Ladies and gentlemen, thank you for standing by and welcome to Upwork first quarter 2020 earnings conference call. At this time, all participants lines are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Ms. Denise Garcia, Investor Relations. Please go ahead, ma'am.

Welcome to Upwork's discussion of its first quarter 2020 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 the federal securities laws. These statements are not guarantees of future performance, but rather are subject to a variety of risks, uncertainties and assumptions. Our actual results could differ materially from expectations reflected in any forward-looking statements. In addition, any statements regarding the current and future impacts of the COVID-19 pandemic on our business and actions we have taken in response to the COVID-19 pandemic are forward-looking statements and related to matters beyond our control and are changing rapidly. 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 on our Investor Relations website as well as the risks and other important factors discussed in today's press release. Additional information will also be set forth in our Quarterly Report on Form 10-Q for the three months ended March 31, 2020 when filed. 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 first quarter of 2020 are to the first quarter of 2019. All measures are GAAP unless cited as non-GAAP. Please note that, consistent with recent SEC guidance, today we will be disclosing more current and detailed information regarding our operating results and financial condition in order to provide insight into the impact of the COVID-19 pandemic on our business. We do not currently plan to provide these types of disclosures in future earnings calls. 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 Denise and thanks everyone for dialing in today. The COVID-19 pandemic has unsettled all of us. I would like to start by saying that our hearts are with everyone impacted by this unprecedented event. We are so incredibly grateful for the many individuals on the frontlines of this crisis. Thank you. In the face of the pandemic and the associated economic crisis, Upwork is focusing with a renewed sense of purpose on our mission, which is to create economic opportunities so people have better lives. In the current environment, we are drawing on our 20 years of practicing and enabling remote work in order to support our clients, many of whom are mobilizing to expand their remote work capabilities internally as well as seeking the talent they need to address urgent and emerging challenges and opportunities. I am pleased to say that given our prior experience working as a highly remote company, the transition to remote work for us has been smooth. More than half of our team members were already working from home across 800 cities before the pandemic and today all of our approximately 2,000 team members are working remotely. As a result, we have successfully maintained high-performing operations while continuing to innovate our product offering. I want to express deep gratitude for the incredible efforts by our dedicated Upwork team who have stayed focused on serving our customers during this time of unparalleled change. Last quarter, I shared that our company is positioned at the crossroads of four major trends: First, a planet blanketed by high-speed 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…

Thank you Hayden and good afternoon everyone. I would like to start with a brief update on our first quarter financial results and share thoughts regarding our outlook before opening the call to your questions. GSV, which includes both client spend and additional fees we charge for other value-added services, was $559.5 million in the first quarter. Core clients increased by approximately 4,000 in the first quarter to approximately 129,000. Core clients increased in line with our expectations, given our current emphasis on not just adding new accounts, but expanding our footprint within existing accounts. Client spend retention was 102% as of March 31, 2020, steady with where this metric was in Q4. Revenue increased by 21% year-over-year to $83.2 million in the first quarter, exceeding the high-end of our guidance range of $82.5 million. We estimate that our Q1 revenue year-over-year growth rate was reduced by approximately 1% by the COVID-19 pandemic. Marketplace revenue increased by 24% year-over-year to $74.8 million in the first quarter, representing 90% of our total revenue. Managed services revenue increased as expected, growing 5% in the first quarter to $8.4 million. Our overall take rate in the first quarter was 14.9%, up from 14.1% in the year prior. Our marketplace take rate improved to 13.6% in Q1 compared to 12.6% in the year prior. This improvement was primarily from several changes we made after the first quarter of last year, including the adoption of new paid client subscription plans, changes to connects, which are the virtual tokens that allow independent professionals to bid on projects on our platform and the increase in client payment fees for Upwork Basic and Plus from 2.75% to 3%. Non-GAAP gross profit was $59.9 million, representing 72% of revenue, compared with 69% in the first quarter of 2019. The…

[Operator Instructions]. And we have a question from Marvin Fong with BTIG. Your line is open.

Good afternoon. Thank you for taking my questions. I thought I would start with just elaborating on the adjustment you are making advertise or performance marketing and brand awareness advertising. If you could just kind of talk about the ROI that this new environment is, how much better the ROI is with regards to performance marketing, that would interesting to know? And then also, are you able to calculate and ROI on your brand awareness spending as well? Thanks. And I have a follow-up.

Marvin, thanks for the question. We think that this is really a once in a generational moment for us in terms of building our brand awareness and that's one of the reasons we are moving to really shore up all of our channels and make sure that we are full force sending the message to customers about how relevant our solution is at this very moment. In terms of the ROI on performance marketing, we have seen actually similar ROI our over the last couple months and weeks as we have seen historically. So the performance marketing spend has been returning similar results to what we have seen in the past in that scenario where we continue to invest where we see opportunities. On the brand side, we are trying to closes this perception versus reality gap that I think exists in the market and are fortified by the fact that the brand investments we have made in 2019, heading into this year already resulted in a 70% increase in brand awareness amongst our target market place buyers. So I think there are great signs that the brand work we are doing is driving the results that we are looking for. And we are increasingly focused on measuring as well conversion around users deeper into the funnel, although, as you know, with brand spending, some of those attributions are always a little bit less direct than what we have on the performance side. But stepping back, I think this is really a time where we feel the interest and relevancy of our message is at an all-time high and we have taken measures in Q1 to really retool a lot of our marketing assets to speak to customers at this very moment around things that are most top of mind for them. And so that's where we think now we are prepared with some of the really relevant messaging that can help them understand why we are relevant and really lower the barriers to them starting out and trialing our offering.

And I would add, the other thing that we have been doing is targeting in where and how we think about the marketing channels. So no longer doing outdoor and coming back on radio and really focusing on the right channels in this environment. Again, measuring that ROI threshold and making sure we get pay for performance advertising, where we see strong economics. The other thing I would add is, as part of this investment in Q2 is this being very thoughtful around deploying some of this related to the working together talent grant program where we allocated $1 million. We felt it was the right thing to do. It enables us to both get new and existing customers experience Upwork in new ways, while supporting our community of independent professionals and will result in some really powerful stories that bring our solution and network of professionals to life.

Terrific. Thanks for that, Hayden and Brian. And my follow-up question, it was very encouraging to hear about the leading metric indicators. And I understand that second quarter revenue guidance was impacted by what happened in March and I guess in April as well. So if you could just kind of help me square that in the sense, perhaps you could just kind of add more color to the run rate that we are kind of operating now through April into this first half of May. You seem to indicate that the run rate is above the $83 million from first quarter since that, correct me if I am wrong, was your highest revenue quarter so far in your history. So just kind of help me square those two comments you made. Thanks.

There is definitely still a number questions, Marvin, in terms of how quickly and how aggressively the really strong leading indicators that we have been seeing in the last few weeks will translate into GSV and revenue. So what we did with this quarter's forecast is, we really looked at a number of different scenarios and have been planning around the various outcomes that we anticipate, both based on some of the tailwinds we have been seeing in the last few weeks as well as a number of things that could happen in a more macro environment to the business. And so we basically came up with a balanced approach where we have baked in some of the continued headwinds for March continuing with our SMBs as their activity may still be dampened in areas where they are still facing uncertainty, deciding how to spend, are facing challenges because of their business model. But also, that impact we think will continue to muted barring much worse things happening in the macro environment. So that's factored into the Q2 forecast. And we also have a little bit of upside factored in due to the tailwinds that we have been seeing in the last few weeks, but anticipate that that may not materialize in a significant way until late in the quarter or the following quarter, just given the pacing at which this type of activity, the timing it takes to kind of translate into GSV and revenue. So we have tried balance some of those different factors with this forecast.

Terrific. Thanks for that color and I am glad everyone's healthy and safe and I hope that remains the case. Thank you.

Same to you. Thanks.

Thank you. Our next question comes from Jian Li with RBC Capital Markets. Your line is open.

Great. Thank you. This is Jian, for Mark Mahaney. So maybe just a couple of questions here. One on just double-clicking on the improvement in take rate. Wondering if you can highlight where you are seeing the most improvement in? Is it just from new subscriptions uptake? Or the adjustments you made in connects? And is this a metric that you think has stabilized? Or do you think there is still room to grow in the next few quarters? And then I have a follow-up. Thank you.

Thanks. The improvement in Q1 was related to the adoption of paid client subscription plans we launched last year in lat Q1, early Q2. And then there is the changes in connects as well that we had introduced last year and we started to kind of rollback a little bit of that in the late part of Q1 and into Q2 which is going to be a little bit of a headwind for the rest of the year, as we talked about on the last call. And then the increase in the client payment fee that we also introduced last year was 2.75%. We move that to 3% last year. So this is a high watermark for us on the take rate for quite a while here. We expect it to come down in Q2 with the connects changes we mentioned before and remain in line with the rest of the year.

Great. Thank you. And also just if you can share any color on around client spend retention? Retention rate has been stable versus last quarter. But wondering if you are seeing different trends in the SMB retention versus enterprise, especially I think historically enterprise has higher retention rate. Just wondering if that trend has been increasing, either before or after the COVID outbreak? Thank you.

We feel really good about where client spend retention netted out in the past quarters, staying stable at 1% or 2%. And I would say, between SMB and mid-market, it's slightly different performance. We mentioned in our remarks that small and midsize businesses did see a softening of GSV by about 3%. We did see an uptick on the mid-market and larger customers. So that was slightly offsetting that trend. And I would say, in general for this metric, it's still really early innings for us anticipate where it might go with COVID specifically, it looks really solid. Again, the trends we are seeing in terms of our existing cohort of customers are really strong, but there is some unforeseen bumpiness that could come out of the macro economic conditions it doesn't exist. And since this is trailing 12-month metric, it may take a while for those things to flow-through the metric. But so far, it's looking really positive.

Great. Thank you.

Thank you. And we have a question from Ron Josey with JMP Securities.

[indiscernible] some increased demand for freelancer services and as unemployment increases, do you see some of these organizations more permanently shifting to freelancers? And then number two, can you highlight any vertical, like creative and design or technical that are seeing higher or lower demand or performing better or worse? Thank you.

Pardon me. Ron, can you repeat your question?

Sorry. I think my line cut out while Ron was asking the first part of his question. Ron, can you repeat the question related to, I think you were asking about freelancing becoming a more prominent fixture for larger companies?

Yes. Sorry. This is David for Ron. You talked about seeing some increased demand for freelancer services in your prepared remarks. And I am wondering if you can see some of this demand being more permanent as unemployment increases?

Absolutely. I think that that's a lot of the conversations that we are having with customers and certainly as we are looking at a lot of the data from folks like Gartner, PwC and others who are talking to many CFOs and CEOs in the landscape who are saying these trends around remote work and having a more flexible workforce are things that are more important to companies now than ever before. And we do expect that as companies place a higher premium on having flexibility in their workforce models, right now they are scrambling to figure out how to create more of that flexibility overnight and I think will be realizing that that flexibility is something that will serve them well even after this crisis passes because it let's them be much more dynamic in adapting to the variety of business challenges and opportunities that they face even outside of a crisis. So we do anticipate that more dynamic and flexible models will be the rule of the road going forward. I think our model is particularly interesting because we provide not just freelancing talent and IC compliance, but also we have an employer of record and payrolling solution. So we are also having a lot of customer conversations right now where companies are looking at moving their distributed workforce that takes a lot of forms onto our platform to take advantage of both the IC talent capabilities we have as well as global payroll and compliance. And I think those are the types of things that more companies will be doing once they start seeing the opportunities during the crisis, it will become part of their new normal way of operating after the crisis passes.

The only thing I think I would add to the financial services, which Hayden mentioned was we created this new offering called direct contracts which is a service for freelancers that aren't on the platform to bring their work to the platform so they get the payments protection of Upwork's escrow service. So hopefully, that will bring more freelancers that aren't working necessarily on the platform and bring them more onto our platform as well as more of as their existing business as well which will help us grow as well.

Your second question about some of the trends we are seeing around used cases right now. I think there is a lot of incredible activity happening and I can characterize a few broad themes that we are seeing. So the first one is around customers looking for IT and superstructure skills for digital transformations and digital tools that are implementing and really all of the digital pieces of their business continuity planning and execution right now. And so customers coming to look for freelancers who can help with deployments around websites that they are building for the first time. We have had customers looking to build COVID-19 app tracking mechanisms or new digital storefronts that they are moving from brick-and-mortar to online. So there is a lot of activity around kind of IT and infrastructure support. The second big theme that we are seeing is around marketing and content. So as you might imagine, so many companies are pivoting to address customer needs in new ways in new channels. So there is broadly a content explosion happening with companies trying to create relevant, timely content for customers that addresses those pain points and top of mind concerns that their customers are having right now. So that's creating demand for people who are doing writing, content creation, content strategy and then areas within the same theme around designers, video production, animation. Those type of skills are really in demand right now, as companies are looking for new digital vehicles for communicating with their customers and they usually don't have those skills fully in-house. And maybe redeploying their marketing budgets from in-person events to virtual events and they need help to create all of the content assets, videos, et cetera that would go with those types of activities. A third area that we are seeing a lot of activity is around customer support. Because whether companies are benefiting from the current crisis or struggling with the current prices, we are seeing a trend where so many companies, regardless of their situation, are getting spike in customer contacts. And so they are looking to us to provide customer support reps who can really deal with these unexpected demand surges in speaking with customers, which is so critical to them to get feedback or communicate key messages or a resolve customer issues. The fourth and final thing I would say is there are definitely some interesting niche verticals that have become very active. For us, they are much smaller relative to our total business, but areas like game development, instructional design, e-learning, all of those are, I think, areas where you wouldn't be surprised just to imagine the type of use cases that companies are leaning into right now to stay relevant, pivot and really make sure that they are delivering the messages, the solutions, et cetera that they need to at this very moment. So those are some of the really interesting themes that we are seeing.

That's really helpful. Thank you.

[Operator Instructions]. And I am showing no further questions at this time. That concludes our call for today. Thank you for participating. You may now disconnect. Everyone have a great day.