Upwork, Inc Q1 FY2024 Earnings Call

Good day, and thank you for standing by. Welcome to the Upwork Q1 2024 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Niederman, Vice President, Investor Relations. Please go ahead.

Thank you. Welcome to Upwork's discussion of its first 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, we 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 also 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 March 31, 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 first quarter of 2024 after the first quarter of 2023. All financial measures are GAAP unless cited as non-GAAP. With that, I will turn the call over to Hayden.

Welcome, everyone, to Upwork's First Quarter 2024 Earnings Call. Upwork started the year off strong with first quarter revenue of $190.9 million, representing 19% growth year-over-year. Our commitment to running a profitable business continued in the first quarter as GAAP net income was $18.4 million, and adjusted EBITDA was $33.3 million. These results reflect the strength of our business and ability to deliver consistent results even in a fluid operating environment. Our unwavering focus on increasing operating leverage while investing in future growth is allowing us to raise our 2024 outlook for both revenue and adjusted EBITDA. We are committed to continuing to grow operating leverage into 2025 and beyond. Erica will share details on these plans in a few minutes. Our marketplace business continues to deliver steady GSV performance within a dynamic macro environment as GSV again exceeded $1 billion for the quarter. Historically, one of the most important leading indicators of GSV growth is the addition of new clients, and we were very pleased to drive active client growth of 5% year-over-year to 872,000 in the first quarter. In addition to growth via attracting new clients, we are engaging growth in GSV via product innovations. These include investing in new AI-enabled products, features and partnerships that equip clients and freelancers to achieve desired outcomes faster and easier than ever before. With the launch of these new experiences and encouraged by early success signals showing a lift in GSV, we anticipate our growth rate will continue to accelerate. Our strength in revenue growth stems from several areas, including our ads and monetization products, which displayed impressive performance and stand out as the fastest-growing revenue stream for Upwork. The Freelancers subscription, which provides printers with connects and tools to develop new skills, increase their visibility and improve their efficiency with AI, had over 100,000 active subscribers in the first quarter. Year-over-year, we've grown subscribers 60% and driven 76% growth in revenue from this offering, and we continue to make Freelancer Plus more compelling for customers as the subscription now includes exclusive access to Upwork chat Pro powered by GPT4 and customized with Upwork data. In the first quarter, we also premiered instant consultations, a new way for clients to get expert advice within minutes from skilled professionals who are online and available to consult in real time, ultimately getting projects started and completed faster. Building instant consultations on top of our already successful consultations product is a promising avenue for us because we've seen the repeat usage rate of regular consultation clients is more than 50% higher than that of clients to start with a standard marketplace engagement. We're optimistic that instant consultations will gain similar traction and produce similar results. Demand for Upwork services was also evident in the slate of new partners signing up for our burgeoning Upwork partner experts program in the first quarter. These partnerships are designed to drive incremental GSV by acquiring clients who are active in third-party SaaS ecosystems and can benefit from talent on Upwork that is specialized in deploying, customizing, and maintaining these SaaS technologies. In Q1, GoDaddy, BigCommerce, and Constant Contact joined existing partners like OpenAI and ClickUp and are now able to connect to their customers directly with exactly the right talent on Upwork at exactly the moment they need to get work done, thus enabling greater usage of their own products. This is a true multidimensional win-win in which our partners, their customers who become our clients, and Upwork talent and shareholders all benefit. The Enterprise business unit exhibited very good progress in the first quarter with accelerated revenue growth at 10% year-over-year. Momentum in signing new customers continues exceeding our own target by adding 28 new enterprise client logos in the first quarter, including WPP, Unisys, and ANSYS, building on our December announcement of inaugural vendor management system and managed service provider partnerships. We are rapidly expanding the workforce management ecosystem in which talent pools on Upwork can be tapped and leveraged bringing on Workday, Vile, and KellyOCG as enterprise suite partners with KellyOCG serving as our first MSP partner. Velocity of our product innovation is rapidly increasing. We are shipping new features to our clients and freelancers on a daily basis. The speed to market of new features and experiences on the platform is accelerating so quickly that we realized we needed to provide our customers with a single place and moment to get to know all of the enhancements we have released and new ways they can use our platform to get more done. As a result, yesterday, we launched Upwork updates, our new semiannual product showcase that highlights what's new with our innovative products, features and partnerships across the world's work marketplace. Upwork updates will help educate our customers in the market about the value of our offering and the rapid progress we are making in delivering the features that enable them to work faster, better, and more effortlessly than ever. One highlight of our spring 2024 update is the launch of Uma, which stands for Upwork, mindful AI. We're developing Uma on top of industry-leading large language models and fine-tuning it with trillions of tokens of highly relevant Upwork plain data across a range of work interactions. Today, Uma Intelligence underpins key steps in the hiring and matching process, which is critical to clients in ensuring getting started and completing more high-quality work faster. Uma powers new features like Best Match Insights, an AI-powered matching capability that surfaces not just the best talent, but the most relevant skills, qualifications, and client reviews to help clients make high-end decisions with ease and confidence. Uma's capabilities also power performance improvements to recent innovations and experiences, including Upwork job post generator, proposal tips, and Upwork Chat Pro. We're also excited to introduce Uma as an indispensable work companion, accessible via an easy-to-use conversational interface that guides clients and freelancers to success throughout their Upwork journey. We've started to roll out Uma on the Upwork homepage. And in subsequent releases, we will expand capabilities to other areas of the platform. We are building Uma to serve as an always-on intelligent companion for our customers, assisting them across the entire Upwork experience. Our very early testing of Uma is already showing benefits as a conversational companion for new customers. Clients who used Uma started spending on Upwork in their first month at a 7% higher rate than non-users. These very early signals are compelling and are only the beginning because Uma will continue to get smarter and more effective with additional customer usage, which trains the model. Additionally, Uma will improve its capabilities and extend its customer and business impact as it is released across various experiences on our platform. At the end of last year, we acquired AI startup Headroom and deepened our bench of technical talent and leadership in this area. Uma is an illustration of how this team is accelerating the delivery of our vision for how to serve customer needs using AI. It's a key development towards realizing a much larger vision as we leverage AI to deliver an experience where customers move from idea to outcome, from dream to delivery powered by a combination of AI and humans working effortlessly together. To further catalyze this new reality and solidify Upwork as the premier destination for where that happens most effectively, we continue to expand the ecosystem of partners, offering industry-leading tools through our apps and offers page, welcoming a cohort of new partners, including Dropbox, Notion, and iStock by Denny Images. Data shows that freelancers are already ahead of their full-time employee peers inside businesses in the adoption of AI tools. The Upwork Research Institute found that freelancers are more than 2x more likely to regularly use Generative AI in their work versus non-freelance professionals. Our goal is to equip freelancers on Upwork with preferential access to the best tools to become the most highly skilled and sought-after AI-enabled talent pool in the world. This directly taps into a growing chorus of client demand for skilled workers who already know how to create exponential business value using these technologies. We are already serving this need, as evidenced by the 50% year-over-year growth rate in our AI services category in Q1. We are extremely excited for our customers to benefit from the many new products, features, and partnerships included in our spring 2024 update to supercharge their businesses and work. If you haven't yet, take a moment to visit upwork.com/updates, where you can learn more about these exciting innovations and how they address customer needs. This encouraging start to the year, including our rapid pace of innovation and enhanced financial outlook on both revenue and adjusted EBITDA, gives us confidence in the year ahead, our growth prospects, and the exciting long-term framework for Upwork's profitability. We look forward to continuing to update you on our progress in the quarters to come. With that, I will turn it over to Erica to review our financials.

Thanks, Hayden. While we've accelerated our pace of innovation in all the ways Hayden just outlined, in Q1, we also rapidly identified new levers to deepen our focus on durable profitable growth. We are committed to driving revenue growth and growing operating margins regardless of the macroeconomic backdrop we're executing in. And our first quarter results and increased outlook for 2024 clearly show our ability to do that. And I am delighted to say that our plans to continually and meaningfully grow our operating leverage extend beyond 2024. Our highly profitable business model with gross margins over 75%, as well as the investments we're making in operational improvements like engineering productivity and back-office automation mean that we can make clear and concrete commitments to growing our margins and free cash flow for the foreseeable future. As I strategized with Hayden and the team, I've grown confident in our ability to drive growth while also increasing profitability and adjusted free cash flow. We are now in a position to commit to hitting a 35% adjusted EBITDA margin in the next five years, and I'm confident we can increase our operating leverage each and every year as we get there. Turning back to our most recent results. I'll hit a few highlights. Revenue growth in the first quarter was very strong, growing 19% year-over-year to $190.9 million and was driven in part by the final transition to the new flat fee pricing structure we started last year. Marketplace revenue was $164.3 million and grew 20% year-over-year. In our enterprise business unit, our unique breadth of offerings drove total enterprise revenue growth of 10% year-over-year to $26.6 million. Within Enterprise revenue, Enterprise Solutions revenue was $11.7 million and grew 3% year-over-year. Managed Services performed particularly well, driving revenue of $14.9 million, representing growth of 17% year-over-year. Our active client base continues to grow, driven by increasing demand with growth in Q1 in both activations and reactivations. We added over 20,000 new active clients in the first quarter of 2024, and we now have over 872,000 active clients, representing 5% year-over-year growth. This is the highest growth in active clients in two years. Turning to some additional color on GSV. Excluding the impact to GSV growth rate from the pricing change, we estimate Q1 GSV growth would have been approximately 3% year-over-year, while GSV grew approximately 1% year-over-year. This included some temporary headwinds associated with the final transition to our simplified flat fee pricing structure, which occurred on January 1. While we naturally see some temporal headwinds to GSV as we make the appropriate strategic adjustments to our pricing structure, these changes are driving growth for our business and a simplified value proposition for our customers, making it easier to price and negotiate contracts. Even after these changes, our marketplace take rate at 17.7% remains one of the lowest in the industry, which means that we have the capacity to continue to develop targeted monetization opportunities on the platform that will bring value to our customers. Non-GAAP gross margin continued to improve, both on a year-over-year and a sequential basis. Non-GAAP gross margin of 77.1% increased nearly 200 basis points year-over-year. Non-GAAP operating expense was $116.6 million in the first quarter, representing 61% of revenue, a significant reduction compared to the $125.8 million or 78% of revenue in the comparable prior year period. For the first quarter, non-GAAP R&D expense was $45.1 million, increasing 23% year-over-year as we continue to accelerate our pace of innovation and new product releases, culminating in our Upwork updates announcement in the launch of Uma yesterday. The sequential increase in R&D also reflects the growth of our AI/ML talent bench through the acquisition in Q4 of Headroom and other investments. Even with our commitment to ongoing innovation, we anticipate growth in R&D expenses to moderate in the future through our work on engineering productivity and other levers. Non-GAAP sales and marketing expense of $44.9 million declined 27% year-over-year, even as we continue to accelerate our active client growth. Our provision for transaction losses remains low at $0.9 million for Q1, representing less than 1% of total revenue. PFTL benefited from some one-time items in the first quarter, and we expect our absolute dollar run rate to be slightly higher going forward while still remaining very low as a percentage of revenue. Adjusted EBITDA was $33.3 million in the first quarter, representing a margin of 17.4%. Our profitable business model continues to generate GAAP earnings per share growth, which includes the impact of stock-based compensation. For the first quarter of 2024, fully diluted GAAP earnings per share was $0.13. Adjusted free cash flow for the first quarter was $15.5 million. Adjusted free cash flow is lower in the first quarter every year due to the timing of our employee bonus payout. Cash, cash equivalents, and marketable securities were approximately $490.6 million at the end of the first quarter. I'm very pleased to highlight our active execution of our share repurchase authorization. I want to emphasize our commitment to ongoing shareholder returns. In the first quarter, we repurchased approximately 5.2 million shares. And as of April 23, we have completed the entire $100 million repurchase program, repurchasing approximately 8.1 million shares. This program represents the return of value to our shareholders, and we expect our share count in 2024 to be lower than in 2023. Turning to guidance. For the second quarter, we expect to produce revenue in the range of $190 million to $195 million, representing 14.2% year-over-year growth at the midpoint. For adjusted EBITDA, we are guiding to a range of $32 million to $36 million, which represents an adjusted EBITDA margin of 17.7% at the midpoint. We anticipate non-GAAP diluted EPS to be between $0.21 and $0.23. Our outlook for weighted average shares outstanding for the quarter is now in the range of 139 million to 141 million. For the full year 2024, we are increasing our revenue guidance to $770 million to $782 million, representing 12.6% year-over-year growth at the midpoint. As we mentioned in our last earnings call, we expect our year-over-year revenue growth rates to moderate in the second half of 2024 as we lap the pricing changes implemented in 2023. For adjusted EBITDA, we are increasing our guidance to a range of $140 million to $150 million, up from our previous guidance of $125 million to $135 million and representing a margin of 18.7% at the midpoint. This increase reflects our multi-quarter efforts to identify structural and persistent efficiencies in our business. Through these efforts, we will increase our operating margin every quarter this year. We expect full year 2024 non-GAAP diluted EPS to be between $0.88 and $0.92, up from our guidance last quarter of $0.77 to $0.81. This improvement is driven both by our focus on efficiencies as well as our share repurchase program. For the full year, weighted average shares outstanding will decline to a range of 140 million to 144 million, down from our prior guidance last quarter of 148 million to 152 million. As I survey our progress in the first few months of 2024, I am excited about Upwork's trajectory. We are at the forefront of the future of work. Our business model and our position as a market leader mean that we can invest in innovation, achieve ongoing profitability gains, and produce adjusted free cash flow to fund our business while driving strong shareholder returns. We are committed to producing steady and significant operating margin and adjusted free cash flow growth this year, next year, and into the future. And because of the profitability of our marketplace model, we can continue to invest in growth as we do it. As always, I want to extend thanks to our incredible team at Upwork for their contributions this quarter. I am seeing our pace of execution accelerate every single day, and I'm proud to be part of this great team. And with that, we will take your questions.

Our first question is coming from Andrew Boone with JMP Securities.

This is Matt on for Andrew. My first one is maybe can you just provide any color on the performance of cohorts? And if there's any change that you're seeing as far as the stabilization of spend there? Anything would be helpful there. And then my second question is, it's great to see the 100,000 active subs for freelancers. Could you give us any color on how big this can get to over time?

Matt, this is Erica. Thanks for the question. Yes, we published our cohort chart once a year in our 10-K. And as I talked about, I think, actually, it was at your conference, that's an annual cohort chart, and we actually have seen some stabilization in terms of newer cohort spend in 2024.

In terms of your question on Freelancer Plus and how big that can get over time, I'd say we're really excited about the progress you've already made with the ad-monetization roadmap so far. We mentioned that this is already the fastest-growing area of our business from a revenue perspective today and we're still in early innings. So specifically on Freelancer Plus, there are definitely opportunities to continue to enhance that offering. We added Upwork Chat Pro very recently, and that has generated a lot of excitement. But we also see opportunities to continue to enhance value there and with other aspects of how we build memberships and membership value on our platform. But I think stepping back, the bigger story here is generally with ad monetization as a lever for this business, which does have a lot of runway. If you look at other marketplace models out there, companies like Airbnb, Instacart, others, see Upwork's 25% of their revenue coming from ad monetization and we're nowhere near that today. So it's going to be unique to Upwork for us to figure out how big this can be, and we certainly don't have that number in mind today, but we are working diligently to ensure we do unlock the value here in a way that is really driving both take rate expansion and GSV growth because those things can really go hand in hand when you look at things like connect pricing, memberships, third-party partnerships that generate revenue, like all of these things can actually be accretive to both sides of that equation, and where we're very focused on locking that. Sure.

Our next question will come from the line of Maria Ripps with Canaccord.

This is Matt on for Maria. Just on the increased full year revenue guidance. Is that largely a function of the momentum you're seeing with freelancer costs in the ad products? Or just wondering if there's any component of that, that relates to upside to GSV. And then more broadly, just any color you can share around how you're thinking about GSV growth for the balance of the year and if we could see some acceleration in the back half would be great.

Yes, thanks for the question, Matt. I'll address it, and Hayden can provide additional insights. Regarding the revenue outlook, we are indeed experiencing significant growth in our advertising and monetization products, which are our fastest-growing revenue stream. We've noted some gradual strengthening in that area. Additionally, we see positive developments in the enterprise business, with encouraging indicators on both the marketplace and enterprise sides, along with new client acquisitions. This gives us confidence in anticipating growth in gross sales volume later this year and into 2025 and beyond.

Sure. And what I'd add, Matt, around GSP acceleration for the balance of the year is growth is our top priority as a company. We're very active. We're working on this, and we're seeing some really good green shoots. As Erica mentioned, active clients being one leading indicator that we're seeing progress on this, 5% growth already is a great sign from this past quarter. The second thing is our product innovations are indicating that releases like Uma can really move the needle early as it is in terms of driving traction around client spend and client metrics. So it does take time for these things to layer through at the size and scale of our customer base and driving the adoption of these products. So I want to be clear that this does is a multi-quarter and multi-year endeavor, but the product innovations that we're driving are really laser-focused on this.

Maybe I'll just actually emphasize one point, which is GSV growth was dampened slightly in the quarter from the structural changes in the kind of final changeover to the new flat fee pricing structure. So absent that, we estimate the GSV growth would have been about 3% this quarter, which is a little bit of an uptick. And so we're really encouraged by that as well.

And our next question is going to come from Eric Sheridan with Goldman Sachs.

Maybe two, if I can, following up on that answer on GSV growth. Can you maybe just unpack for us how you're thinking about the components that have held back growth in GSV as maybe some of the dynamics around fee changes have impacted that, Hayden that you just highlighted? And that we should be thinking about the building blocks for growth in GSV as we get deeper into the year, just in terms of what's in your control versus elements that are out of your control as you see some of that growth evolve. And then as to some of the investments you talked about, especially the internal ones, how do you think about elements of investments driving either incremental growth through the remainder of this year versus also investments that are balanced towards driving increased productivity and efficiency gains that might show up on the margin front.

All right. You packed a lot in there, Eric. So let me see if I can hit everything. So on GSV growth, like I said, we do have about 2 points of headwind in Q1, and that actually is through the year, just from the final cutover with the pricing change. I think beyond that, we've really tried to highlight, we see a lot of really strong leading indicators that give us a lot of confidence that our GSV growth is going to kind of continue to tick up. The active client growth is really encouraging. Some of the strength on the enterprise side that we see kind of falling into late this year and into next year. And then also a lot of the experiments on the platform with a lot of the new experiences we just launched with Uma Hayden highlighted some of the positive benefits we're seeing with very early experimentation with that we think is just going to get better and better. So all these new experiences we see as being GSV growth stimulators, and we expect to help us advance into next year. Regarding investments, we've significantly invested in R&D over the past few years to accelerate platform innovations. We closed the Headroom deal in Q4, and adding that team along with the growth of the AIML bench is a strategic investment in our platform's future. This effort has led to the launch of Uma and other initiatives, indicating we have more advancements on the horizon. However, I anticipate that R&D growth will start to moderate as we progress through this year and into next, focusing our investments on engineering productivity tools, cost management, and data optimization. We're still in the early stages, and I see these investments yielding results by the end of this year and into next year.

And our next question is from Matt Farrell with Piper Stanley.

Awesome work on the profitability side. Maybe on the 35% adjusted EBITDA target within five years, what size or scale do you think you need to be at in order to reach that target? And I guess on the cost side, how much more additional efficiencies or leverage do you have at this point to help you achieve that goal over the next couple of years?

Sure. Let's take a moment to discuss what we believe is necessary from a scale perspective to achieve this. The short answer is that I've gained confidence over the past year by working with the teams and identifying various cost optimization opportunities. We can achieve significant operating leverage in this business even without substantial growth in scale. Over the past year, since I joined, we committed to profitability and made rapid progress toward that goal, reaching mid-teens EBITDA margins in about six months without meaningful volume growth. Last year, our focus was on optimizing sales and marketing. We have seen considerable benefits from client growth while significantly cutting our marketing expenses, which has boosted my confidence in our ability to continue optimizing these areas. Now, we're concentrating on enhancing engineering productivity and data optimization, among other areas, where we believe we can see significant results. I believe we can maintain operating leverage even in a slower growth environment. However, we will continue to invest in growth, and given our strong gross margin profile, we can achieve operating leverage while still investing in growth. We are confident that we can accomplish both, and the growth in gross merchandise value that we're pursuing will build on the operating leverage we can achieve.

Yes. Another way that I'd answer that question, Matt, is to say we are here to build a really big business. We want to drive this business to a tremendous scale. And we're pacing ourselves to continue to invest in growth and create meaningful leverage increases every year towards that 35% target, which is within five years. We are moving there aggressively. But we're investing in growth towards that real scale of the business while enhancing leverage, and we know we can do that irrespective of the pace of the growth of the business.

And as a follow-up, you've hit on the active client growth acceleration now a couple of times. I guess, in the backdrop of the lower sales and marketing spend, like what do you think is driving this dynamic in a more steady macro? And are the customers that are joining Upwork more recently, do they look and feel any different than they have historically?

Yes, they do. I think that what's driving it is the execution that Erica mentioned earlier around sales and marketing. We've done a really great job over many quarters, building the muscles in those areas, and that's delivering results for us. Our value proposition has always resonated and is continuing to resonate in this macro where clients are really looking for flexibility, they're looking for the specialized skills that we have on this platform. But we've really been delivering with our sales and marketing efforts to be extremely efficient and attract in clients who broadly do look like past clients. I wouldn't say there's anything really notably different about them, and they were coming in and they're ramping up with us.

I'll just add that some of the new experiences on the platform that are enabled by the AI investments we've been making are also really advancing the journey from prospect to active clients. So the job post generator that we launched last year, over 70% of new customers are using that tool in order to post jobs and then get to activation. So I think there's a combination of factors of the performance marketing engine really humming even as we've reduced cost and some of the experience on the platform that we've introduced.

And our next question is coming from Brent Thill with Jefferies.

This is Brent. I have one more question regarding GSV. You mentioned that the adjusted figure is 3% in Q1, and there are 2 points of headwind that will persist for the remainder of the year. It seems like, even adjusting for that, there could be acceleration. I wanted to confirm that’s what you’re observing. Additionally, could you provide insights on the macro side regarding spend per cohort, larger projects, or any trends you are noticing at a broader level?

Yes, I think you understand the temporary headwind from the pricing change. We estimate that it's about 2% of GSV growth, which impacted us in Q1 and will continue throughout the year. After that, we will surpass it. For all the reasons we’ve discussed, we expect to see GSV continue to improve. Regarding the macro environment, there is still a lot of dynamism out there. The inflationary environment is affecting consumers and small businesses, and corporations remain very budget-conscious. However, we have been somewhat of a stable presence within this broader context. We have also stated for several quarters that we aim to achieve growth in both profit margins and revenue regardless of the macro conditions, and our current results reflect that commitment. More broadly, we continue to see strong growth in the small business sector of our platform, and the negative effects from larger businesses last year are diminishing in the present environment.

And our next question is going to come from the line of Ron Josey with Citi.

This is Jake standing in for Ron. First, I wanted to ask about the enterprise segment. Can you elaborate on the advantages of the new VMS partnerships? Specifically, what progress are you making in expanding your focus with larger clients? Secondly, it's great to see the growth in AI categories. Can you provide any additional insights regarding the growth mix from existing clients compared to new clients? Are there any observed trends regarding spending or wages in that category?

Sure, Jake. Speaking about the Enterprise VMS partnership. So the reality there is so many of the enterprise customers that we are serving today and are looking to break into already have existing relationships with VMS and MSP partners themselves. And so when we go through the work of partnering with those providers, it really opens up new opportunities where spend that those customers are funneling into those platforms becomes available for us to basically participate in and basically bid on or offer up talent for and become a proved vendor of record around. So it really opens up the dollars available to Upwork both within existing customers who are using VMS and for new prospects. Sometimes it's a condition of them working with us or certainly a big selling point when they realize that we can work with their existing VMS. So it's early in execution of the strategy, but we're very excited about what it can do in opening up the enterprise opportunity. To your question about the AI categories and kind of what's going on there, yes, this is a tremendous area for us with the 50% year-over-year growth specifically in AI services in addition to just generally seeing clients looking for talent across all the categories we serve, where that talent is equipped and enabled using AI tools. And I think the interesting fact there is the data shows that only about 9% of internal employees are using AI tools on a regular basis compared to 20% of freelancers and compared to more than 50% of freelancers on Upwork who are equipped and using these tools. So when we talk to businesses, they're saying, 'I need to upskill my workforce. I can't do it fast enough. Let me instead turn to Upwork find the talent that is skilled in these areas.' And so we're serving a lot of different needs here. I would say we are seeing premium wages in some of these areas, it's probably not quite as strong as it was maybe three or four quarters ago, like it's moderated a little bit, but there is still a delta for a lot of this work, and this talent is still highly in demand, as evidenced by the fast growth we saw last quarter, which was, I would note on top of, I think, quadruple-digit growth a year ago in that same area.

And our next question is going to come from the line of Rohit Kulkarni with ROTH MKM.

Can you discuss your strategy and market presence regarding ads and monetization? It has been your fastest-growing revenue stream for quite some time. How do you see potential for further growth in that area? Additionally, in relation to the 2024 model, could you provide more insights into the drivers and assumptions regarding take rate projections and client growth for the coming year? What are your thoughts for the remainder of the year?

Sure, Rohit. So on ads monetization, our strategy here is to build the monetization levers that are really congruent with creating more value overall for our customers. These things go hand in hand. I think that's what we've really proven with the work already. So we're encouraged by the progress made, but certainly, there's a lot more that we think we can do. And I think examples of that span everything from enhancing memberships on the platform to continuing to price connects more accurately to continue to bring in revenue from new streams like our partnership program. So there's really a lot of runway here. And I think, again, our goal is going to be governed around enhancing our take rate but doing so in a way that really is creating more value for customers and getting them to spend more overall with us, which is really the ultimate goal.

In terms of the outlook for take rate and client growth for the remainder of the year, we experienced a significant increase in the first quarter, which was linked to the new pricing plan that has been very successful and well received by our clients and freelancers. For the rest of the year, we anticipate that take rates will not increase as dramatically, but we do expect ongoing improvements in ad monetization to contribute positively to the take rate as the year progresses. Regarding client growth, our client acquisition efforts are performing well, with both activations and reactivations seeing positive results. Therefore, we expect client growth to continue each quarter throughout the year.

Our next question is from Marvin Fong with BTIG.

Congratulations on the performance. So two questions for myself. So I would like to double-click on reactivation. It seems like something we haven't talked as much about in the past, but I know for at least some other companies in e-commerce reactivated buyers or reactivated customers become a major source of new clients. So could you just kind of talk about how big that pool is for you guys and your initiatives to kind of get more past customers reactivated? And then a question just on GSV per client. I know it was down this quarter, it looks like. I know that onboarding new clients is a drag on that metric. So I was just wondering if you could kind of unpack that. If we just look at existing cohorts, is the spend behavior declining or flat or increasing?

Certainly, Marvin. Regarding the first question, I want to emphasize that our reactivation trends have been improving, and this is contributing positively to our growth in active clients. While we haven't provided specific figures, it's indeed becoming a beneficial factor for us. Additionally, in our efforts toward client reactivation, some of our performance marketing strategies are now focused on this area. Furthermore, the updates we launched recently on Upwork are designed to both attract new clients and re-engage those who haven't been active on the platform for a while, informing them about the new experiences we've introduced. There's a lot of activity happening in this space. On GSV per client, I want to highlight that this metric reflects the performance over the last 12 months. It does capture some fluctuations due to last year's macroeconomic impacts. However, you are correct that as we onboard many new clients, this could slightly reduce GSV per active client. Additionally, the activity from our retained clients has begun to stabilize compared to the previous year.

And I'm showing no further questions at this time. And I would like to hand the conference back to Hayden Brown for closing remarks.

Thank you, everyone, for joining us. We appreciate your interest in Upwork and look forward to keeping you posted on our progress next quarter.

This concludes today's conference call. Thank you for participating, and you may now disconnect.