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spk07: Good day and thank you for standing by. Welcome to the Upwork second quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to speaker today, Evan Barboza. Vice President of Investor Relations, please go ahead.
spk21: Thank you. Welcome to Upwork's discussion of its second quarter 2023 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'll 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 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 shareholder letter. Additional information will also be set forth in our quarterly report on Form 10-Q for the three months ended June 30th, 2023. In addition, Reference will be made to certain non-GAAP financial measures. Information regarding a reconciliation of non-GAAP to GAAP measures can be found in the shareholder letter that was issued this afternoon on our investor relations website at investors.upwork.com. As always, unless otherwise noted, reported figures are rounded and comparisons of the second quarter of 2023 are to the second quarter of 2022. All financial measures are GAAP unless cited as non-GAAP. Now it's time to call over to Hayden.
spk14: Thanks, Evan. Thank you all for joining us today. In the second quarter of 2023, we made strong progress on delivering innovative solutions for our customers and driving durable, profitable growth. We achieved better than expected results across our financial goals while making significant strides in generative AI and growth across our business. This resulted in second quarter 2023 revenue of $168.6 million, up 7% from a year ago, and adjusted EBITDA of $14.4 million. Erica will go into greater detail on our financial results later in the call. As we discussed in our first quarter earnings materials, we moved quickly to adapt to the macroeconomic environment by reducing costs, primarily in brand marketing and through reductions to our workforce. Throughout the quarter, we identified and implemented supplemental cost savings measures including an additional reduction of brand marketing investments, deprioritization of lower return on investment vendor expenses and consulting projects, and reassessment of hiring plans to focus on our most important strategic initiatives. We expect to continue to identify new areas of efficiency within our organization and at the same time continue to invest prudently in the focused areas of growth that we see across the business. One of the most important and diverse growth opportunities for Upwork is in the AI space, and we are delivering on this opportunity by serving clients with a singular destination for sourcing the full breadth of AI-focused talent they need, premiering new AI-powered features for discovering and matching with expert talent across every category of work, and ensuring talent on Upwork have access to the most modern generative AI tools to supercharge their productivity and quality of work. Collectively, these steps move our customers closer to unlocking the magic of Upwork to accomplish more than they ever thought possible. We continue to see clients come to Upwork for the professionals and solutions they need to execute on their most ambitious AI initiatives. Hiring talent spanning roles from prompt engineers and AI model trainers to researchers, data annotators, and code checkers. Outstanding growth in this category of work continued in the second quarter as AI was the fastest growing category in Upwork in the first half of 2023. In fact, generative AI job posts on our platform were up more than 10x while related searches were up more than 15x when comparing the second quarter of 2023 to the fourth quarter of 2022. Over the past few weeks, we unveiled the first of many generative AI innovations in our ecosystem, which we expect to further accelerate our momentum in this flourishing space. On July 11th, we launched a new centralized AI services hub that connects clients to highly skilled AI-focused talent, features partnerships with leading AI providers, and highlights resources and tools for businesses and talent looking to boost their work with AI. We further advanced this priority through a partnership with OpenAI announced earlier this week, establishing OpenAI experts on Upwork. This program provides OpenAI customers and other businesses access to highly skilled, pre-vetted, independent professionals deeply experienced with the OpenAI platform so they can bring the power of OpenAI technologies to their products, solutions, and projects just as Upwork has. OpenAI is leveraging talent from the Upwork marketplace to support its own innovation and growth and quickly saw the value in helping its customers connect to talent on Upwork, leading to the new partnership. In the second quarter, we implemented changes to our sales team and strategy, generating improved productivity and increased revenue while reducing staffing and expenses. We grew our enterprise customer base, adding notable new enterprise clients like MasterCard, RR Donnelly, and Las Vegas Sands during the quarter, and enterprise revenue grew 16% year over year. We have continued strong conviction in the long-term opportunity and our ability to execute on our enterprise strategy. and took a significant step in driving that strategy forward with the appointment of Zoe Diamatti as our new general manager of enterprise in the second quarter. Zoe brings a wealth of experience in building businesses and go-to-market strategies, and we are thrilled to gain her leadership of this important growth vector for Upwork. We are pleased with the rapid progress we have made against our priorities of driving durable, profitable growth innovating to make Upwork the preeminent destination for AI-related talent and work, and driving growth within our enterprise business during a time of change. Our confidence in the long-term growth opportunity for Upwork is unwavering. We are proud of the advancements we made in the second quarter and our stellar team members who executed them, and we are excited about the future. I'll now turn the call over to Erica to discuss our financial results.
spk19: Thanks, Hayden, and hello, everyone. It's great to be here for my second earnings call after about three months on the job. Today I will discuss our financial results for the second quarter of 2023, as well as our revenue and adjusted EBITDA guidance for the third quarter and updated guidance for the full year 2023, which we included in our shareholder letter issued today. GSV again exceeded $1 billion in the second quarter. Revenue grew 7% year-over-year to $168.6 million in the second quarter, with marketplace revenue of $156.6 million, representing a year-over-year increase of 9%. Managed services revenue was down 5% year-over-year to $12 million, while enterprise revenue, which is reported as a part of marketplace revenue, was up by 16% to $14.3 million. Total revenue growth was primarily driven by pricing changes related to the shift to our client marketplace offering in April 2022, as well as other platform monetization strategies associated with Connect and the implementation of a contract initiation fee in the quarter. We believe that many of these monetization strategies, like moving to a simplified single rate pricing structure for freelancers and removing rebating for freelancer bids on projects, have helped to simplify and improve our customers' experiences on our platform. Total take rate in the second quarter was 16.3%, up from 16.0% in the first quarter of 2023, and from 15.0% in the second quarter of 2022. Active clients grew 2% year over year in the second quarter to 822,000. Active client growth was driven by a year-over-year increase in our retained clients, partially offset by relatively flat new client acquisition. GSV per active client increased 2% year-over-year to $4,987. Non-GAAP gross profit was $128.2 million for the second quarter, resulting in non-GAAP gross margin of 76%, compared to 74% in the second quarter of 2022. Non-GAAP operating expenses for the second quarter were $115.7 million, or 69% of revenue compared to 77% in Q2 of 2022. Total operating expenses in Q2 were down 4% compared to a year ago. This reduction is the result of cost-saving measures we took at the management team in Q2 to reduce spend in lower ROI activities and reinvest in innovation and growth. Non-GAAP R&D expense in the quarter increased by 24%, while sales and marketing and G&A expense lines were both down significantly year-over-year. Transaction losses also had notable year-over-year and sequential improvements. Provision for transaction losses was down 62% compared to a year ago. This strong result is due to the stellar work of our fraud and loss teams in reducing both chargeback rates and the rates of fraudulent activity on all platforms. which also resulted in a reduction in fraud protection fees paid to our third-party vendor. Non-GAAP net income was $13.5 million in the second quarter compared to non-GAAP net loss of $4.7 million in the second quarter of 2022. Our non-GAAP net income per basic and diluted share was $0.10 in the second quarter as compared to non-GAAP net loss per basic and diluted share of $0.04 in the second quarter of 2022. Adjusted EBITDA was $14.4 million in the second quarter, compared to an adjusted EBITDA loss of $1.9 million in the second quarter of 2022. Our strong adjusted EBITDA overperformance is a direct result of aggressive management action to reduce costs across the business, particularly in sales and marketing and in G&A, to fund growth. Adjusted EBITDA margin was 9% in the second quarter of 2023 compared to adjusted EBITDA margin of negative 1% in the second quarter of 2022. Second quarter 2023 adjusted EBITDA includes approximately $2.5 million of non-recurring severance related costs. Turning now to guidance. We are guiding third quarter revenue to be between $165 million and $170 million, and we are raising our full-year revenue guidance to be between $665 million and $675 million, representing 8% year-over-year growth at the midpoint. We are raising our revenue guidance primarily due to the success of our simplified pricing structure and other platform monetization improvements. We expect third quarter adjusted EBITDA to be between $14 million and $17 million, which represents an adjusted EBITDA margin of 8.5 to 10%. We expect the cost savings actions we took earlier in the second quarter, along with additional cost saving measures taken throughout the quarter, to yield incremental benefits over the remainder of 2023. Because of these actions and our improved revenue outlook, We are raising our full year 2023 adjusted EBITDA guidance to be between $50 million and $55 million, which represents an adjusted EBITDA margin of between 7.5 and 8.1%. With this guidance, we are now expecting adjusted EBITDA in 2023 to be more than double that of any year since we went public. We also expect to generate positive free cash flow going forward. Before I turn it over for questions, I'd like to provide a few reflections on my first quarter at Upwork. I came into this business excited about the strength of Upwork's two-sided network, the power and potential of our enterprise strategy, and the extraordinary enablement power to our business of the AI movement. Having now been here for a quarter, my excitement continues to grow. Upwork is in a strong position to be able to invest in growth profitably, grow free cash flow, and to be at the forefront of one of the greatest technological developments and work enablement of our time. We have a fantastic management team and a wonderful, dedicated workforce that has proven our ability to execute on our plans quickly and effectively. Hayden, the leadership team, and I will continue to focus on innovation, on cost discipline, and on identifying the highest ROI investment to generate durable, profitable growth and shareholder value. Thank you, and we'll now turn the call over to your question.
spk07: To ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please sign by. We'll compile the Q&A roster.
spk15: One moment for our first question.
spk07: Our first question comes from Eric Sheridan from Goldman Sachs. Your line is open.
spk01: Thank you so much for taking the questions. Maybe first, obviously there's been a fairly volatile macro environment you've had to deal with in the last couple of quarters. Could you take a step back for us and help us better characterize what you're seeing in the broader macro environment and enterprise activity levels and how that's impacting the business today versus maybe three or six months ago? And with some of the reorganization and refocus within the company that you highlighted during the remarks. Can you also bring that back to talking about client acquisition activity and or elements of retained clients and spend per retained clients, and how we should think about some of the trajectory around those metrics through the remainder of the year? Thanks so much.
spk14: Thanks, Eric. In terms of the macro question, I'd say we did not see major changes in Q2 in how clients are navigating the environment this quarter versus the prior quarter. It was really a quarter with some mixed market signals. And I'd say for enterprises specifically, the part of the business you're asking about, which is obviously a smaller part of our business, but we saw corporations were still showing, you know, sales cycle elongation, some budgetary caution. And at the same time, our own execution really did continue to improve throughout the quarter. We made our changes on the sales team side in May, and we drove notable productivity improvements throughout the quarter, which we're really showing through in the increased outlook that we have for the remainder of the year, as well as the numbers we had for the quarter. So we saw 16% growth in enterprise revenue, the expansion of enterprise logos with the addition of 19 new accounts in the second quarter, really great names like MasterCard, RR Donnelly. Revenue per account manager or AM in our team was up 100% quarter over quarter. And land team productivity was up 13% quarter over quarter with only one month of the quarter really fully operating with our optimized new model. So I'd say even though the quarter itself didn't have different kind of macro environment, our execution was was a lot, you know, was continuing to improve. And I think that gives us a lot of confidence that we don't need to wait for a different macro environment to continue to drive really great performance in this part of the business. I'll hand it to Eric to talk more about some of the active client trends you were mentioning.
spk19: Yeah, sure. Thanks, Hayden. And hi, Eric. Just to follow up, actually, one on Hayden's last point, too, I would just add that our updated guidance doesn't contemplate any change to the macro environment, and we haven't really included that in the guidance. I think we You know, we feel we're sort of not, you know, our guidance is not tethered to macroeconomic changes and really dependent upon the execution and kind of improvements that we're seeing in the business. On the active client front, you know, if we look at, you know, retained clients are up 4% year over year, and I would say from a client acquisition point of view, Acquisition is down very, very slightly, sequentially, less than 1%. And if you recall three quarters ago, the Upwork business really transitioned to a more value-oriented acquisition approach, really ensuring that we adhere to a very, very strict LTV threshold from acquisition. And so that value versus volume approach is reflected in these acquisition numbers. Obviously, our active client number is a trailing 12-month metric, so You know, that activity shows up in these numbers, and we're also obviously still lapping really strong growth on the tech trailing 12 months comp. I just also note, in active clients, our enterprise client base continues to grow very steadily, both year over year and quarter over quarter.
spk20: Great. Thank you.
spk15: One moment for our next question.
spk07: And our next question will come from the line of Andrew Boone from JMP Securities. Your line is open.
spk04: Thank you so much for taking my questions. I wanted to go and ask about AI. It's really nice to see their product announcement this quarter in terms of the AI hub. What are you guys hearing from clients? What are they asking for? And then additionally, are you guys seeing any headwinds across any other categories?
spk13: Sure.
spk14: Since you asked about client demand, I'd say, you know, we are really seeing explosive growth in the area of AI itself. You know, generative AI job posts are up more than 1,000%. Related searches are up more than 1,500% this quarter versus Q4 of 2022. And so the commentary we're hearing from clients is, you know, as much as these tools are exciting, they really need help from talent to implement them, you know, into their business solutions. And that's where they're coming to us for that talent. they're also willing to pay a premium for that talent. You know, wages for generative AI-related jobs come in at 50% premium over other related jobs in the marketplace. So the kind of bigger picture for us on generative AI is really around robust demand from clients for the right talent to do this work and, more broadly, an eagerness to see the productivity gains from talent around this. So talent are adopting... AI tools in pretty much every category that we serve across 125 plus categories on the site. And this is driving increased productivity, better outcomes for clients, higher wages, as I mentioned, and virtually no negative impacts in the vast majority of categories that we serve. So this is a really exciting story for us.
spk04: That makes a lot of sense. And then I wanted to ask about just the second half EBITDA guidance. You guys had a significant beat here in 2Q, and it's certainly brought up in terms of the rest of the year, but maybe there could have been more. Can you just speak to whether there's conservatism there or what else is kind of being factored into the EBITDA guide for the back half? Thank you so much. Yeah, sure.
spk19: I'll take that one, Andrew. So, you know, if you kind of unpack our EBITDA guidance, it does contemplate kind of steady EBITDA margin improvement kind of quarter upon quarter through the rest of the year. Last quarter, we talked about the fact that we expected to exit the year approaching that 15% EBITDA margin. This guidance still honors that expectation and includes it. I'd say we've identified quite a few areas for cost savings, and we're going to continue to run, I would say, a thoughtful and multi-quarter approach to identifying cost savings. But we're also a top line growth business, right? And we want to make sure that we continue to invest in top line growth, as well as continue to steadily improve EBITDA margins. So we're going to balance both, and we're going to continue to look at organic opportunities for reinvestment in the business as we go, just considering how great the opportunity is ahead of us, as Hayden just highlighted in the AI front.
spk15: Thank you. One moment for our next question. And our next question comes from Matt Farrell from Piper Sandler.
spk07: Your line is open.
spk17: Thanks, guys, and congrats on the really strong results. With my first question, I wanted to jump into the enterprise business. It grew nicely in Q2, and you talked about exiting the quarter with some really strong execution. I think previously you had talked about a pushout in terms of the return of normalized dynamics. You know, is there any update on that? Have we reached it? How should we be thinking about trends there? And maybe a quick second one on enterprise. Is it the enterprise clients that are the early adopters of AI on the Upwork platform, or is it broadly across the client base?
spk14: Sure, Matt. Thanks. In terms of the normalized dynamics, I think you're referring to clients who are kind of moving through the different phases of adjusting to the macro and situation. that have kind of been unfolding the last few quarters. I'd say in terms of updates, as I mentioned previously, I'd say Q2 didn't look a lot different than Q1 in terms of where customers are in navigating the macro. It was a quarter of mixed signals. And so I wouldn't say there was a really different characterization, but what was different for us was our own execution against that backdrop. And so what our conclusion is is we're getting better at – meeting customers where they are, driving performance through the sales cycle, kind of regardless of where they are in any of those three phases of adjusting and where they are in this macro environment. I think that's really the good news for us. In terms of your second question around enterprise clients and AI, you know, we're seeing demand from customers across business sizes. You know, small businesses, medium, large, all of them are interested in leaning into and trying to find talent to help them in these different AI categories. and also outside of just AI specific categories, looking for talent who are being more productive because they're augmenting their normal workflows with AI tools in their work. So again, this is a conversation across the board and something that's happening regardless of client size. And we're just, again, helping clients figure this out as they go and supplying them with the talent they need with these different strategies.
spk19: I would just add one point on the enterprise revenue line. just from a kind of financial recognition point of view. In Q3, you'll see a little bit of dynamic between the managed services and enterprise revenue lines, because we did see in Q2 one of our customers move to a managed services contract. So in combination, those two lines will grow in aggregate, but there will be a little bit of movement between the lines, and this is just dependent upon what the client wants, the best product fit for them.
spk17: And maybe for my second question, you've shown some really nice upside on profitability, and you kind of reiterated that 15% for Q4. Is there any reason why that 15% adjusted EBITDA margin shouldn't be the new floor for profitability moving forward? And I guess, what would be something that would prompt you to take a material step back in terms of profitability from that 15% level? Thanks.
spk19: Yeah, sure. So one of the dynamics we highlighted last quarter just in terms of our kind of the quarterly dynamic of our margin percentage is Q4 does tend to be kind of a higher watermark for us from an EBITDA margin percentage point of view with Q1 being a little bit lower. So there could be some variability, you know, kind of sequentially when we come from Q4 into Q1 next year. But we are very, very focused on continually showing margin improvement along with top line growth. So I think you can also expect that dynamic for the fall year.
spk15: Thank you. One moment for our next question. Our next question will come from Rohit Kulkarni from Roth.
spk07: Your line is open.
spk03: Hey, thank you. A couple questions. First is just observations and impact from the pricing structure change. Maybe just talk about what you're seeing from the behavior of low GSV versus high GSV clients. Clearly, GSV is growing and above our expectations, so probably there is a positive kind of impact from there. But just talk about How are the clients reacting to that, and particularly the clients who may move from 5% to 10% in terms of retention of how their pricing could change?
spk14: So as a reminder, with the change that we announced and started to roll out through Q2, all future talent and most of our newer existing talent are seeing or will see a reduced fee, which is really positive in terms of it enables them to set more competitive rates when they've been on work, and that in turn unlocks more demand for their services and increases their chances of winning contracts. So we do see that lower talent fees do contribute to this virtuous cycle in our marketplace that encourages clients to bring more jobs to Upwork and results in more opportunities for talent. In terms of your specific question around behavior impacts around these changes for lower GSV or higher GSV spending clients, I'd say that all of the changes that we've rolled out so far have gone extremely smoothly, and we've seen both sides of the marketplace, including the cohorts that you're referring to, digesting the change and adopting it very much in line with our expectations. And net-net, this has been a benefit for both the marketplace, customers, and shareholders. So there's really nothing surprising or different in terms of how customers are responding to these changes so far. I mean, we're monitoring this extremely closely, but so far it's been very positive.
spk03: Okay, fantastic. And then just in terms of just profitability and free cash flow, that's very cool that you think that you'll be cash flow positive. Any specific new uses of cash that you think – may have in terms of investments or any other ways that you think you could deploy once you are cash flow positive and continue to generate surplus cash?
spk19: Yeah, sure. Thanks for the question, Rohit. So, look, I mean, look, I'm very focused. I'm a quarter in. I'm very, very focused on taking a disciplined approach to thinking through capital allocation. You know, the nice thing is at the same time right now, given where interest rates are, we're making – you know, pretty good returns on our cash balances. But we will be cash flow positive. We anticipate being cash flow positive on an ongoing basis. And so, you know, we're running a disciplined kind of process internally, myself, Hayden, and the rest of the management team in considering all of our options. We will, as I said, continue to invest in organic growth in a profitable way. And we want to drive top-line growth. while also showing strong EBITDA margins. So that's going to be part of our strategy. There are obviously inorganic growth opportunities available, but we're always going to balance the expected return there with other opportunities and our ability to return capital to shareholders or drive shareholder value. So we're going through a process right now. All of these things are in the consideration set, and we'll keep you updated. But shareholder returns are top of mind and very important to us.
spk03: Okay. Okay. Very nice call, you guys. Thanks, Hayden. Thanks, everybody.
spk15: One moment for our next question. And our next question comes from Ron Josie from Citi.
spk07: Your line is open.
spk06: Great. Thanks for taking the question, Hayden. I wanted to maybe take a step back and just say we're Now, what, a quarter or two post some of the changes internally between the risk and the change in sales. We hired Zoe. Just talk to us internally about how Upwork is positioned. We're clearly seeing better results here, but just curious on the internal structure of where things are. Have we recovered? And as we move forward here, sort of what to expect. Thank you.
spk14: Thanks, Ron. Yeah, we're one quarter in since these changes. Zoe's been here not that long, and yet I feel fantastic about how we're positioned. I think the things we did in Q1, end of Q1, was challenging in terms of it's always hard to make these decisions and execute them, certainly with the team. But they really have set us up for our commitment to durable, profitable growth. I think the team has taken them extremely well, executed really well through the quarter, and I think everyone here is just so excited about what we're building. They're so excited about what we're executing on in the enterprise space with Zoe's leadership, and also so excited about what we're doing, leaning into our opportunity around generative AI. I mean, this is something that's touching every facet of our business in a really positive way. I think, you know, the energy and the enthusiasm around both what we're doing and how we're doing it with our current structure and leadership, you know, couldn't be better. So we're excited. You know, some of these things will play out over different time horizons. Certainly, you know, not everything is overnight, but we do feel that we have, you know, some degree of control over our destiny here in terms of how we're driving performance.
spk05: That's great. Thank you, Aiden.
spk14: Thank you.
spk15: One moment for our next question. And our next question will come from the line of Brent Thill from Jefferies.
spk07: Your line is open.
spk02: Hi, thank you. This is John Dion on behalf of Brent Thill. Two questions. Obviously, AI is a big focus. I want to see if you can maybe provide some call on how to quantify the impact contribution. I don't know if there's a way to think about in terms of GSV contribution and how they compare to other categories. And then secondly, you know, the top line GSV looks like maybe bottoming, but wanted to see how you think about the path to return to double digit, especially once we get past some of these pricing changes and normalization. Thank you.
spk14: Sure. I'd say, John, in terms of quantifying the impact of just the contribution related to AI, certainly some of the things I shared earlier around the really strong growth we've seen in the categories related to generative AI specifically is off of a smaller base. So we're building from a smaller base there, but it is a really positive impact. And I think just to pause and think about that opportunity for us as a business, I think it's important to understand that the trends here are profound for us in the sense of we are at a structural advantage as this space continues to grow, both as generative AI and needs from clients continue to expand, specifically for the talent that is doing generative at work, and as every category that we service, more than 125 today and growing, are touched by the productivity benefits of these tools. And that's for two reasons. One is freelancers have a natural incentive to adopt the best tools and technologies in their field at a faster rate versus the captive employees that are inside companies because freelancers depend on their skills and expertise to put food on the table every single day of the week. And this means that Upwork talent is pushing super hard all the time to be out there on the forefront of these tools and technologies without us having to do anything. And companies are continually going to face this choice between going and getting their internal employees to upskill versus going to Upwork and finding talent that is already there, the best in breeze, using these tools and being the most productive. So I think what you're going to see is, you know, today the GSC contribution related to AI-specific, you know, work is somewhat small, but over time, you know, every category on our platform is going to touch, you know, AI in some way and be advantaged by the fact that companies are turning to us to get that talent that is using these tools and technologies because this is a talent that's the most hungry and working the hardest to be out there delivering those gains for clients. In terms of some of your other GSV questions, I'll turn it over to you.
spk19: Maybe I'll take the second part, which is really, I think, asking about the outlook for GSV. Obviously, we don't guide on GSV. It has a few timing elements on when it's recognized, but maybe I can just give you a little bit of a flavor. We're obviously also guiding for 2024 right now, so our guidance is through the rest of the year. So I'd say, look, first and foremost, the GSB line, as you all know very well, all year long this year is lapping extraordinarily strong growth over the past two years. On this line in particular, between Q2 2020 and Q2 2022, GSB nearly doubled. So obviously we're still kind of lapping that growth. So given this, we're expecting kind of pretty much steady as she goes on a year-over-year basis throughout the rest of the year. But I would also note that our guidance doesn't contemplate any changes in the current trajectory in GSV, and like I said earlier, or changes to the macro environment overall.
spk07: Thank you. Thank you. And once again, as a reminder, that's star 1-1 for questions, star 1-1. One moment for our next question. Our next question is from . Chris from Needham, your line is open.
spk09: Hi, thank you for taking our questions. I just wanted to ask about the OpenAI partnership. Could you just give us a little more detail there? Maybe who approached whom? Is there any exclusivity there? Just any more details. Thank you.
spk14: Sure. This is such an exciting partnership because it's really the first of its kind in our category and something very unique that came out of the work that OpenAI was already doing using Upwork as a provider of talent for their own business and their own growth. So they've been using Upwork talent. We've been working together with them to provide them with the talent that they've needed to build their own business. And out of those conversations came this idea of us providing the talent that their own customers were, frankly, desperate for and couldn't find anywhere else to actually execute on implementations of open AI technologies and really putting those to work in the ecosystem in ways that were really important for their end customers. So that was something that we were very excited to work together to put together with them. And as part of it, it's not just about providing the talent. It's also about the talent being very carefully vetted and proven in the space that open AI serves and that their customers are looking for. And on an ongoing basis, Upwork is able to provide dynamic signals to OpenAI's customers and other businesses who are coming for that talent because of our value propositions around things like reputation, work history, all of these things that have a living value that are not a degree that someone got even six months ago that might be stale because this technology is moving so quickly. And so I think that's some of the things that, as we were working with OpenAI, they found really appealing was what we were able to bring to the table in terms of high-quality, vetted talent with very current skills and expertise both today and moving forward that could really serve their customers in a unique way. So, you know, this is an important partnership for sure, and it's also the first of many that we expect to do in this space. We're talking to a number of other providers who have similar needs to bring our platform of talent to their end customers to really deliver on the solutions that they're trying to enable for their ecosystem. So, you know, this is definitely a big opportunity for us and one we're very excited to have been able to do with our partner.
spk08: That's great. Thank you.
spk13: Thank you.
spk07: Thank you. Now I would like to turn the conference back to Evan for any closing remarks. Thanks.
spk21: On behalf of the entire Upwork team, thank you for joining us today, and thank you for your interest in Upwork. If you need any clarifications or have any follow-up questions, please do not hesitate to reach out to me at investor at Upwork.com. This concludes our call.
spk07: This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day. Music. Thank you. Thank you.
spk12: Thank you.
spk07: Good day and thank you for standing by. Welcome to the Upwork second quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to speaker today, Evan Barboza. Vice President of Investor Relations, please go ahead.
spk21: Thank you. Welcome to Upwork's discussion of its second quarter 2023 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'll 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 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 shareholder letter. Additional information will also be set forth in our quarterly report on Form 10-Q for the three months ended June 30th, 2023. In addition, Reference will be made to certain non-GAAP financial measures. Information regarding a reconciliation of non-GAAP to GAAP measures can be found in the shareholder letter that was issued this afternoon on our investor relations website at investors.upwork.com. As always, unless otherwise noted, reported figures are rounded and comparisons of the second quarter of 2023 are to the second quarter of 2022. All financial measures are GAAP unless cited as non-GAAP. Now it's time to call over to Hayden.
spk14: Thanks, Evan. Thank you all for joining us today. In the second quarter of 2023, we made strong progress on delivering innovative solutions for our customers and driving durable, profitable growth. We achieved better than expected results across our financial goals while making significant strides in generative AI and growth across our business. This resulted in second quarter 2023 revenue of $168.6 million, up 7% from a year ago, and adjusted EBITDA of $14.4 million. Erica will go into greater detail on our financial results later in the call. As we discussed in our first quarter earnings materials, we moved quickly to adapt to the macroeconomic environment by reducing costs, primarily in brand marketing and through reductions to our workforce. Throughout the quarter, we identified and implemented supplemental cost savings measures including an additional reduction of brand marketing investments, deprioritization of lower return on investment vendor expenses and consulting projects, and reassessment of hiring plans to focus on our most important strategic initiatives. We expect to continue to identify new areas of efficiency within our organization and at the same time continue to invest prudently in the focused areas of growth that we see across the business. One of the most important and diverse growth opportunities for Upwork is in the AI space, and we are delivering on this opportunity by serving clients with a singular destination for sourcing the full breadth of AI-focused talent they need, premiering new AI-powered features for discovering and matching with expert talent across every category of work, and ensuring talent on Upwork have access to the most modern generative AI tools to supercharge their productivity and quality of work. Collectively, these steps move our customers closer to unlocking the magic of Upwork to accomplish more than they ever thought possible. We continue to see clients come to Upwork for the professionals and solutions they need to execute on their most ambitious AI initiatives. Hiring talent spanning roles from prompt engineers and AI model trainers to researchers data annotators, and code checkers. Outstanding growth in this category of work continued in the second quarter as AI was the fastest growing category in Upwork in the first half of 2023. In fact, generative AI job posts on our platform were up more than 10x while related searches were up more than 15x when comparing the second quarter of 2023 to the fourth quarter of 2022. Over the past few weeks, we unveiled the first of many generative AI innovations in our ecosystem, which we expect to further accelerate our momentum in this flourishing space. On July 11th, we launched a new centralized AI services hub that connects clients to highly skilled AI-focused talent, features partnerships with leading AI providers, and highlights resources and tools for businesses and talent looking to boost their work with AI. We further advanced this priority through a partnership with OpenAI announced earlier this week, establishing OpenAI experts on Upwork. This program provides OpenAI customers and other businesses access to highly skilled, pre-vetted, independent professionals deeply experienced with the OpenAI platform so they can bring the power of OpenAI technologies to their products, solutions, and projects just as Upwork has. OpenAI is leveraging talent from the Upwork marketplace to support its own innovation and growth and quickly saw the value in helping its customers connect to talent on Upwork, leading to the new partnership. In the second quarter, we implemented changes to our sales team and strategy, generating improved productivity and increased revenue while reducing staffing and expenses. We grew our enterprise customer base, adding notable new enterprise clients like MasterCard, RR Donnelly, and Las Vegas Sands during the quarter, and enterprise revenue grew 16% year over year. We have continued strong conviction in the long-term opportunity and our ability to execute on our enterprise strategy. and took a significant step in driving that strategy forward with the appointment of Zoe Diamatti as our new general manager of enterprise in the second quarter. Zoe brings a wealth of experience in building businesses and go-to-market strategies, and we are thrilled to gain her leadership of this important growth vector for Upwork. We are pleased with the rapid progress we have made against our priorities of driving durable, profitable growth innovating to make Upwork the preeminent destination for AI-related talent and work, and driving growth within our enterprise business during a time of change. Our confidence in the long-term growth opportunity for Upwork is unwavering. We are proud of the advancements we made in the second quarter and our stellar team members who executed them, and we're excited about the future. I'll now turn the call over to Erica to discuss our financial results.
spk19: Thanks, Shaden, and hello, everyone. It's great to be here for my second earnings call after about three months on the job. Today, I will discuss our financial results for the second quarter of 2023, as well as our revenue and adjusted EBITDA guidance for the third quarter and updated guidance for the full year 2023, which we included in our shareholder letter issued today. GSV again exceeded $1 billion in the second quarter. Revenue grew 7% year-over-year to $168.6 million in the second quarter, with marketplace revenue of $156.6 million, representing a year-over-year increase of 9%. Managed services revenue was down 5% year-over-year to $12 million, while enterprise revenue, which is reported as a part of marketplace revenue, was up by 16% to $14.3 million. Total revenue growth was primarily driven by pricing changes related to the shift to our client marketplace offering in April 2022, as well as other platform monetization strategies associated with Connect and the implementation of a contract initiation fee in the quarter. We believe that many of these monetization strategies, like moving to a simplified single rate pricing structure for freelancers and removing rebating for freelancer bids on projects, have helped to simplify and improve our customers' experiences on our platform. Total take rate in the second quarter was 16.3%, up from 16.0% in the first quarter of 2023 and from 15.0% in the second quarter of 2022. Active clients grew 2% year over year in the second quarter to 822,000. Active client growth was driven by a year over year increase in our retained clients partially offset by relatively flat new client acquisition. GSV per active client increased 2% year-over-year to $4,987. Non-GAAP gross profit was $128.2 million for the second quarter, resulting in non-GAAP gross margin of 76%, compared to 74% in the second quarter of 2022. Non-GAAP operating expenses for the second quarter were $115.7 million, or 69% of revenue compared to 77% in Q2 of 2022. Total operating expenses in Q2 were down 4% compared to a year ago. This reduction is the result of cost-saving measures we took at the management team in Q2 to reduce spend in lower ROI activities and reinvest in innovation and growth. Non-GAAP R&D expense in the quarter increased by 24%, while sales and marketing and G&A expense lines were both down significantly year-over-year. Transaction losses also had notable year-over-year and sequential improvements. Provision for transaction losses was down 62% compared to a year ago. This strong result is due to the stellar work of our fraud and loss teams in reducing both chargeback rates and the rates of fraudulent activity on all platforms. which also resulted in a reduction in fraud protection fees paid to our third-party vendor. Non-GAAP net income was $13.5 million in the second quarter compared to non-GAAP net loss of $4.7 million in the second quarter of 2022. Our non-GAAP net income per basic and diluted share was 10 cents in the second quarter as compared to non-GAAP net loss per basic and diluted share of 4 cents in the second quarter of 2022. Adjusted EBITDA was $14.4 million in the second quarter, compared to an adjusted EBITDA loss of $1.9 million in the second quarter of 2022. Our strong adjusted EBITDA overperformance is a direct result of aggressive management action to reduce costs across the business, particularly in sales and marketing and in G&A, to fund growth. Adjusted EBITDA margin was 9% in the second quarter of 2023 compared to adjusted EBITDA margin of negative 1% in the second quarter of 2022. Second quarter 2023 adjusted EBITDA includes approximately $2.5 million of non-recurring severance related costs. Turning now to guidance. We are guiding third quarter revenue to be between $165 million and $170 million, and we are raising our full-year revenue guidance to be between $665 million and $675 million, representing 8% year-over-year growth at the midpoint. We are raising our revenue guidance primarily due to the success of our simplified pricing structure and other platform monetization improvements. We expect third quarter adjusted EBITDA to be between $14 million and $17 million, which represents an adjusted EBITDA margin of 8.5 to 10%. We expect the cost savings actions we took earlier in the second quarter, along with additional cost saving measures taken throughout the quarter, to yield incremental benefits over the remainder of 2023. Because of these actions and our improved revenue outlook, We are raising our full year 2023 adjusted EBITDA guidance to be between $50 million and $55 million, which represents an adjusted EBITDA margin of between 7.5 and 8.1%. With this guidance, we are now expecting adjusted EBITDA in 2023 to be more than double that of any year since we went public. We also expect to generate positive free cash flow going forward. Before I turn it over for questions, I'd like to provide a few reflections on my first quarter at Upwork. I came into this business excited about the strength of Upwork's two-sided network, the power and potential of our enterprise strategy, and the extraordinary enablement power to our business of the AI movement. Having now been here for a quarter, my excitement continues to grow. Upwork is in a strong position to be able to invest in growth profitably, grow free cash flow, and to be at the forefront of one of the greatest technological developments in work enablement of our time. We have a fantastic management team and a wonderful, dedicated workforce that has proven our ability to execute on our plans quickly and effectively. Hayden, the leadership team, and I will continue to focus on innovation, on cost discipline, and on identifying the highest ROI investment to generate durable, profitable growth and shareholder value. Thank you, and we'll now turn the call over to your questions.
spk07: To ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please sign by. We'll compile the Q&A roster.
spk15: One moment for our first question.
spk07: Our first question will come from Eric Sheridan from Goldman Sachs. Your line is open.
spk01: Thank you so much for taking the questions. Maybe first, obviously there's been a fairly volatile macro environment you've had to deal with in the last couple of quarters. Could you take a step back for us and help us better characterize what you're seeing in the broader macro environment and enterprise activity levels and how that's impacting the business today versus maybe three or six months ago? And with some of the reorganization and refocus within the company that you highlighted during the remarks. Can you also bring that back to talking about client acquisition activity and or elements of retained clients and spend per retained clients, and how we should think about some of the trajectory around those metrics through the remainder of the year? Thanks so much.
spk14: Thanks, Eric. In terms of the macro question, I'd say we did not see major changes in Q2 in how clients are navigating the environment this quarter versus the prior quarter. It was really a quarter with some mixed market signals. And I'd say for enterprises specifically, the part of the business you're asking about, which is obviously a smaller part of our business, but we saw corporations were still showing sales cycle elongation, some budgetary caution. And at the same time, our own execution really did continue to improve throughout the quarter. We made our changes on the sales team side in May, and we drove notable productivity improvements throughout the quarter, which we're really showing through in the increased outlook that we have for the remainder of the year, as well as the numbers we had for the quarter. So we saw 16% growth in enterprise revenue, the expansion of enterprise logos with the addition of 19 new accounts in the second quarter, including really great names like MasterCard, RR Donnelly. Revenue per account manager or AM in our team was up 100% quarter over quarter. And land team productivity was up 13% quarter over quarter with only one month of the quarter really fully operating with our optimized new model. So I'd say even though the quarter itself didn't have different kind of macro environment, our execution was was a lot, you know, was continuing to improve. And I think that gives us a lot of confidence that we don't need to wait for a different macro environment to continue to drive really great performance in this part of the business. I'll hand it to Eric to talk more about some of the active client trends you were mentioning.
spk19: Yeah, sure. Thanks, Hayden. And hi, Eric. Just to follow up, actually, one on Hayden's last point, too, I would just add that our updated guidance doesn't contemplate any change to the macro environment. And we haven't really included that in the guidance. I think we You know, we feel we're sort of not, you know, our guidance is not tethered to macroeconomic changes and really dependent upon the execution and kind of improvements that we're seeing in the business. On the active client front, you know, if we look at, you know, retained clients are up 4% year over year, and I would say from a client acquisition point of view, Acquisition is down very, very slightly, sequentially, less than 1%. And if you recall three quarters ago, the Upwork business really transitioned to a more value-oriented acquisition approach, really ensuring that we adhere to a very, very strict LTV threshold from acquisition. And so that value versus volume approach is reflected in these acquisition numbers. Obviously, our active client number is a trailing 12-month metric, so You know, that activity shows up in these numbers, and we're also obviously still lapping really strong growth on the tip-trailing 12-month comp. I just also note, in active clients, our enterprise client base continues to grow very steadily, both year-over-year and quarter-over-quarter.
spk20: Great. Thank you.
spk15: One moment for our next question. And our next question will come from the line of Andrew Boone from JMP Securities.
spk07: Your line is open.
spk04: Thank you so much for taking my questions. I wanted to go and ask about AI. It's really nice to see their product announcement this quarter in terms of the AI hub. What are you guys hearing from clients? What are they asking for? And then additionally, are you guys seeing any headwinds across any other categories?
spk13: Sure.
spk14: Since you asked about client demand, I'd say, you know, we are really seeing explosive growth in the area of AI itself. You know, generative AI job posts are up more than 1,000%. Related searches are up more than 1,500% this quarter versus Q4 of 2022. And so the commentary we're hearing from clients is, you know, as much as these tools are exciting, they really need help from talent to implement them, you know, into their business solutions. And that's where they're coming to us for that talent. They're also willing to pay a premium for that talent. You know, wages for generative AI-related jobs come in at 50% premium over other related jobs in the marketplace. So the kind of bigger picture for us on generative AI is really around robust demand from clients for the right talent to do this work, and more broadly, an eagerness to see the productivity gains from talent around this. So talent are adopting talent. AI tools in pretty much every category that we serve across 125 plus categories on the site. And this is driving increased productivity, better outcomes for clients, higher wages, as I mentioned, and virtually no negative impacts in the vast majority of categories that we serve. So this is a really exciting story for us.
spk04: That makes a lot of sense. And then I wanted to ask about just the second half EBITDA guidance. You guys had a significant beat here in 2Q, and it's certainly brought up in terms of the rest of the year, but maybe there could have been more. Can you just speak to whether there's conservatism there or what else is kind of being factored into the EBITDA guide for the back half? Thank you so much. Yeah, sure.
spk19: I'll take that one, Andrew. So, you know, if you kind of unpack our EBITDA guidance, it does contemplate kind of steady EBITDA margin improvement kind of quarter upon quarter through the rest of the year. Last quarter, we talked about the fact that we expected to kind of exit the year approaching that 15% EBITDA margin. This guidance still honors that expectation and includes it. I'd say we've identified quite a few areas for cost savings, and we're going to continue to run, I would say, kind of a thoughtful and multi-quarter approach to identifying cost savings. But we're also a top-line growth business, right? And we want to make sure that we continue to invest in top-line growth, as well as continue to steadily improve EBITDA margins. So we're going to balance both, and we're going to continue to look at organic opportunities for reinvestment in the business as we go, just considering how great the opportunity is ahead of us, as Hayden just highlighted in the AI front.
spk15: Thank you. One moment for our next question. And our next question comes from Matt Farrell from Piper Sandler.
spk07: Your line is open.
spk17: Thanks, guys, and congrats on the really strong results. With my first question, I wanted to jump into the enterprise business. It grew nicely in Q2, and you talked about exiting the quarter with some really strong execution. I think previously you had talked about a pushout in terms of the return of normalized dynamics. You know, is there any update on that? Have we reached it? How should we be thinking about trends there? And maybe a quick second one on enterprise. Is it the enterprise clients that are the early adopters of AI on the Upwork platform, or is it broadly across the client base?
spk14: Sure, Matt. Thanks. In terms of the normalized dynamics, I think you're referring to clients who are kind of moving through the different phases of adjusting to the macro and situation. that have kind of been unfolding the last few quarters. I'd say in terms of updates, as I mentioned previously, I'd say Q2 didn't look a lot different than Q1 in terms of where customers are in navigating the macro. It was a quarter of mixed signals. And so I wouldn't say there was a really different characterization, but what was different for us was our own execution against that backdrop. And so what our conclusion is is we're getting better at – meeting customers where they are, driving performance through the sales cycle, kind of regardless of where they are in any of those three phases of adjusting and where they are in this macro environment. I think that's really the good news for us. In terms of your second question around enterprise clients and AI, you know, we're seeing demand from customers across business sizes. You know, small businesses, medium, large, all of them are interested in leaning into and trying to find talent to help them in these different AI categories. and also outside of just AI specific categories, looking for talent who are being more productive because they're augmenting their normal workflows with AI tools in their work. So again, this is a conversation across the board and something that's happening regardless of client size. And we're just, again, helping clients figure this out as they go and supplying them with the talent they need with these different strategies.
spk19: I would just add one point on the enterprise revenue line. just from a kind of financial recognition point of view. In Q3, you'll see a little bit of dynamic between the managed services and enterprise revenue lines. Because we did see in Q2, one of our customers moved to a managed services contract. So in combination, those two lines will grow in aggregate, but there'll be a little bit of movement between the lines. And this is just dependent upon what the client wants, the best product fit for them.
spk17: And maybe for my second question, you've shown some really nice upside on profitability, and you kind of reiterated that 15% for Q4. Is there any reason why that 15% adjusted EBITDA margin shouldn't be the new floor for profitability moving forward? And I guess, what would be something that would prompt you to take a material step back in terms of profitability from that 15% level? Thanks.
spk19: Yeah, sure. So one of the dynamics we highlighted last quarter, just in terms of our kind of the quarterly dynamic of our margin percentage, is Q4 does tend to be kind of a higher watermark for us from an EBITDA margin percentage point of view, with Q1 being a little bit lower. So there could be some variability, you know, kind of sequentially when we come from Q4 into Q1 next year. But we are very, very focused on continually showing margin improvement along with top line growth. So I think you can also expect that dynamic for the fall year.
spk15: Thank you. One moment for our next question. Our next question will come from Rohit Kulkarni from Roth.
spk07: Your line is open.
spk03: Hey, thank you. A couple questions. First is just observations and impact from the pricing structure change. Maybe just talk about what you're seeing from the behavior of low GSV versus high GSV clients. Clearly, GSV is growing and above our expectations, so probably there is a positive kind of impact from there. But just talk about How are the clients reacting to that, and particularly the clients who may move from 5% to 10% in terms of retention of how their pricing could change?
spk14: So as a reminder, with the change that we announced and started to roll out through Q2, all future talent and most of our newer existing talent are seeing or will see a reduced fee, which is really positive in terms of it enables them to set more competitive rates when they've been on work, and that in turn unlocks more demand for their services and increases their chances of winning contracts. So we do see that lower talent fees do contribute to this virtuous cycle in our marketplace that encourages clients to bring more jobs to Upwork and results in more opportunities for talent. In terms of your specific question around behavior impacts around these changes for lower GSV or higher GSV spending clients, I'd say that all of the changes that we've rolled out so far have gone extremely smoothly, and we've seen both sides of the marketplace, including the cohorts that you're referring to, digesting the change and adopting it very much in line with our expectations. And net-net, this has been a benefit for both the marketplace, customers, and shareholders. So there's really nothing surprising or different in terms of how customers are responding to these changes so far. I mean, we're monitoring this extremely closely, but so far it's been very positive.
spk03: Okay, fantastic. And then just in terms of just profitability and free cash flow, that's very cool that you think that you'll be cash flow positive. Any specific new uses of cash that you think – may have in terms of investments or any other ways that you think you could deploy once you are cash flow positive and continue to generate surplus cash?
spk19: Yeah, sure. Thanks for the question, Rohit. So, look, I mean, look, I'm very focused. I'm a quarter in. I'm very, very focused on taking a disciplined approach to thinking through capital allocation. You know, the nice thing is at the same time right now, given where interest rates are, we're making – you know, pretty good returns on our cash balances. But we will be cash flow positive. We anticipate being cash flow positive on an ongoing basis. And so, you know, we're running a disciplined kind of process internally, myself, Hayden, and the rest of the management team in considering all of our options. We will, as I said, continue to invest in organic growth in a profitable way. And we want to drive top-line growth. while also showing strong EBITDA margins. So that's going to be part of our strategy. There are obviously inorganic growth opportunities available, but we're always going to balance the expected return there with other opportunities and our ability to return capital to shareholders or drive shareholder value. So we're going through a process right now. All of these things are in the consideration set, and we'll keep you updated. But shareholder returns are top of mind and very important to us.
spk03: Okay. Okay. Very nice call, you guys. Thanks, Hayden. Thanks very much.
spk15: One moment for our next question. And our next question is from Ron Josie from Citi.
spk07: Your line is open.
spk06: Great. Thanks for taking the question, Hayden. I wanted to maybe take a step back and just say we're Now, what, a quarter or two post some of the changes internally between the risk and the change in sales. We hired Zoe. Just talk to us internally about how Upwork is positioned. We're clearly seeing better results here, but just curious on the internal structure of where things are. Have we recovered? And as we move forward here, sort of what to expect. Thank you.
spk14: Thanks, Ron. Yeah, we're one quarter in since these changes. Zoe's been here not that long, and yet I feel fantastic about how we're positioned. I think the things we did in Q1, end of Q1, was challenging in terms of it's always hard to make these decisions and execute them, certainly with the team. But they really have set us up for our commitment to durable, profitable growth. I think the team has taken them extremely well, executed really well through the quarter. And I think everyone here is just so excited about what we're building. They're so excited about what we're executing on in the enterprise space with Zoe's leadership and also so excited about what we're doing, leaning into our opportunity around generative AI. I mean, this is something that's touching every facet of our business in a really positive positive way. So I think, you know, the energy and the enthusiasm around both what we're doing and how we're doing it with our current structure and leadership, you know, couldn't be better. So we're excited. And, you know, some of these things will play out over different time horizons. Certainly, you know, not everything is overnight, but we do feel that we have, you know, some degree of control over our destiny here in terms of how we're driving performance.
spk05: That's great. Thank you, Aiden.
spk14: Thank you.
spk15: One moment. for our next question. And our next question will come from the line of Brent Thill from Jefferies.
spk07: Your line is open.
spk02: Hi, thank you. This is John Dionne on behalf of Brent Thill. Two questions. Obviously, AI is a big focus. I want to see if you can maybe provide some call on how to quantify the impact of contribution. I don't know if there's a way to think about in terms of GSV contribution and how they compare to other categories. And then secondly, you know, the top line GSV looks like maybe bottoming, but wanted to see how you think about the path to return to double digit, especially once we, you know, get past some of these pricing changes and normalization. Thank you.
spk14: Sure. I'd say, John, in terms of quantifying the impact of GSV contribution related to AI, Certainly, some of the things I shared earlier around the really strong growth we've seen in the categories related to generative AI specifically is off of a smaller base. So we're building from a smaller base there, but it is a really positive impact. And I think just to pause and think about that opportunity for us as a business, I think it's important to understand that the trends here are profound for us in the sense of you know, we are at a structural advantage as this space continues to grow, both as generative AI needs from clients continue to expand, specifically for the talent that is doing generative AI work, and as every category that we service, more than 125 today and growing, are touched by the productivity benefits of these tools. And that's for two reasons. One is freelancers have a natural incentive to adopt the best tools and technologies in their field at a faster rate versus the captive employees that are inside companies because freelancers depend on their skills and expertise to put food on the table every single day of the week. And this means that Upwork talent is pushing super hard all the time to be out there on the forefront of these tools and technologies without us having to do anything. And companies are continually going to face this choice between going and, you know, getting their internal employees to upskill versus going to Upwork and finding talent that is already there, the best in breeze, you know, using these tools and being the most productive. So I think what you're going to see is, you know, today the GSC contribution related to AI-specific, you know, work is somewhat small, but over time, you know, every category on our platform is going to touch, you know, AI in some way and be advantaged by the fact that companies are turning to us to get that talent that is using these tools and technologies because this is a talent that's the most hungry and working the hardest to be out there delivering those gains for clients. In terms of some of your other GSV questions, I'll turn it over to you.
spk19: Maybe I'll take the second part, which is really, I think, asking about the outlook for GSV. Obviously, we don't guide on GSV. It has a few timing elements on when it's recognized, but maybe I can just give you a little bit of a flavor. We're obviously also guiding for 2024 right now, so our guidance is through the rest of the year. You know, so I'd say, look, first and foremost, the GSB line, as you all know very well, all year long this year is lapping extraordinarily strong growth over the past two years. On this line in particular, between Q2 2020 and Q2 2022, GSB nearly doubled. So obviously we're still kind of lapping that growth. So, you know, given this, we're expecting kind of pretty much steady as she goes on a year-over-year basis throughout the rest of the year. But I would also note that our guidance doesn't contemplate any changes in the current trajectory in GSV, and like I said earlier, or changes to the macro environment overall.
spk07: Thank you. Thank you. And once again, as a reminder, that's star 1-1 for questions, star 1-1. One moment for our next question. Our next question comes from Stefano. Chris from Needham, your line is open.
spk09: Hi, thank you for taking our questions. I just wanted to ask about the OpenAI partnership. Could you just give us a little more detail there? Maybe who approached whom? Is there any exclusivity there? Just any more details. Thank you.
spk14: Sure. This is such an exciting partnership because it's really the first of its kind in our category and something very unique that came out of the work that OpenAI was already doing using Upwork as a provider of talent for their own business and their own growth. So they've been using Upwork talent. We've been working together with them to provide them with the talent that they've needed to build their own business. And out of those conversations came this idea of us providing the talent that their own customers were, frankly, desperate for and couldn't find anywhere else to actually execute on implementations of OpenAI technologies and really putting those to work in the ecosystem in ways that were really important for their end customers. So that was something that we were very excited to work together to put together with them. And as part of it, it's not just about providing the talent. It's also about the talent being very carefully vetted and proven in the space that OpenAI serves and that their customers are looking for And on an ongoing basis, Upwork is able to provide dynamic signals to OpenAI's customers and other businesses who are coming for that talent because of our value propositions around things like reputation, work history, all of these things that have a living value that are not a degree that someone got even six months ago that might be stale because this technology is moving so quickly. And so I think that's some of the things that as we were working with OpenAI, they found really appealing was what we were able to bring to the table in terms of high-quality, vetted talent with very current skills and expertise both today and moving forward that could really serve their customers in a unique way. So, you know, this is an important partnership for sure, and it's also the first of many that we expect to do in the space. We're talking to a number of other providers who have similar needs to bring our platform of talent to their end customers to really deliver on the solutions that they're trying to enable for their ecosystem. So, you know, this is definitely a big opportunity for us and one We're very excited to have been able to do with our partner.
spk08: That's great. Thank you.
spk13: Thank you.
spk07: Thank you. Now I would like to turn the conference back to Evan for any closing remarks. Thanks.
spk21: On behalf of the entire Upwork team, thank you for joining us today, and thank you for your interest in Upwork. If you need any clarifications or have any follow-up questions, please do not hesitate to reach out to me at investor at Upwork.com. This concludes our call.
spk07: This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.
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