that you're seeing because of the pricing change starts to diminish in the future? Sure.

So, you know, we feel the pricing change was definitely very successful and the outcomes were in line with our expectations. Customers have gotten a better benefit in terms of the features and functionality that they're receiving. The pricing is working for them, although we do see for a period of time until the anniversary of this change, some of that GSV headwind, even as we've seen a big uptick on the revenue side that has yielded higher overall take rate for the business. So that is kind of the overall, I think, observation of what we've seen with the pricing change. We do expect that the GSB headwind that we saw coming out of that change will be something that once we anniversary of the change, which was made in late April of last year, will fade out and we'll be kind of in a new situation around that.

Thank you. Our next question comes from the line of Logan Ray of RBC Capital Markets. Your line is open, Logan.

Hey, thanks for taking the question. Just one quick one on artificial intelligence. Obviously, ChatGPT has gotten a lot of buzz recently. On a more long-term basis, how do you view the advent of artificial intelligence as like a headwind or a tailwind for the business, just given technology? So there would probably be some categories that could be fulfilled through AI and also some categories that would pop up as a result of artificial intelligence. So just want to get a sense of how you're thinking of that on a more long-term basis.

Yeah, our view is that the opportunities here are so exciting for our customers and for Upwork, and certainly the opportunities far outweigh the risk. I highlight a couple of things in particular that I'm excited about in terms of AI and how it's going to impact our customers and our business. So one is, you know, we can already see with the applications that are available today, how incredible these can be in terms of productivity tools that make our talent, you know, all talent, but talent on Upwork that's leveraging them better, faster, and cheaper at what they do. And that is just in line with why people come to Upwork and what they're looking for. And we're already seeing talent leveraging these tools to get better and more effective at their work, which I think is a tremendous value. The second one is we do see that companies that are building the AI platforms and infrastructure that are subject of so much of kind of the headline news these days, they need talented, skilled workers to do the work that is related to all of the stages of developing, deploying, and commercializing those models. And so we already work with notable companies in this space, serving them with the talent that they need. And we can continue to expand that as this entire market is growing because these models, as smart as the AI is, the models don't all build themselves. There are people needed to actually go through and work on the workflows in a variety of ways to make this happen. The third opportunity that I am excited about is the ways that companies that are integrating new AI tools and applications into their services, whether it's integrating them into their websites or offering for customers. Again, they need talent to do this integration work and to do some of the work around customizing, tailoring, and deploying these solutions as they're being adopted at scale in the market. And this is another place where Upwork Talent already has a lot of the activity happening and can continue to serve this market going forward. I think we noted that we've seen searches for AI-related services on our website grow 3,900% in the last four months alone, as well as job posts growing 1,400% in the last couple months. So this is just the beginning, I think, of many ways that this will impact our business very positively and the ways that our customers can take advantage of Upwork as they're navigating kind of this next frontier of technology.

Great. Thanks for the call. Thank you. Our next question comes from the line of Maria Rips of Canaccord. Your line is open, Maria.

Great. Thanks for taking my questions. So I just wanted to go back to your point about sort of different phases of recovery. And so if you look at the clients that have moved into the second phase, Are there any sort of common characteristics or perhaps even verticals that are represented in that group? And then I have a quick follow-up.

I wouldn't say, Maria, there's a specific trend in terms of clustering that activity by industry or anything like that. Upwork, we do serve tech-enabled businesses broadly, and so we've seen different parts of the business be impacted through the macro. Some are in that phase one, as we talked about. They're navigating a more turbulent time, and others are leaning in, and they're comfortable, and they're ready to spend more. Both of those things, you know, are seen simultaneously in our customer base right now. And I wouldn't say it's even as you've looked at things like industry, you know, cuts of the data and things like that. It hasn't been evident that that is there's kind of clear lines of demarcation that is determining that behavior. It seems very company specific because different companies are moving through kind of different stages of this at their own pace at the moment. So we're, you know, we're not really seeing it by industry.

Got it. And then secondly, I appreciate all the callers on brand spend and understanding that you're targeting to reduce brand spend this year versus last year. Can you maybe just talk about how you're thinking about prioritizing brand spend relative to other investment opportunities this year?

Sure. We think about the brand spend as this umbrella driver that brings the awareness to the market that then our sales team our other marketing channels whether it's performance marketing digital marketing of other kinds etc can pick up and take advantage of because we've created more of that headroom and awareness for space for ourselves in the market so for that reason it is right now something we're deploying as a kind of underpinning strategy that's that's meant to lift all boats of other activity in the business I think if we have to make trade-offs later in the year around profitability for some reason or something else due to unexpected or unforeseen things, clearly the brand area and others will be up for evaluation. I mean, I think we'll just look at where are we getting the best return and is it from brand or is it something else? And that'll be a conversation we would have then. But I think Right now, we have prioritized the brand spend because of the results that we shared and because of the belief that this is a moment when companies absolutely resonate with our value proposition, and yet the vast majority of them aren't aware of Upwork and aren't aware of what we offer. So we have to connect those dots for them, and then all of the rest of our sales, marketing, and product work will work harder in that environment when we have more of that awareness.

Thank you. Our next question comes from the line of Marvin Fong. of BTIG. Your line is open, Marvin.

Great. Thanks for squeezing me in here. A couple of questions. Just first on the 13% revenue guidance for 2023, just wondering if you could maybe look at it through the lens of enterprise versus SMB. Do you expect both of them to be kind of Similarly, week, year on year, obviously enterprise is going to outgrow SMB, we would all guess, but just maybe just add some color about how you're thinking about those two end markets relative to your guidance.

Sure. I'd say SMBs are the faster twitch part of our business. So they tend to slow down faster when conditions get rocky and then pick up faster once they get comfortable or once conditions change. Enterprises are the slower twitch part of the business. So they behave through a slightly different arc. But the good news is we are still seeing strong demand in that environment. A lot of the things I mentioned earlier in the call are more timing issues of us getting reps ramped and the flow through from the improvements we made last year on operations and things like that. So I think that's why there's some different dynamics on each side. But for both sides, we are baking in an expectation based on the numbers and the trends we're seeing right now that these parts of the business will both grow and they will both grow in a way that's in line with what we're seeing from the end of last year and heading into this year. So we're basically expecting some consistency there based on our execution and everything that we've done to date.

That's great. Thanks for answering that one. And then my next question, my second question, just on the net ads, like returning to that topic, I think this is the first quarter decline sequentially since you've been giving us the active client metric. And I appreciate the reasons for that. I'm just curious that you could just dissect for us, you know, what can you tell us about the clients that are leaving the platform? I mean, were they really just sort of experimenters who didn't really do much business and were really not starting to see them go? And then maybe as a follow-up to that, you know, does history tell you, you know, that clients that churn out, that you're able to recapture them in the future? Thanks.

Yeah, sure. I'd say the reason our – I mean, to try to simplify on the client net ads number – The reason that we are lower quarter-by-quarter is more to do with smaller acquisition cohorts in the recent periods, rather relative to very large acquisition cohorts that we had when you go back over the last 18 months or so that created this very large, healthy base of active customers. But more recently, our acquisition cohorts have been smaller in terms of their ability to contribute to that mix. And then we have seen, I wouldn't say, you know, meaningful changes in churn that are concerning. It's more as you look at, as you look at measuring churn on our site over different periods of time, customers do display kind of episodic behavior. And so it's, it's not, It's kind of hard to say, like, when have we lost a customer? Because you might see a customer go dormant for three months, six months, nine months, and then they come back and they come back with, you know, multiple needs or whatever that case may be. So I think that's where, you know, we're doing a lot with our product solution, things like full-time hiring, things that we can put in terms of customers to get them re-excited about Upwork, things they may have forgotten or not known that we can offer them. That's part of the strategy in terms of driving that engagement from, you know, existing users that may have lapsed. and then obviously continuing with our acquisition efforts this year to make sure that those, you know, customer cohorts coming in continue to be healthy.

Thank you. Our final question comes from the line of Bernie Matern of Needham & Company. Your line is open, Bernie.

Great. Thank you for taking the question. Just lastly, I guess, on the end-to-end solution for full-time hiring, just What provides you the confidence that this is going to be incremental to the business or to the talent marketplace instead of cannibalizing it?

You know, I don't think it matters, Bernie. I think if we're giving solutions to customers that are better than the previous solutions that we're giving to customers, then that's, you know, that's part of our job is to continue to innovate into the spaces where we can offer something better, faster, superior, and that really meets better. So I don't think we look at this as a, cannibalization type of situation. It's much more, this is additive. It gives them an alternative. Some people will want to do one thing. Some people want to do one other. We see this all the time in talking to customers. They have a range of needs that need to be met in a lot of different ways. Previously, we didn't have a perfect solution for them in this space. Now we do. And so I think this is additive overall, but certainly if some people take a relationship that was previously worked on one way in Upwork and then move it over to this offering, we see that as a win.

Got it. Makes sense. Thanks, Hayden.

Absolutely.

Thank you. At this time, I'd like to turn the call back over to management for closing remarks.

On behalf of the entire Upwork team, thank you for joining us today and thank you for your interest in Upwork. If you need any clarifications or have any follow-up questions, please do not hesitate to reach out to me at investor at Upwork.com. This concludes our call.

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