Upwork Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 3, 2023

Key Takeaways

  • Upwork delivered 14% YoY Q1 revenue growth to $160.9 M with adjusted EBITDA of -$2.9 M and GSV topping $1 B for the fifth straight quarter.
  • The company surpassed $20 B in lifetime freelancer earnings—doubling in three years—and aims for $40 B as it expands high‐value work on its platform.
  • Facing macro uncertainty in enterprise and self‐service segments, Upwork enacted cost reductions including a 15% headcount cut and pausing brand media, targeting over $80 M in annualized savings.
  • Upwork is refocusing its product development on core offerings and aggressively pursuing generative AI, noting a 1,000% surge in AI‐related searches and 600% increase in AI job posts.
  • To enhance profitability, Upwork narrowed its sales focus to the highest‐return segments, realigned leadership roles, and issued Q2 adjusted EBITDA margin guidance of 0%–1% (3%–4% ex. severance), with a long‐term goal of ~15% by Q4.
AI Generated. May Contain Errors.
Earnings Conference Call
Upwork Q1 2023
00:00 / 00:00

There are 15 speakers on the call.

Operator

You for standing by, and welcome to Upwork's First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentations, there will be a question and answer session. As a reminder, today's call is being recorded. I would now like to turn the conference over to your host, Mr.

Operator

Evan Barbosa, Vice President of Investor Relations. Please go ahead, sir.

Speaker 1

Thank you. Welcome to Upwork's discussion of its Q1 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 will be happy to take your questions. But first, I'll review the Safe Harbor statement.

Speaker 1

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 our 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.

Speaker 1

Additional information will also be set forth in our quarterly report on Form 10 Q for the 3 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 in comparison to the Q1 of 2023 or to the Q1 of 2022.

Speaker 1

All financial measures are GAAP unless cited as non GAAP. Now I'll turn the call over to Hayden.

Speaker 2

Thanks, Evan, and thank you all for joining us today for our Q1 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 Guessert. 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.

Speaker 3

Thank you, Hayden, and hello, everyone.

Speaker 4

Let me start by saying I'm 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 At just a weekend, 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.

Speaker 4

There's a lot of important work ahead of us, but the long term opportunity is significant and 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.

Speaker 2

Thanks, Erica. I'm looking forward to partnering with you as we We spent the Q1 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 Q1 with GSV exceeding $1,000,000,000 for the 5th Straight quarter and 1st quarter revenue growth of 14% year over year to 160,900,000 We had adjusted EBITDA of negative $2,900,000 in the Q1. We also surpassed an exciting milestone in the Q1, $20,000,000,000 in lifetime freelancer earnings on Upwork, which doubled from $10,000,000,000 in only 3 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 $40,000,000,000 in freelancer earnings and beyond.

Speaker 2

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 are moving aggressively and intentionally to advance both our profitability and growth goals via a 3 part framework. 1st, running a lean and efficient organization. We remain unwavering in our commitment to building an Efficient profitable business.

Speaker 2

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 $22,000,000 in the second half of twenty twenty three, representing a reduction of 94% versus the prior plan for the second half of twenty twenty three. 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.

Speaker 2

In total, the measures announced today are expected to drive over $80,000,000 of annualized net cost savings and deliver approximately $40,000,000 of net cost savings in 2023. Our Q2 2023 adjusted EBITDA guidance of $0,000,000 to $2,000,000 representing a 0% to 1% adjusted EBITDA margin includes approximately $4,000,000 of non recurring severance related costs. Excluding these non recurring severance related costs, our Q2 2023 adjusted EBITDA margin Would have expected to be 3% to 4%. These actions put us on a course to deliver 4th quarter 2023 adjusted EBITDA margin of approximately 15%, 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 Q1.

Speaker 2

We will share more about our long term outlook and targets over the next several quarters as Erica settles into the role. We were also pleased to announce Nitha Silao as our new Chief People Officer shortly after quarter end and look forward to her leadership of our people team. 2nd, optimizing our growth portfolio. Growth continues to be a major priority, and we are focused on 2 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 project catalogs, consultations and our recently announced end to end solution to support full time hiring.

Speaker 2

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 are in a strong position to drive the adoption of our product portfolio and deliver even more delightful experiences to customers. This means we are going deeper rather than broader with our R and 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 the preeminent option for finding and hiring specialized Thank you, and good morning everyone.

Speaker 2

We have identified and are pursuing multiple dimensions of this opportunity for talent, Clients and our own teams through our own 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 percent compared to the Q4 of 2022 and the average number of weekly job posts related to Generate dotai 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 teams have also been innovating and testing new interfaces and experiences made possible for our customers by generative AI, technology and large language models.

Speaker 2

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 that 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, and we are committed to fully exploring and harnessing It's power and efficiency. And third, tuning our sales approach to where we win in this macro environment.

Speaker 2

In the Q4 of 2022, trends in Enterprise suggested we could achieve our quarter over quarter growth goals Inland, productivity and expand client spend for 2023. These indicators included expected strength or stability in key metrics like sales cycle length, 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 Q1 and early in Q2 shifted our expectations, So we have acted accordingly in announcing personnel changes today that put our sales team back on sound economic footing. As part of today's changes, Eric Gilpin, our Chief Sales Officer and current GM, Enterprise, will be stepping down. He has contributed so much building our business and team to this point and is leaving a strong legacy.

Speaker 2

He will stay on in an advisory role through the end of the second We also spent time in the Q1 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 will have, bringing our productivity back in line with our ROI targets. To support our objectives, as underscored in the 3 part framework, we continue to focus on capital structure and allocation. In the Q1, we repurchased at a discount over $200,000,000 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.

Speaker 2

Our established strategy and investments are sound, and we will continue to be prudent and disciplined with our spend in the here and now, taking actions aimed at delivering profitability as we progressively unlock durable growth and position the business to capitalize on 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 Thank

Operator

We do ask that you please limit yourself to one question and a follow-up and then please feel free to rejoin the queue. Thank you. One moment for our first question. Our first question comes from the line of Eric Sheridan of Goldman Sachs. Your line is open.

Speaker 5

Thank you so much for taking the questions. Maybe 2 if I Could. 1st, 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 small or medium sized clients and why we might be seeing more of a macroeconomic impact there versus the larger clients we won. 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.

Speaker 2

Thanks, Eric. Your first question around the spend trends that we've seen in the last couple of months emerging. We still feel really excited about the enterprise opportunity for this business. It's clear that this is, evident, unlocked for us over time with our TAM. But in this macro environment, we've definitely seen some of our larger customers really feeling under budgetary pressure and the way that translated through is some of them are just maintaining the existing budgets that they've had with us instead of spending that spend as they might have in a normal macro environment, and that's really clear on the enterprise side of our offering.

Speaker 2

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. So that has been showing through in our enterprise business And it's been 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, they've been incredibly resilient. And while we do see Some smaller average spend per client than what we would probably normally see outside of this macro. That business is Trending really well and has contributed much less to our takedown in the guidance outlook.

Speaker 2

To your second question around telephosphically, thinking about Martin, on the bottom line, we've always been very committed to driving profitable growth in this business. That has not changed. But in this environment, which has changed, we're really demonstrating that we can drive that profitable growth and have reorder some of our priorities so that we are investing again Right now, in the places where we see good line of returns and are excited about things like R and D and where that can take us, and are right sizing our sales effort based on what we see in the environment. So exiting this year with Q4 at 15% Approximate EBITDA margin, I think is a good indicator of where we think we can take this business. But I think it's early to say what we would do in 2024 or beyond.

Operator

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

Speaker 6

Hello. This is John Young for Brent Thill. Thank you. I want to get maybe a little bit more color on the macro What you were seeing different maybe by industry or by geography? I mean, you mentioned tech was weak, but just wondering about some of the other industries.

Speaker 6

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 would be great. Thank you.

Speaker 2

Hi, John. In terms of industry and geotrends, We did see towards the end of Q1, I'd say, more of a show through in terms of From an industry sector, we've seen the layoffs. We've seen the impact of the tech industry at large. And I think that's through 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.

Speaker 2

So I know we've had that opportunity gone away, but I think they are feeling the environment and that was more evident with our larger customers this quarter than in the past. And we have factored that into our outlook. At the same time, we did see a lot of positive activity in terms of technical categories on our site with huge growth In job flows and demand for Gen AI. And so I think, again, we served tech buyers across the landscape regardless of the industry of those client And that's something that we saw with the increase in 10x of searches for talent in those categories and a 600 quarter to quarter increase in job growth 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 going to be very enduring.

Speaker 2

From a geo perspective, I think the trend that we started to In Q3 of last year, where kind of way to Q2, Q3, where the European Customer base on the client side has felt, I think, more of an economic slowdown than customers in the U. S. Has continued to be true. So our clients in the U. S.

Speaker 2

Have continued to be a bit stronger than European based clients. But I wouldn't say that there was no new noticeable separation More recently than currently.

Operator

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

Speaker 7

Yes. Hi, Hayden. Thank you.

Speaker 8

The CEO of IBM Recently said that they could see 30% of back office jobs replaced by AI in the next 5 years. Obviously, we've heard all kinds of predictions like this before and from other people, but it was an interesting one that just came out and a lot of people are 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 this evolves?

Speaker 2

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 and this announcement from IBM, because frankly, we all know that the old ways of working are And this started before AI even. I mean, as we saw 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, because 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.

Speaker 2

It was a lot harder for a company like us to get into that conversation and have a really conversation about how they

Speaker 3

need to shift from full

Speaker 2

time employees, the fractional work, the project based work and a different model is just really what we deliver. In a world where they are now really rethinking things and shifting to AI and alternative models of working and old staffing models and old Full time employee models are out the window, it is a lot easier for us to have the conversation that we should be having with the IBMs of the world about how we can help them with the flexibility, The cost savings, the on demand model that we offer them. So I think the advent of companies really shifting their entire Thinking about how work is delivered and what tools are critical to that is an enormous opening for Upwork now and in the future.

Speaker 8

Great. Thank you.

Operator

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

Operator

Farrell, your line is open.

Speaker 7

Hey, thanks for taking my question. You made the move to cut the second half brand spending almost entirely due to the macro. I guess, where does brand spending fit in 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 the scale that you have been over the last couple of quarters?

Speaker 2

Matt, our marketing team has done a phenomenal job increasing our awareness. We saw 45% increase in unaided awareness amongst business decision makers Overall, since the start of the campaign that we released at the end of last year, and 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 deliver on. So I think your question is a good one. I think for us, We've got to drive some of our 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 We're targeted ways that we can elevate our brand awareness with the right audiences as well as deliver on performance marketing and other channels And in this environment, ours do really well for us.

Speaker 7

And maybe a second question. You all announced The 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 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.

Speaker 2

I think the take rate expectations we have for this year are around Something kind of similar from an expansion perspective to what we probably saw last year. And 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 1st and foremost unlocking client demand, because at the end of the day, we are a demand constrained business. And so that's really, the needs all of the changes we've made into pricing both last year and this year.

Operator

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

Speaker 9

Hey, thanks for taking the question. This is Logan on for Brad. Maybe one for Erica, just as 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 6 to 12 months?

Speaker 3

Thanks. Yes, sure, Logan. Nice to meet you. And just to correct you, I'm actually on day 8 right now.

Speaker 4

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. 1st and foremost, obviously, learning the business and the team.

Speaker 3

I do want to dig into the growth strategies of the road map of which I see many.

Speaker 4

I just want to emphasize in my 1st 8 days, We're as I said in my prepared remarks, we're not immune from the kind of broader macroeconomic environment in this business. But that by no means in my mind diminishes opportunity ahead for this business. I think it's tremendous. And I'm going to be working together with the rest of the management team To really dig into those growth opportunities and make sure that we're right now, we are absolutely making the right responsible moves in order to show that we can produce But this is both a top and bottom line growth company. I think we all have that conviction here as a management team, and I

Speaker 9

And then just One quick follow-up. In the past, you guys have said that, obviously, S and B 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, saw your return to growth on active clients. So is there any sort of signs you guys are seeing In terms of the SMB inflecting relative to what you're seeing in terms of the larger customer weakness? Thanks.

Speaker 2

The SMEs, I think it shows 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. And when we look at the delta between our expectations Last quarter versus this quarter, you're right that basically the difference we've seen is Not on the volume side in terms of client activity or even contracts or job postings like that on the site. The only place where we've been somewhat surprised has been just the spend per contract or the GSV per client, which you can see in 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 and also the fact that our talent marketplace has become So at scale, there's a lot of wage pressure for talent.

Speaker 2

And so it's a very competitive attractive marketplace for clients and clients Finding that great value, which is driving that SMB activity, because people are seeing that they're getting great quality talent and great work done In this ecosystem. So those SMBs, as we said, have that fast twitch. They responded quicker last year and now we're seeing some strength there in terms of Volume and activity, which is great.

Speaker 10

Great. Thanks.

Operator

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

Speaker 11

Great. Thank you for taking the questions. Hayden, 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?

Speaker 2

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 applicable in this environment. In that area, we saw Job postings are going 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 over 25 job 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.

Speaker 2

And then I think the other thing I would mention in this area is, as we draft off the tail for this new job work site In this area, we also have additional categories, like writing, which you might think to your point is going to be More at risk is 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. So I would just underscore, we're not seeing any negative impacts from AI today. And as we look across The work that's happening in the platform, some of the more interesting things we see is in pretty much every category we serve, talent are using AI tools To augment their workflows, and I think this is where they're now delivering better value and better solutions For their clients.

Speaker 2

And so I think to the extent that that's happening, we can also help that happen because we can give them insights into What tools to be using, give them access to tools and things like that, that's improving their outcomes, improving satisfaction for the clients that are buying work from them, Potentially driving down prices, but also just getting the clients to come back to the platform again and again. So with all of that happening, I think that's a plus. And then the final thing I'd add on this 85% of our GSP today actually comes from longer complex projects and jobs On the platform, so again, I think the thing we see here is AI augmenting the work over time more so than displacing the work All together. So we're very excited about what this is going to allow for our customers. I think directly with Talend using the tools as well as us Embedding a lot of the AI functionality directly into the site, and we're executing on all fronts to really take advantage of this exciting opportunity.

Speaker 9

Understood. Thank you very much.

Speaker 2

Absolutely.

Operator

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

Speaker 12

Great. Thanks for taking my questions.

Speaker 9

I guess, just to build on some previous questions.

Speaker 12

So So question on the take rate change or the commission fee change, I think is starting today. So I guess by definition, the 5% tier are your most valuable relationships, I think that's a $10,000 cutoff. So 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

Speaker 9

that some

Speaker 12

of your most viable projects You might see some pressure from your from this change in the fee structure.

Speaker 2

Marvin, the change for the folks that are already at a 5% tier with their existing projects actually doesn't go into effect until the end of So for those relationships and contracts, there's a really good grace period before any of that impact happens. And frankly, 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 helps derisk part of what you're asking about. I think on the other side, we've seen a lot of data over the many years that we've We have monitored and examined our pricing in this platform. We approach this change with Extreme Care and thoughtfulness based on the data we have going back to 16, what we had our previous pricing, which was a flat 10% fee.

Speaker 2

And based on looking at all that data and and testing we've done to really understand the dynamics around pricing and how it drives incentives and behaviors. We did conclude that the new flat The structure is both simpler, which has a huge benefit for customers, and also, has really positive impact in terms of Reducing pricing for the vast majority of talent and relationships that actually will unlock and stimulate Further client demand, which is the number one thing that, freelancers care about other than making sure that they get paid. Like those are the 2 things that people want more jobs and Making sure that they get paid for the work they're doing. So with all of that taken together and understanding, the puts and takes at a very deep level based on all the data we have From many years looking at this, we are very confident that the one time risk around switching that fee structure, both the 20 to 10 At the front end of relationships and the $5,000 to $10,000 for relationships that get to that $10,000 earning level, it's definitely a positive change For the marketplace or the long term.

Speaker 12

Great. That makes perfect sense. And then just to build on all the questions about AI and I imagine This will be difficult for you to pinpoint, but you've already you're giving us full year guidance. Would you say that AI You know factored at all as a standalone phenomenon in your annual revenue guidance? And if No.

Speaker 12

Is it a positive, negative or neutral?

Speaker 2

AI did not factor into our For your guidance at all, because we're not seeing any impact of that on the business. I think the benefits for Sure, outweigh the opportunity sorry, outweigh the negatives here. And so I think as we're executing through this, we're excited to take advantage of the tailwinds and the things that we're in the future, but we didn't factor anything specific into the guidance around that.

Speaker 12

Okay. Appreciate the color. Thank you.

Operator

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

Speaker 13

Good afternoon. Thanks so much for taking my questions. You talked in the letter about narrowing the focus for R and D. Can you flesh 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.

Speaker 13

Can you help us understand as we get to the other side of that transformation, What changes about enterprise and kind of what's your longer term vision there? Thanks so much.

Speaker 2

Sure. So on the R and D side, we're taking this opportunity to really hone in on We have a really robust product portfolio and cover, the fantastic breadth of use cases for our customers Across the work marketplace, we've built that out substantially over the last

Speaker 9

3 plus

Speaker 2

years. And now we're really just going deeper in terms of 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. So That's really the opportunity for us. And as we go through that exercise over the next months quarters and continue to go deeper and really Continue to drive performance in those products. I think we will continue to evaluate other places where we can Sunset features, functionality, aspects of the product portfolio to again continue to make sure that our resources are focused on delivering where we have the So that's part 1 of what we're capturing on the R and D side.

Speaker 2

And obviously part 2 is with all of the Exciting work happening on AI, which you talked about on this call, that's a big opportunity as well. And in key places, we are moving resources from Less exciting areas of our products, road map and portfolio and to those opportunities. On the enterprise side, this is again, this is a huge Long term opportunity for us. The sales team is really just shifting focus into the most high value and highest performing areas of our We have amazing data about what that is. So it's pretty easy and evident for us to take our leaner team that we have today And redirect them to those highest performing opportunities.

Speaker 2

And so I think the long term vision here is absolutely unchanged. We know we can serve Larger customers, whether it's the Fortune 100, the Microsoft of the world and others, as we have always done with a really compelling best in class offering and continue to graduate customers who come into our self-service marketplace and start to scale up into our enterprise offering over time. Broadly speaking, it's not about changing the strategy or the vision. It is more about tuning some of our focus areas and the efforts of the sales team to go after the places that In this macro environment are, most evident. So nothing is diminished about the opportunity.

Speaker 2

The strategy is broadly unchanged, but we are attuned to the approach

Operator

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

Speaker 3

Hi. This is Jake on for Ron. I just wanted to touch On the full time opportunity, now that we're quarter end, could 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.

Speaker 2

Absolutely. The full time offering continues to be something that As I mentioned, a key part of our product lineup that we just launched a quarter ago. So in terms of adoption reception, Very positive. 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 intrigued that they can now use Upwork to do Things like payroll and solutions from the talent marketplace, which historically was something only available to our enterprise customers. But I'd also note that it is only a quarter end.

Speaker 2

And so We always knew that this type of new offering will be something that would take time to socialize, to ramp, to tune, given that this is not something that most of our customers have And so, I wouldn't say that there's anything notable about macro headwinds. It's more about socializing and This type of a new offering to a customer base that has been historically accustomed to getting other types of things from us. So we're very excited to continue pursuing that.

Operator

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

Speaker 10

Hey, thanks for taking my questions. On the revenue outlook for rest of the year, maybe talk about like 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 3 phases and the first phase being cost cutting and Freezing hiring budgets in your customers and you're still in that phase. So given that probably there is A little bit more time for the 2nd phase to kick in. Maybe just talk about how confident do you feel about the remaining 8 to 9 months The year as well as just the visibility that you have versus where you were at the beginning of the year?

Speaker 2

Well, we're a quarter closer to the end of the year, Rohit. So I guess we have a little more visibility than we did 3 months ago. And I'd say what's changed is, we definitely have a perspective now that more of our larger customers Targets are sitting still in that first phase that we talked about rather than having moved to the 2nd or third phase. So that is More information that we didn't have previously. 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 that we had about our normal seasonality that we would have in the business In a non macro impacted year, where the back half of the year would be seasonally stronger due to kind of the ordinary things we see On our platform, so with our revised outlook based on seeing more of these customers in that Phase 1 impacted by the macro environment, we now Do not expect to see that normal seasonal behavior in the second half of the year.

Speaker 2

We do expect to see A step up in the second half of the year versus the trough we're in in Q2 because of the dynamics around the rollout of our pricing changes and The lapping effect relative to last year in what we'll see in Q3 and Q4. But I think that is a shift in perspective versus what we had last year. I'll also note, we didn't bake in a specific macro perspective about things getting worse or things getting better, but we did remove from our outlook The normal seasonality improvement that we would see absent what we're now seeing in the macro.

Speaker 10

Okay. That's helpful, Hayden. And then A question on AI. I guess, there is this growing debate that structurally AI is going to drive more efficiency and the first Lack 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.

Speaker 10

Do you feel structurally speaking A year or 2 years from now, Upwork could be a much more profitable company if you are adopting AI internally. Is there just broadly, not specifically to Upwork, where do you think about Applying AI for internal productivity gains, not just for your customers?

Speaker 2

This is a huge opportunity for us and every tech company. Certainly, we've been testing these new tools as well because I think the productivity gains are very real. And I can't tell you how that will translate exactly into profitability Outlook 1 or 2 years out, but I think it's the responsibility of me and every CEO who has Engineers in their business could be really pushing on how we can use these tools to improve efficiency and also to improve developer satisfaction. I mean, I can tell you that as our engineers Try out these tools as we have extremely exciting conversations and frankly unlocked their skills and expertise to be doing Other things that they're really excited about kind of layering on, in their work. So, I think there's going to be big questions about as our teams get more productive, What then do you do with the resources that you're freeing up?

Speaker 2

And so I think those are questions that all of us will navigate as we move forward. But Again, AI is a huge opportunity and we're really excited to be taking advantage of it.

Speaker 14

Thank you.

Operator

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

Speaker 1

Thank you. On behalf of the entire Upwork team, thank you for joining us today and thank you for your interest

Speaker 14

in Upwork. If you need any clarifications

Speaker 1

or have any follow-up questions, Please do not hesitate to reach out to me at investorupwork.com. This concludes our call.

Operator

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

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