Good day and thank you for standing by. Welcome to the Upwork Third Quarter 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Samuel Meehan, Vice President of Investor Relations. Please go ahead..

Thank you. 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. Following management's prepared remarks, , they will be happy to take your questions.

But first, I'll review the safe harbor statement. During this call we may make statements related to our business that are forward-looking statements under federal securities laws. Forward-looking statements include all statements other than statements of historical fact.

These statements are not guarantees of future performance, but rather are subject to a variety of risks, uncertainties, and assumptions. Our actual results could differ materially from expectations reflected in any forward-looking statements.

For a discussion of the material risks and other important factors that could affect our actual results, please refer to our SEC filings available on the SEC website and on our Investor Relations website, as well as the risks and other important factors discussed in today's earnings press release.

Additional information will also be set forth in our Quarterly Report on Form 10-Q for the 3 months ended September 30, 2024. In addition, reference will be made to certain non-GAAP financial measures.

Information regarding non-GAAP financial measures, including reconciliations to their most directly comparable GAAP financial measures, can be found in the press release that was issued this afternoon on our Investor Relations website at investors.upwork.com.

Unless otherwise noted, reported figures are rounded and comparisons of the third quarter of 2024 are to the third quarter of 2023. Adjusted EBITDA, adjusted EBITDA margin, and free cash flow are non-GAAP financial measures, and all other financial measures are GAAP unless cited as non-GAAP. Now, I'll turn the call over to Hayden..

Featured Jobs that are likely to be seen by more candidates and connect clients with the talent they need more efficiently. Other ads & 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.

Our organizational changes for proactive cost discipline and our pace of innovation that fuels our GSV and revenue growth levers continue to fortify Upwork, illustrated by our ongoing market share gains and outperformance of industry peers.

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, whereas revenue declined an average of 8% year-over-year across the broader staffing industry.

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.

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

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..

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. We continue to gain market share and generate increasing profitability and top-line growth.

Margins reached all-time highs in the third quarter, with our gross margin increasing to 78% and our adjusted EBITDA margin to 22%. We are demonstrating continued progress toward our goal of 35% adjusted EBITDA margin in the next 5 years, while increasing our operating leverage every year along the way.

The organizational changes we announced on October 23 will align our operating model with our ambitions for accelerated execution and margin expansion. These actions resulted in a company-wide 21% reduction in headcount and an expected $60 million in annualized cost savings. Now, I'll review a few highlights from our third quarter results.

Revenue grew 10% year-over-year to $193.8 million in the quarter, significantly above our previous guidance. This overperformance was driven by slight top-of-funnel improvements, momentum in Managed Services, and continued growth from our ads products.

Marketplace revenue was $167.3 million, a 12% increase compared to $149.6 million in the third quarter last year. In our Enterprise business, total Enterprise revenue grew slightly at $26.4 million in Q3. We remain very confident in the huge opportunity in Enterprise.

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.

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.

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.

We continue to grow our Managed Services land funnel and signed an increasing number of Managed Services MSAs in the quarter. Our overall active client base grew 2% year-over-year to 855,000, with both new acquisition and retention benefiting us.

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

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 & monetization business.

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.

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.

Non-GAAP gross margin continued to improve both on a year-over-year and sequential basis to 77.8%, as we executed disciplined cost management across every area of our business. 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.

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

Non-GAAP sales & marketing expense was $42.9 million and it declined 3% year-over-year, and we expect spend to decline in the fourth quarter by an even greater magnitude on a percentage basis compared to the third quarter. Our provision for transaction losses remained low at $1.8 million for Q3, approximately 1% of total revenue.

Adjusted EBITDA was $43.2 million in the third quarter, representing adjusted EBITDA margin of 22.3%. Our profitable business model generated our highest quarter of GAAP net income ever and continues to generate GAAP earnings per share growth, which includes the impact of stock-based compensation.

For the third quarter of 2024, GAAP net income was $27.8 million and fully diluted GAAP earnings per share was $0.20. Free cash flow for the third quarter was $98 million, which benefited from the weekly timing of payments to customer accounts.

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. 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.

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. Turning to guidance.

We are increasing our fourth quarter revenue and adjusted EBITDA outlook based on a continuation of trends we saw in the third quarter. For the fourth quarter of 2024, we expect to produce revenue in the range of $178 million to $183 million.

For adjusted EBITDA in the fourth quarter, we are guiding to a range of $38 million to $42 million, which represents an adjusted EBITDA margin of 22% at the midpoint. We expect the majority of the cost benefits driven by our recently announced organizational changes to materialize in 2025.

For the full year 2024, we anticipate revenue between $756 million and $761 million, representing 10% year-over-year growth at the midpoint. We expect our take rate for the rest of the year to be down slightly from what we saw in Q3.

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 million to $159 million.

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.

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

We expect full-year 2024 non-GAAP diluted EPS to be between $1 and $1.02, up from our guidance last quarter of $0.90 to $0.94. For the full year, we expect weighted average shares outstanding between 139 million to 141 million. We are also providing an update to our stock-based compensation expense guidance for the year.

Our prior guidance was that SBC expense would average a little under $20 million per quarter in 2024. We are tracking below that guidance both 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.

We expect stock-based compensation to continue to trend down into 2025. 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. Finally, as we have discussed for some time now, the macro environment continues to be challenging.

New tech jobs continue to hover at a nearly 3-year low, and inflationary and interest rate pressures continue to affect corporate spending across all business segments. We expect that it will take some time for these broader macro factors to improve and spending behavior to shift.

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.

However, we are not immune to the environment we operate in, and as we expect macro pressures to continue as we enter 2025, we are cautious about top line growth over the next few quarters.

Within this environment, we will continue our focus on durable, profitable growth, our investment in new growth vectors like the advancement of AI on our platform, and our commitment to driving shareholder value through capital return as we expand our margins and free cash flow.

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..

Thank you. [Operator Instructions] And our first question comes from Ronald Josey of Citi. Your line is open..

Hey, thanks so much. This is Jake Zhang for Ron. So really the first question I wanted to ask was around 4Q guidance. And so we talked about the improving trends in September 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 -- I know you talked about it a little bit, but what are the key factors that are going to drive GSV to reaccelerate? And then, second, really wanted to double click on the new services 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 services and key products that you expect to help drive those take rates going forward. Thanks so much..

Yes, sure. Maybe I'll take this, and Erica will take the question on guidance and then maybe answer to you to talk about the freelancers services. So on the Q4 guidance, we did see really starting in late August and into September, some improvements in our top of funnel trends versus what we experienced in June and July.

I do want to emphasize, though, that some of the top of the funnel trends, including clients seeking work 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. We do, we are still forecasting kind of negative year-over-year GSV growth in Q4.

So I think, 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, we are still quite cautious on the macro environment and think that 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 kind of GSV trends overall, but really more of a steady state to what we saw kind of going into October, which is consistent with how the relationship between September and October has worked..

Jake, on the topic of how freelancers can promote their offerings and how that relates to our take rate outlook, 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 center side through Freelancer Plus, which is a subscription plan for freelancers, as well as 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 freelancers 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, user profiles is the one we mentioned earlier, which is now more prominent, more visible in search results as an example.

As these relate back to your question about take rates, our view is that we're continuing to be very specific and surgical in making sure that these types of enhancements are super beneficial to the entire ecosystem as they have been to date.

And as we mentioned, these are places where take rate will -- 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 been notable, the traction 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 we've done a lot of work here and we're going to do so, but in a more surgical way..

Thank you..

Thank you. Our next question comes from Andrew Boone of JMP Securities. Your line is open..

Thanks so much for taking my questions. Hayden, in the letter and prepared comments, it sounds like there's just an increased focus across the business.

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. 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% EBITDA margin target in the future? Thanks so much..

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 GSV, 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, we've stripped away projects and programs that were not directly lined up against these initiatives. And that's what lends us more focus, more clarity.

And also, as we look under the hood of some of these things, we are going after them with 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. 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.

Another place with a ton of focus is the Enterprise area. 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 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..

Yes, and on the cost side, the organizational realignment and the $60 million in cost improvements that we talked about on October 23. So, these are part of an ongoing kind of cost management that I talked about for several quarters, talking about cost optimization as a multi-quarter endeavor.

And this is just really the next step in that kind of in that journey. I think, those cost improvements, they're not incremental to our stated 5-year profitability target of 35% adjusted EBITDA margins, but are really the step along the way. We do expect the majority of the $60 million cost savings to benefit adjusted EBITDA next year.

So there'll be a small offset as we add some of the OpEx for the Objective acquisition, which 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.

But with a relatively consistent take rate outlook for next year, we expect -- about a few points in EBITDA margin improvement in 2025. But I think as our record demonstrates over the past, call it, a couple of years, we've had a clear focus on margin expansion, and we're fully committed to continuing that as we progress..

Thank you..

Thank you. Our next question comes from Bernie McTernan of Needham & Company. Your line is open..

Hi. This is Stefanos Crist calling in for Bernie. Thanks for taking our questions.

First, can you just give us maybe a little more detail on Objectives? What they do and how it will fit into the Upwork ecosystem?.

Yes, absolutely, Stefanos. So, Objective is the company entered into a definitive agreement to acquire and announcing today and they are an AI-native 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. And this will build on our successful M&A track record around identifying small tech and talent focused acquisitions, 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.

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. So it's a small deal. It's a very small but high impact team.

And we are looking forward to closing the deal in the coming weeks and welcoming them on board.

I just would 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..

Got it. That's great. Thank you.

And maybe just following up on that, what does the M&A market look like? How many potential acquisitions do you see out there and maybe different end markets you're looking at?.

Yes, I think our posture is to achieve our goals around our product roadmap and the strategies we've outlined in terms of growth and profitability through M&A when and where it makes sense.

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 [indiscernible] and we are very excited to make this deal happen. But of, course, every deal is unique and we'll see what happens next..

All right. Thank you..

Thank you. Our next question comes from Maria Ripps of Canaccord. Your line is open..

Great. Thanks so much for taking my questions.

Can you please 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? Excuse me, and then secondly, about any divergence in performance by smaller versus larger customers in Q3 and so far in Q4 maybe that you would highlight..

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?.

Yes sorry about that.

Yes, just any thoughts on your advertising spend for next year in the context of your $60 million cost savings?.

Yes, and I think you're asking about business segment behavior in the second question. So on the first question, there's no change to our investment in our high ROI marketing investments. So performance marketing, other high ROI channels that we've been benefiting from, we see good returns on those investments and so there's no change to that.

We have -- where we did kind of make some adjustments was in non-working marketing spend, but that won't affect any kind of customer acquisition or other things like that.

On the question on kind of behavioral things with business segments, I would say one of the things that was notable in the quarter was that we did see a GSV per client increase in every business segment. And so we were really pleased to see those signals.

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

Got it. Thank you so much for the call..

Thank you. Our next question comes from Brent Thill of Jefferies. Your line is open..

Hi. Thank you. This is John [indiscernible] for Brent Thill. 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, why -- I mean, is there more organic demand coming to you, or why are you making [indiscernible]? And then I have a follow-up..

Sure, John.

The traction Managed Services, I'd say, has been building over multiple quarters and really relates to the fact that we have a very attractive value proposition that spans direct to talent offerings for larger customers who want to use that feature of Upwork, as well as those who want to either extend beyond that and also have a skilled program that are managed for them, or who simply want that as a standalone offering that we can deliver for them.

So it's been building, our sales team has seen more and more demand in the market for this. And so we have been, I'd say, leaning in to where we see the demand signal and equipping our sales team with more go-to market and other resources 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 demands that we see from larger customers..

Great. Thank you. And then on the Business Plus plan, I think you had during the prepared marks you mentioned that 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 as opposed to why not continue to have it in the Enterprise line item?.

Yes, so the way that we've structured the land team is that they are now selling these Business Plus plans 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 access to new volumes of clients and 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 us.

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 prop. But for that reason, they're going to be recognized in the marketplace plan..

Okay. That makes sense. Thank you..

Thank you. Our next question comes from Marvin Fong of BTIG. Your line is open..

Great. Good evening. Thanks for taking my questions and congratulations on the quarter. So another question on Business Plus.

How should we kind of think about how many of your clients would be a good candidate for this product line? And should we kind of think about this product as 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 project, the managed project service that you mentioned, with Ocoya and Lettuce, 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..

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.

So what we saw was Enterprise Standard is a plan that we've had for many years now and has a ton of value within it, but has been out of reach for a lot of our target enterprise companies, both in the price point of the plan and the buying model. So we could only get those customers into Upwork through the sales team.

And so to your question about, who are the good candidates, 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.

So we have both of those as entry points now. And as we mentioned earlier, we're seeing hundreds of clients already since -- in a 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 for coming in through both of those channels.

So this new plan allows us to much more rapidly and cost effectively serve our [indiscernible] 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.

So it's a more targeted and segmented approach that aligns the value we have with the customer needs that we're seeing and have to think through testing in the market and has a lot of these benefits that we mentioned.

In terms of Lettuce and Ocoya, this is some very early concept work that we've done around bringing 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, [indiscernible] Lettuce and Ocoya to really deliver outcomes for their customers. And so this is early days and certainly it's very -- it's too soon I think for us to project how big this market is or how big this opportunity is.

But this idea of upward talent being found in delivering work on an outcome basis, not just kind of an hourly basis inside of these third-party ecosystems of which there's thousands or tens of thousands of these businesses potentially, is a very exciting and different borrowing model for us to be bringing and connecting basically demand and supply in a different way outside of our own kind of internal captive ecosystem.

So we'll keep you posted, but we're excited about some of the testing that we're doing..

Great. That's super helpful. Thanks, Hayden..

Sure..

Thank you. That concludes Upwork's third quarter 2024 earnings call. Thank you for participating, and you may now disconnect..