Good day, and thank you for standing by. Welcome to the Upwork Q1 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Niederman, Vice President, Investor Relations. Please go ahead.

Thank you. Welcome to Upwork's discussion of its first quarter 2024 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 laws. Forward-looking statements include all statements other than statements of historical fact. 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 also on our Investor Relations website as well as the risks and other important factors discussed in today's earnings press release. Additional information will also be set forth in our quarterly report on Form 10-Q for the 3 months ended March 31, 2024. In addition, reference will be made to certain non-GAAP financial measures. Information regarding non-GAAP financial measures, including reconciliations to their most directly comparable GAAP financial measures can be found in the press release that was issued this afternoon on our Investor Relations website at investors.upwork.com. Unless otherwise noted, reported figures are rounded and comparisons of the first quarter of 2024 after the first quarter of 2023. All financial measures are GAAP unless cited as non-GAAP. With that, I will turn the call over to Hayden.

Welcome, everyone, to Upwork's First Quarter 2024 Earnings Call. Upwork started the year off strong with first quarter revenue of $190.9 million, representing 19% growth year-over-year. Our commitment to running a profitable business continued in the first quarter as GAAP net income was $18.4 million, and adjusted EBITDA was $33.3 million. These results reflect the strength of our business and ability to deliver consistent results even in a fluid operating environment. Our unwavering focus on increasing operating leverage while investing in future growth is allowing us to raise our 2024 outlook for both revenue and adjusted EBITDA. We are committed to continuing to grow operating leverage into 2025 and beyond. Erica will share details on these plans in a few minutes. Our marketplace business continues to deliver steady GSV performance within a dynamic macro environment as GSV again exceeded $1 billion for the quarter. Historically, one of the most important leading indicators of GSV growth is the addition of new clients, and we were very pleased to drive active client growth of 5% year-over-year to 872,000 in the first quarter. In addition to growth via attracting new clients, we are engaging growth in GSV via product innovations. These include investing in new AI-enabled products, features and partnerships that equip clients and freelancers to achieve desired outcomes faster and easier than ever before. With the launch of these new experiences and encouraged by early success signals showing a lift in GSV, we anticipate our growth rate will continue to accelerate. Our strength in revenue growth stems from several areas, including our ads and monetization products, which displayed impressive performance and stand out as the fastest-growing revenue stream for Upwork. The Freelancers subscription, which provides printers with connects and tools to develop new skills, increase their visibility and improve their efficiency with…

Thanks, Hayden. While we've accelerated our pace of innovation in all the ways Hayden just outlined, in Q1, we also rapidly identified new levers to deepen our focus on durable profitable growth. We are committed to driving revenue growth and growing operating margins regardless of the macroeconomic backdrop we're executing in. And our first quarter results and increased outlook for 2024 clearly show our ability to do that. And I am delighted to say that our plans to continually and meaningfully grow our operating leverage extend beyond 2024. Our highly profitable business model with gross margins over 75% as well as the investments we're making in operational improvements like engineering productivity and back-office automation mean that we can make clear and concrete commitments to growing our margins and free cash flow for the foreseeable future. As I strategized with Hayden and the team, I've grown confident in our ability to drive growth while also increasing profitability and adjusted free cash flow. We are now in a position to commit to hitting 35% adjusted EBITDA margin in the next 5 years, and I'm confident we can increase our operating leverage each and every year as we get there. Turning back to our most recent results. I'll hit a few highlights. Revenue growth in the first quarter was very strong, growing 19% year-over-year to $190.9 million and was driven in part by the final transition to the new flat fee pricing structure we started last year. Marketplace revenue was $164.3 million and grew 20% year-over-year. In our enterprise business unit, our unique breadth of offerings drove total enterprise revenue growth of 10% year-over-year to $26.6 billion. Within Enterprise revenue, Enterprise Solutions revenue was $11.7 million and grew 3% year-over-year. Managed Services performed particularly well, driving revenue of $14.9 million, representing growth of…

[Operator Instructions] Our first question is going to come from the line of Andrew Boone with JMP Securities.

This is Matt on for Andrew. My first one is maybe can you just provide any color on the performance of cohorts? And if there's any change that you're seeing as far as the stabilization of spend there? Anything would be helpful there. And then my second question is, it's great to see the 100,000 active subs for freelancers. Could you give us any color on how big this can get to over time?

Matt, this is Erica. Thanks for the question. Yes, we published our cohort chart once a year in our 10-K. And as I talked about, I think, actually, it was at your conference, that's an annual cohort chart, and we actually have seen some stabilization in terms of newer cohort spend in 2024.

In terms of your question on Freelancer Plus and how big that can get over time, I'd say we're really excited about the progress you've already made with the ad-monetization road map so far. We mentioned that this is already the kind of fastest-growing area of our business from a revenue perspective today and we're still in early innings. So specifically on Freelancer Plus, there are definitely opportunities to continue to enhance that offering. We added Upwork Chat Pro very recently, and that has generated a lot of excitement. But we also see opportunities to continue to enhance value there and with other aspects of how we build memberships and membership value on our platform. But I think stepping back, the bigger story here is generally with ad monetization as a lever for this business, which does have a lot of runway. If you look at other marketplace models out there, companies like Airbnb, Instacart, others, see Upwork's of 25% of their revenue coming from ad monetization and we're nowhere near that today. So it's going to be unique to Upwork for us to figure out how big this can be, and we certainly don't have that number in mind today, but we are working diligently to ensure we do unlock the value here in a way that is really driving both take rate expansion and GSV growth because those things really can go hand in hand when you look at things like connect pricing, memberships, third-party partnerships that generate revenue, like all of these things actually can be accretive to both sides of that equation, and where we're very focused on locking that. Sure.

[Operator Instructions] And our next question is going to come from the line of Maria Ripps with Canaccord.

This is Matt on for Maria. Just on the increased full year revenue guidance. Is that largely a function of the momentum you're seeing with freelancer costs in the ad products? Or just wondering if there's any component of that, that relates to upside to GSV. And then more broadly, just any color you can share around how you're thinking about GSV growth for the balance of the year and if we could see some acceleration in the back half would be great.

Yes, sure. Thanks for the question, Matt. Maybe I'll take it and Hayden can add any color. So just on the revenue outlook, yes, I mean, I think we are -- we absolutely are seeing some growth -- good strong growth in our ad and monetization products. As we said, they're the fastest-growing revenue stream on the platform, and we have seen some incremental strength there. And we're also seeing some nice strength in the enterprise business and some very good kind of leading indicators actually on both sides of the business in the marketplace and the enterprise and kind of new client growth that's also giving us some good confidence in terms of leading indicators for GSP growth later and into 2025 and beyond.

Sure. And what I'd add, Matt, around GSP acceleration for the balance of the year is growth is our top priority as a company. We're very active. We're working on this, and we're seeing some really good green shoots. As Erica mentioned, active clients is one leading indicator that we're seeing progress on this, 5% growth already is a great sign from this past quarter. Second thing is our product innovations are indicating that releases like Uma can really move the needle early as it is in terms of driving traction around client spend and client metrics. So it does take time for these things to layer through at the size and scale of our customer base and driving the adoption of these products. So I want to be clear that this does -- is a multi-quarter and multi-year-endeavor, but the product innovations that we're driving are really laser-focused on this.

Maybe I'll just actually just also emphasize one point, which is GSV growth was dampened slightly in the quarter from the structural changes in the kind of final changeover to the new flat fee pricing structure. So absent that, we estimate the GSV growth would have been about 3% this quarter, which is a little bit of an uptick. And so we're really encouraged by that as well.

[Operator Instructions] And our next question is going to come from the line of Eric Sheridan with Goldman Sachs.

Maybe 2, if I can, following up on that answer on GSV growth. Can you maybe just unpack for us how you're thinking about the components that have held back growth in GSV as maybe some of the dynamics around fee changes have impacted that Hayden that you just highlighted? And that we should be thinking about the building blocks for growth in GSV as we get deeper into the year, just in terms of what's in your control versus elements that are out of your control as you see some of that growth evolve. And then as to some of the investments you talked about, especially the internal ones, how do you think about elements of investments driving either incremental growth through the remainder of this year versus also investments that are balanced towards driving increased productivity and efficiency gains that might show up on the margin front.

All right. You packed a lot in there, Eric. So let me see if I can hit everything. So on GSV growth, like I said, we do have about 2 points of headwind in Q1, and that actually is through the year, just from the final cutover with the pricing change. I think beyond that, we've really tried to highlight, we see a lot of really strong leading indicators that give us a lot of confidence that our GSV growth is going to kind of continue to tick up. The active client growth is really encouraging. Some of the strength on the enterprise side that we see kind of falling into late in this year and into next year. And then also a lot of the experiments on the platform with a lot of the new experiences we just launched with Uma Hayden highlighted some of the positive benefits we're seeing with very early experimentation with that we think is just going to get better and better. So all these new experiences we see as being GSV growth stimulators, and we expect to help us advance into next year. Real quick on investments. I will -- I'll touch on it in terms of driving growth, look, we are -- we've been investing in R&D quite a bit over a few years here in order to really accelerate the innovations on the platform that we've been talking about. Just as a reminder, we closed the headroom deal in Q4. And the addition of that team and really the growth of the AIML bench is an investment in the future growth of our platform. And it has culminated in the launch of Uma and other things. So I think there's plenty of grit to come. That said, I do expect that the R&D growth will moderate, starting kind of as we advance through this year and certainly into next year as we really invest in tools for engineering productivity in cost of revenue, also data optimization. We're really in the early innings here. And so I see those investments really paying off into -- at the end of this year and into next year.

[Operator Instructions] And our next question is going to come from the line of Matt Farrell with Piper Stanley.

Awesome work on the profitability side. Maybe on the 35% adjusted EBITDA target within 5 years, what size or scale do you think you need to be at in order to reach that target? And I guess on the cost side, how much more additional efficiencies or leverage do you have at this point to help you achieve that goal over the next couple of years?

Yes. Sure. Look, maybe it's good to kind of just take a step back real quick and I'll make sure to answer your question in terms of what we think we need from a scale point of view to achieve this. I mean the short answer is, I've gained confidence over the past year working with the teams, looking at all the cost optimization opportunities in front of us. that we can achieve significant and meaningful operating leverage in this business, absent of meaningful growth in scale. So if you look at kind of the journey over the past year, when I came into the business last year, we committed to being profitable. We advanced very, very quickly on that journey even absent of kind of meaningful volume growth and got to kind of mid-teens EBITDA margins in just about 6 months. Last year was all about focusing on sales and marketing optimization. And some of the benefits that we've been able to yield in our business with active client growth and other things, even while significantly reducing our marketing spend has given me a tremendous amount of confidence that we continue to optimize in these areas. And honestly, last year was about sales and marketing optimization, -- we're now looking -- I've been working very deeply with the teams looking at engineering productivity. Like I said, data optimization, many, many other places in the organization where we think we can gain significant yields. So I think that we can certainly continue to gain operating leverage even in a relatively lower growth environment. That said, we will continue to invest into growth, and there's no reason, given the kind of gross margin profile of this business that we can't continue to invest in growth while producing operating leverage. So I think we think that we're convinced we can do both. But really, the GSV growth that we're investing in now will really be just on top of operating leverage that we can achieve.

Yes. Another way that I'd answer that question, Matt, is to say we are here to build a really big business. We want to drive this business to a tremendous scale. And we're pacing ourselves to continue to invest in growth and create meaningful leverage increases every year towards that 35% target, which is within 5 years, like we are moving there aggressively. But we're investing in growth towards that real scale of the business while enhancing leverage, and we know we can do that kind of irrespective of the pace of the growth of the business.

And as a follow-up, you've hit on the active client growth acceleration now a couple of times. I guess, in the backdrop of the lower sales and marketing spend, like what do you think is driving this dynamic in a more steady macro? And are the customers that are joining Upwork more recently, do they look and feel any different than they have historically?

Yes, they do. I think that what's driving it is the execution that Erica mentioned earlier around sales and marketing. We've done a really great job over many quarters, building the muscles in those areas, and that's delivering results for us. Our value proposition has always resonated and is continuing to resonate in this macro where clients are really looking for flexibility, they're looking for the specialized skills that we have on this platform. But we've really been delivering with our sales and marketing efforts to be extremely efficient and attract in clients who broadly do look like past clients. I wouldn't say there's anything really notably different about them, and they were coming in and they're ramping up with us.

I'll just add that some of the new experiences on the platform that are enabled by the AI investments we've been making are also really advancing the journey from prospect to active clients. So the job post generator that we launched last year, over 70% of new customers are using that tool in order to post jobs and then get to activation. So I think there's -- it's a combination of factors of the performance marketing engine really humming even as we've reduced cost and some of the experience in the platform that we've introduced.

[Operator Instructions] And our next question is going to come from the line of Brent Thill with Jefferies.

This is [indiscernible] for Brent. One more question on GSV. So you mentioned the adjusted is 3% in Q1 and 2 points of headwind that might -- that will last through the rest of the year. And it sounds like also even adjusting for that, it might accelerate, I just wanted to kind of clarify that, that's what you're seeing. And then maybe related to that, on the macro side, if you could talk about how things look in terms of spend per cohort, larger project, anything you're noticing on a macro level.

Yes. I think you got it on the temporary headwind that we're seeing from the pricing change. We estimate that at about 2% of GSV growth and it impacted us in Q1 and throughout the year. From there, we'll lap that. And I think for all the reasons we've talked about, expect to see GSV continue to step up. And the next question on the macro. Yes. Look, I mean, I think just in general, the macro, we're still seeing a lot of dynamism out there in the environment, inflationary environment still affecting consumers and small businesses. Corporation's still quite budget conscious. I think the reality is that we've been really kind of an oasis of stability, I think, within some of this broader environment. And also, we've said for a few quarters now that we intend to produce growth, growing our profit margins and revenue regardless of the macro. And I think we're really showing that with our current results. More broadly, I think if any kind of underlying detail, I think we -- like I said, I think we continue to see very good growth in our -- in kind of the small business side, very small business side of our platform. And some of the negative kind of impacts from large business from last year is moderating in the current environment.

[Operator Instructions] And our next question is going to come from the line of Ron Josey with Citi.

This is Jake on for Ron. First, I wanted to ask on the enterprise side. Could you talk more about the benefits of the new VMS partnerships? And specifically, progress you're making in terms of focusing more on the expand side of the equation with the larger clients. And then second, just on -- great to see the AI categories growth. Any additional color you could share there in terms of mix of this growth from existing clients versus new clients? And any trends in terms of spend or wages within that category?

Sure, Jake. Speaking about the Enterprise VMS partnership. So the reality there is so many of the enterprise customers that we are serving today and are looking to break into already have existing relationships with VMS and MSP partners themselves. And so when we go through the work of partnering with those providers, it really opens up new opportunities where spend that those customers are funneling into those platforms becomes available for us to basically participate in and basically bid on or offer up talent for and become a proved vendor of record around. So it really opens up the dollars available to Upwork both within existing customers who are using VMS and for new prospects. Sometimes it's a condition of them working with us or certainly a big selling point when they realize that we can work with their existing VMS. So it's early of FX the strategy, but we're very excited about what it can do in opening up the enterprise opportunity. To your question about the AI categories and kind of what's going on there, yes, this is a tremendous area for us with the 50% year-over-year growth, specifically in AI services in addition to just generally seeing clients looking for talent across all the categories we serve, where that talent is equipped and enabled using AI tools. And I think the interesting fact there is the data shows that only about 9% of internal employees are using AI tools on a regular basis compared to 20% of freelancers and compared to more than 50% of freelancers on Upwork who are equipped and using these tools. So when we talk to businesses, they're saying, "I need to upskill my workforce. I can't do it fast enough. Let me instead turn to Upwork find the talent that is skilled in these areas. And so we're serving a lot of different needs here I would say we are seeing premium wages in some of these areas, it's probably not quite as strong as it was maybe 3 or 4 quarters ago, like it's moderated a little bit, but there is still a delta for a lot of this work, and this talent is still highly in demand, as evidenced by the fast growth we saw last quarter, which was, I would note on top of, I think, quadruple-digit growth a year ago in that same area.

[Operator Instructions] And our next question is going to come from the line of Rohit Kulkarni with ROTH MKM.

I guess on the ads and monetization side of things, maybe just talk about the strategy and the footprint that you think you have there. And in terms of -- it's been the fastest-growing revenue stream for you guys for quite some time. And how do you see the runway in terms of unpacking more growth on that? And then the -- as far as the 24 model is concerned, any extra color on the drivers and assumptions in terms of how should we think about take rate from year on out as well as client growth? How are you thinking about for the rest of the year?

Sure, Rohit. So on asset monetization, our strategy here is to build the monetization levers that are really congruent with creating more value overall for our customers. And these things go hand in hand. I think that's what we've really proven with the work already. So we're encouraged by the progress made, but certainly, there's a lot more that we think we can do. And I think examples of that span everything from enhancing memberships on the platform to continuing to price connects more accurately to continue to bring in revenue from new streams like our partnership program. So there's really a lot of runway here. And I think, again, our goal is going to be governed around enhancing our take rate but doing so in a way that really is creating more value for customers and getting them to spend more overall with us, which is really the ultimate goal.

In terms of the outlook for take rate and client growth. I think for the rest of the year, obviously, we had a big step-up in Q1. As I said, that was associated with the cutover on the pricing plan, which really by all measures has been incredibly successful and well accepted by our clients and freelancers. I think for the rest of the year, we'll expect take rates to not have, obviously, as big a step-up and -- but we do expect really some of the continued advancement on ad monetization to add a little bit to take rate as we move through the year. And client growth, I mean, things are going really nicely with our client acquisition engine as we've kind of emphasized a few times on the call, both activations and reactivations are doing nicely. So we do expect client growth to continue each quarter through the year. And one moment as we move on to our next question.

[Operator Instructions] And our next question is going to come from the line of Marvin Fong with BTIG.

Congratulations on the performance. So 2 questions for myself. So I would like to double-click on reactivation. It seems like something we haven't talked as much about in the past, but I know for at least some other companies in e-commerce reactivated buyers or reactivated customers become a major source of new clients. So could you just kind of talk about how big that pool is for you guys and your initiatives to kind of get more past customers reactivated. And then a question just on GSV per client. I know it was down this quarter, it looks like. I know that onboarding new clients is a drag on that metric. So I was just wondering if you could kind of unpack that. If we just look at existing cohorts, is the spend behavior declining or flat or increasing?

Sure, Marvin. So on the first question, look, I will note that reactivation trends have been accelerating for us, and it is a nice source of growth for active clients. We haven't broken it out. I don't think we will. But as I said, it kind of -- it is kind of a nice tailwind for us. And look, I think that within the work that we're doing in terms of client reactivation, there -- some of the performance marketing work that we do is also now is aimed at client reactivation. Also all of the work we're doing, some of the new Upwork updates launch that we just did yesterday. All of this work is aimed at both attracting new clients and reattracting clients who maybe haven't been using the platform lately and we're letting them know all the new experiences that are being launched. So there's a lot going on there. On GSV per client, I'll just emphasize to you that, that metric is a trailing 12-month metric. So it does have some -- it is kind of picking up some of -- still some of the vacillations of kind of macroeconomic impacts that we had last year. But overall, you're right, to the extent we're activating lots of new clients, that will be a drag on GSV proactive client. And the activity of retained clients has started to stabilize compared to what we saw last year.

And I'm showing no further questions at this time. And I would like to hand the conference back to Hayden Brown for closing remarks.

Thank you, everyone, for joining us. We appreciate your interest in Upwork and look forward to keeping you posted on our progress next quarter.

This concludes today's conference call. Thank you for participating, and you may now disconnect.