Upwork:Quarterly Results/2024 Q2

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Earnings Call Summary

Webcast: Upwork Q2 2024 Earnings Conference Call | Transcript: Upwork Q2 2024 Earnings Conference Call

Q2 2024 Results

• Revenue rose 15% y/y to $193.1 million driven by the flat fee structure as well as sustained momentum from ads and monetization products. "Revenue grew 15% year over year to $193.1 million in the second quarter and was driven in part by the flat fee pricing structure we started last year as well as sustained momentum from our ads and monetization products," CEO Hayden Brown said.
• Upwork reported GAAP net income of $22.2 million, the highest ever.

• CEO Hayden Brown said they outperformed their profitability goals in a dynamic macroeconomic environment that has become more challenging for both large and small businesses.
• CFO Erica Gesert said customer spend and behavior of Enterprise clients remained consistent with Q1.

GSV, Take rate and Clients Insights

• GSV declined 2.7% while GSV per active client was down 5% in Q1 due to macro-related challenges.
• Active clients grew 6% y/y to 868,000 aided by both acquisition and retention.
• Take rate rose 30 bps to quarter over quarter to 18%.
• Gesert pointed out that they are confident that they can grow their take rate further. "We are confident we have additional capacity to grow our take rate, and our approach to this is focused on pricing to value. We continue to test and experiment with a wide variety of monetization strategies on the platform, and these tests are supporting our belief that we have significant opportunities to increase our take rate in the future," she said.
• Freelancer Plus subscriptions grew 28% y/y in Q2.
• Hayden Brown pointed out that they are still behind their competitors when it comes to monetization (Q&A). " Stepping back and looking more broadly at the ads and monetization opportunity we have, we know that given where we are today and when we compare our opportunity to other two-sided marketplace businesses, there is a lot of run room here. And we also know specifically about features and functionality, whether it's in value-added services or further enhancements to subscriptions that there's a long road map here that we can execute on," she said.
• Hayden said they expect the levers they are investing now such as UMA, AI, anti-circumvention efforts and enterprise initiatives to benefit GSV from 2025.

Macro

• Hayden Brown said macro conditions became more challenging in Q2 2024: "This challenging environment showed through with softer top-of-funnel activity than expected in the second quarter. A leading indicator of the softness that we track internally is client-seeking work, which is a measure of the number of clients engaging in an action that leads to a new contract. In Q1, this number accelerated 11% quarter over quarter, while in Q2, this number decelerated 6% sequentially, with particular impact in May and June, along with a mix shift of active clients toward very small businesses," she said. 'We did see those trends get slightly worse in June and July," Gesert said.
• Hayden said the tech industry is being hit harder in terms of job openings perspective. But there are some categories in tech that are performing better.
• Hayden pointed out that U.S., Germany, and U.K. were more impacted than other countries.

Outlook

• Hayden said though small businesses showed resilience compared to other cohorts, their spend has historically been smaller hence they are lowering their guidance for 2024. "We believe it's prudent to assume that the changes in client activity due to macroeconomic conditions that we observed in Q2 will remain for the rest of 2024, and we have factored those changes into lowered 2024 full-year revenue guidance while reiterating our 2024 full-year adjusted EBITDA guidance," she said.
• Gesert pointed out that they also expect some anti-circumvention headwinds in 2024. "Contemplated in our revenue guidance are some near-term headwinds from anti-circumvention initiatives, which we expect will help to improve customer experience and platform quality while stimulating long-term growth of our marketplace," she said.
• They also expect timing headwinds in Q4. "As a reminder, GSV and revenue growth, and consequently adjusted EBITDA margins, 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. Excluding the structural impact, our GSV growth rate for the year would be approximately one point higher."

• They expect their take rate throughout 2024 to remain stable with what they saw in Q2 due to the current trends that they are seeing. " I think we're just being prudent, again, kind of anticipating the trends that we're seeing and just looking at top-of-funnel trends, both on kind of the demand side as well as this mix shift and expecting that we'll see a little bit lighter usage in some of the ads products as well," Gesert said in their Q&A.
• Gesert pointed out that they will likely maintain their cost discipline as demand picks up. "We've built a very, very good, for example, performance marketing engine, with very kind of clear parameters in terms of yield and ROI, and we'll continue to invest that way as we go forward. So, I don't necessarily see the need to ratchet up significantly our spend as demand returns, but we'll assess it as we go," she said.

Pricing

• Hayden said they added more connects during the quarter.
• Hayden pointed out that asset monetization products revenue grew by 75% y/y. "Asset monetization products continue to be one of our fastest-growing revenue streams," she said.

Share Buy Backs

• They bought back shares worth $33.1 million during the quarter.

Competition

• Hayden pointed out that their numbers indicate they are winning market share. "Our numbers also evidence our continued success in winning share from offline, analog, and digital hiring and staffing sources as we outperform broader market trends. Upwork benefits from the ongoing enduring secular shift toward a high-quality, cost-effective, flexible alternative to traditional full-time and contingent staffing approaches," she said.

AI

• Hayden Brown said in the Q&A that the number of jobs in the platform that can get disrupted by AI are few. "The segment of jobs in our marketplace that are less complex and hypothetically, most easily disrupted over time by AI, are jobs and Upwork with less than $300 of spend, which comprised just under 5% of our GSV today," she said. Hayden added that they are not yet seeing an AI impact on these jobs. "To be clear, we are not yet seeing a broad-based AI impact overall in this small job segment. Now, if you look within the small job segment, the current impact from AI is much more limited and is most visible in a couple of categories. Writing and translation is obviously where it's most evident, and that's just as we've expected and seen over multiple quarters now. In writing and translation and elsewhere, we continue to see, at this point, a positive AI-driven mix shift away from simple, very low-effectiveness jobs, to complex, more valuable, higher-paying work."

• Hayden said clients are coming to them to transform their AI dreams into realities.
• Hayden pointed out that more than half of Upwork freelancers are already familiar with AI compared to 15% of corporate employees.
• Some of Upwork's AI clients include Scale AI which uses Upwork's talent.
• GSV from AI-related work was up 67% y/y in Q2.
• AI freelance professionals earned 47% more per hour than those that working on non-AI related projects.
• Upwork announced UMA in Q2, an AI model that facilitates hiring and matching process.
• Users interacting with UMA grew 23% y/y in Q2.

Products

• During Q2, Upwork ring-fenced its existing enterprise client functionality. The result was more winning of enterprise clients. They added 46 enterprise clients in Q2, 27 as a result of the new model and 19 as a result of the traditional model.
• They introduced AI-powered Upwork Chat Pro app to the Freelancer Plus subscription during the quarter. Upwork Chat Pro saw 68% y/y growth in daily active users.

Clients

• Some of the clients added during the quarter include Labelbox, Builders FirstSource, and Guidepoint.
• Historically, they acquired clients through their website and mobile apps, word of mouth, SEO and paid acquisition channels but now they are also targeting third-party ecosystems, where they win clients from their partners.
• Hayden Brown said they double their partnership deals in Q2 and May brought the highest monthly revenue from partnerships that they have seen to date. However, GSV contribution by partnerships is still small though growing.