Upwork, Inc Q1 FY2023 Earnings Call

Thank you for joining us for Upwork's First Quarter 2023 Earnings Conference Call. As a reminder, today's call is being recorded. I will now turn it over to your host, Mr. Evan Barbosa, Vice President of Investor Relations. Please proceed.

Thank you. Welcome to Upwork's discussion of its first quarter 2023 financial results. Joining me today are Hayden Brown, Upwork's President and Chief Executive Officer, and Erica Gessert, Upwork's Chief Financial Officer. Following management's prepared remarks, we'll be happy to take your questions. But first, I'll review the Safe Harbor statement. During this call, we may make statements related to our business that are forward-looking statements under federal securities laws. Forward-looking statements include all statements other than statements of historical fact. These statements are not guarantees of future performance but rather are subject to a variety of risks, uncertainties, and assumptions. Our actual results could differ materially from expectations reflected in any forward-looking statements. For a discussion of material risks and other important factors that could affect our actual results, please refer to our SEC filings available on the SEC website and on our Investor Relations website, as well as the risks and other important factors discussed in today's shareholder letter. Additional information will also be set forth in our quarterly report on Form 10-Q for the three months ended March 31, 2023, when filed. In addition, reference will be made to certain non-GAAP financial measures. Information regarding a reconciliation of non-GAAP to GAAP measures can be found in the shareholder letter that was issued this afternoon on our Investor Relations website at investors.upwork.com. As always, unless otherwise noted, reported figures are rounded and comparisons to the first quarter of 2023 or to the first quarter of 2022. All financial measures are GAAP unless cited as non-GAAP. Now I'll turn the call over to Hayden.

Thanks, Evan, and thank you all for joining us today for our first quarter 2023 earnings call. Before we dive into our results, I would like to take a moment to introduce all of you to our new CFO, Erica Gessert. She started her new role last week, and I'm thrilled to welcome Erica to Upwork. Erica joins us from PayPal, where she previously served as Chief Transformation Officer and before that SVP of Finance and Analytics. She has had an extensive track record of driving operational and financial excellence and is a tremendous addition to our team.

Thank you, Hayden, and hello, everyone. Let me start by saying I am delighted to join Upwork at such an important time in the company's history. I'm inspired by Upwork's mission and vision, and I'm deeply compelled by the tremendous growth potential ahead of us. My first week has been busy and energizing. There's clearly a lot going on in the business, and we're not immune to the macroeconomic environment affecting so many companies right now. Just a week in, I've been very impressed by Hayden and the team here and their commitment to making the difficult but responsible decisions for the business in this environment. I spent a lot of time over the past week diving into the details of our business and engaging with the organization on key growth and profitability initiatives. There's a lot of important work ahead of us, but the long-term opportunity is significant. Upwork is well positioned and committed to delivering sustainable and profitable growth. I look forward to partnering with Hayden and the rest of the leadership team, as well as continuing our transparent relationship with our investors, analysts, and other key stakeholders. Now I hand it back over to Hayden.

Thanks, Erica. I'm looking forward to partnering with you as we continue to innovate, evangelize, and scale our work marketplace. We spent the first quarter of 2023 moving swiftly to adapt to new realities as we saw the economy further impact our customers and our business. We delivered a better than expected first quarter with GSV exceeding $1 billion for the fifth straight quarter and first-quarter revenue growth of 14% year-over-year to $160.9 million. We had adjusted EBITDA of negative $2.9 million in the first quarter. We also surpassed an exciting milestone in the first quarter with $20 billion in lifetime Freelancer earnings on Upwork, which doubled from $10 billion in only three years. This milestone is a testament to the incredibly diverse high-value work happening on our platform every day, as well as the abundance of highly skilled talent with which hundreds of thousands of clients build long-term trusted relationships on Upwork. We're building this business to achieve the next milestone of $40 billion in Freelancer earnings and beyond. At the same time, we saw some unanticipated deterioration in certain client metrics due to macroeconomic uncertainty, which was most pronounced with our enterprise customers and large businesses in the self-service marketplace. This caused us to lower our top-line revenue growth expectations and proactively take cost reduction measures to increase our profitability outlook for the remainder of the year and significantly accelerate our progress towards long-term profitability. The opportunity ahead of Upwork continues to be significant, and we're moving aggressively and intentionally to advance both our profitability and growth goals via a three-part framework. First, running a lean and efficient organization. We remain unwavering in our commitment to building an efficient, profitable business; steps we have taken to streamline our operations include a workforce reduction, a pause on our second-half brand media investment, considerable revisions to our hiring plans, and a reduction of vendor-related expenses. We reduced our workforce by 137 roles or approximately 15% of full-time employees and have also reduced positions of independent team members. We're also pausing our brand media investment indefinitely and reducing our brand working media spend by more than $22 million in the second half of 2023, representing a reduction of 94% versus the prior plan for the second half of 2023. Our team has done a phenomenal job increasing our unaided brand awareness, and our brand campaign is resonating with customers. However, in the current macroeconomic environment, we do not have enough visibility into exactly when we will see brand awareness translate into client conversion to continue prioritizing the investment at this time. In total, the measures announced today are expected to drive over $80 million of annualized net cost savings and deliver approximately $40 million of net cost savings in 2023. Our second-quarter 2023 adjusted EBITDA guidance of zero to $2 million, representing a 0% to 1% adjusted EBITDA margin includes approximately $4 million of non-recurring severance-related costs. Excluding these non-recurring severance-related costs, our second-quarter 2023 adjusted EBITDA margin would have been expected to be 3% to 4%. These actions put us on a course to deliver a fourth-quarter 2023 adjusted EBITDA margin of approximately 16%, while remaining consistent with our ongoing commitment to drive durable growth and invest for strong returns. Our cost discipline, agility, and focus on cost optionality in our operations will continue under Erica Gessert, who we are thrilled to announce as our new CFO during the first quarter. We will share more about her long-term outlook and targets over the next several quarters as Erica settles into the role. We were also pleased to announce Sunita Solao as our new Chief People Officer shortly after quarter end and look forward to her leadership of our people team. Second, optimizing our growth portfolio. Growth continues to be a major priority, and we are focused on two main areas right now. Over the last few years, we bolstered our product lineup considerably with key enhancements and expansions, including integral improvements to our enterprise suite, the addition of new products like product catalog consultations, and our recently announced end-to-end solution to support full-time hiring. As the category leader in our space, we know that our opportunity to offer customers a singular destination capable of serving the full breadth of their hiring and work needs is critical for client spend, lifetime value, and retention. Now that we have such a robust product lineup, we're in a strong position to drive the adoption of our product portfolio and deliver even more delightful experiences to customers. This means we're going deeper rather than broader with our R&D, narrowing the scope and focus of the projects on which our team will work. Another major focus area for us continues to be generative AI. We are establishing Upwork as a pre-eminent option for finding and hiring specialized skilled talent for the full range of generative AI-related work. We have identified and are pursuing multiple dimensions of this opportunity for talent, clients, and our own teams through our product development, unique research, and partnerships. Both supply and demand for work and talent related to generative AI tools and technology implementations continue to climb. The average weekly number of search queries related to generative AI in the first quarter increased over 1,000% compared to the fourth quarter of 2022, and the average number of weekly job posts related to generative AI increased more than 600% over the same time period. To serve this explosive demand, we have continued updating our talent marketplace to reflect exciting new skills and roles, like prompt engineers, and added new project catalog categories of work, bringing the total number of categories on Upwork to over 125. Our own development team has also been innovating and testing new interfaces and experiences made possible for our customers by generative AI technology and large language models. We are testing generative AI-powered solutions for transforming core customer experiences, like getting started, posting jobs, receiving support, and having questions answered. We are working around the clock to bring the benefits of these new technologies to talent on Upwork in every category we serve. Generative AI, as it emerges into the mainstream, has us excited. We know that it is going to be a force-multiplying tool for talent and a cost-saving advantage for clients. We are committed to fully exploring and harnessing its power and efficiency. Finally, our third focus area is tuning our sales approach to where we win in this macro environment. In the fourth quarter of 2022, trends in enterprise suggested we could achieve our quarter-over-quarter growth goals, including productivity, and expand client spend for 2023. These indicators included expected strength or stability in key metrics like sales cycle lengths, new deal close rates, client retention, and spend levels from some of our largest customers. Those expectations did not materialize, and headwinds in these metrics in the first quarter and early in the second quarter shifted our expectations. So we've acted accordingly, announcing personnel changes today that put our sales team back on sound economic footing. As part of these changes, Eric Gilpin, our Chief Sales Officer and current GM Enterprise, will be stepping down. He has contributed so much to building our business and team to this point and is leaving a strong legacy. He will stay on in an advisory role through the end of the second quarter. We also spent time in the first quarter analyzing our data and testing to identify key insights about where our product and our sales reps are performing best. We're using those insights to refine our sales strategy, focus on the most productive areas of opportunity in this environment, and drive stronger results with the leader team we have bringing our productivity back in line with our ROI targets. To support our objectives, as underscored in the three-part framework, we continue to focus on capital structure and allocation. In the first quarter, we repurchased at a discount over $200 billion in principal amount of our outstanding convertible senior notes. Despite some of the short-term turbulence we face, we continue to operate the business in a nimble and proactive manner, given our confidence that our massive long-term opportunities continue to be intact. As our financial results demonstrate, we continue to grow, albeit at a more moderate rate. Our established strategy and investments are sound, and we will continue to be prudent and disciplined with our spending in the here and now, taking actions aimed at delivering profitability as we progressively unlock durable growth and position the business to capitalize on the recovery in the macroeconomic environment. Throughout 2023, we're focused on the things we can control, innovating, evangelizing, and scaling a work marketplace that delivers cost-effective, unparalleled workforce solutions, and an exceptionally deep and diverse pool of skilled global talent to meet our customers' work needs. Thank you. We'll now open the call to your questions.

Thank you. Our first question comes from Eric Sheridan of Goldman Sachs. Your line is open.

Thank you so much for taking the questions. Maybe two, if I could. First in terms of the larger clients where you're still seeing very good growth. Could you contrast the behavior of some of your larger clients and the growth you're seeing there versus some of the smaller and medium-sized clients and why we might be seeing more of a macroeconomic impact there versus the larger clients? And then on the back of the efficiency program, how should we think philosophically about allowing elements of that increased profitability to drop and stay at the bottom line in terms of margin versus eventually possibly redeploying and reinvesting it behind your growth initiatives over the medium to long-term? Thanks so much.

Hi, Eric. Your first question around the spend trends that we've seen in the last couple of months emerging, we still feel excited about the enterprise opportunity for this business; it's clear that this is evident, unlocked for us over time with our TAMs. But in this macro environment, we've definitely seen some of our larger customers really feeling under budgetary pressure. And the way that's translated through is that some of them are just maintaining the existing budgets that they've had with us instead of expanding that spend as they might have in a normal macro environment. That's really clear on the enterprise side of our offering. Others are going through budget cuts themselves or layoffs and things like that, and those customers might be reducing the size of their spend with us, whereas again, in an ordinary environment, they would be maintaining or expanding their spend. This has been shown in our enterprise business and has contributed to more than half of the reduction in our guidance outlook for this year. On the marketplace side of the business, where we talked about, our smaller customers have been incredibly resilient. While we do see some smaller average spend per client than what we would normally see outside of this macro environment, that business is trending really well and is contributing much less to our takedown in the guidance outlook. To your second question around philosophically thinking about margin in the bottom line, we've always been very committed to driving profitable growth in this business, and that has not changed. But in this environment, which has changed, we're really demonstrating that we can drive that profitable growth and have reordered some of our priorities so that we are investing again right now in the places where we see a good line of returns, and are excited about things like R&D, and where that can pick up, and are right sizing our sales efforts based on what we see in the environment. Exiting this year with Q4 at an approximate 15% EBITDA margin, I think, is a good indicator of where we think we can take this business. But it's early to say what we would do in 2024 and beyond.

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

Hello, this is John Byun for Brent Thill. Thank you. Once you get maybe a little bit more call on the macro side and what you were seeing different maybe by industry, or by geography. You mentioned tech was weak, but just wondering about some of the other industries. And then maybe as a follow-up, if you could talk about how April trends were different in any way versus what you saw in Q1. That'll be great. Thank you.

Hi, John. In terms of industry and geo trends, we did see, for the end of Q1, more of a show-through in terms of tech from an industry sector. We've seen the layoffs and the impact of the tech industry at large. And I think that's affected some of our customers more prominently than what we've seen earlier in Q1 or even in 2022. So that was a bit more evident, although we still see tech companies as some of our strongest vendors and great adopters of Upwork. So by no means has that opportunity gone away. But I think they are feeling the pain of this environment, and that was more evident with our larger customers this quarter than in the past. And we have seen, at the same time, a lot of positive activity in terms of technical categories on our site with huge growth in job posts and demand for Gen AI. Again, we served tech buyers across the landscape, regardless of the industry of those client companies, and that's reflected by the increase in 10x of searches for talent in those categories and a 600% quarter-over-quarter increase in job posts for that type of talent. So we continue to serve both talent, technical talent and technical customers in a variety of ways, which I think is interesting. From a geo perspective, the trend that we started to see in Q3 of last year continues to hold; the European customer base on the client side has been more affected. Our clients in the U.S. have continued to be a bit stronger than European-based clients, but I can't say that there was any new noticeable separation more recently than currently.

Thank you. One moment, please. Our next question comes from the line of Nat Schindler of Bank of America, your line is open.

Yes. Hi, Hayden. Thank you. The CEO of IBM recently said that they could see 30% of back-office jobs replaced by AI in the next five years. Obviously, we've heard all kinds of predictions like this before from other people. But it was an interesting one that just came out and a lot of people were thinking about AI disruption in the market in the last two days. On the one side, you can help companies find AI contract work. But on the other side, you have a lot of contractors who do what would be often called back-office work or short-term labor that would be in that category. What do you think happens to the entire staffing industry online and offline competitors as AI finds its way into this space?

Yes. Nat, thank you for the question. I think it's a really interesting sea change that's happening in the environment right now with the advent of AI. The outlook from IBM is insightful because frankly, we all know that the old ways of working are out the window. This started before AI, I mean, as we've gone through the pandemic, with the advent of remote work, companies absolutely need to be rethinking their workplace and workforce strategies, and we are a part of that. The fact that IBM is rethinking their workplace and workforce strategy with AI is actually a huge opening for a company like Upwork. In the past, when they weren't thinking big about how they need to redesign work, and who and how work is getting done, including the technology and the tools to deliver that work, it was a lot harder for a company like us to get into that conversation and have a really strategic conversation about how they need to shift from full-time employees and fractional work to project-based work in a different model, just really what we deliver. In a world where companies are now rethinking how work is delivered and what tools are critical for that is an enormous opening for Upwork now and in the future.

Thank you. One moment please. Our next question comes from the line of Matt Farrell of Piper Sandler. Your line is open.

You made the move to cut the second-half brand spending almost entirely due to the macro? I guess, where does brand spending fit into the picture longer term now that we've accelerated the path to profitability? And what are you looking for in the market to potentially reinstitute the brand spend, maybe at the size and scale that you have been over the last couple of quarters?

Matt, our marketing team has done a phenomenal job increasing our awareness. We saw a 45% increase in unaided awareness among business decision-makers overall since the start of the campaign that we released at the end of last year. I think at this moment, we don't have enough visibility into exactly when we will see the brand awareness that we've been building translate into client conversion. Particularly just because, in this environment, companies are really in this mode of cutting budgets, kind of cut now, ask questions later about how they're going to deal with some of the things that they're trying to address. I think it's a good question. We need to drive results around some of the more immediate term opportunities we see where we know we can invest and deliver strong returns from a growth perspective and then come back to this question about brands over time. Knowing also that, in the meantime, we can execute on other more targeted ways to elevate our brand awareness with the right audiences, as well as deliver on performance marketing and other channels that are doing really well for us in this environment.

And maybe a second question, you all announced a change in the fee structure to a more simplified dynamic, I guess as we think about the marketplace take rate, as we move through 2023 and 2024, how should we be thinking about the tailwinds or the uptick in marketplace take rate due to the fee structure change? Thank you.

Sure. I think the take rate expectations we have for this year are around something similar from an expansion perspective to what we probably saw last year. I'd underscore that the pricing changes that we're making really are founded in marketplace health and ensuring that we're both capturing value when we're creating value and we're driving the right incentives on the platform around first and foremost, unlocking client demand. Because at the end of the day, we are a demand-constrained business. That's really beneath all of the changes we've made into pricing, both last year and this year.

Thank you. One moment, please. Our next question comes from the line of Brad Erickson of RBC Capital. Your line is open.

Hey, thanks for taking the question. And this is Logan on for Brad. Maybe one for Erica, just because you've been in the business for about a month now, what are the kind of big initiatives and things you'll be working on in the next six to twelve months? Thanks.

Sure, Logan. Nice to meet you. Just to correct you, I'm actually on day eight right now. So a little less than a month. But I do feel like I've had an opportunity to dig in, although I'm really just scratching the surface here. First and foremost, obviously learning the business and the team. I do want to dig into the growth strategies of the roadmap of which I've seen many. I just want to emphasize in my first eight days, we're not immune from the broader macroeconomic environment in this business. But by no means does that diminish opportunity ahead for us; I think it's tremendous. I'll be working together with the rest of the management team to really dig into those growth opportunities and ensure that we're making the right responsible moves in order to show we can produce profitable growth. This is both a top and bottom-line growth company, and I think we all have that conviction here as a management team. I'm going to be working with everyone to deliver on that.

Great, thanks. And then just one quick follow-up. In the past, you guys have said that obviously, the SMB was a little bit weak. I think last quarter, you guys called them out specifically, and also mentioned that they're a little bit quicker to react to changes in the macro environment. So how your return to growth on active clients? So are there any sort of signs you guys are seeing in terms of the SMB inflecting compared to the larger customer weakness? Thanks.

SMBs show the resiliency of the business, even through this macro. It's interesting because it has been the larger customers who seem to be a bit more impacted right now. When we look at the delta between our expectations last quarter versus this quarter, you're right that the difference we've seen is not on the volume side in terms of client activity or even contract or job postings. The only place where we've been somewhat surprised has been just a spend for contracts or the GSV per client. You can see some of our published numbers, and I think that's just attributable to some of the factors and the pressures we see in the macro. Additionally, our talent marketplace has become so well-scaled that there's a lot of wage pressure for talent, making it a very competitive, attractive marketplace for clients. Clients are finding great value, which is stimulating SMB activity, as people see that they're getting great quality talent and great work done in this ecosystem. So those SMBs, as we've said, have that fast twitch; they respond quickly, and now we're seeing some strength in terms of volume and activity, which is great.

Thank you. One moment, please. Our next question comes from the line of Bernie McTernan of Needham. Your line is open.

Hey, I guess demand, looking for people who can do AI jobs is I think a bit counterintuitive. I think part of the allure of AI is not having to hire as many people. So can you maybe just describe what you're seeing from the demand perspective?

Sure. I think some of the growth we're seeing is definitely in categories like Data Science and Analytics, which you can imagine why that would be an opportunity in this environment. In that area, we saw job postings growing 33% year-over-year and 22% sequentially as one example. We've also been adding new skills and categories to the platform, which got us to roughly 25 broad categories, including some areas that are very relevant to the work that people are undertaking to implement, train, and do other AI-based modeling work. So I think that's a piece of it. The other thing I would mention in this area is that we also have additional categories like writing, which you might think, to your point, is more at risk, but it's a very small category for us today. I mean, it’s pretty tiny, but even in that category, we actually saw sequential growth quarter-over-quarter. We're not seeing any negative impacts from AI today. Looking across the work that's happening on the platform, some of the more interesting things we see is that talent is using AI tools to augment their workflows. That's improving their outcomes and satisfaction for clients. It’s potentially driving our prices, but also giving clients time to come back to the platform again and again. With all of that happening, I think that's a plus. Also, 85% of our GSB today comes from longer complex projects and jobs on the platform. So I think the thing we see here is AI augmenting work over time more so than displacing it altogether. We're excited about what this can allow for our customers, directly with talent using the tools as well as embedding a lot of AI functionality directly into the site, and we're executing on all fronts to take full advantage of this exciting opportunity.

Thank you. One moment, please. Our next question comes from the line of Marvin Fong of BTIG. Your line is open.

I guess, just to build on some previous questions. So question on the take rate change, or the commission fee change, I think is starting today. By definition, the 5% will be your most valuable relationships since that's a $10,000 cutoff. They'll be seeing a fee increase, and I guess just maybe drill down a bit deeper into your thought process about the trade-off of simpler, higher fee structure and the potential that some of your most valuable projects might face some pressure from this change in the fee structure.

Marvin, the change for the 5% on existing projects actually doesn't go into effect until the end of this year. For those relationships and contracts, there's a good grace period before any of that impact happens. A lot of those relationships or contracts may have already rolled off or reached a natural endpoint before that time anyway, so I think that derisk part of what you're asking about is substantial. On the other side, you've seen a lot of data over many years that we've monitored and examined our pricing in the platform. We approached this change with extreme care and thoughtfulness based on the data we have going back to 2016, when we had our previous pricing of a flat 10% fee. Based on looking at all that data and experimentation and testing we've done to really understand the dynamics around pricing and how it drives incentives and behaviors, we concluded that the new flat fee structure is both simpler and has really positive impacts in terms of reducing pricing for the vast majority of talent and relationships. It will unlock and stimulate further client demand, which is the number one thing that freelancers care about, other than ensuring they get paid for their work. Those are the two things that people want: more jobs and timely payment. Taken together, and understanding the puts and takes in a deep level based on our data from numerous years, we are very confident that the one-time risk around switching that fee structure will create long-term benefits for the marketplace.

Great. That makes perfect sense. Just to build on all the questions about AI, I imagine that this will be difficult for you to pinpoint. But you've already given us full-year guidance. Would you say that AI factored at all as a standalone phenomenon in your annual revenue guidance? If so, is it a positive, negative, or neutral?

AI does not factor into our full-year guidance at all, because we're not seeing impacts on the business. The benefits for sure outweigh the negatives here, and we're excited to take advantage of the tailwinds in the future. We didn't factor anything specific into the guidance regarding that.

Thank you. One moment, please. Our next question comes from the line of Andrew Boone of JMP Securities. Your line is open.

You talked in the letter about narrowing the focus for R&D. Can you flush that out a little bit and help us understand what on the product roadmap is being emphasized versus maybe being put on the back burner? And then on the enterprise sales force, it sounds like there are significant changes going on there. Can you help us understand as we get to the other side of that transformation, what changes about enterprise and what's your longer-term vision there? Thanks so much.

Sure. On the R&D side, we're taking this opportunity to really hone in on our robust product portfolio. We cover a fantastic breadth of use cases for our customers across the work marketplace, having built that out substantially over the last three-plus years. Now we're really focusing on driving product quality and adoption for the products that we're serving customers with, rather than going broader and adding new products to the lineup. That's part one of what we're capturing on the R&D side. Additionally, with all the exciting work happening on AI, which we talked about on this call, that's a big opportunity as well. In key places, we're moving resources from less exciting areas of our product roadmap and portfolio and using those resources to pursue those opportunities. On the enterprise side, this is, again, a huge, long-term opportunity for us. The sales team is pivoting focus into the most high-value and high-performing areas of our portfolio. We have a wealth of data about what those areas are, making it clear for us to take our leaner team and redirect them towards those highest performing opportunities. The long-term vision here is absolutely unchanged; we know we can serve larger customers, including the Fortune 100 companies, with our best-in-class offerings while continuing to graduate customers who come into our self-service marketplace and scale up into our enterprise offering over time. Broadly speaking, it’s not about changing our strategy or vision; it’s about tuning our focus areas and the efforts of the sales team to address the areas where we see evident opportunities in this macro environment.

Thank you. One moment, please. Our next question comes from the line of Ron Josey of Citi. Your line is open.

Hi, this is Jake on for Ron. I just wanted to touch on the full-time opportunity. Now that we're quarter in, could you kind of give us an update on adoption reception of that offering and whether the headwinds on macro change anything in terms of pushing this offering to clients? Thanks.

Absolutely. The full-time offering continues to be a key part of our product lineup that we launched a quarter ago. In terms of adoption reception, we see strong signals in the current marketplace that customers on both the client side and the talent side are very interested in things like contract-to-hire, which was a piece of that offering, as well as being able to use Upwork for payrolling solutions from the talent marketplace, which historically was only available to our enterprise customers. That said, it’s only a quarter in, and we always knew this type of new offering would take time to socialize, ramp, and tune; given that this is not something most of our customers have historically expected with us. I wouldn’t say there’s anything notable about macro headwinds; it’s about socializing and introducing this new offering to a customer base used to different types of services from us. We’re excited to continue pursuing that.

Thank you. One moment, please. And the last question comes from the line of Rohit Kulkarni of ROTH. Your line is open.

On the revenue outlook for the rest of the year, maybe talk about the level of visibility or the confidence that you have today versus where you were at the beginning of the year. You talk about these three phases, and the first phase being cost cutting and freezing hiring budgets in your customers, and you're still in that phase. Given that, there may be a little bit more time for the second phase to kick in. Could you just talk about how confident you feel about the remaining eight to nine months of the year, as well as just the visibility that you have versus where you were at the beginning of the year?

Well, we’re about a quarter closer to the end of the year, Rohit, so I would say we have a little more visibility than we did three months ago. What’s changed is that we now have a perspective that more of our larger customers and targets are still sitting in that first phase rather than having moved to the second or third phases. In terms of where we see the rest of the year shaking out, I think what we removed from our guidance outlook was previous expectations about the normal seasonality of business in a non-macro impacted year where the back half would be seasonally stronger due to ordinary platform behaviors. Based on the revised outlook and seeing more customers still in that phase one, impacted by the macro environment, we now do not expect to see normal seasonal behavior in the second half of the year. We do expect to see a step up in the second half of the year versus the guidance in Q2, due to the dynamics around many of our pricing changes and the effects relative to last year in Q3 and Q4. I should also note we didn't factor in specific macro perspectives about things getting worse or better, but we did remove expected normal seasonality in our outlook, given what we're seeing in the macro.

Okay. That's helpful. And then a question on AI. I guess there is this growing debate that structurally, AI is going to drive more efficiency. The first leg of efficiency would come into most of the tech companies that would be early adopters of those AI tools internally just to drive better discipline. So maybe talk about your thoughts on that. Do you feel structurally speaking a year or two from now, Upwork could be a much more profitable company if you are adopting AI internally? Where do you think about applying AI for internal productivity gains, not just for your customers?

This is a huge opportunity for us and every tech company, and certainly we’ve been testing these new tools as well because I think the productivity gains are very real. I can't tell you how that will translate into profitability outlook one or two years out, but I think it’s the responsibility of me and every CEO with engineers in their business to be pushing on how we can use these tools to improve efficiency and enhance developer satisfaction. I mean, as our engineers try out these tools, I’m reminded of extremely exciting conversations and frankly, it unlocks their expertise for doing other things that they’re really excited about in their work. There will be big questions on how we handle resources as we free them up, and those are questions we all must navigate moving forward. Again, AI is a huge opportunity, and we're excited about leveraging it.

Thank you. That does conclude the call. I will turn the call back over to Evan Barbosa for any closing remarks.

Thank you. On behalf of the entire Upwork team, thank you for joining us today and thank you for your interest in Upwork. If you need any clarifications or have any follow-up questions, please do not hesitate to reach out to me at investor@upwork.com. This concludes our call.

Thank you, ladies and gentlemen. This does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.