Q3 2024 Upwork Inc Earnings Call

and the other one.

Speaker Change: Good day and thank you for standing by welcome to the Upwork 3rd Quarter 2024 earnings conference call at this time, all participants are an elicinoling mode.

Speaker Change: 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 one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one again.

Speaker Change: Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today. Samuel Mehan, Vice President of Invest Relations, please go ahead.

Samuel Mehan: Thank you. Welcome to Upwork's discussion of its third quarter 2024 financial results. Joining me today are Hayden Brown, Upwork's President and Chief Executive Officer, and Erica Gessert, Upwork's Chief Financial Officer.

Samuel Mehan: 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 security laws.

Samuel Mehan: For 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 and certainties and assumptions.

Samuel Mehan: Our actual results could differ materially from expectations reflected in any forward-looking statements.

Samuel Mehan: 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.

Samuel Mehan: Additional information will be set forth in our quarterly report on Form 10-Q for the three months ended September 30th, 2024.

Samuel Mehan: In addition, reference will be made to certain non-GAAP financial measures.

Samuel Mehan: 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.

Samuel Mehan: Unless otherwise noted, reported figures are rounded and comparisons of the third quarter of 2024 are to the third quarter of 2023.

Samuel Mehan: 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.

Hayden Brown: Welcome, everyone, to Upwork's third quarter 2024 earnings call.

Hayden Brown: Upwork continues to deliver durable, profitable growth as we execute our long-term strategy to drive revenue and margin expansion, even amid a challenging and dynamic macro environment.

Samuel Mehan: Third quarter revenue grew 10% year-over-year to $193.8 million as we saw a slight top of funnel improvements, momentum in managed services, an all-time high intake rate, and continued growth from our ads and monetization products.

Samuel Mehan: Our third quarter net income of $27.8 million and adjusted EBITDA of $43.2 million, both record highs, demonstrate our steadfast commitment to enhancing profitability.

Samuel Mehan: Simultaneously, we are rapidly innovating, especially in AI, and activating our levers to catalyze GSV and revenue growth. Together, all of these initiatives ultimately deliver greater shareholder value.

Samuel Mehan: The organizational changes announced on October 23rd are part of our ongoing efficiency efforts, allowing us to execute more effectively while generating an expected $60 million in annualized cost savings.

Samuel Mehan: These changes enable us to continue leaning into our strengths, moving more nimbly, and further innovate to deliver for our customers.

Samuel Mehan: We're assembling smaller, more streamlined teams that can move faster towards our goals. We're focused on a narrower portfolio of high ROI and high potential R&D investments.

Samuel Mehan: And we're implementing more automation and third party vendor solutions across the business. So our own teams can put all of their energy into excelling at what we do best.

Samuel Mehan: In enterprise, we used learning from the last few quarters to sharpen our strategy. We've positioned a leaner, more effective sales and support team against our largest, highest ROI clients, immediately improving profitability in this business unit while still enabling our smaller enterprise clients to succeed with a lighter touch approach.

Samuel Mehan: The launch of Upwork Business Plus on October 16th lets us serve larger clients with a plan that meets their needs by being more fully featured than our marketplace offering, but with a higher take rate.

Samuel Mehan: At the same time, acquisition costs and cost to serve are significantly lower than with our enterprise offering.

Samuel Mehan: BusinessPlus enables clients to grow and expand share of wallet with Upwork through a smoother glide path that further closes the gap between our current marketplace and enterprise offerings.

Samuel Mehan: We're already achieving solid traction via business class with hundreds of clients organically enrolling in the new plan since its launch.

Samuel Mehan: In the third quarter, we signed 42 enterprise deals for a combination of our traditional enterprise plans and a continuation of the testing from last quarter.

Samuel Mehan: We welcome Hunter Douglas, Bill.com, Berlitz, and Gess as new enterprise clients.

Samuel Mehan: Based on the success of our testing, we recently shifted our land sales team's focus to selling business plus and managed services.

Samuel Mehan: We are confident that this refreshed go-to-market strategy and our right-sized investment to deliver higher ROI for customers and shareholders will allow us to more effectively capitalize on the enterprise opportunity.

Samuel Mehan: We're steadfast in our commitment to serving the enterprise market and believe Upwork has the right model to unlock a very large enterprise CAM.

Samuel Mehan: Our account management teams will continue to support our existing installed base of hundreds of enterprise customers whose selection of Upwork is a result of our unique value proposition and product offerings.

Samuel Mehan: Execution of this strategy is being overseen by Ernesto La Mina, our GM of Enterprise. Ernesto has already logged major successes over his past year at Upwork and brings deep experience building enterprise products and leading digitally enabled businesses within traditional staffing providers.

Samuel Mehan: These operational changes support our strategic plan to create shareholder value alongside our execution on key GSV and revenue growth levers that include, one, making Upwork the preeminent destination for AI talent and work.

Samuel Mehan: 2. Improving Customer Productivity and Accelerating Work Outcomes with AI-Powered Features and Experiences built on UMA, Upwork's Mindful AI.

Samuel Mehan: 3. Continued expansion into our enterprise TAM, which we've already touched on today. 4. Acquiring new clients cost-effectively and at scale through partnerships.

Samuel Mehan: 5. Continuing to drive marketplace quality, efficiency, and pay grade expansion via our ads and monetization efforts.

Samuel Mehan: Progress on these levers was notable in Q3 as showcased in our semi-annual Upwork Updates product release on October 16th.

Samuel Mehan: First, AI continues to be a tailwind for our business, with GSV from AI-related work growing 36% year-over-year in the third quarter, even as we lap quarters of very pronounced growth in this type of work.

Samuel Mehan: In parallel, a number of clients engaging in AI-related projects on the Upwork platform grew 30% year-over-year in the quarter.

Samuel Mehan: Second, we are continuing to make rapid progress along our AI roadmap by infusing UMA, our mindful AI, with advanced features that improve our customers' productivity.

Samuel Mehan: We unveiled new capabilities for UMA as a powerful work companion that helps customers brainstorm work ideas and solutions, analyze problems, write content, code for projects, and more, all enhanced by rich historical signals from the Upwork platform.

Samuel Mehan: To improve speed and quality of matching between clients and talent, UMA can now create tailored proposal drafts for freelancers and evaluate candidates for clients based on how closely professional skills and experience fit their job post.

Samuel Mehan: These features are gaining popularity with customers and will amplify our matching performance with our corresponding metrics, like fill rate, already being at an all-time high.

Samuel Mehan: Additionally, to expedite our progress in delivering on-demand work outcomes to larger clients, our managed services teams are now utilizing UMA as a competitive advantage.

Samuel Mehan: A key accelerant to our AI strategy has been our successful acquisition and integration of Headroom, which enabled us to deepen our AI talent bench and increase velocity of our AI roadmap, including the launch and advancement of UMA.

Samuel Mehan: Today, we are thrilled to announce the next step on that AI roadmap as we've entered a definitive agreement to acquire Objective, an AI-native search-as-a-service company.

Samuel Mehan: Objectives multimodal search technology will be another accelerant to our core search and match performance, as well as UMA's capabilities associated with images, videos, and audio content.

Samuel Mehan: The objective team will provide further depth for the Upwork AI and Machine Learning group.

Samuel Mehan: These small, focused acquisitions are aimed at advancing our AI strategy, and we have a strong track record of integrating them to elevate our AI offerings and talent density.

Samuel Mehan: We anticipate the transaction will close in the coming weeks and are eager to welcome the objective team to Upwork.

Samuel Mehan: Next, we've continued pursuing our strategy to acquire new clients cost effectively and at scale through partnerships.

Samuel Mehan: We've introduced the ability for third-party tech providers to offer fully managed projects delivered by Upwork, embedded directly within their own checkout or platform experiences.

Samuel Mehan: In early proof-of-concept partnerships, emergent tech providers like Lettice and Akoya are now offering project outcomes within their own customer workflows delivered through AI-powered Upwork managed services.

Samuel Mehan: Supported by proven talent from our platform.

Samuel Mehan: We also expanded our Upwork Partner Experts program so that clients can find the exact expertise they need more easily on Upwork, now partnering with Webflow, Smartsheet, Bubble, and others to supply pre-vetted experts in their technologies.

Samuel Mehan: Finally, we continue to drive marketplace quality, efficiency, and take rate expansion via our ads and monetization products, which continue to be one of our fastest growing revenue streams, increasing 35% year over year during the quarter.

Samuel Mehan: In Q3, we introduce a new ad product, Featured Jobs, that are likely to be seen by more candidates and connect clients with the talent they need more efficiently.

Samuel Mehan: Other ads and monetization enhancements included expanding boosted profiles to appear more prominently in search results, giving high intent freelancers a better likelihood of getting selected by clients for a project.

Samuel Mehan: Our organizational changes for proactive cost discipline and our pace of innovation that fuels our GSE and revenue growth levers continue to fortify Upwork.

Samuel Mehan: Illustrated by our ongoing market share gain and outperformance of industry peers.

Samuel Mehan: Thanks to our customers and team, even against a backdrop of undeniably challenging market conditions, impacting small and large businesses alike, we grew revenue 17% year-over-year during the first half of 2024.

Samuel Mehan: or as revenue declined an average of 8% year-over-year across the broader staffing industry.

Samuel Mehan: We've made strong, steady progress along a clear path to durable, profitable growth and driven unrivaled scale while continuing to invest in a focused and impactful innovation agenda.

Samuel Mehan: As ever, we remain relentlessly committed to delivering for our customers and delivering shareholder value through increasing profitability and free cash flow alongside strategic capital allocation.

Samuel Mehan: We look forward to continuing to unlock the immense potential of Upwork over the short, medium, and long term for all of our stakeholders. With that, I will turn it over to Erica to review our financials.

Erica Gessert: Thanks, Hayden. The strength of our business is impressive in the current challenging macro environment. The third quarter was one of rapid execution at Upwork in which we made strong progress across every area of our business.

Samuel Mehan: We continue to gain market share and generate increasing profitability and top line growth.

Samuel Mehan: We are demonstrating continued progress toward our goal of 35% adjusted EBITDA margin in the next five years, while increasing our operating leverage every year along the way.

Samuel Mehan: The organizational changes we announced on October 23rd will align our operating model with our ambitions for accelerated execution and margin expansion.

Samuel Mehan: These actions resulted in a company-wide 21% reduction in headcount and an expected $60 million in annualized cost savings.

Samuel Mehan: Now, I'll review a few highlights from our third quarter results.

Samuel Mehan: This overperformance was driven by slight top-of-funnel improvements, momentum in managed services, and continued growth from our ads products.

Samuel Mehan: Marketplace revenue was $167.3 million, a 12% increase compared to $149.6 million in the third quarter last year.

Samuel Mehan: In our enterprise business, total enterprise revenue grew slightly at 26.4 million in Q3.

Samuel Mehan: We remain very confident in the huge opportunity in enterprise.

Samuel Mehan: We will continue to report enterprise revenue separately, even as we serve more of our enterprise customers through our Business Plus plan, which will be recognized in the Marketplace Revenue line going forward.

Samuel Mehan: Given changes to our approach, our traditional enterprise plan deal number will decline as the year progresses. And as we close out our existing pipeline, meaning our prior new enterprise logo metric will be less relevant after Q4.

Samuel Mehan: Managed services revenue showed strength in the third quarter growing 5% on a year-over-year basis reflecting steady demand for outcome-based delivery of work and our focus on expanding share of wallet among our largest enterprise clients.

Samuel Mehan: We continue to grow our managed services land funnel and signed an increasing number of managed services MSAs in the quarter.

Samuel Mehan: Our overall active client base grew 2% year-over-year to 855,000.

Samuel Mehan: With both new acquisition and retention benefiting us.

Samuel Mehan: Our GSV per active client increased in the third quarter versus the second quarter, as our value proposition continues to resonate with customers, even in a period of tighter budgets.

Samuel Mehan: In Q3, we also saw average GSV per client increase over Q2 in all business segments from enterprises to very small businesses.

Samuel Mehan: Our marketplace take rate continued to reach record highs at 18.3% in Q3, increasing 30 basis points from Q2, driven by continued growth in our ads and monetization business.

Samuel Mehan: While we have implemented significant pricing and monetization measures to optimize take rate over the past few years, in coming quarters we will take a more surgical approach, resulting in a more measured pace of take rate expansion.

Samuel Mehan: Introducing new and innovative ways to bring value to our customers catalyzes activity on our marketplace.

Samuel Mehan: And we expect these to be the drivers of take rate over the next few quarters, as opposed to wholesale pricing changes.

Samuel Mehan: Non-GAAP gross margin continued to improve both on a year-over-year and sequential basis to 77.8 percent.

Samuel Mehan: as we execute a disciplined cost management across every area of our business.

Samuel Mehan: Non-GAP operating expense was $110.8 million, representing 57% of revenue in Q3 2024, compared to 59% of revenue in the prior year period.

Samuel Mehan: For the third quarter, non-GAAP R&D expense was $42.0 million.

Samuel Mehan: We expect non-GAAP R&D expense, excluding one-time charges, to decline by low single digits on a percentage basis sequentially in the fourth quarter.

Samuel Mehan: Non-GAAP sales and marketing expense was $42.9 million and it declined 3% year-over-year.

Samuel Mehan: And we expect spend to decline in the fourth quarter by an even greater magnitude on a percentage basis compared to the third quarter.

Samuel Mehan: Our provision for transaction losses remain low at $1.8 million for Q3, approximately 1% of total revenue.

Samuel Mehan: Our profitable business model generated our highest quarter of GAP net income ever, and continues to generate GAP in earnings per share growth, which includes the impact of stock-based compensation.

Samuel Mehan: For the third quarter of 2024, gap net income was $27.8 million and fully diluted gap earnings per share was $0.20.

Samuel Mehan: Free cash flow for the third quarter was $98 million, which benefited from the weekly timing of payments to customer accounts.

Samuel Mehan: Excluding this favorable timing impact, we estimate our free cash flow in the quarter would have been approximately $52 million, which is a 58% year-over-year increase.

Samuel Mehan: Cash, cash equivalents, and marketable securities were approximately $601 million at the end of the third quarter. Following the completion of our previous $100 million share repurchase program earlier this year, we are pleased to announce a new $100 million share repurchase authorization.

Samuel Mehan: We remain committed to executing our long-term strategy and will utilize our healthy balance sheet and strong cash generation to deliver shareholder value, including making the right investments in our growth levers, evaluating accretive M&A, and opportunistically deploying capital to repurchase shares.

Samuel Mehan: Turning to guidance. We are increasing our fourth quarter revenue and adjusted EBITDA outlook based on a continuation of the trends we saw in the third quarter.

Samuel Mehan: For the fourth quarter of 2024, we expect to produce revenue in the range of $178 to $183 million.

Samuel Mehan: For adjusted EBITDA in the fourth quarter, we are guiding to a range of $38 to $42 million, which represents an adjusted EBITDA margin of 22% at the midpoint.

Samuel Mehan: We expect the majority of the cost benefits driven by our recently announced organizational changes to materialize in 2025.

Samuel Mehan: For the full year 2024, we anticipate revenue between 756 and 761 million, representing 10% year-over-year growth at the midpoint.

Samuel Mehan: We expect our take rate for the rest of the year to be down slightly from what we saw in Q3.

Samuel Mehan: As a result of our ongoing cost discipline and the strength of our business model, we are increasing our adjusted EBITDA margin outlook and now expect our full year adjusted EBITDA will be in the range of $155 to $159 million.

Samuel Mehan: As a reminder, GSV and revenue growth, and consequently adjusted EBITDA margin, are affected in the fourth quarter of this year by the fact that there are fewer Sundays in the quarter this year versus last year.

Samuel Mehan: Because of the timing each week when our clients are billed, the number of Sundays in any set period affects our revenue and GSV recognition in that period.

Samuel Mehan: For the full year, we expect weighted average shares outstanding between $139 to $141 million.

Samuel Mehan: We are also providing an update to our stock based compensation expense guidance for the year.

Samuel Mehan: Our prior guidance was that SBC expense would average a little under $20 million per quarter in 2024.

Samuel Mehan: We are tracking below that guidance in our projection for Q4, due to our long-term strategy regarding team structure and operating approach that balances stock-based compensation with cash-based compensation.

Samuel Mehan: We expect stock-based compensation to continue to trend down into 2025.

Samuel Mehan: These efforts, along with our ongoing cost discipline and active capital return, reflect our clear and unrelenting focus on building shareholder value over the near and long term.

Samuel Mehan: Finally, as we've discussed for some time now, the macro environment continues to be challenging. New tech jobs continue to hover at a nearly three-year low, and inflationary and interest rate pressures continue to affect corporate spending across all business segments.

Samuel Mehan: We expect that it will take some time for these broader macro factors to improve and spending behavior to shift.

Samuel Mehan: Our ability to deliver strong growth over a multi-year period of volatility and suppressed demand is a testament to our focus on operational excellence and our highly attractive value proposition.

Samuel Mehan: However, we're not immune to the environment we operate in. And as we expect macro pressures to continue as we enter 2025, we are cautious about our top line growth over the next few quarters.

Samuel Mehan: As always, I want to close by thanking our incredible team at Upwork for their contributions this quarter and their unparalleled creativity, focus, and pace of execution. With that, we would be happy to take your questions.

Speaker Change: Thank you. As a reminder 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 stand by while we compile the Q&A roster.

Speaker Change: Transcript by Rev.com Page of

Samuel Mehan: And our first question comes from Ronald Josia City. Your line is open.

Speaker Change: Hey, thanks so much. This is Jake down for a round. So really, the first question I wanted to ask was around 4Q guidance.

Speaker Change: And so we talked about improving trends in September.

Speaker Change: and then the guidance.

Speaker Change: implies continuation of those positive trends through your end. Could you maybe spend a moment just on what is that kind of like assuming that those improving trends continue throughout the quarter maybe just help us understand. Unknown Speaker

Speaker Change: I know you talked about it a little bit, but what are the key factors that are going to drive GSV to re-accelerate?

Speaker Change: and then.

Speaker Change: Second.

Speaker Change: Really wanted to double click on the new

Speaker Change: surfaces for freelancers to promote their listings. You've talked about a few in the prepared remarks, but given that that could be the key driver of take rates going forward, just wanted to better understand the additional surfaces and key products that you expect to help drive those take rates going forward. Thanks so much.

Speaker Change: Yes, sure. Maybe I'll take this, Erica. I'll take the question on guidance and then maybe hand it to Hayden to talk about the freelancer services.

Speaker Change: So on the Q4 guidance, you know, we did see really starting in late August and into September some improvements in our top of funnel trend versus what we experienced in June and July.

Speaker Change: I do want to emphasize, though, that some of the top-of-the-mill trends, including site-seeking work and

Speaker Change: and contract starts are still negative on a year-over-year basis. And so, you know, that's also in the guidance, as you can see, you know, we do, we are still forecasting kind of negative year-over-year GSB growth in Q4.

Speaker Change: So I think, you know, while we have seen some improvement in the trends, and those are positive signs, I think that we are, you know, as I talked about,

Speaker Change: We are still quite cautious on the macro environment and think that, you know, we've seen a lot of volatility in the trends and we're kind of not ready to call it a trend now. So, incorporated into the Q4 forecast is not an upswing in GSB trends overall, but really more of a steady state to what we saw going into October, which is consistent with

Speaker Change: You know, how the relationship between September and October have worked.

Speaker Change: Jake, on the topic of how sponsors can some of their offerings and how that relates to our take rate outlook.

Jake: Today on Upwork, there's a few ways that they can do this. So we have Boosted Profiles and Boosted Proposals as two ways that they can really make themselves more visible on the platform, and we also monetize on the sponsor side through SponsorPlus, which is a subscription plan for sponsors, as well as

Speaker Change: Connect purchases, which is the way that they buy bundles of Connect in order to bid on generally available jobs in the ecosystem. So there's basically four levers on the financial side there.

Speaker Change: These are generally not newly launched features in the last quarter, but we have been expanding and enhancing some of the ways that these features are visible. So, for example, user profiles is the one we mentioned earlier, which is now more prominent and more visible in search results, as an example.

Speaker Change: As we relate back to your question about pay grade.

Speaker Change: Our view is that we are continuing to be very specific and structural and

Speaker Change: Making sure that these types of enhancements are

Speaker Change: super beneficial to the entire ecosystem as they have been to date.

Speaker Change: And as you mentioned, these are places where take rate will, you know, have maybe modest increases going forward, but we're not making wholesale pricing changes in the ecosystem that would drive substantial increases in take rate. And we're really pleased with the increase we've had already. I mean, it's a notable attraction increases in take rate you've seen over the last year, year and a half with us. But going forward, you're not going to see that type of major increases in take rate because

Speaker Change: We've done a lot of work here and we're going to continue to do so but in a more surgical way.

Speaker Change: Thank you.

Speaker Change: Thank you.

Speaker Change: Our next question comes from Andrew Boone of JMP Securities. Your line is open.

Andrew Boone: Thanks so much for taking my questions.

Andrew Boone: Hayden in the letter and prepared comments, it sounds like there's just an increased focus across the business.

Andrew Boone: Can you just dive in into that thought and talk about a couple of places where you guys are investing more engineering and maybe product resources to be able to refine Upwork and more target your strategy as well as resources going forward. And then Erica, a question in terms of costs, where you guys have done a great job in terms of identifying efficiencies.

Speaker Change: How do we think about that going forward? Right? As you guys get through your 25 budget planning, how do we think about cost structure and the growth of costs as we get to that 35% even a margin target in the future? Thanks so much.

Speaker Change: Andrew, the way I think about this in terms of the focus is both the what and how of our work. So, I talked earlier about the five growth levers that we're focused on in terms of revenue and GSE, and these are not new. We've been working on these for several quarters. We talked about them last quarter. But certainly, as we continue to strategize and change some of the how in the business,

Speaker Change: We've stripped away, you know, projects and programs that were not directly lined up against these initiatives. And that's, it's lent us more focus, more clarity. And also, as we look under the hood of some of these things, we are going after them with

Speaker Change: Unknown Speaker You know, fleets of smaller teams that are equipped to move more nimbly, more effectively against the goal. Unpacking those five levers and maybe just highlighting a couple of the ones that were particularly notable as we look back at this past quarter and some of the recent announcements.

Speaker Change: The second one around improving our customer productivity and accelerating work outcomes built on UMA, we just announced today this acquisition of Objective, which is really enhancing our focus and our acceleration of our AI roadmap. So this is something that's been underway for a while. We are very lean and disciplined in this area, but with an incredibly talent-dense team going after this and shipping incredible features all the time.

Speaker Change: Another place with a ton of focus is the enterprise area.

Speaker Change: We've been retooling the strategy. We shipped business plus on October 16th. This is coming out of a lot of work and insights that we've had in that area. And we've reduced

Speaker Change: You know, the team size and enhance the profitability of the entire business unit.

Speaker Change: through the work that we've been doing to really strategize how we unlock that huge hand, but in a very disciplined way. So lots of things happening in the business to make sure we're going after these huge levers for us in a very disciplined fashion.

Speaker Change: Yeah, and on the cost side, you know, the organizational realignment and the $60 million in cost improvements that we talked about on October 23rd,

Speaker Change: So, you know, these are part of an ongoing, you know, kind of, you know, kind of cost management that, you know, I talked about for several quarters, you know, talking about cost optimization as a multi-quarter endeavor.

Speaker Change: And this is just really the next step in that, you know, kind of in that journey. I think, you know, those cost improvements, they're not incremental to our stated five-year profitability target of 35% adjusted income margins, but are really the step along the way.

Speaker Change: We do expect the majority of the $60 million cost savings to benefit the next year. There will be a small offset as we add some of the objects for the objective acquisition, which, you know, overall we expect to be highly accretive over time, as that team helps us to improve search and match and even further on our core platform.

Speaker Change: But, you know, with a relatively consistent take rate outlook for next year, we expect, you know, about, you know, a few points of EBITDA margin improvement in 2025.

Speaker Change: But, you know, I think as our record demonstrates over the past, you know, college couple of years, we've had a clear focus on margin expansion and we're fully committed to continuing that as we, you know, as we progress.

Speaker Change: Thank you.

Speaker Change: Thank you.

Speaker Change: Our next question comes from Bernie McTernan of Needham & Company. Your line is open.

Speaker Change: Hi, this is Stephanos Crist calling in for Bernie. Thanks for taking our questions. First, can you give us maybe a little more detail on objectives and what they do and how it will fit into the Upwork ecosystem?

Speaker Change: Jacob McQuown, David Niederman, Jacob McQuown, Unknown Executive

Speaker Change: Yeah, absolutely. So objective is the company we entered into an agreement to acquire and are announcing today and they are an AI native.

Speaker Change: Search as a Service Company. And our goal is to accelerate the already all-time high performance we have in the search and match area of our core business, as well as accelerating UMA's capabilities around images, videos, and audio content.

Speaker Change: And this really builds on our successful M&A track record around identifying moles.

Speaker Change: Tech and Talent Focused Acquisition.

Speaker Change: which are aimed at advancing our AI strategy. And this started last year with the acquisition of Headroom, where we brought on board Andrew Rabinovich and his team, and they have been meaningfully advancing our AI roadmap, including all of the work on UMA and the features we've been launching throughout the year, and most recently our Upwork updates.

Speaker Change: So with Objective, we have been testing their capabilities with some proof of concept over the past few months. And this is really what gave us the confidence that their cutting edge technology would have a meaningful and immediate impact on our platform once we brought them in-house.

Speaker Change: So it's a small deal. It's a very small but high impact team. And we are looking forward to closing this deal in the coming weeks and welcoming them on board.

Speaker Change: I just want to add that given the healthy balance sheet that we have and the free cash flow that we continue to generate, we are going to continue to look for opportunities to extend our own market leadership, deliver exceptional and innovative products like the ones we're already shipping to our customers to grow our business and enhance our possibilities through acquisitions exactly like this one.

Speaker Change: Got it. That's great. Thank you. Maybe just following up on that. You know, what does the M&A market look like? You know, how many potential acquisitions do you see out there and maybe different end markets you're looking at?

Speaker Change: Yeah, you know, I think our posture is to, you know, achieve our goals around our product roadmap and the strategies we've outlined in terms of growth.

Speaker Change: and profitability through M&A when and where it makes sense.

Speaker Change: I think a lot of buyers are on the sidelines right now, but that's not our posture because we're in a great position to bring in the right company if and when they meet our very high bar. So in this case, a company came that didn't meet our bar and we were very excited to make this deal happen. But of course, every deal is unique and we'll see what happens next.

Speaker Change: All right. Thank you.

Speaker Change: Our next question comes from Maria Ripps of Canada Cords. Your line is open.

Maria Ripps: Great, thanks so much for taking my questions. Can you talk about sort of excuse me your thoughts on advertising spend next year in context of your 60 million sort of cost savings initiative and maybe more broadly how are you thinking about your customer acquisition strategy in this environment?

Speaker Change: And then secondly, any divergence in performance by smaller versus larger customers in Q3 and so far in Q4 maybe that you would highlight?

Speaker Change: Maria, I think the first question was on, was it on advertising spend? I'm sorry, you came through a little garble. Was it on advertising spend? Yeah, sorry about that. Yeah, just any thoughts on your advertising spend for next year in the context of your $60 million cost savings initiation?

Speaker Change: Yeah, and I think you're asking about business segment behavior in your second question. So, on the first question, you know, there's no change to our investment in our high ROI marketing investment.

Speaker Change: and David Niederman, Jacob McQuown, David Niederman, Jacob McQuown, David Niederman,

Speaker Change: that.

Speaker Change: On the question on kind of behavioral, you know, things with business segments, I would say

Speaker Change: You know, one of the things that was notable in the quarter was that we did see a, you know, a GSV per client increase in every business segment.

Speaker Change: And so that was, you know, we were really, really pleased to see those signals.

Speaker Change: That said, you know, there really was no change from last quarter, in that from a customer volume point of view, we did see some relative strength on the very small business side compared to some of the larger business segments. And it's actually some of that consistency and trends that

Speaker Change: does lead us to be cautious on next year, because, you know, we really aren't seeing a significant change in trends. And quite honestly, I think, you know, the multiple quarters of macro pressures are going to take some time to unwind and

Speaker Change: Truly change in a business lending manager.

Andrew Boone: Go ahead. Thank you so much for the call.

Speaker Change: Thank you.

Speaker Change: Our next question comes from Brent Phil of Jeffries. Your line is open.

Speaker Change: Hi, thank you. This is Chan Byun from Brandsail. First question I had was around managed services. You seem to be getting more traction there or signing up more customers. I just want to see, you know, why, I mean, is there more organic demand coming to you or why are you making a bigger push there? And then I have a follow-up.

Speaker Change: The Traction Managed Services, I'd say, has been building over multiple quarters and

Speaker Change: really relate to the fact that we have a very attractive value proposition that spans

Speaker Change: Director Talent Offerings for larger customers who want to use that that feature of Upwork as well as those who want to either extend beyond that and also have a field program that are managed for them or who simply want that you know as a standalone offering that we can deliver for them.

Speaker Change: So, you know, it's been building our sales team has seen more and more demand in the market for this.

Speaker Change: And so we have been, I'd say, leaning in to where we see the demand signal and equipping ourselves.

Speaker Change: with more go to market and other resources.

Speaker Change: to capture the demand that we're getting and leverage that. When we did our Upwork update just a few weeks ago, we did enhance the capabilities of our managed services team with more AI enablement with UMA, which is continuing to differentiate our offering in terms of the speed and the quality, not just of the talent, but also the entire workflow underpinning managed services. So this will be a continued focus. And I think it just speaks to the breadth of our offering and kind of the demand signals that we see from larger customers.

Speaker Change: Great, thank you. And then on the business plus plan.

Speaker Change: I think during the prepared market, you mentioned that being sold more by the land team. Just wondering, in terms of rational, putting that as part of the marketplace line, is that because it's still more self-service than anything?

Speaker Change: As opposed to, you know, why not continue to have it in the enterprise line item.

Speaker Change: Yeah, so the way that we've structured the land team is that they are now selling these Business Plus plans.

Speaker Change: on the marketplace. Right. So and the one reason we did that was really to open up the acquisition funnel to have a much wider, you know, access to new volumes of clients and, you know, be able to actively sell the kind of parts of the enterprise value prop to marketplace clients to help them move up the value chain with that.

Speaker Change: So, it reduces our cost of acquisition, it actually reduces our cost of service as well because it is a more self-service experience, but has aspects of the enterprise value.

Speaker Change: So for that reason, we're recognized on the market in the marketplace plan.

Speaker Change: Okay, that makes sense. Thank you.

Speaker Change: Thank you.

Speaker Change: Our next question comes from Marvin Fong of BTIG. Your line is open.

Marvin Fong: Great, good evening. Thanks for taking my questions and congratulations on the quarter. So another question on, excuse me, Business Plus, you know, how should we kind of think about, you know, how many of your clients, you know, would be a good candidate for this?

Marvin Fong: for this product line. And should we kind of think about this product as

Marvin Fong: being something, kind of a stepping stone for clients to graduate up the enterprise? Or do you kind of expect them to kind of stay on this plan for as long as they're on the platform? And then second question, just on sort of the

Speaker Change: The project.

Speaker Change: the Managed Project Service that you mentioned, you know, with Akoya and Lotus. Just kind of talk about what that opportunity opens up for you. How much of project work relative to the overall market might that represent? Thanks so much.

Speaker Change: Marvin, let me just frame how to answer your business questions in the context of some of the insights we've gotten in this area through the last couple quarters of testing.

Speaker Change: So what we saw was Enterprise Standard is a plan that we've had for many, you know, many years now.

Speaker Change: have the

Speaker Change: kind of value within it.

Speaker Change: that has been out of reach for a lot of our target enterprise companies.

Speaker Change: Both in the price point of the plan and the buying model.

Speaker Change: So we can only get those customers into Upwork through the sales team. And so it's your question about, you know, who are the good candidates? Now that we have Business Plus.

Speaker Change: We are really opening up a much larger pipeline of large buyers who can now get to this plan through a smoother glide path, either by self-serving and upgrading from the marketplace as that stepping stone, as you mentioned, or by directly working with our sales team and coming in that way, which some larger customers require and prefer that as a way to set up a program with Upwork.

Speaker Change: So we have both of those as entry points now, and as we mentioned earlier, we're seeing hundreds of clients already in a couple weeks since we've launched coming into this plan. And to be clear, those are clients of multiple sizes, but that does include many clients of our kind of enterprise-grade, enterprise-quality clients who are coming in through both of those channels.

Speaker Change: So this new plan allows us to much more rapidly and cost-effectively serve our mid-market and large customer target audience with a more acceptable and broader value proposition while we also are selling managed services and other things also to these customers who want to buy that type of a program for us.

Speaker Change: So it's a more targeted and segmented approach that aligns the value we have with the customers that we're seeing and have seen through testing in the market, and has a lot of these benefits that we mentioned.

Speaker Change: In terms of Lettuce and Okoye, this is some very early concept work that we've done around bringing

Speaker Change: Secretary for Business, Innovation and Employment Services, and we're looking at how we can implement these kind of talent that we have in our ecosystem in a more packaged way in terms of delivering these work outcomes, almost like mini-managed services projects, into the ecosystems of these types of partner businesses, in this case, us, Nicoya, to really deliver outcomes for their customers.

Speaker Change: And so this is early days and certainly, you know, it's very, it's too soon, I think, for us to project, you know, how big this market is or how big this opportunity is. But this idea of upper talent.

Speaker Change: being found in delivering work on an outcome basis, not just kind of an hourly basis.

Speaker Change: Great. That's super helpful. Thanks, Hayden.

Speaker Change: Well,

Speaker Change: Thank you.

Speaker Change: Continued from episode 2

Speaker Change: David Niederman, Hayden Brown, David Niederman, Jacob McQuown, Unknown Executive

Speaker Change: David Niederman, Hayden Brown, David Niederman, Jacob McQuown, Unknown Executive David Niederman, Hayden Brown, David Niederman, Jacob McQuown, Unknown Executive

Speaker Change: Credits

Speaker Change: Good day and thank you for standing by. Welcome to the Upwork 3rd Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode.

Speaker Change: 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 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again.

Speaker Change: Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today Samuel Meehan, Vice President of Investor Relations. Please go ahead

Samuel Meehan: Thank you. Welcome to Upwork's discussion of its third quarter 2024 financial results. Joining me today are Hayden Brown, Upwork's President and Chief Executive Officer, and Erica Gessert, Upwork's Chief Financial Officer.

Samuel Meehan: Following management's prepared remarks, they will be happy to take your questions. But first, I'll review the Safe Harbor Statement.

Samuel Meehan: 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.

Samuel Meehan: Our actual results could differ materially from expectations reflected in any forward-looking statements.

Samuel Meehan: 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.

Samuel Meehan: Additional information will be set forth in our quarterly report on Form 10-Q for the three months ended September 30th, 2024.

Samuel Meehan: In addition, reference will be made to certain non-GAAP financial measures.

Samuel Meehan: 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.

Samuel Meehan: Unless otherwise noted, reported figures are rounded and comparisons of the third quarter of 2024 are to the third quarter of 2023.

Samuel Meehan: 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.

Hayden Brown: Welcome everyone to Upwork's third quarter 2024 earnings call.

Hayden Brown: Upwork continues to deliver durable, profitable growth as we execute our long-term strategy to drive revenue and margin expansion, even amid a challenging and dynamic macro environment.

Samuel Meehan: Third quarter revenue grew 10% year-over-year to $193.8 million as we saw a slight top-of-funnel improvements, momentum in managed services, an all-time high intake rate, and continued growth from our ads and monetization products.

Samuel Meehan: Our third quarter net income of $27.8 million and adjusted EBITDA of $43.2 million, both record highs, demonstrate our steadfast commitment to enhancing profitability.

Samuel Meehan: Simultaneously, we are rapidly innovating, especially in AI, and activating our levers to catalyze GSV and revenue growth. Together, all of these initiatives ultimately deliver greater shareholder value.

Samuel Meehan: The organizational changes announced on October 23rd are part of our ongoing efficiency efforts, allowing us to execute more effectively while generating an expected $60 million in annualized cost savings.

Samuel Meehan: These changes enable us to continue leaning into our strengths, moving more nimbly, and further innovate to deliver for our customers.

Samuel Meehan: We're assembling smaller, more streamlined teams that can move faster towards our goals. We're focused on a narrower portfolio of high ROI and high potential R&D investments.

Samuel Meehan: And we're implementing more automation and third party vendor solutions across the business. So our own teams can put all of their energy into excelling at what we do best.

Samuel Meehan: In enterprise, we use learning from the last few quarters to sharpen our strategy.

Samuel Meehan: We've positioned a leaner, more effective sales and support team against our largest, highest ROI clients, immediately improving profitability in this business unit while still enabling our smaller enterprise clients to succeed with a lighter touch approach.

Samuel Meehan: The launch of Upwork Business Plus on October 16th lets us serve larger clients with a plan that meets their needs by being more fully featured than our marketplace offering but with a higher take rate.

Samuel Meehan: At the same time, acquisition costs and cost to serve are significantly lower than with our enterprise offering. Business Plus enables clients to grow and expand share of wallet with Upwork through a smoother glide path that further closes the gap between our current marketplace and enterprise offerings.

Samuel Meehan: We're already achieving solid traction via business class with hundreds of clients organically enrolling in the new plan since its launch.

Samuel Meehan: We welcome Hunter Douglas, Bill.com, Berlitz, and Gess as new enterprise clients.

Samuel Meehan: Based on the success of our testing, we recently shifted our land sales team's focus to selling business plus and managed services.

Samuel Meehan: We are confident that this refreshed go-to-market strategy and our right-sized investment to deliver higher ROI for customers and shareholders will allow us to more effectively capitalize on the enterprise opportunity.

Samuel Meehan: We're steadfast in our commitment to serving the enterprise market and believe Upwork has the right model to unlock a very large enterprise cam.

Samuel Meehan: Our account management teams will continue to support our existing installed base of hundreds of enterprise customers, whose selection of Upwork is a result of our unique value proposition and product offerings.

Samuel Meehan: Execution of this strategy is being overseen by Ernesto La Mina, our GM of Enterprise. Ernesto has already logged major successes over his past year at Upwork and brings deep experience building enterprise products and leading digitally enabled businesses within traditional staffing providers.

Samuel Meehan: These operational changes support our strategic plan to create shareholder value alongside our execution on key GSV and revenue growth levers that include, one, making Upwork the preeminent destination for AI talent and work.

Samuel Meehan: 2. Improving Customer Productivity and Accelerating Work Outcomes with AI-Powered Features and Experiences built on UMA, Upwork's Mindful AI.

Samuel Meehan: 3. Continued expansion into our enterprise TAM, which we've already touched on today. 4. Acquiring new clients cost-effectively and at scale through partnerships.

Samuel Meehan: 5. Continuing to drive marketplace quality, efficiency, and pay grade expansion via our ads and monetization efforts.

Samuel Meehan: Progress on these levers was notable in Q3, as showcased in our semi-annual Upwork updates product release on October 16th.

Samuel Meehan: First, AI continues to be a tailwind for our business, with GSV from AI-related work growing 36% year-over-year in the third quarter, even as we lap quarters of very pronounced growth in this type of work.

Samuel Meehan: In parallel, the number of clients engaging in AI-related projects on the Upwork platform grew 30% year-over-year in the quarter.

Samuel Meehan: Second, we are continuing to make rapid progress along our AI roadmap by infusing UMA, our mindful AI, with advanced features that improve our customers' productivity.

Samuel Meehan: We unveiled new capabilities for UMA as a powerful work companion that helps customers brainstorm work ideas and solutions, analyze problems, write content, code for projects, and more, all enhanced by rich historical signals from the Upwork platform.

Samuel Meehan: To improve speed and quality of matching between clients and talent, UMA can now create tailored proposal drafts for freelancers and evaluate candidates for clients based on how closely professional skills and experience fit their job post.

Samuel Meehan: These features are gaining popularity with customers.

Samuel Meehan: and will amplify our matching performance with our corresponding metrics like fill rate already being at an all-time high. Additionally, to expedite our progress in delivering on-demand work outcomes to larger clients, our managed services teams are now utilizing UMA as a competitive advantage.

Samuel Meehan: A key accelerant to our AI strategy has been our successful acquisition and integration of Headroom, which enabled us to deepen our AI talent bench and increase velocity of our AI roadmap, including the launch and advancement of UMA.

Samuel Meehan: Today, we are thrilled to announce the next step on that AI roadmap as we've entered a definitive agreement to acquire Objective, an AI-native search-as-a-service company.

Samuel Meehan: Objectives multimodal search technology will be another accelerant to our core search and match performance, as well as UMA's capabilities associated with images, videos, and audio content.

Samuel Meehan: The objective team will provide further depth for the Upwork AI and Machine Learning group.

Samuel Meehan: These small focus acquisitions are aimed at advancing our AI strategy, and we have a strong track record of integrating them to elevate our AI offerings and talent density.

Samuel Meehan: We anticipate the transaction will close in the coming weeks and are eager to welcome the objective team to Upwork.

Samuel Meehan: Next, we've continued pursuing our strategy to acquire new clients cost-effectively and at scale through partnerships.

Samuel Meehan: We've introduced the ability for third-party tech providers to offer fully managed projects delivered by Upwork, embedded directly within their own checkout or platform experiences.

Samuel Meehan: In early proof-of-concept partnerships, emergent tech providers like Lettice and Akoya are now offering project outcomes within their own customer workflows delivered through AI-powered Upwork managed services.

Samuel Meehan: supported by proven talent from our platform. We also expanded our Upwork Partner Experts program so that clients can find the exact expertise they need more easily on Upwork, now partnering with Webflow, Smartsheet, Bubble, and others to supply pre-vetted experts in their technologies.

Samuel Meehan: Finally, we continue to drive marketplace quality, efficiency, and take rate expansion via our ads and monetization products, which continue to be one of our fastest-growing revenue streams, increasing 35% year-over-year during the quarter.

Samuel Meehan: In Q3, we introduce a new ad product, Featured Jobs, that are likely to be seen by more candidates and connect clients with the talent they need more efficiently.

Samuel Meehan: Other ads and monetization enhancements included expanding boosted profiles to appear more prominently in search results, giving high intent freelancers a better likelihood of getting selected by clients for a project.

Samuel Meehan: Our organizational changes for proactive cost discipline and our pace of innovation that fuels our GSE and revenue growth levers continue to fortify Upwork.

Samuel Meehan: Illustrated by our ongoing market share gain and outperformance of industry peers.

Samuel Meehan: Thanks to our customers and team, even against a backdrop of undeniably challenging market conditions impacting small and large businesses alike, we grew revenue 17% year-over-year during the first half of 2024.

Samuel Meehan: or as revenue declined an average of 8% year-over-year across the broader staffing industry.

Samuel Meehan: We've made strong, steady progress along a clear path to durable, profitable growth and driven unrivaled scale while continuing to invest in a focused and impactful innovation agenda.

Samuel Meehan: As ever, we remain relentlessly committed to delivering for our customers and delivering shareholder value through increasing profitability and free cash flow alongside strategic capital allocation.

Samuel Meehan: The resiliency of this business and its enduring potential for value creation are proven.

Samuel Meehan: We look forward to continuing to unlock the immense potential of Upwork over the short, medium, and long term for all of our stakeholders. With that, I will turn it over to Erica to review our financials.

Erica Gessert: Thanks, Hayden. The strength of our business is impressive in the current challenging macro environment. The third quarter was one of rapid execution at Upwork in which we made strong progress across every area of our business.

Erica Gessert: Margins reached all-time highs in the third quarter with our gross margin increasing to 78% and our adjusted EBITDA margin to 22%.

Erica Gessert: The organizational changes we announced on October 23rd will align our operating model with our ambitions for accelerated execution and margin expansion.

Erica Gessert: These actions resulted in a company-wide 21% reduction in headcount and an expected $60 million in annualized cost savings.

Erica Gessert: Now, I'll review a few highlights from our third quarter results.

Erica Gessert: Revenue grew 10% year-over-year to $193.8 million in the quarter, significantly above our previous guidance.

Erica Gessert: This overperformance was driven by slight top-of-funnel improvements, momentum in managed services, and continued growth from our ads products.

Erica Gessert: Marketplace revenue was $167.3 million, a 12% increase compared to $149.6 million in the third quarter last year.

Erica Gessert: In our enterprise business, total enterprise revenue grew slightly at $26.4 million in Q3.

Erica Gessert: We remain very confident in the huge opportunity in enterprise.

Erica Gessert: We will continue to report enterprise revenue separately, even as we serve more of our enterprise customers through our Business Plus plan, which will be recognized in the Marketplace Revenue line going forward.

Erica Gessert: Given changes to our approach, our traditional enterprise plan deal number will decline as the year progresses and as we close out our existing pipeline, meaning our prior new enterprise logo metric will be left less relevant after Q4.

Erica Gessert: Managed services revenue showed strength in the third quarter, growing 5% on a year-over-year basis, reflecting steady demand for outcome-based delivery of work and our focus on expanding share of wallet among our largest enterprise clients.

Erica Gessert: We continue to grow our managed services land funnel and signed an increasing number of managed services MSAs in the quarter.

Erica Gessert: Our overall active client base grew 2% year-over-year to 855,000.

Erica Gessert: With both new acquisition and retention benefiting us.

Erica Gessert: Our GSV per active client increased in the third quarter versus the second quarter, as our value proposition continues to resonate with customers, even in a period of tighter budgets.

Erica Gessert: In Q3, we also saw average GSV per client increase over Q2 in all business segments, from enterprises to very small businesses.

Erica Gessert: Our marketplace take rate continued to reach record highs at 18.3% in Q3, increasing 30 basis points from Q2, driven by continued growth in our ads and monetization business.

Erica Gessert: Introducing new and innovative ways to bring value to our customers catalyzes activity on our marketplace, and we expect these to be the drivers of take rate over the next few quarters, as opposed to wholesale pricing changes.

Erica Gessert: as we executed disciplined cost management across every area of our business.

Erica Gessert: Non-GAAP operating expense was $110.8 million, representing 57% of revenue in Q3 2024, compared to 59% of revenue in the prior year period.

Erica Gessert: For the third quarter, non-GAAP R&D expense was $42.0 million.

Erica Gessert: We expect non-GAAP R&D expense excluding one-time charges to decline by low single digits on a percentage basis sequentially in the fourth quarter.

Erica Gessert: Non-GAAP sales and marketing expense was $42.9 million, and it declined 3% year-over-year.

Erica Gessert: And we expect spend to decline in the fourth quarter by an even greater magnitude on a percentage basis compared to the third quarter.

Erica Gessert: Our provision for transaction losses remain low at $1.8 million for Q3, approximately 1% of total revenue.

Erica Gessert: Our profitable business model generated our highest quarter of GAP net income ever and continues to generate GAP in earnings per share growth, which includes the impact of stock-based compensation.

Erica Gessert: For the third quarter of 2024, gap net income was $27.8 million and fully diluted gap earnings per share was $0.20.

Erica Gessert: Free cash flow for the third quarter was $98 million, which benefited from the weekly timing of payments to customer accounts.

Erica Gessert: Excluding this favorable timing impact, we estimate our free cash flow in the quarter would have been approximately $52 million, which is a 58% year-over-year increase.

Erica Gessert: Cash, cash equivalents, and marketable securities were approximately $601 million at the end of the third quarter. Following the completion of our previous $100 million dollar share repurchase program earlier this year, we are pleased to announce a new $100 million dollar share repurchase authorization.

Erica Gessert: We remain committed to executing our long-term strategy and will utilize our healthy balance sheet and strong cash generation to deliver shareholder value, including making the right investments in our growth levers, evaluating accretive M&A, and opportunistically deploying capital to repurchase shares.

Erica Gessert: Turning to guidance, we are increasing our fourth quarter revenue and adjusted EBITDA outlook based on a continuation of the trends we saw in the third quarter.

Erica Gessert: For the fourth quarter of 2024, we expect to produce revenue in the range of $178 to $183 million.

Erica Gessert: For adjusted EBITDA in the fourth quarter, we are guiding to a range of $38 to $42 million, which represents an adjusted EBITDA margin of 22% at the midpoint.

Erica Gessert: We expect the majority of the cost benefits driven by our recently announced organizational changes to materialize in 2025.

Erica Gessert: For the full year 2024, we anticipate revenue between 756 and 761 million, representing 10% year-over-year growth at the midpoint.

Erica Gessert: We expect our take rate for the rest of the year to be down slightly from what we saw in Q3.

Erica Gessert: As a result of our ongoing cost discipline and the strength of our business model, we are increasing our adjusted EBITDA margin outlook and now expect our full year adjusted EBITDA will be in the range of $155 to $159 million.

Erica Gessert: As a reminder, GSV and revenue growth, and consequently adjusted EBITDA margin, are affected in the fourth quarter of this year by the fact that there are fewer Sundays in the quarter this year versus last year.

Erica Gessert: Because of the timing each week when our clients are billed, the number of Sundays in any set period affects our revenue and GSV recognition in that period.

Erica Gessert: Excluding the structural impact, we estimate our GSV and revenue growth rates for the fourth quarter would be approximately 4 percentage points higher year over year.

Erica Gessert: Up from our guidance last quarter of 90 to 94 cents.

Erica Gessert: For the full year, we expect weighted average shares outstanding between $139 to $141 million.

Erica Gessert: We are also providing an update to our stock based compensation expense guidance for the year.

Erica Gessert: We are tracking below that guidance in our projection for Q4, due to our long-term strategy regarding team structure and operating approach that balances stock-based compensation with cash-based compensation.

Erica Gessert: We expect stock-based compensation to continue to trend down into 2025.

Erica Gessert: These efforts, along with our ongoing cost discipline and active capital return, reflect our clear and unrelenting focus on building shareholder value over the near and long term.

Erica Gessert: Finally, as we've discussed for some time now, the macro environment continues to be challenging. New tech jobs continue to hover at a nearly three-year low, and inflationary and interest rate pressures continue to affect corporate spending across all business segments.

Erica Gessert: We expect that it will take some time for these broader macro factors to improve and spending behavior to shift.

Erica Gessert: Our ability to deliver strong growth over a multi-year period of volatility and suppressed demand is a testament to our focus on operational excellence and our highly attractive value proposition.

Erica Gessert: However, we're not immune to the environment we operate in. And as we expect macro pressures to continue as we enter 2025, we are cautious about our top-line growth over the next few quarters.

Erica Gessert: As always, I want to close by thanking our incredible team at Upwork for their contributions this quarter and their unparalleled creativity, focus, and pace of execution. With that, we would be happy to take your questions.

Speaker Change: Thank you. As a reminder 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 stand by while we compile the Q&A roster.

Erica Gessert: Transcript by Rev.com Page of

Speaker Change: And our first question comes from Ronald Josius City, your line is open.

Jake Vaughan: Hey, thanks so much. This is Jake Vaughan for.

Jake Vaughan: So really the first question I wanted to ask was around 4Q guidance.

Erica Gessert: And so we talked about improving trends in September.

Erica Gessert: and then that the guidance implies continuation of those positive trends through your end. Could you maybe spend a moment just on what is that kind of like assuming that those improving trends continue throughout the quarter maybe just help us understand.

Erica Gessert: I know you talked about it a little bit, but what are the key factors that are going to drive

Erica Gessert: GSV to reaccelerate.

Erica Gessert: and then.

Erica Gessert: Second

Erica Gessert: Really wanted to double click on the new surfaces for freelancers to promote their listings. You've talked about a few in the prepared remarks, but given that that could be the key driver of take rates going forward, just wanted to better understand the additional surfaces and key products that you expect to help drive those take rates going forward. Thanks so much.

Speaker Change: Yes, sure. Maybe I'll take this, Erica. I'll take the question on guidance and then maybe hand it to Hayden to talk about the freelancer services.

Erica Gessert: So on the Q4 guidance, you know, we did see really starting in late August and into September some improvements in our top of funnel trend versus what we experienced in June and July.

Erica Gessert: I do want to emphasize, though, that some of the top-of-the-line trends, including client picking work and contract starts, are still negative on a year-over-year basis. And so that's also in the guidance, as you can see. We are still forecasting kind of negative year-over-year GSB growth in Q4.

Erica Gessert: So I think, you know, while we have seen some improvement in the trends, and those are positive signs, I think that we are, you know, as I talked about,

Erica Gessert: We are still quite cautious on the macro environment and think that, you know, we've seen a lot of volatility in the trends and we're kind of not ready to call it a trend now. So, incorporated into the Q4 forecast is not an upswing in GSB trends overall, but really more of a steady state to what we saw going into October, which is consistent with.

Erica Gessert: You know, how the relationship between September and October has worked.

Speaker Change: Jake, on the topic of how sponsors can promote their offerings and how that relates to our cake rate outlook.

Jake Vaughan: Today on Upwork, there's a few ways that they can do this. So we have Boosted Profiles and Boosted Proposals as two ways that they can really make themselves more visible on the platform. And we also monetize on the sponsor side through Sponsor Plus, which is a subscription plan for sponsors, as well as

Speaker Change: Director, GFB, and the GFB, and this is the way that they buy bundles of Connect in order to bid on generally available jobs in the ecosystem. So there's basically four levers on the financial side there. These are generally not newly launched features in the last quarter, but we have been expanding and enhancing some of the ways that these features are visible. So for example, through the profiles is the one we mentioned earlier, which is now more common, more visible in search results, as an example.

Speaker Change: Our view is that we are continuing to be very specific and surgical and

Speaker Change: Making sure that these types of enhancements are

Speaker Change: super beneficial to the entire ecosystem as they have been to date.

Speaker Change: And as we mentioned, these are places where take rate will, you know, have maybe modest increases going forward, but we're not making wholesale pricing changes in the ecosystem that would drive substantial increases in take rate. And we're really pleased with the increases we've had already. I mean, it's a notable attraction increases in take rate you've seen over the last year, year and a half with us. But going forward, you're not going to see that type of, you know, major increases in take rate because

Speaker Change: We've done a lot of work here and we're going to continue to do so, but in a more surgical way.

Speaker Change: Unknown Speaker

Speaker Change: Thank you.

Speaker Change: Our next question comes from Andrew Boone of JMP Securities. Your line is open.

Andrew Boone: Thanks so much for taking my questions.

Andrew Boone: Hayden in the letter and prepared comments, it sounds like there's just an increased focus across the business.

Andrew Boone: Can you just dive in into that thought and talk about a couple of places where you guys are investing more engineering and maybe product resources to be able to refine, upwork, and more target your strategy as well as resources going forward? And then, Erica, a question in terms of costs. You guys have done a great job in terms of identifying efficiencies. How do we think about that going forward? As you guys get through your 25 budget planning, how do we think about cost structure and the growth of costs as we get to that 35%, even a margin target in the future? Thanks so much.

Speaker Change: Andrew, the way I think about this in terms of the focus is both the what and how of our work. So I talked earlier about the five growth levers that we're focused on in terms of revenue and GSD, and these are not new. We've been working on these for several quarters. We talked about them last quarter.

Speaker Change: but certainly as we continue to strategize and change some of the how in the business.

Speaker Change: We've stripped away, you know, projects and programs that were not directly lined up against these initiatives and that's, it's lent us more focus.

Speaker Change: more clarity. And also, as we look under the hood of some of these things, we are going after them with

Speaker Change: You know, fleets of smaller teams that are equipped to move more nimbly, more effectively against the goal.

Speaker Change: Unpacking those five levers and maybe just highlighting a couple of the ones that were particularly notable as we look back at this past quarter and some of the recent announcements.

Speaker Change: The second one around improving our customer productivity and accelerating work outcomes built on UMA, we just announced today this acquisition of Objective, which is really enhancing our focus and our acceleration of our AI roadmap. So this is something that's been underway for a while. We are very lean and disciplined in this area, but with an incredibly talent-dense team going after this and shipping incredible features.

Speaker Change: All the time. Another place with a ton of focus is the enterprise area.

Speaker Change: Transcription by CastingWords

Speaker Change: We've been retooling the strategy. We shipped business plus on October 16. This is coming out of a lot of work and insights that we've had in that area. And we've reduced the team size and enhanced the profitability of the entire business unit.

Speaker Change: through the work that we've been doing to really strategize how we unlock that huge TAM but in a very disciplined way. So lots of things happening in the business to make sure we're going after these huge levers for us in a very disciplined fashion.

Speaker Change: Yeah, and on the cost side, you know, the organizational realignment and the $60 million in cost improvements that we talked about on October 23rd,

Speaker Change: So, you know, these are part of an ongoing, you know, kind of, you know, kind of cost management that, you know, I talked about for several quarters, you know, talking about cost optimization as a multi-quarter endeavor.

Speaker Change: And this is just really the next step in that, you know, kind of in that journey. I think, you know, those cost improvements, they're not incremental to our stated five year profitability target of 35% adjusted income margins, but are really the step along the way.

Speaker Change: We do expect the majority of the $60 million cost savings to benefit the justices of the next year. So there'll be a small offset as we add some of the offsets for the objective acquisition, which, you know, overall we expect to be highly accretive over time as that team helps us to improve search and match and even further on our core platform.

Speaker Change: But, you know, with a relatively consistent take rate outlook for next year, we expect, you know, about, you know, a few points of EBITDA margin improvement in 2025.

Speaker Change: But, you know, I think as our record demonstrates over the past couple of years, we've had a clear focus on margin expansion, and we're fully committed to continuing that as we progress.

Speaker Change: Thank you.

Speaker Change: Thank you.

Speaker Change: Our next question comes from Bernie McTernan of Needham & Company. Your line is open.

Speaker Change: Hi, this is Stephanos Crist calling in for Bernie. Thanks for taking our questions. First, can you give us maybe a little more detail on objectives and what they do and how it will fit into the Upwork ecosystem?

Speaker Change: Yeah, absolutely. So objective is the company we entered into an agreement to acquire and are announcing today and they are an AI native.

Speaker Change: Search as a Service Company. And our goal is to accelerate the already all-time high performance we have in the search and match area of our core business, as well as accelerating UMA's capabilities around images, videos, and audio content.

Speaker Change: And this really builds on our successful M&A track record around identifying moles.

Speaker Change: Tech and Talent Focused Acquisition.

Speaker Change: which are aimed at advancing our AI strategy. And this started last year with the acquisition of Headroom, where we brought on board Andrew Rabinovich and his team, and they have been meaningfully advancing our AI roadmap, including all of the work on IMA and the features we've been launching throughout the year, and most recently our Upwork updates.

Speaker Change: So with Objective, we have been testing their capabilities with some proof of concept over the past few months. And this is really what gave us the confidence that their cutting edge technology would have a meaningful and immediate impact on our platform once we brought them in-house.

Speaker Change: So it's a small deal. It's a very small but high impact team. And we are looking forward to closing this deal in the coming weeks.

Speaker Change: and welcoming them on board.

Speaker Change: I just want to add that given the healthy balance sheet that we have and the free cash flow that we continue to generate, we are going to continue to look for opportunities to extend our own market leadership, deliver exceptional and innovative products like the ones we're already shipping to our customers to grow our business and enhance our possibilities through acquisitions exactly like this one.

Speaker Change: Got it. That's great. Thank you. And maybe just following up on that, you know, what does the M&A market look like? You know, how many potential acquisitions do you see out there and maybe different end markets you're looking at?

Speaker Change: Unknown Speaker

Speaker Change: Yeah, you know, I think our posture is to, you know, achieve our goals around our product roadmap and the strategies we've outlined in terms of growth.

Speaker Change: and profitability through M&A when and where it makes sense.

Speaker Change: I think a lot of buyers are on the sidelines right now, but that's not our posture because we're in a great position to bring in the right company, if and when they meet our very high bar. So in this case, a company came that didn't meet our bar, and we were very excited to make this deal happen. But of course, you know, every deal is unique, and we'll see what happens next.

Speaker Change: All right. Thank you.

Speaker Change: Our next question comes from Maria Ripps of Canaccord. Your line is open.

Maria Ripps: Great, thanks so much for taking my questions. Can you talk about sort of, excuse me, your thoughts on advertising spend next year in the context of your 60 million sort of cost savings initiative and maybe more broadly, how are you thinking about your customer acquisition strategy in this environment?

Speaker Change: And then secondly, any divergence in performance by smaller versus larger customers in Q3 and so far in Q4 maybe that you would highlight?

Speaker Change: Maria, I think the first question was on, was it on advertising spend? I'm sorry, you came through a little garbled. Was it on advertising spend? Yeah, sorry about that. Yeah, just any thoughts on your advertising spend for next year in the context of your $60 million cost savings initiative?

Speaker Change: Yeah, and I think you're asking about business segment behavior in your second question. So on the first question, you know, there's no change to our investment in our high ROI marketing investment.

Speaker Change: So, performance marketing, other high ROI channels that we've been, you know,

Speaker Change: Benefiting from, you know, we see good returns on those investments, and so there's no change to that. You know, we have, where we did, you know, kind of make some adjustments was in non-working marketing spend, but that won't affect any, you know, kind of customer acquisition or other things like that.

Speaker Change: On the on the question on kind of behavioral, you know, things on with business segments, I would say

Speaker Change: You know, one of the things that was notable in the quarter was that we did see a, you know, a GSB per client increase in every business segment.

Speaker Change: And so that was, you know, we were really, really pleased to see those signals.

Speaker Change: That said, you know, there really was no change from last quarter in that from a customer volume point of view, we did see some relative strength on the very small business side compared to some of the larger business segments. And it's actually some of that consistency and trends that

Speaker Change: does lead us to be cautious on next year because, you know, we really aren't seeing a significant change in trends. And quite honestly, I think, you know, the multiple quarters of macro pressures are going to take some time to unwind and truly change, you know, business spending behavior.

Speaker Change: Thank you so much for the call.

Speaker Change: Thank you.

Speaker Change: Presenter. Thank you. Thank you.

Speaker Change: Our next question comes from Brent Phil of Jeffries. Your line is open.

Speaker Change: Hi, thank you. This is Chan Byung for Brandsail. First question I had was around managed services. You seem to be getting more traction there or signing up more customers. I just want to see, you know, why, I mean, is there more organic demand coming to you or why are you making a bigger push there? And then I have a follow-up.

Speaker Change: The Traction Managed Services, I'd say, has been building over multiple quarters and

Speaker Change: really relate to the fact that we have a very attractive value proposition that spans

Speaker Change: Director Talent Offerings for larger customers who want to use that that feature of Upwork, as well as those who want to either extend beyond that and also have us build programs that are managed for them, or who simply want that you know as a standalone offering that we can deliver for them.

Speaker Change: So, you know, it's been building. Our sales team has seen more and more demand in the market for this.

Speaker Change: And so we have been, I'd say, leaning into where we could have demand signal and equipping ourselves.

Speaker Change: more, you know, go to market and other resources.

Speaker Change: to capture the demand that we're getting and leverage that. When we did our Upwork updates just a few weeks ago, we did enhance the capabilities of our managed services team with more AI enablement with UMA, which is continuing to differentiate our offering in terms of the speed and the quality, not just of the talent, but also the entire workflow underpinning managed services. So this will be a continued focus. And I think it just speaks to the breadth of our offering and kind of the demand signals that we see from larger customers.

Speaker Change: Great, thank you. And then on the Business Plus plan, I think during the prepared market you mentioned that it's being sold more by the land team. Just wondering in terms of rationale, putting that as part of the marketplace line, is that because it's still more self-service than anything or...

Speaker Change: As opposed to, you know, why not continue to have it in the enterprise line item.

Speaker Change: Yeah, so the way that we've structured the LAM team is that they are now selling these Business Plus plans on the Marketplace. And one of the reasons we did that was really to open up the acquisition funnel to have a much wider access to new volumes of clients and be able to actively sell parts of the enterprise value prop to Marketplace clients to help them move up the value chain with that.

Speaker Change: So, it reduces our cost of acquisition, it actually reduces our cost of service as well because it is a more self-service experience but has aspects of the enterprise value product.

Speaker Change: So for that reason, we recognize on the market in the marketplace plan.

Speaker Change: Okay, it makes sense. Thank you.

Speaker Change: Thank you.

Speaker Change: Our next question comes from Marvin Fong of PTIG. Your line is open.

Marvin Fong: Great, good evening. Thanks for taking my questions and congratulations on the quarter. So another question on, excuse me, Business Plus, you know, how should we kind of think about, you know, how many of your clients we know would be a good candidate for this?

Speaker Change: for this product line. And should we kind of think about this product and

Speaker Change: being something, kind of a stepping stone for clients to graduate up to enterprise, or do you kind of expect them to kind of stay on this plan for as long as they're on the platform? And then, second question, just on sort of the

Speaker Change: the, uh, the project.

Speaker Change: the Managed Project Service that you mentioned, you know, with Akoya and Lotus. Just kind of talk about what that opportunity opens up for you. How much of project work relative to the overall market might that represent? Thanks so much.

Speaker Change: Marvin, let me just frame how to answer your Business Plus questions in the context of some of the insights we've gotten in this area through the last couple quarters of testing.

Speaker Change: So what we saw was Enterprise Standard is a plan that we've had for many, many years now.

Speaker Change: kind of value within it.

Speaker Change: that has been out of reach for a lot of our target enterprise companies.

Speaker Change: Both in the price point of the plan and the buying model.

Speaker Change: So we can only get those customers into Upwork through the sales team. And so it's your question about, you know, who are the good candidates?

Speaker Change: Now that we have Business Plus, we are really opening up a much larger pipeline of large buyers who can now get to this plan through a smoother glide path, either by self-serving and upgrading from the marketplace as that stepping stone, as you mentioned, or by directly working with our sales team and coming in that way, which some larger customers require and prefer that as a way to set up a program with Upwork.

Speaker Change: So we have both of those as entry points now. And as we mentioned earlier, we're seeing hundreds of clients already in the couple of weeks since we've launched coming into this plan. And to be clear, those are clients of multiple sizes, but that does include many clients of our kind of enterprise-grade, enterprise-quality clients who are coming in through both of those channels.

Speaker Change: So this new plan allows us to much more rapidly and cost-effectively serve our mid-market and large customer target audience with a more accessible and broader value proposition while we also are selling managed services and other things also to these customers who want to buy that type of a program for us.

Speaker Change: So it's a more targeted and segmented approach that aligns the value we have with the customers that we're seeing and have seen through testing in the market, and has a lot of these benefits that we mentioned.

Speaker Change: In terms of Lettuce and Okoye, this is some very early proof of concept work that we've done around bringing

Speaker Change: Calendars that we have in our ecosystem in a more packaged way, in terms of delivering these work outcomes, almost like mini managed services projects, into the ecosystems of these types of partner businesses—in this case, Buddha's Nekoia—to really deliver outcomes for their customers.

Speaker Change: And so, this is early days and certainly, you know, it's very, it's too soon, I think, for us to project, you know, how big this market is or how big this opportunity is.

Speaker Change: with this idea of upper talent.

Speaker Change: being found in delivering work on an outcome basis, not just kind of an hourly basis.

Speaker Change: Great, that's super helpful. Thanks, Hayden.

Speaker Change: Well,

Speaker Change: Thank you.