Good day, and thank you for standing by. Welcome to the Upwork Fourth Quarter and Full Year 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, Samuel Meehan, Vice President of Investor Relations. Please go ahead.

Thank you, and welcome to Upwork's discussion of its fourth quarter and full year 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, they 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 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 annual report on Form 10-K for the year ended December 31, 2024, when filed. 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, comparisons of the fourth quarter of 2024 are to the fourth quarter of 2023 and comparisons of the full year 2024 are to the full year 2023. Adjusted EBITDA, adjusted EBITDA margin, and free cash flow are non-GAAP financial measures and all other financial measures are GAAP unless cited as non-GAAP. Now, I'll turn the call over to Hayden.

Good afternoon, and welcome to Upwork's fourth quarter and full year 2024 earnings call. Upwork had a record year in 2024 with all-time highs for full-year revenue, adjusted EBITDA, and adjusted EBITDA margin. The strategic foundation for Upwork has never been stronger nor more timely. As the AI work tide builds, organizations of all sizes are seeking out more flexible talent models that match their needs for new and emerging skills with partners who integrate cutting-edge AI technology and valued human workers seamlessly and at scale to rapidly deliver on their priorities. At the same time, professionals across geographies, specialties, and industries want digitally powered ways of working that give them easy access to more autonomy, flexibility, and earning power. Upwork is uniquely positioned to capitalize on these massive work trends. We are delivering new and exciting ways for businesses to access the expert global talent and work outcomes they need and for highly skilled professionals to find lucrative work opportunities and grow their independent careers. Last year was a year of transformation for Upwork. We achieved record performance in the face of a challenging macroeconomic environment. We optimized the organization to increase efficiency and execution velocity, creating a leaner, more agile company that is moving faster and operating more profitably than ever before. We gained market share and substantially outperformed the incumbent staffing industry, a testament to the inherent advantages of our business model, the resilience of our platform, and Upwork's industry-leading innovation and scale. We grew revenue 12% year-over-year in 2024 compared to an estimated 9% year-over-year decline in the broader staffing industry. This was the sixth consecutive year of double-digit growth outperformance for Upwork compared to the staffing industry and we expect the strategic moves we made in 2024 to fuel our continued industry outperformance this year.…

Thanks, Hayden. Upwork finished 2024 in a position of strength within a tough operating environment. Our pace of execution continues to accelerate and despite the headwind environment over the past couple of years, our financial position has never been stronger. For the full year and the fourth quarter of 2024, we delivered record revenue and profitability and our growing free cash flow profile and strong balance sheet give us tremendous flexibility even as the operating environment for our industry remains challenging and unpredictable. The strong profitability characteristics of our marketplace model give us confidence that we will continue to increase margins and generate value for our customers and shareholders while investing in growth over the next few years. We have been building the growth levers Hayden just outlined to be catalysts for our business over the medium to long term. And when macroeconomic conditions improve, these catalysts will be additional growth drivers for us. As we head into 2025, our outlook reflects our caution with regard to the current macroeconomic environment. While some of the indicators we watch for our business, such as the Jolts report and other macro data showed signs of stabilization in Q4, they remain at multi-year lows. Historically, these indicators tend to have a six to nine-month lag effect on our business. The current macro uncertainty makes us cautious about the outlook for 2025, but despite that Upwork continues to perform well and we are executing across every area of our business. Now, onto our results. As I mentioned, we are ending the year with record-high revenue and profitability. Our gross margin was 77.7% for Q4 and 77.4% for the full year 2024. Adjusted EBITDA margin was 26.2% for Q4 and 21.8% for the full year 2024, both all-time highs. Our adjusted EBITDA margins have expanded…

[Operator Instructions] Our first question will come from the line of Maria Ripps from Canaccord. Your line is open.

Great. Thanks so much for taking my questions. First, just in terms of your revenue guidance, it looks like your full year outlook implies modestly higher revenue declines after Q1. Can you maybe just talk about some of the dynamics driving that?

Yes, sure, Maria, thanks for the question. Obviously 2024 was a really record year for us. We achieved all-time highs in revenue adjusted EBITDA. But as we know, we as a business have encountered sort of cumulative years of macro headwinds. And right now as we enter 2025, I'd say that the dynamics on the top of the funnel haven't really changed, unfortunately. It's important to note, of course also that there's a sort of a six to nine-month lag in our business when the macro starts to change. So there's a lot of uncertainty out there and our 2025 guidance reflects that.

Got it. That's helpful. And then secondly, appreciate all the detail on Uma, but can you maybe share a little bit more color on AI and impact on your business? Especially kind of in light of the recent industry developments. And I guess what are some of the building blocks to perhaps accelerate AI-related GSV spend on the platform from 60% you reported last year?

Sure, Maria. We are really excited about the advancements in AI and all of the new technology that's coming forward at such an incredible pace because we see that Upwork really benefits from this broader AI trend. Our platform is infinitely flexible and what we've seen is that it shape shifts to whatever customer demand for work looks like, including whatever combination of humans and technology are working together to deliver great outcomes for customers. In the past, we've seen Upwork's shapeshift very naturally and rapidly as work itself has evolved. So if you look back to the early 2000s, we had no social media managers or marketers then. Before the launch of the iPhone, there were very few mobile developers on our platform. But those roles and categories of work today are thriving on our platform because Upwork grew rapidly when customer demand appeared. So what we're seeing today is a similar shape-shifting as AI is evolving with the talent mix on Upwork really being remade before our eyes as AI skills are emerging. This is evident from the GSV that we saw in prompt engineering growing 92% in Q4, the AI-related work growing 50% year-over-year in 2024. And this shift is really happening across not just the AI categories themselves we report on, but also in all 125 categories and 10,000 skill areas where workers are really adopting these new technologies and improving their value proposition to customers. Delivering better, faster, and more compelling work to customers at the rate of these technology changes. So this is a very positive trend for us. We're clearly benefiting already, and we're excited about what this unlocks, even as we ourselves are innovating on our own platform with the launch of Uma and the AI capabilities that Uma has that were, advanced over 2024 and coming forward even more in 2025. So this is a fun and exciting thematic for us.

Great. Thank you, Hayden. Thank you, Erica. And that's very helpful.

Thanks, Marie.

One moment for our next question. Our next question comes in line of Andrew Boone from Citizens. Your line is open.

Thanks so much for taking my questions. I wanted to go to marketplace take rates. There was a sequential decline from 3Q to 4Q. Can you guys just help explain that and then talk about the trajectory of marketplace take rates as we think about 2025. Is there any reason to think that that would step down again or should we see more stability there? And then thinking more broadly about Uma and the potential to improve liquidity on the platform. Can you just speak to that? What does AI unlock as you basically improve the contextualization of matching freelancers to demand? Thanks so much.

Hi, Andrew, I'll take the take rate question first. Yes. When we reported Q3 results, we actually did give an indication that we'd be doing some testing in Q4 that could kind of have some effect on the sequential take rate accretion. But that's one time in nature. We've been running some tests on the platform and we fully expect take rate to continue to grow as we go into 2025. That be it albeit at much more modest rate than of course, the 260 basis points that we saw in 2024. We do -- take rate overall we have a lot of headroom to go, but the strategies that we do within for take rate take time to test, and to learn and to release on the platform. So 2025 should be sort of a modest year. But we fully expect that some of the kind of promising take rate strategies that we've got that we're in development right now will be ready to launch in kind of late 2025 and early 2026.

Andrew, on the side of Uma and what it unlocks through better matching. Let me give you a little color there. So our ability to invest into the AI thematic and launch AI work companion Uma last year in April and then enhance its capabilities over the course of the year, including with our October release, is a big differentiator. The way it attracts and really drives better matching on the platform is, as an example, when we launched Uma's capabilities with the job Post generator, we've seen tremendous adoption of that. More than 70% of new clients are using the Uma-powered job post generator, which is then turning into more job posts per client. It's turning to more job post quality. So better quality posts coming into our marketplace and is increasing our fill rates, matching specifically and fill rates specifically are moving because of things like the quality of the posts that are being written. And on the other side of the equation, freelancers who have adopted Uma with a proposal writing capability are actually bidding at a higher rate. So their bid volumes are up 2.5%. So in the first phase of this work, we've basically been enhancing core matching components of our ecosystem with Uma capabilities. We're seeing the adoption, we're seeing that translate into gains on things like 8% of our -- 8% higher fill rates on our highest value jobs for new clients, which is again another great outcome of this. In the second phase of work, what you're going to see from us is Uma the work companion, evolving much more into a fully blown AI agent. And that's where Uma will be able to take on even more tasks and work from our customers that they can offload to Uma to execute work on Upwork. But we're already seeing the wins from the first phases of this work and are excited about how we're accelerating that with the acquisition we made last year and with the roadmap that we have ahead.

Great, thank you.

One moment for our next question. Next question comes from the line of Bernie McTernan from Needham. Your line is open.

Hi, this is Stefanos Crist calling in for Bernie. Thanks for taking our questions. Just wanted to ask on the $60 million of cost savings, I think they were announced mid-Q4, so should be more room in '25. What areas can we expect to see those? And then you also mentioned some minor investments through;25. Can you also just provide some more color there? Thank you.

Yes, sure. When we announced the cost reductions in October of last year, we outlined them. They work sort of across our business. We really took several quarters to think through the cost reductions that we made. And it was really an operational realignment of the business. The places where they were focused were on the enterprise business and the new bifurcated strategy that we've got, focusing on our largest enterprise accounts for acquisition and then launching Business Plus on the marketplace, which of course opened up part some of the enterprise value props to our marketplace customers. So that has greatly reduced both our cost to acquire and our cost to serve on the enterprise side. And then we did also rationalized our R&D portfolio and really take a much more focused approach to R&D. G&A has relatively lesser benefits on a year-over-year basis than those two categories. However, we do see longer-term opportunities in G&A as well. And what was the second question? Oh, on minor investments in 2025?

Yes.

In terms of investments in 2025, this is really the three kind of growth catalysts that investment areas that Hayden outlined on the call. We're very, very focused on additional investments in AI-enabled platforms and in the advancement of our enterprise strategy. So it's a minor reinvestment there, but these are relatively minimal. And you know, we'll just have a little bit kind of slightly lower margin in Q2 and Q3 versus Q1.

Got it. Thank you.

One moment for next question. Our next question comes the line of Brad Erickson from RBC Capital Markets. Your line is open.

Hi. Thanks for taking the questions. First for Erica. I guess with the GSV declines you've been seeing lately, obviously, you mentioned kind of no changes to the top-of-the-funnel headwinds, a lot of what's behind that. But maybe speak to things that might be in your control for trying to get that GSV back to growth versus what's out of your control. And then second for Hayden, you guys are talking about contemplating, call it other products and services that could expand, take rate over time. I wonder if you just could expand on that a bit. Obviously, we have ads and managed services and then the newer launches like Business Plus. Just curious to learn maybe a bit more about some of the adjacencies where you see opportunities for that as a driver? Thanks.

Yes, Brad, thanks for the question. In terms of GSV trends, we are seeing some ongoing top-of-funnel weakness that we highlighted last year coming into 2025 and that gives us some caution on our outlook. Now that said, we have some very positive signals in our retained client base in our enterprise customers, Q4 saw increased engagement, GSV for active enterprise account increased 2% year-over-year in the quarter and that's after multiple quarters of negative growth. We also saw our overall retained client base grow 9% year-over-year in Q4. And also as I highlighted, GSV per active client increased across all business segments in the quarter for the second quarter in a row. So we're really pleased with some of the dynamics we're seeing under the covers there. And in terms of what we can control, we've outlined the kind of strategic investments we're making. I would add to that in terms of our ads & monetization strategies, we have multiple take rate strategies that we can deploy, including some that are very GSV beneficial, like the Business Plus strategy of launching this take rate accretive product with enhanced value proposition on the marketplace. And there's more to come there as we develop kind of new strategies, new tiers for this going into 2026.

Sure. And on the product and services, on the take rate area, you know, we grew take rate 250 basis points in 2024 to an all-time high of 19.4%. So we feel good about the pace of our execution and expansion in this area and are taking, of course, a more measured approach this year. But there is a big portfolio of opportunity here in the long runway, so some of the specific opportunities for us are around first of all, subscriptions. We launched the Business Plus subscription last year and today we have basically one subscription plan on the marketplace upgrade side for clients and one on the spinner side. So there's more opportunity for us to both enhance those plans, the value props, continue to refine pricing of those plans, and add more subscription tiers over time. Another big opportunity for us is around our current advertising products. Just in Q4, we launched some client-side advertising products for the first time that were new. And there's more things we can do because we have so much audience inside of our marketplace on both the client side and the freelancer side. So there's more runway there as well. The final thing I'd mention is there are places where we can monetize kind of ad hoc value propositions and paid services either offered by us or our third-party partners. We've done a little bit of experimentation with this to date, but certainly, it's not something that is mature at this time and so there's a runway of opportunity there. So when we look at all of this together, we feel great about what the opportunity is ahead. And even though we're going to be more in some of the development phase on some of these things and this year and take the opportunity for our customers to absorb some of the price changes we've made over the last 1.5 years.

Got it. That's great. Thanks.

One moment for our next question. Next question will come from the line of Josh Chan from UBS. Your line is open.

Hi, good afternoon. Thanks for taking my questions. I guess on the enterprise side, it sounds like that things are turning a corner a bit there. So I was wondering if you could give a little bit more color on why you think you're seeing the improvements that you are and what's driving the improved trajectory there? Thank you.

Sure, Josh. I'd say we've been focusing more of our resources in the enterprise area on our top biggest clients, where they're really looking to expand wallet share with these customers. That was part of the focus and reorganization work we did in Q4, and that is certainly paying off, which I would note is remarkable given the amount of change that the team absorbed in the fourth quarter. We've also seen just those kind of signifiers here. Our managed services offering continues to really resonate with customers. It grew 12% year-over-year in the quarter. We saw higher year-end spend in the quarter in terms of customers kind of running through to the end of the year and wanting to spend more with us as the year was closing out. And then we also saw one trend that was interesting. Our GSV for active Enterprise account actually did grow on a year-on-year basis for the first time in recent quarters. So we feel good about where this business is as we enter this year building on that momentum and the Business Plus side of things, where again, there's a lot of activity happening, a lot of clients in the funnel. But again, this is kind of a year where we're building into these new strategies and we're really expecting bigger growth for us in 2026 and beyond.

Great. Thanks for the color there. And maybe one on margin. I guess you achieved 26% margin in Q4 with not much help probably from the streamlining initiatives. So I guess, was there anything one-time there or I guess could there be some upside to what you're guiding for '25 because of the flowing through of the cost savings in '25? Thanks for the color.

Thanks, Josh. So in Q4, yes, I mean, we actually executed a little bit faster than we expected to in some of the cost savings in Q4 to get to that 26% margin. In 2025, our guide is our guide at this point. I think we are constantly looking at cost optimization opportunities in this business. And we are obviously very, very committed to the kind of margin progress that we talked about in growing margins each and every year to the 35%. So we do see additional cost opportunities across the business. They're a little bit longer-term in nature. So by and large, we expect this to hit 2026. I would just remind you as well that, you know, we did make the objective acquisition at the end of Q4, and that also has a slight impact on offset on R&D in 2025.

That's right. That makes sense. Thank you both for the color.

One moment for our next question. Next question will come from the line of Rohit Kulkarni from ROTH Capital Partners. Your line is open.

This is Jared on for Rohit Kulkarni. How would you anticipate your capital allocation philosophy to evolve now that you might be generating $25 million to $30 million in free cash flow every quarter going forward? And secondly, from an end-market standpoint and with the macro stabilization seen in Q4, how would you characterize your visibility and your confidence in annual guidance? Thank you.

Sure. On capital allocation, you know, I would say overall our capital allocation strategy is to very judiciously invest in this very focused set of organic growth opportunities that we've been talking about on the call. But you're right, as we've really accelerated the profitability and free cash flow gains in this business, you know, we're now able to drive long-term shareholder return with a very proactive capital allocation strategy. So, you know, we have now a track record of taking action on these kind of smaller tech and talent acquisitions. And so we'll continue to look for M&A to enhance our roadmap and accelerate our strategic path as a market leader. But you know, and lastly, I'd say we're very, very focused on returning capital to shareholders. 2024, we deployed our first ever $100 million share repurchase that we used 72% of our free cash flow last year to repurchase shares. Going forward, we intend to fully offset dilution from stock-based compensation and we also plan to opportunistically reduce our share count over time.

In terms of visibility and the confidence in guidance given the macro, we talked a lot about the macro. I think even this morning's inflation worries point to the fact that we won't see unfortunately interest rates coming down anytime soon. We're really focused on what we can control and we're very, very confident in the guidance that we've given that we should be able to perform as long as the macro kind of remains as it is. If there are shocks to the system, of course, that would affect all businesses. That said, if the macro were to start to improve, of course, we would expect that our business would follow that on a kind of six to nine-month lag.

Thank you. One moment for our next question. Our next question comes from the line of John Byun from Jefferies. Your line is open.

Thank you. This is John Byun at Jefferies. A couple of questions. First, I want to see if could maybe talk about what you saw in terms of linearity on month-to-month trends and related to them. I don't know if you saw any pause or acceleration around elections or inauguration, either positive or negative. And then second, more on the numbers. Big step down in sales and marketing in Q4. I guess it was post-restructuring but I'm wondering if there was any other factors behind that because it had been running over $40 million for five quarters in a row. Thank you.

Yes. In terms of the month-to-month linearity, I would say that broadly our month-to-month trends in Q4 and coming into Q1 had followed our sort of normal seasonality. We did see some unexpected strength as we've outlined in towards the end of Q4 really in our GSV for active client. Like I said, both on the enterprise and on the marketplace side. So we've seen growth in both business units and that's kind of sequential growth that we have or year-over-year growth that we hadn't seen in several quarters. But I don't think there's anything, particularly of note in terms of the impacts of the election and other things. We haven't seen a particular change in behavior within our client base coming from that. And I think it remains to be seen what will happen given all the pace of the policy decisions coming out of the new administration. And then on the big step down for sales and marketing, I mean this really is the cost reductions that we talked about focused on the enterprise business and we also did take some cost reductions. We talked about this on the Q3 call. We reduced non-working marketing spend. We have not reduced spend on performance marketing which remains a good acquisition channel for us and a high ROI channel.

Thank you.

Thank you. One moment for our next question. The next question comes from the line of Marvin Fong from BTIG. your line is open.

Great. Thank you for taking my questions. Pretty much all been asked here. I just like to maybe ask Juan on that increase we're seeing in the GSV per client and could you maybe break that down a step further in terms of what's the component driving that? Is it hours per project, hourly rate? And relatedly, are you kind of assuming whatever you're seeing in terms of trends kind of persisting in 2025, or what's sort of underpinning your expectations for your guidance with respect to those items? Thanks.

Sure. In terms of drivers, we have not seen an increase in hourly rate that's been consistent over the last couple of years. And you know, I think that that's very much kind of a macro -- part of the macro headwind. I would note that there are certain categories on our platform, including our very highest growth AI category, that do get a higher rate within that category. So AI work gets about a 44% wage accretion versus non-AI work on the platform. So to the extent that that continues to grow as it has been the fastest-growing category on the platform, we should continue to see some benefits there. Now for the remainder of the year. Like I've said, given the macro headwinds, the multiple years of macro headwinds that we've been kind of enduring, we are looking with caution just simply because I think that the future is a bit unpredictable with the macro environment. So right now I think we're sort of looking at relatively steady GSV per active client going forward for the rest of the year. And also you have to take into account we do have seasonality in our business with Q2 and Q3 being relatively lower than Q1.

Got it. Thanks so much, Erica. Appreciate it.

Got it.

Thank you. This concludes our Q&A for today. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.