Good day. Thank you for standing by. Welcome to Upwork's Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that today's conference may be recorded. I will now hand the conference over to your speaker host, Samuel Meehan, Vice President of Investor Relations. Please go ahead.

Thank you, and welcome to Upwork's discussion of its second quarter 2025 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 may 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 be set forth in our quarterly report on Form 10-Q for the quarter ended June 30, 2025, 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 second quarter of 2025 are to the second quarter of 2024. 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 second quarter 2025 earnings call. Upwork delivered another record quarter on both the top and bottom lines. We generated our highest ever Q2 revenue of $194.9 million, with our outperformance driven by AI enhancement of the platform, accelerated client hiring in AI-related work, ads and monetization strategies and our thriving Business Plus offering. We also exceeded our guidance by generating net income of $32.7 million and adjusted EBITDA of $57.1 million, resulting in a 16.8% profit margin and 29.3% adjusted EBITDA margin. Based on our performance in the first half of the year and positive momentum, we are raising our full year guidance for both revenue and adjusted EBITDA. Our strong results and increased guidance underscore the success of our AI and M&A strategies in attracting and converting larger clients in the marketplace. This increase is driven in part by a more than $80 million in-year lift in GSV attributable to our AI and customer experience enhancements. Our innovation velocity was on display in our summer 2025 Upwork updates announced on July 23. This product release was rooted in our unique ability to combine the world's best human talent with cutting-edge AI to deliver unparalleled outcomes and pioneering customer experiences. We are seeing the fruits of evolving Uma, Upwork's Mindful AI into a more fully capable always-on AI work agent. Clients can now leverage Uma to interview talent on their behalf and find the right fit, saving them time on manual reviews. This capability also helps freelancers find work faster, interviewing on their own time and showcasing their skills more effectively than a cover letter can. New Uma-powered Upwork video meetings generate transcripts, summaries and action items, which enhance collaboration, propose project milestones and turn meetings into real progress. We completed the integration of…

Thanks, Hayden. We delivered an outstanding second quarter with revenue of $194.9 million and better-than-expected performance across all financial metrics. The quarter's results clearly demonstrate the significant advancement of our AI efforts and product enhancements, resulting in growth of our core marketplace business, including Business Plus. Our focused, disciplined approach to margin expansion while investing in growth was evident across our business, as our adjusted EBITDA margin hit a new record high of 29.3%, exceeding our guidance range. This was driven by strong revenue outperformance alongside our continued cost optimization efforts, including internal investments in AI enablement. We are firmly on track to achieve our 35% adjusted EBITDA margin target, and we are raising our full year 2025 revenue and adjusted EBITDA guidance. While the macro environment remains difficult to predict, we continue to outperform peers and our own plans while investing in future growth levers. Second quarter GSV of $1 billion was stronger than expected due to successful product improvements we've made to the marketplace, including search and match and Business Plus. We are encouraged by early positive signals that our GSV growth levers are beginning to bend the GSV curve. Average GSV per active client continued on its positive growth trajectory, rising 5% year-over-year and surpassing $5,000 for the first time since 2022. This marks the second consecutive quarter of positive year-over-year growth and the fourth consecutive quarter of sequential growth. Once again, GSV per active client grew year-over-year in every major client segment with particularly strong growth of 16% year-over-year in our very large client segment. Our hours per contract in Q2 were also the highest ever as our platform attracts larger jobs and more complex work. Our active client count continues to exhibit the cumulative effect of the top-of-funnel demand pressure that we have noted for…

[Operator Instructions] Our first question coming from the line of Josh Chan with UBS.

I wanted to ask about the acquisitions. So could you talk about kind of these assets, in particular, how -- maybe give an example of how they will work once you integrate into your Upwork platform and kind of how things will flow through the revenue and GSV in terms of how you're going to report it?

Thanks, Josh. We've always been best-in-class in offering our enterprise clients talent through the independent contracting model, and we've provided a range of solutions such as employer record and other contracting types through our partners and extensions or workarounds of our platform. Historically, this partnership approach really limited our ability to serve the full range of opportunities that enterprise customers approached us on. So that includes other engagement types like employer of record, some type of managed services and staff augmentation. Clients have been asking us to expand into these spaces because they love our strength in independent contracting. They love our digitally native platform, and they wanted to use us for broader parts of their contingent work programs. With these acquisitions, we're really bringing into Upwork a fully comprehensive digitally native set of solutions that combine our incredible talent pool with Bubty’s workforce management system and Ascen’s contingent employment solution. And each of those businesses and their products were purpose-built for enterprises. So going forward, we are going to be able to serve enterprises in all of these different ways across their full contingent programs, meeting them where they are, integrating into their existing efforts and really not requiring major change management on their side. We've had the benefit of piloting both Bubty and Ascen together along with our solution. And that really showed us how effective this combination is going to be and give us tremendous confidence that this is the right solution that will open up this tremendous $650 billion enterprise opportunity.

And Josh, this is Erica. Maybe I'll just hit the question on GSV and revenue. Like I said, these transactions are immediately GSV and revenue accretive in 2025. They'll have a very small, approximately $5 million or so benefit in the back half of 2025 revenue. And so -- and they'll contribute some top line growth as we enter 2026. As Hayden described, these enterprises have long sales cycles, and we are going after very large multimillion dollar contracts with both our existing enterprise customers and new enterprise customers. So we expect to see much more meaningful GSV and revenue accretion in late 2026.

Okay. Perfect. And then maybe if I can ask about the macro situation. I guess some of the employment-oriented data points have kind of softened in recent months. How are you seeing the macro environment impacting your business kind of through Q2 and recognizing that you're taking other steps to kind of offset them, but just curious what kind of macro shape are you embedding into the second half?

Yes, I'll comment on the macro, Josh. So the environment right now continues to be unpredictable. We really haven't seen notable changes from the prior quarter. And so the slower acquisition environment that we've been experiencing for a while now does weigh on things like our active client metrics, but we're now lapping those trends. We have been executing extremely well, and we are increasingly successful in offsetting these macro pressures through the things we can control, things like AI enablement of our platform, growth in our AI categories, our enterprise strategy, which we just discussed. So if you look at our Q2 beat and the increased revenue guide that we just shared, it really reflects our confidence in our own initiatives despite not anticipating or seeing any changes in the macro now or in the near term. As we've said for a while, we do look at a lot of factors here, but we feel that this is a very prudent outlook, and we're excited about what we're delivering.

Our next question coming from the line of Maria Ripps with Canaccord.

Congrats on the acquisitions. Can we maybe dive a little bit deeper on your comments around bending the GSV curve? I guess what contributed the most to take rate expansion this quarter? So should we think about AI enhancement, maybe monetization products, like other sort of new offerings like business plan? And sort of now with these 2 acquisitions sort of that you announced today, maybe talk about the opportunity going forward, especially as you think about the gap between your platform and other platforms or solutions out there on the take rate?

Okay. Maria, I'll talk a little bit about take rate and then maybe I'll hand it to Hayden. She can talk a little bit about some of the opportunities that we're seeing, which are really exciting on the GSV front. In terms of take rate expansion in Q2, we've talked a lot about kind of the experimentation that we'd be doing on the platform this year and the amount of time and effort that goes into kind of value-based take rate strategies. So there are quite a number of things that are contributing to the take rate benefit. It's about 50 basis points that we've seen year-over-year in Q2. One of which is some of the supply and demand experimentation that we've implemented on the platform. We started in May with kind of a larger range of kind of freelancer fees on the freelancer side, looking at adjusting the fees according to the amount of freelancer supply on the platform. We've seen some nice take rate benefits there, along with other kind of year- over-year growth, 19% growth in Connects and 13% growth in Freelancer Plus. So actually quite a number of contributors, and we're seeing actually this is just the beginning and a lot more benefits to come from some of the experimentation we're doing. Hayden, do you want to talk to the GSV opportunity?

Sure. Overall, we're seeing a lot of bright spots in terms of our GSV performance here and some of the things that are unlocking it. So notably, the 3-pronged strategy we announced at the beginning of the year is absolutely working. We're seeing the AI features that we're building on the platform are driving volume and velocity. And that means we've seen this $80 million 2025 GSV uplift just from AI and customer experience improvements alone, and that's going to sustain further in 2026 and beyond. We're also seeing great strength in our AI work categories. So GSV is up 30% year-over-year in Q2, which is an acceleration versus Q1. Definitely, demand there is extremely strong, and that's becoming more evident. Enterprise is obviously going to be a bigger opportunity. And to address what you're saying there, we've really set ourselves up with a game-changing offering that lets our sales team go to existing and new accounts and really engage with them on multimillion-dollar opportunities. So these are even bigger than what we were able to do before, and that is really going to contribute over time to enterprise performance overall on both growth. And again, these are take rate accretive solutions relative to our marketplace. So it's going to help us there as well.

Great. That's very helpful. And then can you maybe talk about how you are prioritizing sort of investments in AI, enterprise and ads and monetization against other forms of returning capital to shareholders?

Yes. Sure, Maria. Look, our ability to expand margins and really -- and invest in organic growth is proven with over 20 percentage points of margin expansion over the past 2 years. And the growth catalysts that we've been investing in over the last 2 years are really starting to show strength and starting to bend the GSV curve as we've described. At the same time, we've also been able to execute on some really smart, inexpensive high ROI M&A, and that's helping drive the growth objectives that we're starting to see success in, first with headroom and objective and now most recently with Bubty and Ascen. And last but not least, we've been able to do this while we're also returning capital to shareholders, so far executing $170 million of share buyback just in the last 18 months. So you can really expect more of the same from us. We're going to be focusing our investment in organic growth with really clear yield prospects and really focusing in on using our strong free cash flow and balance sheet, both to accelerate our growth strategy with M&A and to continue our capital return.

Our next question coming from the line of Ron Josey with Citi. [Operator Instructions] Our next question coming from the line of Rohit Kulkarni with ROTH Capital Partners.

This is Jared Osteen on for Rohit Kulkarni. Great to see Business Plus continue to grow substantially. I was curious if you could talk a little bit more to the evolution of how new customers are using the platform and anything to the behavior you're seeing of more mature cohorts?

Yes. It's clear from the growth we're seeing in Business Plus that this product is meeting a really clear need in the market. So we built this offering really for larger SMBs and teams that have bigger work needs from us. And what we're seeing so far is Business Plus clients convert faster. They spend more than a typical marketplace client, and they are adopting across the board high-value features like access to our expert-vetted talent and AI-powered talent sourcing and shortlisting. So this all contributed to that big GSV growth of 190% quarter-over-quarter in Business Plus and the 45% growth in clients. And it really is showing that the offering is resonating. I would say the fact that 35% of Business Plus clients are entirely new to Upwork is showing that they want these features, too. We're seeing their adoption very similar to our established customers and really taking up some of these new products and features that are available through Business Plus. And there's not a real difference in terms of how they look new versus existing. It's more that Business Plus overall is just such a great segment for us, performing even more strongly than typical marketplace customers. So we really see this as a material revenue growth driver in 2026 because it's really just kind of building up steam now.

I would just add, we continue to see very strong active client retention overall. This has been a very steady metric for us, and our retained clients grew 2% year-over-year in Q2. So just another bright spot in terms of drivers behind our GSV per active growth overall.

And our next question coming from the line of Brent Thill with Jefferies.

This is [ John ] for Brent Thill. Maybe some more questions regarding Bubty and Ascen. I guess curious to hear more about the distinction between there in the Marketplace and Business Plus side of the business. I mean, are they very, very distinctly separate? What about if you have clients that want to migrate from one to the other? How would that work? And if they do sign multimillion dollar contracts, is the recognition of that upfront? Or is it spread out as they use the labor pool? And maybe one more -- what -- how is the margin profile compare?

Sure, John. So the distinction is actually pretty big between the marketplace business and the types of customers and deals that Bubty and Ascen unlock for us. If you look at our core marketplace business, we have a lot of very small and small business customers who are doing -- sometimes it's programmatic work for us, but with us, but they don't need the types of features and functionality that very large enterprise customers do. So if you think about the top few thousand enterprise businesses in the world, they have very complex needs around compliance, around reporting, around auditing, around integrating with existing tools. And that's where Bubty and Ascen really come in with new capabilities that are tailored for these very big tens of millions of dollars or greater programs. So it's a very different customer set. The functionality and the needs are very different. To the question about migrating, certainly, if a customer starts with us in the marketplace, we will have a very clear upgrade path for them to move into our enterprise offerings. But right now, we're really focused on kind of a different set of customers who really are best served and would probably only start with us with all of these robust capabilities that we've added in.

I'll just add a couple of things and maybe hit a couple of your questions on revenue recognition and margin profile. But first and foremost, just to be super clear, Business Plus is targeted at more of the SMB market. It has a curtailed set of kind of enterprise- grade solutions, mostly focused on expert talent and other things. And we have seen virtually 0 downgrades from our core enterprise business. So these are really different sets of products targeted at different types of businesses. In terms of go-forward enterprise subsidiary with Bubty and Ascen integrated, these contracts will be recognized as the work is executed just like our enterprise business is today. So really no change there. The one thing about the go-forward business is the majority of these contracts are likely to be a gross revenue recognition contracts, but that will really largely be a presentation issue. And overall, there's, number one, no change at all to our adjusted EBITDA margin target of 35%. And number two, we expect that, that enterprise business unit with its huge growth potential will be meaningfully EBITDA accretive starting in 2027.

Our next question coming from the line of Matthew Condon with Citizens Bank.

My first one, I just wanted to ask on the testing of the freelancer fees. Just how widely is this rolled out across the platform today? And how should we think about that being rolled out maybe in the back half of this year and into 2026? Any color there would be helpful.

Sure. The changes in the testing around the variable fee is still not fully rolled out to all work types or freelancers. And that's because we're still fine-tuning exactly what that approach needs to look like. So I'd say it's still early in that implementation, and we have a lot of runway to move forward with that. One thing to note about that is it really does drive both GSV and revenue because these fee changes actually drive more matching. And so we expect that the impact from these things will be positive, not just on take rate, but also on GSV in 2026.

Great. That's helpful color. And then I just wanted to ask a follow-up just specifically on AI efficiencies internally. You called out some stuff in the press release around customer support, but also just coding. Can you just talk about where we are as far as the efficiencies that you can drive further in cost reductions that you can implement through AI?

Sure. AI implementation is a huge priority for us and is certainly gaining momentum and having impact both internally and on our margin structure. For us, it's not about replacing people. We're really focused on helping our people be more effective and impactful. So we've been implementing AI workflows across the company in engineering and product development, we're seeing 35% of code shipped is touched by or generated by AI. Customer support is another area we're seeing impact. Our agents are actually able to have faster response times, handle higher volumes of tickets. And in finance and HR, that's another area where we're using AI for things like forecasting and analyzing our internal employee feedback. So we have done a lot here, but there's definitely more to do. And again, it does show up in our margin structure, but what we're most excited about is our team is more effective and more productive because of this.

And I'm showing no further questions in the Q&A queue at this time. Ladies and gentlemen, that does conclude our conference for today. Thank you all for your participation, and you may now disconnect.