Good day and thank you for standing by. Welcome to the Upwork Second Quarter 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 speaker today, Jacob McQuown, Vice President, Chief Deputy General Counsel. Please go ahead.

Thank you. Welcome to Upwork's discussion of its second 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 Web site and also on our Investor Relations Web site, 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 three 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 Web site at investors.upwork.com. Unless otherwise noted, reported figures are rounded and comparisons of the second quarter of 2024 are to the second quarter of 2023. Free cash flow is a non-GAAP figure, and all financial measures are GAAP unless cited as non-GAAP. Now, I'll turn the call over to Hayden.

Welcome everyone to Upwork's second quarter 2024 earnings call. Upwork's strong and durable business continues to deliver compelling growth characteristics on both the top and bottom line. Our second quarter reached $193.1 million, marking a 15% year-over-year increase. Our continued commitment to enhancing profitability was demonstrated by our highest ever quarter of GAAP net income at $22.2 million, while adjusted EBITDA was $40.8 million, a 21% adjusted EBITDA margin, up from 8.5% in the second quarter of last year. We delivered this revenue growth and outperformed our profitability goals while operating in a dynamic macroeconomic environment that has become more challenging for businesses, large and small. This challenging environment showed through with softer top-of-funnel activity than expected in the second quarter. A leading indicator of this softness that we track internally is clients seeking work, which is a measure of the number of clients engaging in an action that leads to a new contract. In Q1, this number accelerated 11% quarter-over-quarter, while in Q2 this number decelerated 6% sequentially, with particular impact in May and June, along with the mix shift of active clients towards very small businesses. While we applaud the resiliency of smaller businesses outperforming other cohorts on our platform, small businesses' historical characteristics of lower spend per contract and fewer contracts per client lead us to have more caution about performance expectations for the remainder of the year. We believe it's prudent to assume that the changes in client activity due to macroeconomic conditions that we observed in Q2 will remain for the rest of 2024. And we have factored those changes into lowered 2024 full-year revenue guidance, while reiterating our 2024 full-year adjusted EBITDA guidance. Upwork's profitable marketplace model and our continued disciplined execution provide us with a distinct competitive and financial advantage, which we are…

Thanks, Hayden. As Hayden outlined, we're excited about the strength of our business model, the opportunities ahead for Upwork, and our ability to generate durable, profitable growth in a tough macro. Our model is highly profitable, with gross margins over 77% in the second quarter, expanding adjusted EBITDA margins and increasing free cash flow. We are steadfast in our goal to reach 35% adjusted EBITDA margin in the next five years, while increasing our operating leverage every year along the way. Now, I'll review a few highlights from our most recent results. Revenue grew 15% year-over-year to $193.1 million in the second quarter, and was driven in part by the flat fee pricing structure we started last year, as well as sustained momentum from our ads and monetization products. Marketplace revenue was $166.8 million, and grew 17% year-over-year. In our enterprise business, total enterprise revenue remained flat at $26.3 million in Q2. Within our enterprise solutions products, customer spend and behavior remained consistent with Q1 trends, and with the current high interest rate environment, which is impacting corporate spending. Managed services revenue showed strength in the quarter, growing on a year-over-year basis, reflecting increasing demand for work product delivery, and the signing of six new managed services MSAs in the past few quarters. Well, Q1 of this year saw strengthening top of funnel activity on Upwork. In Q2, we saw softening of these trends, as well as a mixed shift to very small businesses, which affects our average contract size. This activity is a flow through from broader macroeconomic trends. As a result, Upwork's GSV declined 2.7%, and GSV per active client declined 5% year-over-year. In spite of these temporal macro-related challenges, we're pleased with our ongoing ability to perform better than many traditional staffing, temp services, and job board…

Thank you. [Operator Instructions] And our first question comes from Andrew Boone of JMP Securities. Your line is open.

Thanks so much taking my questions. Hayden, in your prepared remarks you talked about the health of the platform in terms of balancing take rate initiatives and monetization products. Can you just speak to that in terms of how you are viewing things like connects and pushing more monetization on to freelancers, as well as also making sure that there is plenty of liquidity for the platform, as well as supporting more first-time freelancers?

Thanks, Andrew. I'd say the work we've done so far has been incredibly successful, and provides the blueprint for how we want to continue driving and balancing the factors we are outlining, because we are laser-focused on expanding take rate while making these initiatives accretive from a marketplace health and quality perspective. What we look at here is things like connects and subscriptions and value-added services that we're enhancing the platform with really are ways for us to improve signal quality in the marketplace. For us to also give talent and clients more control over when, where, and how they want to engage and be featured or propose themselves with more priority for work, things like that. And so, really these are features and functionalities in a large part or are in service of our marketplace health goals. And monetization is, in some cases, just a byproduct of how these work most effectively and really can be capitalized on for customers and for us. Stepping back and looking more broadly at the ads and monetization opportunity we have, we know that, given where we are today and when we compare our opportunity to other two-sided marketplace businesses, there is a lot of [run room] (ph) here. And also note specifically about features and functionality, whether it's in value-added services or further enhancements through subscriptions, that there is a long roadmap here that we can execute on. So, we feel great about the opportunity to continue to expand and build on what we've done, and really continue to expand take rate in a way that is really valuable and healthy for the marketplace and for customers.

That's helpful. And then, I wanted to ask about partner deals. Hayden, as you roll out more of these deals, can you talk about what's been successful and how that paints the picture for where do you guys want to pursue additional deals going forward? Thanks so much.

We view the partnership opportunity as very large. And there's certainly a lot of ways to look at this. OpenAI was our launch partner for this bigger program, and really provided the starting point for the momentum that we've been building and that, now, we have. I'd say what success looks like for us is really using this partnership muscle that we've been building over the last few quarters to build this highly scalable, very cost-effective new way for us to bring client demand to our talents. And the unlock for us is that we don't need all of these clients to come and know about our brand or register and start with an account on Upwork for them to find success and for them to find our talent. So, we're really turning our model around to bring our talent out into the ecosystem through these partners, and leveraging some of these marquee partnerships, like the OpenAI one, to generate what has become a very successful and fast-moving funnel here of partners who are coming to us and saying, "Hey, can we get in on some of this action?" Because these partners have ecosystems of clients and customers who themselves have needs that these partners have not always had a good way to service. So, this is what's contributed to May being the highest monthly revenue partnership month we've seen to date, and the fact that, in the past quarter, we doubled the number of partner deals, and are still building from there. So, it is still early in the opportunity, but we do see that this could be a very exciting trajectory around client acquisition, and a different model for us to go forward.

Thank you.

Thank you. Our next question comes from Bernie McTernan of Needham & Company. Your line is open.

Great. Thank you very much. Just a couple for me, and maybe we know the answer just based on guide, but just wanted to clarify if the trends that you saw in June continued into July and August on -- at the bookings level? And then the guidance for take rate to be flat sequentially or for the remainder of the year relative to 2Q, is that just thinking that in this kind of top line and -- excuse me, bookings environment it's not right to be leaning in on monetization or is there anything we should we thinking of? And then, sorry, one last clarification, just the 100 basis point impact to GMV growth, given the one less Sunday in the fourth quarter, is that for the full-year or just the fourth quarter? Thank you -- thinking about the year-over-year growth.

Yes, sure, Bernie. So, in terms of -- [technical difficulty] back on the line there, in terms of the trends that we saw top of funnel, first and foremost, we actually saw very strong top-of-funnel demand signals in Q1. And we really saw it starting to turn in kind of mid-May, and then into June and July. We did see those trends get slightly worse in June and July. And so, this is really what we're basing our guidance on. We fully contemplated this impact in our guidance. And, in fact, are now contemplating no improvement to these trends going forward. So, in that way, I think we feel like we've fully [divested] (ph) our guidance for the year. On your question in terms of the take rate trend, yes, I mean I think we're just being prudent, again anticipating the trends that we're seeing, and just looking at top-of-funnel trends, both on the demand side as well as this mix shift, and expecting that we'll see a little bit lighter usage in some of the ads products as well. And then, on the Sunday effect question, yes, that's the -- the one-point impact is for the full-year.

Got it. Thanks, Erica.

Sure.

Thank you. Our next question comes from Maria Ripps of Canaccord. Your line is open.

Great. Thanks so much for taking my questions. First, sort of understanding that you operate in a dark macro environment; can you maybe just talk about your ability to sustain your EBITDA guidance? And there, as you look at your P&L, what are some areas that you can optimize here in the near-term without impacting future growth as the environment improves? And then I have a quick follow-up.

Yes, just in terms of maintaining the adjusted EBITDA guidance, look, this is an inherently profitable business, and we've made a tremendous amount of progress with the cost discipline muscle that we've implemented as a business. We're obviously continually making progress both on the gross margin line, as well as on the OpEx line. And so, we feel really, really confident that we can continue to do so. We're at 77.5% gross margin now. And we do still have some continued optimization that we can do that we're working on, on rates, with hosting costs, other things like that. And then, just as a reminder to everyone, we're continuing to invest in growth. Our R&D expense was up 21% year-over-year in Q2. And we are very, very focused on investing in the growth levers that will grow GSV into the future. So, we think we -- we know we can do both. We can continue to optimize in areas that are lower ROI spend for us, optimize on the G&A line and other places, and produce that growing operating margin while investing in growth.

Got it, that's very helpful. And then, secondly, could you maybe talk about any recent developments as it relates to AI tools and functionality? And I know you highlighted a few in the press release. And is there any way to quantify the impact of AI on your overall business?

Sure, Maria. In terms of the AI tools and functionality, I'd say we're very pleased with how the features and functionality we're launching, including things like our Uma AI work companion, as well as Upwork Chat Pro, which is an AI-enabled feature for freelancers, in particular, to leverage that throughout the work journey on Upwork. These are all getting very strong adoption and continue to be advancing, even though they're still in the early stages. We've seen a 23% increase between Q1 and Q2 in users interacting with Uma. We also saw a 68% increase in freelancers using Upwork Chat Pro on a daily basis. So, these are kind of positive signals that this is an effective strategy for us that is going to continue to enhance the experience and our metrics, and really is giving us confidence in the roadmap that we're executing. In terms of AI impact on the overall business, here's one way to think about ring fencing. The negative impact, which I think we get a lot of questions about, as the world is undergoing an AI transition, and inevitably on that journey, some of the old ways of working will get left behind. The segment of jobs in our marketplace that are less complex and hypothetically most easily disrupted over time by AI are jobs on Upwork with less than $300 of spend, which comprise just under 5% of our GSV today. To be clear, we are not yet seeing a broad-based AI impact overall in this small job segment. Now, if you look within this small job segment, the current impact from AI is much more limited and is most visible in a couple categories. Writing and translation is obviously where it's most evident, and that's just as we've expected and seen over multiple quarters now. In writing and translation and elsewhere, we continue to see, at this point, a positive AI-driven mid-shift away from simple, very low-effectiveness jobs to complex, more valuable, higher-paying work. And this transition has started in the past. And this past quarter, we saw hours per contract in writing, we saw spend per contract in translation all increasing because of the new work that's emerging for editors and translators who are actually working with and supplementing the outputs delivered by AI. So, these factors are really a testament to the AI-related opportunity that we expect to benefit from by offering the human expertise that is so valued across all of our categories in the marketplace as humans are working with AI tool in the ecosystem. And what we see is AI augmenting humans much more so than replacing them.

Great, thank you so much. That's very helpful.

Thanks, Maria.

Thank you. Our next question comes from Josh Chan of UBS. Your line is open.

Hi, good afternoon. Thanks for taking my questions. I was wondering if you could talk a little bit more about the trajectory that you saw through Q2. Was it kind of like a one-time step down in May or June and then kind of flat from there, or was it like a slow easing? And then I guess just to clarify on your guidance, I guess does that imply a flatlining from, current levels, or does it imply kind of continuing slowing as you talk about maintaining the current trend? Thank you.

Yes. So, maybe to take a step back and talk about kind of the transition from Q1 to Q2, we saw a really promising top of funnel demand signals in Q1, our client seeking work metric, which is a leading indicator for us on overall demand on the platform and growth on the platform was up 11% in Q1. And that trend really started to reverse around mid-May. And then, we saw a declining trend into June and July. And so, and again, we saw a couple of factors here. We saw overall demand signals decline. And then, we also saw a mixed shift for two, we saw strong growth from very small businesses and lower demand from larger customers, which is really understandable given the high interest rate environment that we're operating in. Since smaller businesses tend to have lower spend characteristics overall, this mixed shift impacts our GSV per active, which is what's making us more cautious about the outlook for the rest of the year.

Thank you. Thanks for that color. And then, in terms of your expense management, very impressive in this environment, when demand eventually returns, will you need to undergo like a period of added spend, or how are you thinking about that trajectory as demand eventually bottoms and gets better? Thank you.

Yes, sure. I mean, you know, we're very, very proud of the cost discipline that we've implemented. I think we're doing a great job at it, and I'm really proud of the teams here for working so hard. We are very committed to continuing to grow operating leverage as we continue down this path. And even as demand returns, I think we'll be very moderated in the way that we invest. We've built a very, very good, for example, performance marketing engine with very clear parameters in terms of yield and ROI. And we'll continue to invest that way as we go forward. So, I don't necessarily see the need to ratchet up significantly our spend as demand returns, but we'll assess that as we go.

Perfect. Thank you for your time and the color.

Thank you. Our next question comes from Matt Farrell of Piper Sandler. Your line is open.

Thanks for taking my question. I'd love to understand a little bit more about the bifurcation of the enterprise pricing strategy, what kind of went into that. You obviously hit on some early results, but how should we be thinking about that helping to drive acceleration in the enterprise business over the next couple of quarters?

Sure, Matt. Our view on this is the enterprise TAM is so attractive, and we're really positioned well to work aggressively to keep unlocking it. With the pilot we ran in the last quarter, you're right, we saw some promising signals, and we're still in testing and really using the learnings from those signals to inform where we go next from here. I'd say because of where we are with that work, the insights have been really strong, but we're not yet expecting the same level of performance every quarter in terms of the type of new logo conversion that we saw in the last quarter carrying forward. But we do think it's critical in this environment and every environment to remain really agile and unlocking the market opportunity. And that's really what we're focused on doing. Because we see opportunities both to increase conversion and expand the number of logos in the enterprise space that we have, as well as unlock share of wallet. And that's where we're focused. So, I think it's too soon to say more specific than that, but that is absolutely laser focus. And the results, I think, are showing that from the agility.

And then, following up on some of the questions on the full-year guide, based on my math, it assumes a pretty significant deceleration in GSV as we move through the rest of the year. I guess how does the macro, both on the small and the enterprise customers, different -- how is it different than previous cycles of slowing? It seems like it's much more intense this time around than it has been in the past, but would love just any more clarity on spending patterns and the assumptions that are embedded in GSV. Thanks.

Maybe I'll start, and Hayden, you feel free to add on. So, a couple things here, like I said, the guidance is based on essentially bringing forward the kind of lower trends that we saw exiting Q2 and even into Q3 for the rest of the year. So, that's what we're basing it on. It's kind of the June and July trends. And we really wanted to make sure that we were not anticipating any improvement to the macro from what we've been seeing in the last couple of months. And so, like I said, to that effect, we do think we've effectively de-risked the back half of the year. Just in terms of how macro is impacting kind of spending on the platform, I would say, look, Writ Large, high interest rates impact demand on the large and medium business customer spend. Inflation impacts demand on the small business and consumer side. And these both impact GSV, and they have compounding effects, right over time. And I think we've been able to weather the storm really well for the past few years as we've been going through this. And now we're starting to see some of those compounding effects, I think, it really affects some of the demand on the platform. But we've been able to grow revenue in this environment due to some of the investments we've made in high growth categories, in our ads and monetization strategies. And we do anticipate that some of those things will also get share with benefits in 2025 and beyond.

Thank you. And our next question comes from Marvin Fong of BTIG. Your line is open.

Good evening. Thanks for taking my question. So, I guess just to kind of maybe round out the whole discussion about the state of the world, anything you can add in terms of categories or even geography areas that might be trending particularly weak or maybe even relatively stronger relative to kind of the overall marketplace. And then, I have a follow-up.

Marvin, what we're seeing is, from a category standpoint, the tech industry broadly, in the macro at large, is being hit harder from a job openings perspective. So, we are seeing that, that is flowing through to some extent in terms of demand for tech jobs on our own platform being a bit weaker. And that's consistent with the macro trend. We'd also note that, that impact, however, is not totally uniform. There are some subcategories within our own tech category on our platform that are performing better. So, it's a bit uneven, but that's, I'd say, one theme. The bright spots in terms of categories definitely are the strength in AI-related work. That grew 67% year-over-year, and we're seeing emerging growth in subcategories, even within these AI-impacted, like, slices of the business, like writing and translation, where even as automation is happening, new growth shoots are popping up. So, that's the category story. To the question of geos or other segments, I'd say we saw U.S., Germany, and U.K. as a bit more impacted than other countries globally, in terms of client demand. And again, I think that's indicative of kind of what's going on broadly in those economies.

Yes. Okay, perfect. That makes total sense. And I did want to also follow up on the bifurcated enterprise. So, I'm just curious exactly what is it about or how should we sort of think about the less, the lower feature version? I mean, what is it that makes it more palatable? Is it some of maybe the upfront costs, or is it a take rate being lower? What exactly is it that's going to draw these more on the fence kind of enterprises? And then, just part B of that question, is there any risk in your mind that some of your existing enterprise customers that are on the full-featured version that they might opt for the less full-featured version? Thanks.

Yes, I understand the concern. I can tell you there's no risk of cannibalization here. What we are doing is really leveraging the art of getting the packaging, the pricing, the whole structure absolutely right to meet the different sub-segments that exist within enterprise. And previously we had more or less like one offering to target with and now we have more tools in our toolkit. And again, we are not done. This was one first iteration at this, really aimed at optimizing, landing these new customers and expanding their share of wallet, which is something that we want to be absolutely best-in-class at. So, we learned a bunch of things. I would say, we're not compromising margins or take rate or kind of the effectiveness of our overall business and its profitability, but we are determined to nail how we get these packages and pricing absolutely right to unlock this market.

That's great. Thanks for the color, Hayden.

Sure.

Thank you. [Operator Instructions] And our next question comes from John Byun of Jefferies. Your line is open.

Hi. Thank you. This is John Byun on behalf of Brent Thill. On the macro and GSV growth, in what sort of actions could you take or what could help resume the growth there? I mean, does -- will it require low interest rate or some other either external or specific factors to you? And then, on the EBITDA margin for the expansion, I think in the past you had mentioned that there was still room to optimize in R&D. I'm wondering how you still view that. If not, and where are there still big pockets we can still optimize more in between the different outputs lines? Thank you.

John, we don't have to wait for a better macro to return for our GSV investments to pay off. We expect the levers we're investing in now, based on the early stages they're in now, to have impact in 2025, even if a challenging macro persists. And certainly they will perform better when the macro improves. So, our growth will come from enterprise initiatives, including the pricing and packaging work, which unlocks logos and wallet share, as well as amplifications from the VMS and MSP program, the AI and human-powered performance improvements we're making on our platform, from partnership efforts that drive new client acquisition at scale, from the scaling of AI talent and work-related GSV in our marketplace, which is growing at a rapid pace. These efforts are all in their early execution this year, and we never expected them to have a significant 2024 impact. In 2025, they will be beneficial, and they will also be enhanced by the ads and monetization work, which will be an additional tailwind, as well as anti-circumvention efforts, which will be favorable next year on GSV and revenue. So, we feel great about our portfolio of opportunities and the ongoing strong execution we have behind every single one of them.

And I'll just answer on the adjustability with the margin expansion question. Yes, we absolutely do have more optimization to go in the R&D line. We are continuing to grow that line, and I think you can expect that we are going to continue to invest in innovation on the platform. We think that ongoing innovation and investment in technology are the ways to grow this business. And so, you will see that line continue to grow some on a year-over-year basis, but not nearly to the extent that it has in the past. So, we've been growing over 20% a year for the past few years in R&D. And we're taking a really surgical approach. We're going kind of project by project and looking through and cutting back where we're not seeing the ROI profile that we want along the time horizons that we want. And again, we also have optimizations that we can take in continuing to improve on our growth margin line. And then, I think there's definitely a way to go in G&A as well.

Thank you.

Thank you. That concludes Upwork's second quarter 2024 earnings call. Thank you for participating, and you may now disconnect.