Upwork Inc.

Good day and thank you for standing by. Welcome to the Upwork second quarter earnings conference call. At this time, all participants are in a listen-only mode. After the 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 your speaker today, Jacob McCown, Vice President to Deputy General Counsel. Please go ahead.

Thank you. Welcome to Upwork's discussion of its second quarter 2024 financial results. Joining me today are Hayden Brown, Upwork's President and Chief Executive Officer, and Erica Gesser, Upwork's Chief Financial Officer. Following managers' prepared remarks, they will be happy to take your questions. But first, I'll review the Safe Harbor Statement. During this call, we may make statements related to our business that are forward-looking statements under federal securities laws. Forward-looking statements include all statements other than statements of historical fact. These statements are not guarantees of future performance, but rather are subject to a variety of risks, uncertainties, and assumptions. Our actual results could differ materially from expectations reflected in any forward-looking statements. For a discussion of the material risks and other important factors that could affect our actual results, please refer to our SEC filings available on the SEC website and our Investor Relations website, as well as the risks and other important factors discussed in today's earnings press release. Additional information will also be set forth on a quarterly report on Form 10-Q for the three months ended June 30, 2024. Unless otherwise noted, reported figures are rounded in comparison to the second quarter of 2024 or the second quarter of 2023. Free cash flow is a non-GAAP figure, and all other financial measures are GAAP and less cited as non-GAAP. Now, I'll turn the call over to Hayden.

Welcome, everyone, to Upwork's second quarter 2024 earnings call. Upwork's strong and durable business continues to deliver compelling growth characteristics on both the top and bottom lines. Our second quarter revenue reached 193.1 million, marking a 15% year-over-year increase. Our continued commitment to enhancing profitability was demonstrated by our highest ever quarter of GAAP net income at 22.2 million, while adjusted EBITDA was 40.8 million, a 21% adjusted EBITDA margin, up from 8.5% in the second quarter of last year. We delivered this revenue growth and outperformed our profitability goals while operating in a dynamic macroeconomic environment that has become more challenging for businesses large and small. This challenging environment showed through with softer top of funnel activity than expected in the second quarter. A leading indicator of the softness that we track internally is clients seeking work, which is a measure of the number of clients engaging in an action that leads to a new contract. In Q1, this number accelerated 11% quarter over quarter, while in Q2, this number decelerated 6% sequentially, with particular impact in May and June, along with a mixed shift of active clients towards very small businesses. While we applaud the resiliency of smaller businesses outperforming other cohorts on our platform, small businesses' historical characteristics of lower spend per contract and fewer contracts per client lead us to have more caution about performance expectations for the remainder of the year. We believe it's prudent to assume that the changes in client activity due to macroeconomic conditions that we observed in Q2 will remain for the rest of 2024, and we have factored those changes into lowered 2024 full-year revenue guidance while reiterating our 2024 full-year adjusted EBITDA guidance. Upwork's profitable marketplace model and our continued disciplined execution provide us with a distinct competitive and and financial advantage, which we are continuing to leverage. Our advanced technology platform and global two-sided marketplace enable us to serve as the singular online destination to connect highly skilled freelance talent with clients in the full range of ways they want to work. Our numbers also evidence our continued success in winning share from offline, analog, and digital hiring and staffing sources as we outperform broader market trends. Upwork benefits from the ongoing, enduring secular shift towards a high-quality, cost-effective, flexible alternative to traditional full-time and contingent staffing approaches. We are in a position of continued strength, both on an absolute and relative basis, with growing profitability and free cash flow dynamics that reflect the fundamental advantages of our business model. Innovation for growth continues to be paramount for Upwork, positioning us for peak performance once the macro rebounds. We continue to invest in multiple revenue and GSV growth levers to maintain our position as an industry leader and translate that leadership position into top and bottom line growth, supported by continued healthy take rate expansion. These levers include, first, continuing to leverage Upwork's intrinsic ability to shapeshift to wherever the market demand for skills is, with the current focus on making Upwork the preeminent destination for AI talent and work. Second, improving customer productivity, engagement, and work outcomes in our products by infusing AI-powered features and user experiences built on UMA, Upwork's mindful AI. Third, our continued expansion into our enterprise town through the right products, partnerships, and integrations. Fourth, acquiring new clients cost effectively and at scale by launching new distribution channels through partnerships. And fifth, continuing to drive marketplace quality, efficiency, and adoption of value-added services via our ads and monetization efforts. I'll touch on progress for each of these GSV and revenue enhancing levers. Based on a long track record of serving clients with access to the talent that is always most relevant for the skills they need today, clients are coming to us for professionals skilled and knowledgeable and transforming their AI dreams into realities. From building and deploying GenAI chatbots, to training and tuning data and prompts for LLMs, to delivering marketing or back office projects that integrate the latest AI-enabled capabilities, businesses are realizing the need to supplement their internal capabilities and know-how by looking externally to find talent and solutions that deliver on the promise of AI-driven productivity and innovation. This is where Upwork has a tremendous structural advantage. Compared to studies that show only 15% of corporate employees have the AI-related skills and training they need, more than half of freelance professionals on Upwork are already familiar with and using AI tools to deliver high-quality outcomes. It's no surprise then that a recent report from our Upwork Research Institute found that nearly half, 48%, of C-suite executives have already brought in freelancers to get delayed AI-related projects back on track. Upwork is serving a range of businesses, including leading companies like Scale AI, with the expert talent they require for their AI initiatives. And we are evolving our offerings to meet this growing market demand. While GSV from AI-related work was up 67% year over year in Q2, what excites us most is the opportunity ahead for this business and our customers. The tangible benefits for talent on our platform who are leaning into these opportunities are compelling. As just one example, freelance professionals working on AI-related projects earned 47% more per hour than those working on non-AI-related projects in Q2. Our second ongoing growth lever is improving customer productivity and enhancing engagement through our own AI-powered product features. During the second quarter, we announced UMA, Upwork's mindful AI, to underpin key steps in the hiring and matching process and serve as an always-on, indispensable work companion. Our vision for UMA is to transform the way work is done on Upwork by more seamlessly augmenting the power of people and AI working together. Although this product is still in its early days and is launched only in select use cases, we've seen demand growing with a 23% quarter over quarter increase in users interacting with Ooma in Q2. Over time, we see Ooma changing the game for customers, both making our platform easier to use and improving the quality of work outcomes. We also continue to innovate our offerings on behalf of our enterprise clients. The large enterprise market is not a monolith, but is comprised of multiple large subsegments with clients that prioritize their needs differently. So we have been strategically addressing that diversity of business needs. This quarter, we successfully began testing a new bifurcation of our solutions for enterprise clients in which we ring-fenced existing functionality and pricing in one offering. and windowed down a more limited set of functionality and alternative pricing to target a subset of enterprise buyers. During testing, this approach yield higher total conversion for our sales team, with 46 combined enterprise deals closed in the quarter, 27 for the new offering, and 19 for our traditional enterprise standard and compliance products. This dual-track approach is giving us good insights on how to move forward with modifications to our pricing and packaging to re-accelerate enterprise growth, and we will have further updates in the coming quarters. During the second quarter, LabelBox, Builders Per Source, and GuidePoint were among the new Enterprise Solutions clients we added. Further advancing our existing Enterprise Solutions partnerships, This month we announced a new partnership with Beeline, one of the largest and most familiar VMS providers. We've also built on our MSP partnership with Kelly OCG by enabling our first joint clients, including NASDAQ, to incorporate and access the high quality talent pool we have on Upwork. These steps indicate our agility and further lay the foundation for unlocking this large market opportunity. Historically, Upwork's primary method of acquiring and converting clients has been on our website and mobile apps, attracting them through word of mouth, SEO, and paid acquisition channels. With our broad partnership strategy, we see a new avenue for cost-effectively attracting and converting new clients at scale by embedding Upwork experts and innovative experiences for businesses in the third-party ecosystems where those prospective clients encounter the need for expertise in real time. Upwork is already home to huge communities of experts in everything from GoDaddy, WordPress and website development, to Shopify, e-commerce and other e-commerce platforms, to social media management, project management, and a massive middle and long tail of knowledge work specialties. Our strategy is to light up these communities of experts inside third-party ecosystems, the places where they can enable partners and their customers to succeed. The starting point of engagement does not need to be on Upwork for significant value to be created. In the past quarter, we more than doubled our number of partner deals and May brought the highest monthly revenue derived from partnerships that we've seen to date. Today, partnerships combined contribution to our GSV is small, but it is growing. As we further accelerate this partner program over future quarters, we will reach orders of magnitude more businesses in prime position to leverage Upwork for their work needs. Finally, a critical lever for us as we continue to lean in to building more value-added sources for customers that improve the overall quality and efficiency of the marketplace while also expanding our take rate are our ads and monetization features, including subscriptions. Q2 was a quarter of record experimentation velocity for us in this area, and we saw notable success in updates to our pricing and packaging. In the marketplace, we added more connects and our AI-powered Upwork Chat Pro app to the Freelancer Plus subscription, while increasing our price point to align with the additional value we are delivering. These changes contribute to our highest take rate ever, 75% year-over-year revenue growth in ads and monetization products, and a 68% quarter-over-quarter increase in Upwork Chat Pro daily active users in Q2. Ads and monetization products continue to be one of our fastest-growing revenue streams. This is another area where the progress made is significant, and yet the runway ahead is even more promising. Upwork is demonstrating our position to capture long-term growth even while navigating a choppy environment in the near term, staying the course and executing unwaveringly on our profitability goals. We're excited to drive this business to tremendous scale, building on our formidable assets and momentum, continuing to invest in growth and creating meaningful leverage increases every year towards our 35% five-year adjusted EBITDA target. We are thrilled to be in a position to innovate work with and for our customers using our distinct differentiators of talent, technology, and know-how. With that, I will turn it over to Erica to review our financials.