Yahoo Finance Upwork Inc. (NASDAQ:UPWK) Q3 2023 Earnings Call Transcript
Upwork Inc. (NASDAQ:UPWK) Q3 2023 Earnings Call Transcript November 7, 2023
Upwork Inc. beats earnings expectations. Reported EPS is $0.21, expectations were $0.11.
Operator: Good day, and thank you for standing by. Welcome to the Upwork Q3 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, David Anhalt, Manager of Investor Relations. Please go ahead.
David Anhalt: Thank you. Welcome to Upwork's discussion of its third quarter 2023 financial results. Joining me today are Hayden Brown, Upwork's President and Chief Executive Officer; and Erica Gessert, Upwork's Chief Financial Officer. Following management's prepared remarks, we will 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 law. Forward-looking statements include all statements other than statements of historical facts. These statements are not guarantees of future performance but rather are subject to a variety of risks, uncertainties and assumptions. Our actual results could differ materially from expectations reflected in any forward-looking statements.
For a discussion of the material risks and other important factors that could affect our actual results, please refer to our SEC filings available on the SEC website and 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 quarterly report on Form 10-Q for the three months ended September 30, 2023. In addition, reference will be made to certain 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 third quarter of 2023 are to the third quarter of 2022.
All financial measures are GAAP unless cited as non-GAAP. Now, I'll turn the call over to Hayden.
Hayden Brown: Thanks, David. Thank you all for joining us today. In the third quarter of 2023, Upwork continued to drive durable profitable growth while advancing our position as the world's work marketplace. We made significant progress on our goal to become the pre-eminent destination for AI-related talent and work, while also improving the efficiency, effectiveness and speed to match on our platform through improvements to our core product experiences and capabilities. In the third quarter, we made huge strides on our financial goals. We achieved better than expected results generating third quarter 2023 revenue of $175.7 million, up 11% from a year ago. We recorded GAAP net income of $16.3 million and adjusted EBITDA of $31.2 million this quarter, demonstrating a very rapid margin improvement.
We also continue to make important investments in near and long-term growth opportunities. These include adding new features and functionality to the platform, including new innovations to our ads and monetization products. These products contribute revenue to Upwork, but more importantly, they contribute to the efficiency of the platform by helping professionals and clients connect more quickly. One of our most ambitious growth goals is to foster the most AI-empowered independent professionals in the world. In pursuit of this, we greatly enhanced our AI Services hub, which has seen a 10X increase in average monthly visitors since its launch in the second quarter, and just yesterday, announced an extension of the hub with a new suite of generative AI app offers and educational content especially designed for talent.
Our scale as the world's work marketplace has aided us in creating a deep and diverse ecosystem of partners that span education, technology and special offers for clients and talent. New features partnerships for AI-powered apps and offers for independent professionals include industry leading companies like Adobe, Amazon, ClickUp and Miro that have advanced integration of generative AI into their tools and services alongside educational AI skill based courses and content from leading providers like Coursera, Jasper and Udemy that form a new education marketplace on Upwork Academy. We also launched limited access to Upwork Chat Pro, a new generative AI application embedded directly on Upwork platform and powered by GPT-4. Upwork Chat Pro utilizes unique insights from Upwork about independent professionals to provide specific contextualized responses and recommendations that are relevant to the needs of professionals on Upwork, assisting them in starting, creating and completing projects more efficiently and effectively.
In the third quarter, we continued on our journey to unlock the vast opportunity in the enterprise space, increasing our new enterprise logos in the quarter by 21% versus Q2 2023. We added 23 new enterprise clients in the third quarter, expanding our customer roster with notable new organizations like Dropbox, IT'SUGAR, Moderna, and Florida State University. We also drove substantive growth in our highest value cohort of customers as the number of enterprise clients in the third quarter spending $5 million or more over the trailing 12 months rose 43% quarter-over-quarter. We continue to be pleased with the progress we are making toward our long-term strategy of providing companies with the talent, skills and tools they need to get critical work done through harnessing the power of generative AI on the platform, innovating on behalf of all our customers, optimizing our operation and running our business to drive durable profitable growth.
We are on track to deliver a record year in 2023 in both revenue and adjusted EBITDA and have set a steady course for sustained momentum in the quarters ahead. I'll now turn it over to Erica for more details on the financials.
Erica Gessert: Thank you, Hayden, and hello, everyone. I'm delighted to be here with you today to review a very successful third quarter. GSV again exceeded $1 billion in the third quarter. Revenue grew 11% to $175.7 million with Marketplace revenue of $161.7 million. The enterprise business unit which includes managed services and enterprise revenue was flat quarter-over-quarter with revenue of $26.1 million. This quarter, managed services revenue increased 4% year-over-year to $14 million, while enterprise revenue which is reported as a part of Marketplace revenue was down 3% to $12.1 million. These offsetting growth rates are due to the movement of a customer to managed services during the quarter. Total revenue growth was the result of take rate expansion driven by strength in our ads products and our move in 2023 to a simplified flat fee pricing structure.
Total take rate in the third quarter of 2023 was 17.1% up from 16.3% in the previous quarter and from 15.4% in the third quarter of 2022. Active clients increased 2% year-over-year and quarter-over-quarter to approximately 836,000. Active client growth was driven both by improvements to our client retention, as well as improvements in efficiency and acquisition of new clients. In particular, we saw a strong improvement to our performance marketing efficiency in the quarter. GSV per active client decreased slightly by 1% year-over-year to $4,906, a reflection of the strong active client growth in the quarter. Non-GAAP gross profit was $133 million, or 76% of revenue in the third quarter compared to 75% in the third quarter of 2022. Non-GAAP operating expenses for the third quarter of 2023 were $103.5 million, representing just 59% of revenue compared to 78% in the prior year period, with R&D expense increasing 16% year-over-year offset by sales and marketing expense decreasing by 26% year-over-year and G&A decreasing by 2% year-over-year.
Provision for transaction losses decreased a remarkable 84% year-over-year. The strong improvements in operating costs were the result of aggressive management actions to focus on efficiency and profitable growth. We will continue to identify ways to improve our efficiency while also investing in innovation to grow our business. In the third quarter, we made huge strides in our focus on durable profitable growth. Non-GAAP net income was $28.9 million in the third quarter of 2023 compared to non-GAAP net loss of $4.2 million in the third quarter of 2022. Our non-GAAP net income per basic and diluted share was $0.20 in the third quarter of 2023 as compared to non-GAAP net loss per basic and diluted share of $0.03 in the third quarter of last year.
This rapid improvement is the result of our ability to quickly identify areas across optimization and efficiency. Adjusted EBITDA was $31 million in the third quarter, compared to negative $2.9 million in the third quarter of 2022. Adjusted EBITDA margin was 18% in the third quarter of 2023 compared to adjusted EBITDA margin of negative 2% in the third quarter of last year. Our strong adjusted EBITDA results are due to revenue overperformance as well as the implementation of the cost optimization programs we've discussed. We are very pleased with our ability to rapidly identify these cost efficiencies in our business, which we expect, in part, to reinvest in organic growth in future quarters. In Q4 2023, we remain committed to our previous guidance of exiting the year at approximately 15% EBITDA margin.
Our focus on profitable growth is also increasing our cash balances, with cash from our operating activities of $37 million in the third quarter and cash, cash equivalents and marketable securities of approximately $555 million. I am also delighted to announce that our Board of Directors have approved a share repurchase program with authorization to purchase up to $100 million of our outstanding shares of common stock. This is a testament to our strong financial performance and ongoing commitment to durable profitable growth. Turning now to guidance. We are guiding fourth quarter revenue to between $175 million and $180 million which results in full year revenue guidance to between $680 million and $685 million, which represents a 10% year-over-year growth rate at the midpoint.
We're raising our revenue guidance primarily due to the revenue over performance we saw in the third quarter, particularly around our ads and monetization product. We expect fourth quarter adjusted EBITDA to be between $24 million and $28 million, which represents an adjusted EBITDA margin of 13.5% to 15.8%. We're also raising our full year 2023 adjusted EBITDA guidance to be between $67 million and $71 million. We continue to be on pace to post an adjusted EBITDA in 2023 that is more than double that of any year since we went public. We also expect to generate positive free cash flow on an ongoing basis. The third quarter has been another successful one for Upwork Business and I'm proud of our team's ability to rapidly execute on our efficiency goals.
Going forward, we will continue to balance our commitment to strong and steady growth of revenue and EBITDA margin expansion, while also focusing on shareholder value. I want to thank the fantastic Upwork team for everything they contribute every day to driving value for our customers and building a growing successful business. Thank you. And we'll now turn the call to your questions.
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