Ladies and gentlemen, thank you for standing by. And welcome to Upwork’s Second Quarter 2020 earnings conference call. At this time, all participant 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.

Welcome to Upwork's discussion of its second quarter 2020 financial results. Leading the discussion today are Hayden Brown, Upwork's President and Chief Executive Officer; and Brian Kinion, Upwork's Departing Chief Financial Officer and Current Advisor to the CEO. Also on the line is Jeff McCombs, Upwork's Incoming 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 current and future impact of 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 June 30, 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. 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. I want to start by commending our team for thriving in a fully remote work environment, while continuing to put our customers at the center of everything we do. Overnight knowledge workers everywhere have adopted a remote working model that is testing companies and individuals in new ways. And I'm incredibly proud of the work our team has been doing to bring our own 20 years of remote work experience to bear in supporting companies large and small in navigating the remote works landscape. The seismic trends towards remote work and more flexible working models continue to move in our favor, and this was illustrated by numerous data points from our Fourth Annual Future Workforce report released in June. Our study found that, 45% of hiring managers have frozen full time hiring, and yet 72% are continuing or increasing their usage of independent professionals -- underscoring, the focus companies have today on cost management and workforce flexibility. The breakthroughs companies in making the adoption of remote work and they're focused on creating a more agile workforce is increasing the appeal of our online freelance talent solution. Against this backdrop, I'm pleased to report second quarter revenue of $87.5 million, representing 19% year-over-year growth and exceeding the high-end of our guidance range. Spend from new clients was a larger contributor than usual this quarter, as we on-boarded and activated our record number of new clients. We benefited from the structural shift in favor of remote work and labor flexibility and drove performance through our continued investments in brand, performance marketing, and use case specific content and marketing outreach. The other key driver of our revenue was spent from retained clients. A predictable and meaningful spend level from retained client is a critical…

Thank you for the time, Hayden, and hello everyone. Before I get into our second quarter financial results, I'd like to share a few parting words. It has been an honor to work with such an amazing team over the years, and I'd thank everyone at Upwork for the partnership and support. Serving as CFO of Upwork, has been a career highlight and the Company is on a great path. I look forward to seeing Upwork succeed well into the future. I'd like to introduce Jeff, and then we'll turn to the second quarter results.

Thank you, Brian and Hayden, and hello everyone. I'm very excited to join Upwork at such a transformational time for the Company. Now more than ever before, the flexibility that Upwork provides is critical for businesses and freelancers alike. I look forward to working closely with Hayden and the rest of the leadership team to execute on Upwork's vision of connecting businesses with great talent. Now, back to Brian to wrap up with the second quarter results.

Thanks, Jeff. In the second quarter, our gross services volume was $582 million, and our revenue was $87.5 million, reflecting a 19% year-over-year increase. Marketplace revenue was $78.5 million, reflecting a year-over-year increase of 19% and managed services revenue was $9.1 million. As we showed on the last call, we began surpassed pre-crisis levels on numerous top line activity metrics such as client registrations and new job post in early to mid April. These new client relationships resulted in revenue at the higher tiers of our tiered freelancer service fee. Revenue was also boosted by clients and retention that improved over the course of the quarter. Lastly, our revenue performance was driven by better-than-expected usage of connects, freelancers, virtual bidding tokens and COVID related project under managed services. Our core clients grew by approximately 4,000 to 133,300 at the end of the second quarter. And our clients spend retention for the quarter was 100%. Our overall take rate in the second quarter was 15% and our marketplace take rate came in at 13.7%. Non-GAAP gross profit was $62.3 million or 71% of revenue, which was consistent with the second quarter of 2019. Non-GAAP sales and marketing expenses were $33.1 million, representing 38% of total revenue as compared to 32% in the second quarter of 2019. The increase was driven by investments to drive brand awareness, performance marketing and sales. Non-GAAP R&D expenses were $17.8 million, representing 20% of total revenue, as compared to 19% in the second quarter of 2019. This increase was driven by our continued investment in product innovation. Non-GAAP G&A expenses were $13.4 million, representing 15% of total revenue as compared to 18% in the second quarter of 2019. We will continue to drive leverage in G&A as we scale for growth. Transaction losses were $1 million…

[Operator Instructions] First question comes from Brent Thill with Jefferies. Your line is now open.

Hayden, curious, if you could just give us a sense, you mentioned you saw close rate starting to improve. Can you just talk to what you're seeing currently now in the current period? And Brian, great working with you and best of luck, I guess everyone would just love to hear. I think there's little concern about the transition and maybe just talk through this, from your perspective, that'd be helpful?

Brent. So in terms of the sales question, we're seeing really good progress on the sales side around expanding spend with existing customer accounts, and we really leaned into the opportunity this past quarter to partner with our customers, to help them navigate the transition to remote work and bring our expertise to bear and that really showed up with customers like Microsoft as we help them expand, deployments of things like customer support agents and other types of freelancers who could really help them you know, as they navigated the challenge. We did not see the conversion rates that we wanted to see in terms of new clients signing up and I think that's something where we feel really good about the top of the funnel where the indicators are strong with our sales opportunities that offer and highs. But the closures haven't quite been there yet and we really see customers having some hesitancy just because of the overall economic downturn, and that is starting to really improve in June. And those indicators are much more like what we were seeing in March-April time period where, I just sold a lot of customers that they were not bring they pandemic or recession and kind of come to terms with what that meant to the business. So our focus has been retooling from sales backup our approach for really meet customers where they are, make sure that they talks about revenue, it has been building the returns, as I mentioned, with improving deal close rates in the more recent period. And as you step back and look at all this, we do continue to believe that having a strong sales team is critical to unlocking the larger $560 billion TAM that we're addressing. And it's really heartening to see especially over the last few months. So much customer mindsets are evolving as, in the past before all of the work from home efforts that customers have been going through the fact that the freelancers on Upwork or remote was one of the key objections that the sales team run into inside of accounts. And that was something that a lot of customers or prospective customers just weren't that comfortable with. And the fact that over the course of a few months, people's mindset around their openness to working with remote freelancers and the idea that what used to be one of the key objections in the sales process is now becoming a key asset in the sales process has just shifted really rapidly. So overall, we feel really good about where things are headed and the numbers are back that up as well. Go ahead, Brian.

And I'm not leaving immediately and I'm here for a few months to do a smooth transition to set up for success, but we've done a good job of building a strong infrastructure and lay a good framework for him to build off of. We've remediated the material weakness as of June 30th filings, you'll see that in the 10-Q, so that's good news as well. I haven't decided what's next. I'm going to take some time over with my families. And I'll be very good and happy Upwork shareholder as well.

Just to add some more color to that, Brent. I think Brian's been an incredible partner and I think we've been having a lot of conversations since I stepped into the CEO role about the direction of the Company and our focus right now on really driving strategic growth priorities. And I'm excited that Jeff is really bringing in a strategic lens to financial leadership. His numerous roles as a CFO harkening back to his days leading business operations at Facebook, as well as his executive leadership experience at a number of fitnesses and drawing on his mark, two sided marketplace experience. He's been the CFO at OpenTable and Doctor On Demand. So, I think Jeff is going to be an incredible partner, really diving into our strategies and our growth priorities as we're moving the business forward in this next chapter.

Our next question comes from Mark Mahaney with RBC Capital Markets. Your line is now open.

Okay, if I could just throw out three quick ones. On the Citrix partnership, I know you talked about Hayden, but any -- how do you think about the materiality of that partnership to Upwork? If it's successful, it translates into work in perhaps in terms of client retention, current client acquisition, et cetera? Secondly, just go through again, why your growth outlook for the following quarter. Your growth in the June quarter really held steady with the earlier quarter and you've got this little bit of deceleration in the September quarter. I think what you're saying is that you just want to be conservative careful, because economic recovery is very uncertain. And so, you're still seeing kind of mixed signs from your clientele, but just go through why we're not seeing kind of consistent or even accelerating growth in Q3? And then finally, Brian, just in terms of the business model, just think about this going forward for your business or for Upwork's business, is there a cost savings because of remote work from home capabilities? I think that was already pretty largely adopted in your company anyway, but I just wondered as we look at all these companies as we've had this dramatic change and how people work. Does that just mean a lot of corporate that G&A expense savings?

So, on the Citrix question, really the partnership and the launch that we did with some of the Upwork counts, we send that search within the Citrix workspace enables our larger customers to seamlessly integrate freelancers into their virtual work environments and give them a safe and secure access to the systems and tools that they need to do high impact work for these customers. And so in the immediate term, that just launched them so we're not expecting material right away. But I think it does represent a great opportunity for us to expand a freelancer adoption with Citrix customers, which are numerous around the world as well as, as part of our larger strategy, we continue to integrate into the tools and the places where our larger customers are doing work and are looking to have freelancers be very effective in helping with their strategies and their various overflows that need to get done. So, I think that's something that this is very early days right now, but certainly as part of our broader strategy to be relevant and really a seamlessly integrated tool inside of enterprise work spaces. To your second question around the growth outlook, I think, we're very realistic about where the economy is right now. And so, we've seen incredible acquisition strength in Q2 and we are expecting that to continue in Q3. But when we step back and see $30 million Americans unemployed, stimulus programs largely dried up and potentially not more forthcoming for individuals or small businesses. It's quite possible that, we're going to be heading into a deeper recession, and a lot of our customers who weathered the storm very well so far, some of them may need to go into some kind of deeper hibernation or terms bending further in order to get through the next couple of months that are ahead. So, we feel incredibly gratified by the performance they've had so far, and frankly, the client spend retention trends, the fact that we've added another 4,000 plus clients to our core client roster this quarter, really great numbers. But as you look ahead to August and September, we are anticipating the economy is going to get worse and that is going to impact a subset of our customers. And so, that is something that we've baked into our models, and part of that is offset by the strength in acquisition, which we see continuing. But, we're anticipating that, that decline just in the macro economic situation is going to trickle through to some of our retention spend as well.

Yes. And on the going remote, obviously, there is nobody in the office and so there are things like food costs and things like that in the office that we ever taught tremendously. We're going virtual on a bunch of events and the biggest piece of that is really looking at your real estate footprint. So, we have three offices, two in the Bay Area. So, we're re-imagining what Santa Clara could look like. There's more of a collaborative space as we probably won't go back to that office until January 1, 2021. The San Francisco office, we are in the process of trying to sublease that space, but that market is very soft right now. So, we do not anticipate seeing any sublease this year in 2020. And then Chicago, we just completed the build out of the second floor and the team has gone back into that office as of yesterday, on a modified basis. And so, there they're sort of getting up and running. But, we've taken a lot of those costs and redeployed them and the Company into investments, for instance, things like in marketing, where we again can drive ROI positive growth. And so we've been looking at all those opportunities, either redeploying them or putting them to the bottom-line and people going back to the offices and we have to also do some things around PPE, social distancing, and we have to re-imagine some of spins we're going to have to do to get those offices ready for when people can't go back to the offices.

Our next question comes from Nick Jones with Citi. Your line is now open.

Hi. Thanks for taking my question. Just two kind of I guess the same line of thinking. I guess, first, has there been any shift in project size since COVID kind of hit the scene here? Is it growing or shrinking? And I guess, what are you seeing there? And I guess second is the focus on larger customers potentially coming at a cost and maybe getting higher volume, smaller customers? And I guess I asked us, we see some pretty significant growth at companies like Wickes and Shopify and a lot of SMBs kind of figure out how to have a digital presence, but maybe focusing on larger customers, or you may be missing out on some of these smaller companies who need nutrition kind of building out their presence with a lot of the services of the freelancers on Upwork provides?

Thanks Nick. In terms of project sizes, I'd say, we've actually seen product sizes hold steady through the last quarter. And if anything we’ve seen a shift in favor of higher value work on the platform and higher value clients continuing to be really active, so there hasn't been a massive shift, but we're continuing to make traction with larger clients and just higher value work in general which is core of ours. Your question about is -- are the larger customers kind of taking away from our ability to focus on and acquire more customers? Our strategy that you're has been to be about both, we've never said that we were pursuing mid-market or enterprise customers at the expense of smaller customers. We continue to see our SMB opportunity is being extremely attractive. And frankly, we're continuing to invest marketing dollars there based on our ROI calculations. There is right LTV and acquiring a lot of those customers. And so that's certainly one avenue of acquisition for us and continues to be one piece of the puzzle. And so, as we look at driving growth across our business, we think there's a huge opportunity with larger customers, but do not feel the need to neglect our smaller customers either, especially in this environment. I think your points are well taken that some of the smaller customers are very fast right now to be pivoting and adopting in this environment. Jumping into digital solutions, and they're very agile and we see some of that on our website to where small customers have been very active and very successful in working with freelancers in our solutions, as they have been adapting their small or very small businesses even through the last few months. So, I think, our focus is on driving growth across our customer segments. We think that over the long-term to get our $560 billion TAM unlock, the market and enterprise customers are very important. But small customers are a key part of the puzzle and they help drive a lot of the marketplace, philosophy, talent curation and bedding. There's a lot of activities that they generate inside of our business that's very valuable. So, I'd say, we're really covering all of our bases right now, I don't see it as an either/or.

Our next question comes from Logan Thomas with Stifel. Your line is now open.

Follow up on a prior question with the answer regarding clients trimming spend in the next couple of quarters or potentially pulling back in different areas. Wondering, based on your visibility or conversations you have with clients, are there certain categories or verticals of projects where clients are thinking of turning spend? Or is it more of a broad based comment in that pockets of clients, you may be seeing more softness in their business and pointing back? And then the second question relates to searching and matching initiatives. Wondering if you could highlight, maybe what, one or two of the improvements made and continue is most incremental for you. And going forward what are some of the other aspects you'd like to focus on within searching and matching? And this survey says the best way to think about the outcome of those efforts, if you could help frame where filed rates are today, where you can go over the longer term? That would be helpful. Thank you.

In terms of the question on the pockets of clients and what we're hearing or expecting at this quarter in terms of pullback and spending, Logan, it's really just an expectation that given the volatility in the broader market, some customers are going to struggle. So, we haven't gotten any indications of specific customer types or categories of work on our sites that seem to be more exposed. Overall, the data that we have suggests that approximately 80% or more of the work on our platform is considered essential or somewhat essential by our customers. And so, the extent that they are in business, they are going to be doing that work on our platform. To extent that the economy forces them into, hibernation or a shuttering of their businesses, obviously, that doesn't have an effect on how they're spending with us. So, we feel that it's more about the macro conditions and how expose a subset of our customers are going to end up being can they get through another three to six months and that's, it's an open question. To your second point around search and match, fill rate is an important part of how we think about a measure of success there. I'd say our overall efforts are around providing increasingly tailored experiences that really speak to specific categories of work and the types of matching experiences that customers look for value in those categories. And so this year, we're particularly focused on tuning the searching and matching experiences in our technical categories. And so, we've been innovating around, for example, the profiles, that freelancers use in those categories, and that includes both, like the underlying data sets, the way that freelancers express their skills and expertise, the way that our matching algorithms consume and process that information and then surface really relevant results based on a client query or client job post. And so that's where we're doing a lot of work that kind of starts in the UI layer and then goes all the way down to the technical infrastructure to really kind of retool and redeliver the different parts of the system that deliver excellent results on a consistent basis for customers around that. And some of the things we look at our relevancy measures, flow rate is a key one as well. But even things like speed of the results. For example, this past quarter, we increased our visitor by for speed by 10x. And those types of improvements do go a long way both for the user experience and for the relevancy that the customers are seeing. So we're continuing to tune those engines because at the end of the day, a key piece of our value proposition is clearly our ability to match incredible talent with exactly the demands that customers have. And so making our systems very adaptive that is a key piece of kind of technical innovation that we focus on.

Our next question comes from Ron Josey with JMP Securities. Your line is now open.

So I had to maybe one bigger question that might have been addressed earlier, Hayden, but hopefully you can provide some additional commentary and then another one on client spend retention. And so just bigger question, you talked about 45% of hiring managers have frozen full time hiring. So, I get the risk around the 30 million unemployed and not knowing what the future holds. But Hayden, can you talk to us a little bit more about what that opportunity could look like and how your conversations have been when talking to larger enterprises that while hiring is frozen, working projects still need to get done, and the ability for Upwork to ramp up and down things pretty quickly? And then the next question is on clients spend retention declined to 100%. We're expecting the stiff. Just any color on how this improved for the quarter or most importantly whether this trend can continue as we laughed the product can just from a year ago, March?

Thanks, Ron. So in terms of your first question around what the opportunity looks like with larger clients and kind of where their heads are right now, I think what we’re hearing is, this has been just a massive opportunity for them to reevaluate a lot of aspects of their business and not just in the context of how do they navigate through the crisis, which I think was where they were three months ago. Three, four months ago, it was all about how do I get through this? What do I need to do kind of in an emergency context to survive? Where the conversations are today is much more about, how do I set myself up for the long-term? I've learned a bunch of things in the last few months about where my business was not resilient? Where things were brittle? Where I was exposed to risk? And frankly, I think a lot of executives have realized that not only of this pandemic probably not going to go away in the immediate future. But they're also seeing some of the advantages around what they're getting from a remote work standpoint that they didn't anticipate. And so, for example, some of the data that we have is more than 50% of hiring managers feel the shift to remote work has gone better-than-expected. I think 20% or 30% of CFOs are saying that, now remote work will be part of the status quo for a number of roles going forward, where it was not that way in the past. And so, the conversations we're having are really around what is your workforce strategy going forward? Where are these opportunities in your organization to have a much more dynamic talent model? And what can that do for you? How can that…

Correct.

Yes, and I think on that, it really remains to be seen what happens in macro environment. We saw really strong trends where clients’ retention in April did hit a trough, and then it climbed out through the rest of the quarter and bounced back to a strong kind of pre-pandemic level by June, by the end of June. And so, if you think about that trajectory, which was really positive, if the macro macro conditions continuing to improve, then the client retention number will benefit from that. If they worsen then that's going to put more pressure on that number. So, I think it remains to be seen what goes on with the broader environment and how that impacts some of these customers that are a big part of our routine to base.

Our next question comes from Marvin Fong with BTIG. Your line is now open.

Great. Thank you for taking my questions. Two questions. First, on the guidance, I think maybe it’d just be helpful. I know that you said it's dependent on the macro environment, if you could just put potentially kind of bracket that in terms of just know how severe of a downturn would it take to kind of hit the 79 versus the 81, is that more of a base case? Or is it an improvement, if you could just kind of give us the assumptions behind that. And I know that you also have some degree of visibility, just how much visibility you have given we're already in August, and there's some lags in your business? And then secondly, I think would help investors if we could go a little further into the workforce management and the opportunity there. I think relative to say the $560 billion opportunity or your core client base. How many of those are kind of targets for this incremental workforce management solution. And where are you guys in terms of penetrating opportunities? I imagine it's like the first or second inning, but it does expand on that. That will be great.

So, in terms of guidance, our assumptions are basically the base cases, but the first half of the quarter is better than the second half. And it really depends on again, the performance our retail clients. Overall, we're assuming that acquisition for Q3 continues to be really strong. We saw it’d be strong consistently through Q2, and we've modeled that to be continued to be the case in Q3. But we know that for us in our business even acquire clients as they come in the door take time to get a better register. They've got to post their first job. Hire their first freelancer. First thing with that individual and ramp up that spend overtime and potentially ramp up with more finances over time. And so, even in an environment where our acquisition is incredibly strong, it does take a little bit of time for that to fully flow through to our numbers. And so that's, one of the kind of dynamics of our business. But acquisition we've modeled in to be very strong for Q3. On the retention side, we are expecting the first half of the quarter to be better than the second half. And we're expecting that there is more of a macroeconomic headwinds for our retain customers. More similar to what we saw in the first half of Q2, frankly, if you expect to have like a double dip where we saw March-April weakness with our retain base, at the end of Q1, early Q2. And then it bounced back, we're expecting that kind of dip at the end of Q3, kind of similar to what we saw in early Q2. So that's essentially kind of the boundary put on it and that's what we're expecting based on just the factors that we see in the broader landscape. For your second question, which was around, let me just make sure I understood it was around kind of our workforce management solution overall?

Right, pretty much the whole gamut -- the employer record and the BYOBs. Just help investors kind of understand the opportunity because it does come up a lot.

Yes. So, I think what's interesting and exciting about this is, if you can think about the investments we're making around our products and services, as really a true platform. And Upwork is not just a point solution for one or two transactions or one finance, or you might hire one day, but really is a single one stop shop with a destination for a business that needs a range of talent solutions. And that that brings a transition that we can serve includes, certainly our talent sourcing, often your core marketplace and everything around that that we've built up over many years. But increasingly, and I say particularly in this environment, we're seeing a lot of demand for customers saying, hey, you guys are doing great with getting a new talent, how can I bring existing contractors, vendors, others that I'm working with in, other venues on to Upwork, so that I can pay them all in one place, have peace of mind that this is all be managed in a single way I have really good cost control through your platform and kind of all the benefits that we offer. So that's where the bring your own talents offering, I think the value proposition there will be stronger in the last few months as people are really stepping back and reassessing their talent programs holistically. And then related to that we've had for many years an employer of record offering, where we can give basically payroll services to our customers, so that they can have both freelance talent and payroll talents through our site. And that's something that's been kind of a limited adoption for a limited set of our larger customers. We're again hearing a lot of demand for that type of a solution from customers who…

Great, thanks, Hayden. And let me just say welcome aboard Jeff, and Brian, best of luck to you on your next endeavor.

Thank you, Martin.

And that concludes today's question-and-answer session. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.