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Upwork (NASDAQ:UPWK)
Q2 2020 Earnings Call
Aug 04, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, thank you for standing by. And welcome to Upwork's second-quarter 2020 earnings conference call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session.

[Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions]. I would now like to hand the conference over to your speaker today, Ms. Denise Garcia, investor relations.

Please go ahead.

Denise Garcia -- Investor Relations

Welcome to Upwork's discussion of its second-quarter 2020 financial results. Leading the discussion today are Hayden Brown, Upwork's president and chief executive officer; and Brian Kinion, Upwork's departing chief financial officer and current advisor to the CEO. Also on the line is Jeff McCombs, Upwork's incoming chief financial officer. Following management's prepared remarks, we will be happy to take your questions.

But, first, let me review the safe harbor statement. During this call, we may make statements related to our business that are forward-looking statements under the federal securities laws. 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.

In addition, any statements regarding the current and future impacts of the COVID-19 pandemic on our business and current and future impact of actions we have taken in response to the COVID-19 pandemic are forward-looking statements and related to matters beyond our control and are changing rapidly. For a discussion of the material risks and other important factors that could affect our actual results, please refer to our SEC filings available on the SEC website and on our Investor Relations website as well as the risks and other important factors discussed in today's press release. Additional information will also be set forth in our quarterly report on Form 10-Q for the three months ended June 30, 2020 when filed. In addition, reference will be made to non-GAAP financial measures.

Information regarding reconciliation of non-GAAP to GAAP measures can be found in the press release that was issued this afternoon on our investor relations website at investors.upwork.com. As always, reported figures are rounded, unless otherwise noted, comparisons of the first quarter of 2020 are to the first quarter of 2019. All measures are GAAP unless cited as non-GAAP. The prepared remarks corresponding to the information reviewed on today's conference call will also be available on our Investor Relations website, shortly after the call has concluded.

Now I'll turn the call over to Hayden.

Hayden Brown -- President and Chief Executive Officer

Thanks, Denise, and thanks everyone for dialing in today. I want to start by commending our team for thriving in a fully remote work environment, while continuing to put our customers at the center of everything we do. Overnight, knowledge workers everywhere have adopted a remote working model that is testing companies and individuals in new ways. And I'm incredibly proud of the work our team has been doing to bring our own 20 years of remote work experience to bear in supporting companies large and small in navigating the remote works landscape.

The seismic trends toward remote work and more flexible working models continue to move in our favor, and this was illustrated by numerous data points from our fourth annual future workforce report released in June. Our study found that, 45% of hiring managers have frozen full time hiring, and yet 72% are continuing or increasing their usage of independent professionals -- underscoring, the focus companies have today on cost management and workforce flexibility. The breakthroughs companies in making the adoption of remote work, and they're focused on creating a more agile workforce is increasing the appeal of our online freelance talent solution. Against this backdrop, I'm pleased to report second-quarter revenue of $87.5 million, representing 19% year-over-year growth and exceeding the high-end of our guidance range.

Spend from new clients was a larger contributor than usual this quarter as we on-boarded and activated our record number of new clients. We benefited from the structural shift in favor of remote work and labor flexibility and drove performance through our continued investments in brand, performance marketing, and use case specific content and marketing outreach. The other key driver of our revenue was spent from retained clients. A predictable and meaningful spend level from retained client is a critical differentiator of our business model, and we are proud of the degree to which our customers have continued to fly on Upwork freelance talents as an essential part of their own operations through the economic downturn, as evidenced by the addition of more than 4,000 additional clients to our core client roster this quarter.

And while some of our clients pulled back spending due to macroeconomic factors with the onset of the pandemic and deepening recession in April, retension spend trended upward thereafter, bringing client spend retention to 100% for the quarter. Now, I'd like to share more about the progress we made in the second quarter as well as the plans we are executing against with respect to our three strategic growth pillars in the third quarter. First, on our strategic priority to get more bigger clients. In Q2, we saw significant traction with business customers from the launch of more than 50 new solution-focused pages demonstrating the specific ways that businesses can leverage freelancers on Upwork for immediate needs.

We're also continuing to build the drumbeat of awareness with larger customers via our Work Together Talent Grants program in which we are seeding a freelance talent showcase that demonstrates the applicability of awkward freelance talent to some of the most pressing challenges being addressed by organizations today. For example, one grant recipient, Buoy Health, based in Boston is an AI-powered healthcare navigation platform that is using Upwork freelancer content creators and designers to help consumers navigate COVID-19 and other healthcare journeys. Another recipient, Zindi, based in Cape Town, Johannesburg, and Accra, is enlisting user interface and user experience designers found on Upwork to enable machine learning experts in locations around the world to participate in virtual hackathons to solve COVID-19 challenges. In Q3, we are excited to be leveraging these powerful stories from these and other Talent Grant recipients to build awareness of Upwork, using a multichannel messaging and advertising campaign that just launched.

This campaign targets both SMB and enterprise buyers with an emphasis on business publications, podcasts, and television. Our sales team experienced impressive top-of-the-funnel activity but a slowdown in new deal close rates in Q2 as larger businesses were at various stages in managing their response to the current recession. However, we saw close rate improvements in June which have continued into the current period. Given the strong indicators we are seeing with three consecutive months of all-time high sales accepted opportunities and improving deal close rate trends, we have confidence in where things are headed.

Next, with respect to our second strategic priority of enabling more spend per client, we successfully increased client hiring activity in our most valuable categories, including technical categories and customer support. As companies around the world adapted their tools and strategies to take advantage of digital systems and technologies in Q2, we found success driving adoption of Upwork for a range of needs served by freelancers in our Web, Mobile and Software Development category and IT and networking category. As companies large and small found themselves fielding an increased volume of customer contacts and, in some cases, struggled to pivot their onsite customer support teams to work in a distributed manner, we supported a number of clients such as Microsoft to successfully expand or launch new teams of multi-language customer support agents already adept at remote work. We are also excited to have partnered with Citrix to make it easy for clients to provision and deprovision Upwork freelancers and agencies onto their corporate tools using Citrix's virtual desktop solution.

We continued to advance our strategy of increasing spend per client by supporting clients to adopt Upwork for additional use cases. Our highest-spending customers are those that use Upwork for payment and management of their own independent contractors, in addition to using Upwork for sourcing new flexible talent. This quarter, as more customers reevaluated their talent programs in a fully remote work environment, we were able to achieve significant adoption of our Bring Your Own Talent functionality, which allows clients to onboard pre-existing individual contractors and agencies onto our platform for global unified billing, enhanced visibility and reporting, strong spend controls, a worker classification option for peace of mind, and centralized team management. As another example of enabling broader use case adoption among clients, we entered into a partnership in Q2 with Business Talent Group, which offers access for our clients to their network of professional business consultants while also enabling us to access BTG's additional client base which includes 50% of the Fortune 100.

In Q3, we are continuing to support customers adjusting to the remote work reality with further enhancements to our Bring Your Own Talent offering in addition to making it even easier for our customers to scale their usage of Upwork for talent sourcing as well as remote team payments and management across their organizations. In light of the current environment and heightened customer interest in solutions that enable them to manage distributed teams centrally, we are expanding the availability of our employer-of-record offering to all our customers so they can convert their Upwork freelancers to be employees without leaving our platform and so that they can easily onboard and pay their own distributed employees, not just freelancers, via the Upwork platform. Our third strategic priority is to make more high-quality matches with a focus on our high value technical categories of work. We saw huge global demand in Q2 for technical talent to address critical business needs in a digital-first world.

And we exceeded our goals for matching technical talent with exciting, high-impact project and role-based work on our site. In Q2, we made significant enhancements to our semantic search and matching system, improving the relevance of search results and increasing client efficiency in search. We also released a new premium talent pool called Upwork Expert-Vetted Talent, which builds on our deep expertise in vetting talent for our most selective enterprise clients. This solution makes available to our customers on a broader scale a pool of highly skilled talent identified via a unique combination of machine- and human-powered talent vetting and curation.

In Q3, we will continue to expand our vetted talent pools as we – as well as our core systems to offer a matching experience differentiated by the specificity, speed, and quality of the talent matches we offer. In addition to being laser-focused on our three strategic growth priorities, we are deeply committed to racial justice, and this commitment is integrated into many aspects of our work. We are building and scaling strategies and practices as an antiracist company with a particular focus on supporting our Black team members. We are holding ourselves accountable to a number of diversity inclusion and belonging commitments and have taken an open and transparent approach to discussing these efforts because we believe that this is an important way we can contribute to the larger, overdue national conversation about racism in America.

As part of this work and consistent with our mission to create economic opportunities so people have better lives, we remain dedicated to ensuring that Upwork is a platform where all people, regardless of skin color, gender or any protected characteristic, can compete on a level playing field and have opportunities to do incredible work. It is consistent with this that 60% of the Work Together talent grant recipients are organizations owned or led by members of underrepresented groups or are diversity-focused organizations. And 18% of the grantees are U.S. Black-owned, -led, or -focused organizations.

In Q3, we are continuing to invest in enhancements to our platform that better enable clients to use Upwork to achieve their own supplier diversity goals. As we look ahead, we see companies building enduring skills, capabilities, and cultural norms that embrace remote work as part of their permanent status quo. This increases the comfort within businesses of all sizes to work with remote talent on Upwork. We also expect businesses to increasingly seek out solutions that enable them to more dynamically manage personnel and vendor costs through any economic climate and believe we are uniquely positioned to meet these needs.

With that in mind, we expect continued strength in new client acquisition in Q3. At the same time, we recognize that some of our existing customers may struggle further should the recession deepen and have anticipated this in our guidance. We remain confident in our growth strategy and excited about the runway ahead of us. The widespread cultural acceptance of remote work across the economy serves as a meaningful enabler for customers to adopt our solution at a larger scale and underscores the positive long-term trajectory of our business and its potential to achieve sustained revenue growth of 20% or more in the years to come.

As you may have seen, today, we also shared the news that Jeff McCombs will join Upwork as chief financial officer succeeding Brian Kinion. To help ensure a smooth transition, Brian will stay on as an advisor to the Company through October 2020. Jeff joins us from Doctor On Demand where he served as CFO. Jeff was also previously CFO at OpenTable, CFO at Flipboard, and head of global business operations at Facebook.

His significant executive leadership experience will help expand Upwork's finance and operational capabilities and add tremendous value to our business. We're thrilled to welcome him to the team. I want to thank Brian for his significant contributions to Upwork throughout his tenure. We are so grateful for his leadership and dedication.

Now, I'll turn the call over to Brian, and then to Jeff to briefly introduce himself.

Brian Kinion -- Departing Chief Financial Officer and Advisor to the Chief Executive Officer

Thank you for the kind words, Hayden, and hello, everyone. Before I get into our second quarter financial results, I'd like to share a few parting words. It has been an honor to work with such an amazing team over the years, and I'd thank everyone at Upwork for the partnership and support. Serving as CFO of Upwork has been a career highlight, and the Company is on a great path.

I look forward to seeing Upwork succeed well into the future. I'd like to introduce Jeff, and then we'll turn to the second-quarter results.

Jeff McCombs -- Incoming Chief Financial Officer

Thank you, Brian and Hayden, and hello, everyone. I'm very excited to join Upwork at such a transformational time for the company. Now more than ever before, the flexibility that Upwork provides is critical for businesses and freelancers alike. I look forward to working closely with Hayden and the rest of the leadership team to execute on Upwork's vision of connecting businesses with great talent.

Now, back to Brian to wrap up with the second-quarter results.

Brian Kinion -- Departing Chief Financial Officer and Advisor to the Chief Executive Officer

Thanks, Jeff. In the second quarter, our gross services volume was $582 million, and our revenue was $87.5 million, reflecting a 19% year-over-year increase. Marketplace revenue was $78.5 million, reflecting a year-over-year increase of 19%, while managed services revenue was $9.1 million. As we showed on the last call, we began surpassed pre-crisis levels on numerous top line activity metrics such as client registrations and new job post in early to mid-April.

These new client relationships resulted in revenue at the higher tiers of our tiered freelancer service fee. Revenue was also boosted by clients in retention that improved over the course of the quarter. Lastly, our revenue performance was driven by better-than-expected usage of connects, freelancers, virtual bidding tokens, and COVID-related project under managed services. Our core clients grew by approximately 4,000 to 133,300 at the end of the second quarter.

And our clients' spend retention for the quarter was 100%. Our overall take rate in the second quarter was 15%, and our marketplace take rate came in at 13.7%. Non-GAAP gross profit was $62.3 million or 71% of revenue, which was consistent with the second quarter of 2019. Non-GAAP sales and marketing expenses were $33.1 million, representing 38% of total revenue as compared to 32% in the second quarter of 2019.

The increase was driven by investments to drive brand awareness, performance marketing, and sales. Non-GAAP R&D expenses were $17.8 million, representing 20% of total revenue, as compared to 19% in the second quarter of 2019. This increase was driven by our continued investment in product innovation. Non-GAAP G&A expenses were $13.4 million, representing 15% of total revenue as compared to 18% in the second quarter of 2019.

We will continue to drive leverage in G&A as we scale for growth. Transaction losses were $1 million in the second quarter, representing approximately 1% of total revenue at the low end of our typical 1% to 2% range. An expected increase in transaction losses associated with the impact of the pandemic did not materialized in the second quarter. We expect operating expenses will increase in absolute dollars but fluctuate as a percentage of revenue from period to period as we continue to invest for growth.

Non-GAAP net loss was $3 million in the second quarter of 2020, compared to non-GAAP net income of $million in second quarter 2019. Our basic and diluted non-GAAP net loss per share was $0.03 in the second quarter of 2020 as compared to a non-GAAP net income per share of $0.01 in the second quarter of 2019. Adjusted EBITDA loss is $1.2 million in the second quarter, compared to positive adjusted EBITDA of $1.2 million in the second quarter of 2019. Considering the macroeconomic uncertainty related to the pandemic and potential volatility and how this may impact our retained customer base, we are guiding third-quarter revenue between $89 million and $91 million.

Note that in Q3, we will be lapping monetization initiatives that will moderate year-over-year growth comparisons in the second half of 2020. We remain bullish on our business opportunities will continue funding growth initiatives while closely monitoring performance to achieve ROI thresholds. We will continue to manage costs with discipline while preserving our cash and maintaining our strong balance sheet, which included cash and marketable securities of over $146 million at the end of the second quarter. Thank you.

We will now take your questions.

Questions & Answers:


Operator

[Operator instructions] Our first question comes from Brent Thill with Jefferies. Your line is now open.

Brent Thill -- Jefferies -- Analyst

Thank you. Hayden, I'm curious if you could just give us a sense. You mentioned you, you know, saw close rates starting to improve. Can you just talk to what you're seeing currently now in the current period? And Brian, great working with you, and best of luck.

I guess, everyone would just love to hear. I think there's a little concern about the transition and maybe just talk through this from your perspective. That would be helpful. Thank you.

Hayden Brown -- President and Chief Executive Officer

Hey, Brent. So, in terms of the sales question, we're seeing really good progress on the sales side around expanding spend with existing customer accounts. And we really leaned into the opportunity this past quarter to partner with our customers to help them navigate the transition to remote work and bring our expertise to bear. And that really showed up with customers like Microsoft as we help them expand, you know, deployments of things like customer support agents and other types of freelancers who could really help them as they navigated this challenge.

We did not see the conversion rate that we wanted to see in terms of new clients signing up. And I think that's something where we feel really good about the top of the funnel, where the indicators are strong with our sales opportunities at all-time-highs. But with the closures that haven't quite been there yet, and we really see customers having some hesitancy just because of the overall economic downturn. And that has started to really improve in June.

And those indicators are coming much more back to life than what we were seeing in, you know, March, April time period where, you know, [Inaudible] just installed for a lot of customers if they were now being the pandemic, the recession and kind of coming in terms of what that means for the business. So, our focus has been retooling some of our sales asset or approach to really meet customers where they are, make sure that attracts our revenue with them, and it has been building the returns, as I mentioned, with improving deal close rates in the more recent period. And as we step back and look at all this, you know, we do continue to believe that having a strong sales team is a critical piece of unlocking the larger $560 billion TAM that we're addressing. And it's really heartening to see, especially over the last few months, how much customer mindsets are evolving as – you know, in the past, before all of the work-from-home efforts that customers have been going through, the fact that the freelancers on Upwork were remote was one of the key objections that the sales team we run out into inside that accounts.

And that was something that a lot of customers or prospective customers just weren't that comfortable with. And the fact that over the course of a few months, people's mindset around their openness to working with remote freelancers and the idea that what used to be one of the key obstructions in the sales process is now becoming, you know, a key asset in the sales process has just shifted really rapidly. So overall, we feel really good about where things are headed and the [Inaudible] has surely backed that up as well.

Brian Kinion -- Departing Chief Financial Officer and Advisor to the Chief Executive Officer

And thanks, Brent. I'll take that --

Hayden Brown -- President and Chief Executive Officer

[Inaudible] Go ahead, Brian.

Brian Kinion -- Departing Chief Financial Officer and Advisor to the Chief Executive Officer

Perhaps to say. I'm not leaving immediately, and I'm here for a few months to do a smooth transition to set Jeff up for success. But, you know, we've done a good job of building a strong infrastructure and laid a good framework for him to build off of. We've remediated the material weakness as of this June 30 filings, so you'll see that in the 10-Q.

So that's good news as well. I haven't decided what's next. I'm going to take some time away with my family. And I'll be a very good and happy Upwork shareholder as well.

Hayden Brown -- President and Chief Executive Officer

And just to add some more color to that, Brent. I think Brian has been an incredible partner, and I think we've been having a lot of conversations since I stepped into the CEO role about the direction of the company and our focus right now on really driving strategic growth priorities. And I'm excited that Jeff is really bringing in a strategic lens to financial leadership. You know, his numerous roles as a CFO, harkening back to his days leading business operations at Facebook, as well as his executive leadership experience at a number of businesses and drawing on his two side of marketplace experience.

He's been a CFO at OpenTable and Doctor on Demand. So I think Jeff is going to be an incredible partner, really diving into our strategies and our growth priorities as we're moving the business forward in this next chapter.

Operator

Our next question comes from Mark Mahaney with RBC Capital Markets. Your line is now open.

Mark Mahaney -- RBC Capital Markets -- Analyst

OK. If I could just throw out three quick ones. On the Citrix partnership, I know you had talked about Hayden. But anyhow, do you think about the materiality of that partnership to Upwork? If it's successful, it translates into what, perhaps in terms of client retention, client acquisition, etc.? Secondly, just go through again why your growth outlook for the following quarter -- your growth in the June quarter really held steady with the earlier quarter, and you've got this a little bit of deceleration in the September quarter.

I think what you're saying is that you just want to be conservative, careful because economic recovery is very uncertain. And so, you're still seeing kind of mix signs from your clientele. But just go through why we're not seeing kind of consistent or even accelerating growth in Q3. And then finally, Brian, just in terms of the business model, just thinking about this going forward, for your business or for Upwork's business, you know, is there a cost savings because, you know, of remote work from home capabilities? I think that was already pretty largely adopted in your company anyway.

But I just wonder, as we look at all these companies as we've had this dramatic change in how people work, does that just mean a lot of corporate G&A expense savings? Thanks a lot.

Hayden Brown -- President and Chief Executive Officer

Mark, so on the Citrix question, really, the partnership and the launch that we did with them of the Upwork talent solution that sits within the Citrix workspace enables our larger customers to seamlessly integrate freelancers into their virtual work environments and give them safe and secure access to the systems and tools that they need to do high-impact, you know, work for these customers. And so, in the immediate term, that just launched, so we're not expecting it to material right away. But I think it does represent a great opportunity for us to expand freelancer adoption with Citrix customers, which are, you know, numerous around the world as well as -- you know, as part of our larger strategy to continue to integrate into the tools in the places where our larger customers are doing work and are looking to have freelancers be very effective in helping with their strategies and their various workflows that need to get done. So, I think that's something that this is very early days right now but certainly is part of our broader strategy to be relevant and really a seamlessly integrated tool inside of enterprise workspaces.

To your second question around the growth outlook, I think, you know, we're very realistic about where the economy is right now. And so, we've seen incredible acquisition strength in Q2, and we are expecting that to continue in Q3. But when we step back and see, you know, 30 million Americans unemployed, stimulus programs largely dried up and potentially not more forthcoming for individuals or small businesses, you know, it's quite possible that we're going to be heading into a deeper recession. And a lot of our customers who weathered the storm very well so far, some of them may need to go into some kind of deeper hibernation or trim spending further in order to get through the next couple of months that are ahead.

So, you know, we feel incredibly gratified by the performance they've had so far. And frankly, the client spend retention trends, the fact that we have added another 4,000-plus clients to our core client roster this quarter, you know, really great numbers. But as you look ahead to August and September, we are anticipating that the economy is going to get worse and that, that is going to impact a subset of our customers. And so that is something that we've baked into our models.

And part, you know, of that is offset by the strength in acquisition, which we see continuing, but we're anticipating that that decline, just in the macroeconomic situation, you know, is going to trickle due to some of our retention spend as well.

Brian Kinion -- Departing Chief Financial Officer and Advisor to the Chief Executive Officer

Yeah. And on the going remote, obviously, there is nobody in the office. So, there are things like food costs and things like that in the office that we have cut tremendously. You know, we're going virtual on a bunch of events.

And the biggest, you know, piece of that is really looking at your real estate footprint. So, we have three offices in -- two in the Bay Area. So, we're reimagining what Santa Clara could look like. It's more of a collaborative space as we probably won't go back to that office until January 1, 2021.

The San Francisco office, we are in the process of trying to sublease that space, but that market is very soft right now. So, we do not anticipate seeing any sublease this year in 2020. And then in Chicago, we just completed a buildout of the second floor, and the team has gone back into that office as of yesterday on a modified basis. And so they're there, you know, sort of getting up and running.

But we've taken a lot of those costs and redeployed them in the company into investments for things like in marketing, where we, again, can drive ROI positive growth. And so, we've been looking at all those opportunities, either redeploying them or putting them to the bottom line. And we have -- people going back to the offices, and we have to also do some things around PPE, social distancing, and we have to reimagine. So, there are some spends that we're going to have to do to get those offices ready for when people can go back to the offices.

Mark Mahaney -- RBC Capital Markets -- Analyst

OK. Thank you, Brian. Thank you, Hayden.

Operator

Our next question comes from Nick Jones with Citi. Your line is now open.

Nick Jones -- Citi -- Analyst

Hi. Thanks for taking my questions. Just two kind of, I guess, the same line of thinking. I guess, first, has there been any shift in project size since COVID kind of hit the scene here? Is it growing or shrinking? And I guess, what are you seeing there? And I guess, second, is the focus on larger customers potentially coming at a cost and maybe getting higher volume smaller customers? And I guess, I asked just we see some pretty significant growth at companies like Wickes and Shopify and a lot of SMBs kind of trying to figure out how to have a digital presence.

But maybe focusing on larger customers, are you may be missing out on some of these smaller customers who need assistance, kind of building out their presence with a lot of , you know, the services, the freelancers on Upwork provide?

Hayden Brown -- President and Chief Executive Officer

Thanks, Nick. In terms of project sizes, I'd say, you know, we've actually seen project sizes hold steady through the last quarter. And if anything, we've seen a shift in favor of higher-value work on the platform and higher-value clients continuing to be really active. So, there hasn't been a massive shift, but we're continuing to make traction with larger clients and just higher-value work in general, which is a goal of ours.

To your question about is the -- are the larger customers kind of taking away from our ability to focus on and acquire smaller customers? You know, our strategy this year has been to be about both. We've never said that we are pursuing mid-market or enterprise customers at the expense of smaller customers. We continue to see our SMB opportunity as being extremely attractive. And frankly, you know, we're continuing to invest marketing dollars there based on our ROI calculations.

There is great LTV in acquiring a lot of those customers. And so, that's certainly one avenue of acquisition for us and continues to be one piece of the puzzle. And so, as we look at driving growth across our business, we think there's a huge opportunity with larger customers, but do not feel the need to neglect our smaller customers either, especially in this environment. I think your points are well-taken that some of the smaller customers are very fast right now to be pivoting and adapting in this environment, jumping into digital solution, and, you know, they're very agile.

And we've seen some of that on our website too, where small customers have been very active and very successful in working with freelancers in our solution as they have been adapting their small or very small businesses even through the last few months. So, I think, you know, our focus is on driving growth across our customer segments. We think that over the long term, to get our $560 billion TAM unlocked, mid-market, and enterprise customers are very important. But small customers are a key part of the puzzle, and they help drive a lot of the marketplace velocity, you know, talent curation, and bedding.

There's a lot of activity that they generate inside of our business that's very valuable. So, I'd say we're really covering all of our bases right now. I don't see it as an either/or.

Nick Jones -- Citi -- Analyst

Great. Thank you.

Operator

Our next question comes from Logan Thomas with Stifel. Your line is now open.

Logan Thomas -- Stifel Financial Corp. -- Analyst

Thanks. Follow-up on a prior question with the answer regarding clients' trimming spend, you know, in the next couple of quarters are potentially, you know, pulling back in different areas. Wondering, based on your visibility, your conversations you have with clients, there are certain categories or verticals of projects where clients are thinking of trimming spend? Or is it more of a broad-based comment in that pockets of clients maybe see more softness in their business and pulling back? And then the second question relates to the searching and matching initiatives. Wondering if you could highlight, you know, maybe what one or two of the improvements made in 2Q is most incremental for you.

And going forward, what are some of the other aspects you'd like to focus on within searching and matching? And, you know, if fill rate is the best way to think about the outcome of those efforts, you know, if you could help frame where fill rates are today, where you think they could go over the longer term, that would be helpful.

Hayden Brown -- President and Chief Executive Officer

In terms of the question on the pockets of clients and what we're hearing or expecting this quarter in terms of pullback in spending, Logan, it's really just an expectation that, given the volatility in the broader market, some customers are going to struggle. So, we haven't gotten any indications of specific customer types or categories of work on our site that seem to be more exposed. You know, overall, the data that we have suggests that approximately 80% or more of the work on our platform is considered essential or somewhat essential by our customers. And so, you know, to the extent that they are in business, they are going to be doing that work on our platform.

To the extent that the economy forces them into, you know, hibernation or a shuttering of their businesses, obviously, that's going to have an effect on how they're spending with us. So, we feel that it's more about the macro conditions and how exposed a subset of our customers are going to end up being. Can they get through, you know, another three to six months? And that's an open question. To your second point around search and match.

Fill rate is an important part of how we think about and measure success there. I'd say our overall efforts are around providing increasingly tailored experiences that really speak to specific categories of work and the types of matching experiences that customers look for and value in those categories. And so, this year, we're particularly focused on tuning the searching and matching experiences in our technical categories. And so, we've been innovating around, for example, the profiles that freelancers use in those categories, and that includes both, like, the underlying data set, the way that freelancers express their skills and expertise, the way that I'm matching algorithms, consume, and kind of process that information, and then surface really relevant results based on a client query or a client job post.

And so that's where we're doing a lot of work that kind of starts in the UI layer, and then goes all the way down to the technical infrastructure to really kind of retool and redeliver the different parts of the system that deliver excellent results on a consistent basis for customers around that. And some of the things we look at are, you know, relevancy measures, fill rate is a key one as well, but even things like speed of the results. And for example, this past quarter, we increased our visitor site search speed by 10x. And those types of improvements, you know, do go a long way, both for the user experience and for the relevancy that the customers are seeing.

So, we're continuing to tune those engines because at the end of the day, a key piece of our value proposition is clearly our ability to match incredible talent with exactly the demand the customers have. And so, making our systems, you know, very adept at that as a key piece of kind of technical innovation that we focus on.

Logan Thomas -- Stifel Financial Corp. -- Analyst

That's great. Thanks, Hayden.

Operator

Our next question comes from Ron Josey with JMP Securities. Your line is now open.

Ron Josey -- JMP Securities -- Analyst

Great. Thanks for taking the question. Brian, we'll miss you for sure. So, I had two, maybe one bigger question that might have been addressed earlier, Hayden, but hopefully, you can provide some additional commentary and then another one on client spend retention.

And so just a bigger question. You talked about 45% of hiring managers have frozen full-time hiring. And so, I get the risk around the 30 million unemployed and not knowing what the future holds. But, Hayden, can you talk to us just a little bit more about what that opportunity could look like? And how your conversations have been when talking to larger enterprises that, while hiring is frozen, you know, work and projects still need to get done, and the ability for Upwork to ramp up and down things pretty quickly.

And then the next question is just on client spend retention, declined to 100%. We're expecting this dip. But just any color on how this improved for the quarter? Or most importantly, whether this trend can continue as we lap the product changes from a year ago, March? Thank you.

Hayden Brown -- President and Chief Executive Officer

Thanks, Ron. So, in terms of your first question around what the opportunity looks like with larger clients and kind of where their heads are right now, you know, I think what we're hearing is this has been just a massive opportunity for them to reevaluate a lot of aspects of their business and not just in the context of how do they navigate through the crisis, which, I think, was where they were three months ago. You know, three, four months ago, it was all about how do I get through this? What do I need to do kind of in an emergency context to survive? Where the conversations are today is much more about, how do I set myself up for the long term? I've learned a bunch of things in the last three months about where my business was not resilient, where things were brittle, where I was exposed to risk? And frankly, I think a lot of executives have realized that not only is this pandemic, probably not going to go away in the immediate future, but they're also seeing, you know, some of the advantages around what they're getting from a remote work standpoint that they didn't anticipate. And so, you know, for example, some of the data that we have is more than 50% of hiring managers feel the shift to remote work has gone better than expected.

Yeah, I think 20% or 30% of CFOs are saying that, you know, remote work will be part of the status quo for a number of roles going forward, where it was not that way in the past. And so, the conversations we're having are really around, what is your workforce strategy going forward? Where are there opportunities in your organization to have a much more dynamic talent model? And what can that do for you? How can that become not just something that's part of getting through a pandemic, but actually part of a strategic advantage and a competitive differentiator for you in the long term. And I think that's where the really interesting conversations are happening, where companies are taking a longer view to this and potentially also taking a little more time to figure out and make some of the decisions around that because those are big decisions. But that's where they're saying, how does Upwork fit into this bigger picture of what my talent strategy might look like going forward, which is very different, where the cost profile for my teams and my employees might look very different? And we've also put out a lot of interesting data recently around that, where we're seeing, you know, the premium that companies pay for having workers in, you know, the top 15 most expensive cities in the world, in the U.S.

rather, is 40% versus getting those same roles filled in other geographies. And so I think a lot of those realities are starting to set in, and the larger companies are very interested in figuring out how do they come up with a new strategy that's much more dynamic that both take into account remote work as a permanent reality for their workforce and also takes into account the opportunity to leverage a distributed team, which can now include freelancers because they're starting to break down some of those barriers where, previously, they felt like this has to be employees in my office, and now they're realizing it doesn't need to be that way. And they've kind of learned so much in the past three months about what's possible and how they can potentially work differently to solve some of the challenges that they had even before all of this. You know, skills gap challenges, reskilling challenges, talent access challenges, like, all of those things are still waiting for them on the other side of this crisis, and they're starting to see how remote work and freelancers can be a strategic tool for tapping into new solutions to some of those kind of perennial problems that they faced.

So, I think those are some of the really interesting conversations with larger customers. Your second question was around our outlook for Q3, I think, given what we saw in Q2 and kind of where we think client spend retention was going to go.

Ron Josey -- JMP Securities -- Analyst

Correct.

Hayden Brown -- President and Chief Executive Officer

I think there's -- yeah. And I think on that, you know, it really remains to be seen what happens in the macro-environment. You know, we saw really strong trends where client spend retention in April did hit a trough. And then it climbed out through the rest of the quarter and bounced back to a strong kind of pre-pandemic level by June -- by the end of June.

And so, if you think about that trajectory, which was really positive, you know, if the macro conditions continuing to improve, then the client spend retention number will benefit from that. If they worsen, then, you know, that's going to put more pressure on that number. So, I think it remains to be seen, you know, what goes on with the broader environment and how that impacts some of these customers that are a big part of our retained base.

Ron Josey -- JMP Securities -- Analyst

Thank you, Hayden. Makes a lot of sense.

Hayden Brown -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Marvin Fong with BTIG. Your line is now open.

Marvin Fong -- BTIG -- Analyst

Great. Thank you for taking my questions. Two questions. Just first on the guidance, I think maybe it would just be helpful.

I know that you said it's dependent on the macro environment. If you could just potentially kind of bracket that in terms of, you know, how severe of a downturn would it take to kind of hit the $79 million and -- versus the $81 million. Is that more of a base case? Or is that assuming some improvement? If you could just kind of give us the assumptions behind that? And I know that you also have some degree of visibility. Just how much visibility you have, you know, given we're already in August, and there are some lags in your business? And then, secondly, I think it would help investors if we could go a little further into, you know, the workforce management and the opportunity there, I think, relative to, say, the $560 billion opportunity or your core client base, how many of those are kind of targets for this, you know, incremental, you know, workforce management solution? And where are you guys in terms of penetrating the opportunity? I imagine it's like the first or second inning, but if you could just expand on that, that'd be great.

Hayden Brown -- President and Chief Executive Officer

Thanks, Marvin. So, in terms of guidance, our assumptions are basically -- the base case is that the first half of the quarter is better than the second half, and it really depends on, again, the performance of our retained clients. Overall, we're assuming that acquisition for Q3 continues to be really strong. We saw it be strong consistently through Q2.

And we've modeled that to be, you know, continued to be the case in Q3. But we know that for us, in our business, even acquired clients, as they come in the door, take time to – you know, they've got a register, they've got to post their first job, hire their first freelancer, start spending with that individual, and ramp up that spend over time, and potentially ramp up with more freelancers over time. And so even in an environment where our acquisition is incredibly strong, it does take a little bit of time for that to fully flow through to our numbers. And so that's just one of the kind of dynamics of our business.

But acquisition, we've modeled in to be very strong for Q3. On the retention side, we are expecting the first half of the quarter to be better than the second half. And we're expecting that there is more of a macroeconomic headwind for our retained customers, more similar to what we saw in the first half of Q2, frankly, if you expect kind of like a double-dip where we saw March-April weakness with our retained base at the end of Q1 and early Q2, and then it bounced back. We're expecting that kind of dip at the end of Q3, kind of similar to what we saw in early Q2.

So that's essentially kind of the balance we put on it, and that's what we're expecting based on just the factors that we see in the broader landscape. For your second question, which was around -- let me just make sure I understood. It was around kind of our workforce management solutions overall.

Marvin Fong -- BTIG -- Analyst

Right. Like, right, pretty much the whole gamut, the employer of record and the BYOTs, just help investors kind of understand the opportunity because, you know, it does come up a lot.

Hayden Brown -- President and Chief Executive Officer

Yeah. So I think what's interesting and exciting about this is if you kind of think about the investments we're making around our products and services as really a true platform, and Upwork is not just a point solution for, you know, one or two transactions or, you know, one freelancer you might hire one day, but really is a single one-stop-shop type of destination for a business that needs a range of talent solutions. And that range of talent solutions that we can serve includes, certainly, our talent sourcing option, our core marketplace, and everything around that that we've built up over many years. But increasingly, and I'd say, particularly in this environment, we're seeing a lot of demand for customers saying, "Hey, you know, you guys are doing great with giving me new talent, how can I bring existing contractors, vendors, you know, others so that I'm working within other, you know, venues onto Upwork, so that I can pay them all in one place, have peace of mind that this is all being managed in a single way.

I have really good cost control through your platform and kind of all the benefits that we offer. So that's where the Bring Your Own Talent offering. I think the value proposition there has grown only stronger in the last few months as people are really stepping back and reassessing their talent programs holistically. And then related to that, you know, we've had, for many years, an Employer of Record offering where we can give basically payroll services to our customers so that they can have both freelance talent and payroll talent through our site.

And that's something that's been kind of a limited adoption for a limited set of our larger customers. We're again, hearing a lot of demand for that type of a solution from customers who either want to payroll existing workers that they have, who they want to bring on to our service, or have freelance relationships that they want to transition into employment relationships. And so, we're doing work right now to expand the availability of that offering to be able to reach more customers because we are seeing so much of that demand. And so I think if you step back and, again, think about our solution broadly as a platform through which our customers are saying, you know, we want to work with you Upwork and kind of get talent and just kind of work with our talent through Upwork in a multitude of ways, and we're serving them in those broader ways.

And what we see as we do that is our highest spending clients are those that actually use us for multiple use cases. They use us for not just, you know, talent sourcing, but also for something like bring your own talent. And so that's an area where I think we can drive a lot of stickiness retention, you know, broader adoption because we're serving them in a lot of different ways that then give us, you know, new frontiers to expand the account as well as, you know, retain those customers over time. So that's, I think, maybe one way to put those different pieces of the offering in the broader context of our strategy, which is around, you know, both targeting larger customers and growing that spend and stickiness over time.

Marvin Fong -- BTIG -- Analyst

Great. Thanks, Hayden. And let me just say welcome aboard, Jeff. And Brian, best of luck to you on your next endeavor.

Brian Kinion -- Departing Chief Financial Officer and Advisor to the Chief Executive Officer

Thank you, Marvin.

Jeff McCombs -- Incoming Chief Financial Officer

Thanks very much.

Operator

[Operator signoff]

Duration: 50 minutes

Call participants:

Denise Garcia -- Investor Relations

Hayden Brown -- President and Chief Executive Officer

Brian Kinion -- Departing Chief Financial Officer and Advisor to the Chief Executive Officer

Jeff McCombs -- Incoming Chief Financial Officer

Brent Thill -- Jefferies -- Analyst

Mark Mahaney -- RBC Capital Markets -- Analyst

Nick Jones -- Citi -- Analyst

Logan Thomas -- Stifel Financial Corp. -- Analyst

Ron Josey -- JMP Securities -- Analyst

Marvin Fong -- BTIG -- Analyst

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