Some of our biggest growth categories in Q4 were actually categories that some of the conventional wisdom thought might get disrupted by AI, but we’re not seeing that. Things like legal, things like logos for marketing and sales, other things like that are actually showing good, nice, healthy growth dynamics in Q4. So, and that’s consistent with the way that we’re seeing client ads come onto the platform as well. In terms of duration and the kind of total project totals that you asked, similar to last quarter, we saw on a sequential basis the average hours for contracts just increased ever so slightly quarter to quarter. And overall, I would say that those dynamics remain pretty persistent over time. And I’m just trying to look at my list of your questions here.
Rate per hour also is pretty flat quarter to quarter, so not a lot to point to there. And then on the questions on the balance sheet, so just for clarity’s sake on the adjusted free cash flow adjustment and why we did it, first and foremost, the reason that we are making this adjustment to free cash flow is to make sure that we are truly reflecting our strong and growing cash position, which we’re committed to driving on an ongoing basis. The reality is that the day of the week in the — depending on the day of the week that the quarter ends on, we may have a significant but temporary fluctuation in cash flow from operations because of the pre-funding of client payments to freelancers in our escrow account. So this happened in Q4 when the quarter ended on a Sunday.
And the reality is that that pre-funding then gets paid back within days each week. And so that’s why there’s a little bit of fluctuation and it can show quite a difference in cash balances compared to what actually ends up in our corporate cash account. So hopefully that clarifies that question. The reduction in deferred revenue, that is consistent with the reduction that we’ve been seeing quarter-to-quarter on an ongoing basis and it’s part of the revenue recognition that we’re seeing from the tiered — from the former tiered pricing change now to this flat fee pricing change. So hopefully — I know I also packed a lot of answers into that question. Hopefully, I covered everything for you.
Kunal Madhukar: Thank you. No, in fact, if I could follow up. So then when we look at deferred revenue, we look at deferred revenue going down. Does that kind of imply that maybe the total number of projects that are longer term projects, the value of those projects is going down?
Hayden Brown: No, no, that is not accurate. The reason that the deferred revenue has declined is because we — because of the dynamic of tiered pricing versus flat fee pricing, in the past we were required to defer more revenue because we were — different contracts were priced at different rates and we’re no longer required to do that with our new flat fee pricing.
Kunal Madhukar: Thank you so much.
Hayden Brown: So it does not have nothing to do with duration. Okay, yeah, sure, no problem.
Kunal Madhukar: Thank you. Thank you.
Hayden Brown: Yep.
Operator: Thank you. One moment for the next question. And our next question will be coming from Ron Josey of Citi. Your line is open.
Ron Josey: Great, thanks for taking the question. Maybe, Hayden, two higher level questions, and one on AI and then one on ads products. Just on AI, we’re just seeing significant traction in the number of tools and products that Upwork offers across the buyers and freelancers. So can you just tell us maybe how this is changing or improving the overall supply and demand and just the vibrancy of the marketplace? That’s on AI tools. And then on ad products, clearly, the ability badges, business proposals are having a good impact here. Longer term, where do you think — where can advertising go as a percentage of revenue, given your comments on just the complementary aspect to marketplaces. Thank you.
Hayden Brown: Sure, Ron. On the AI front, we’re seeing really good traction so far in terms of the adoption of the tools that we’ve been launching for talent. So, Upwork Chat Pro, which was built on OpenAI’s GPT-4, has more than 150,000 signups. We’ve seen tools like Jasper, Adobe Tools, Amazon CodeWhisperer, and others definitely getting a lot of trial interest from talent. And overall, as with this platform shift to AI, what we’ve seen in other previous shifts around new tools and technologies, freelancers are always the fastest to move these technologies and ramp up their skills. And so this is what’s happening right now. They’re eagerly adopting these tools and really using them to drive performance metrics around productivity and quality of work.
So even though it’s still early days in some of this, the indicators are there that this is happening. And we’re going to continue to pursue our strategy this year and empower our talent with the best possible tools out there. To your second question on ad products, this is an interesting question for us and certainly we’re thinking a lot about it. If you look at companies like Instacart or others, I think in their [F1] (ph) they said they had something like 25% or 28% of their revenue coming from ads. And so it certainly seems like we have a lot of headroom to grow this business. I think it’s too early for us to say exactly how big that runway is, but we are certainly early innings of unlocking that path and the fact that this is the fastest revenue grower for us in the past year and we see more runway with both the existing offerings scaling up as well as new offerings that we can put in the hands of our customers.
I think it’s a great sign of the value creation opportunity ahead of us.
Ron Josey: Thank you, Hayden.
Hayden Brown: Sure.
Operator: Thank you. One moment for the next question. And our next question will be coming from John Byun of Jefferies. Your line is open.
John Byun: Hi, thank you. This is John Byun for Brent Thill. First question was, so under guidance, so Q1 you said 15% growth, full year 11.7% I think. So obviously some deceleration through the year which you did talk about, but is there anything else that we should think about other than the lapping the price moves? I mean, to average out to by 12%, it looks like you would have to step down quite a bit by Q4. Not sure how to think about that curve. Thank you.
Hayden Brown: No. Hey, John. No, I think — look, I think when we introduced our new kind of flat fee pricing structure back in May, and I think we talked about then that we would probably see a lapping effect in terms of growth rates in the back half of 2024, given the pacing of when that pricing change is moving through. So that’s really the major dynamic in the back half of the year. And like we said, we’ve kind of been touching a lot on some of the other kind of nascent new revenue streams that we’ve gotten going in 2023. And I think we have kind of just a lot more work to do on execution and launching and supporting some of these additional new revenue streams, which we’re confident we can kind of build and show growth in the future.
So I think overall, yes, we’ll see a little bit of moderation in the back half of 2024 on a growth rate point of view, but we feel pretty confident with the combination of kind of growth vectors that we’ve got in our pipeline that we’ll be able to produce double-digit revenue growth on an ongoing basis.
John Byun: Great, thank you. And then second question was on the AI acquisition. Was that, I don’t know if you can provide more color, but was that just kind of a talent, a team? I don’t know if the $3 million I see on the cash was [indiscernible] balance sheet might be that, or any revenue associated with that, or just a tech talent acquisition? Thank you.
Hayden Brown: Yeah, this was really about the team and the talent. I mean, certainly we’re really excited about this because Andrew and his expertise are going to be extremely meaningful in terms of accelerating our roadmap around AI machine learning. He comes from incredible leadership roles at Google and Magic Leap. And the fact that his vision and his team’s excitement to join us, given our assets, the data and our vision on future work, were really extremely exciting to us. But this was not about revenue, it was really more about the team and our shared vision around what we’re doing and I think it’s going to be exciting to see what we can launch this year in the coming years given the combined efforts.
John Byun: Great. Thank you very much.
Operator: Thank you. One moment for the next question. Next question will be coming from Brad Erickson of RBC Capital Markets. Your line is open.
Brad Erickson: Hi, thanks. So first, just going back to the GSV comments, you called out the modest growth for ‘24. But then obviously you’ve also called out to seeing some of this nice success in the performance marketing channel. So I guess just kind of wondering why maybe not be a little bit more aggressive maybe with advertising in ‘24 or is that kind of embedded in your guidance to some degree? And then secondarily, just generally, no — recognize you mentioned the pledge to kind of drive margin expansion from here. So just curious if the same goes for sales and marketing intensity within the P&L going forward? Thanks.
Erica Gessert: Yeah, sure. Look, I think I’ll first just say, we do not — we don’t plan to increase our brand marketing spend in 2024. And that’s largely because we don’t think we need to right now. Like I said, we saw a really nice step-up increase in new active clients in the back half of the year, underneath the covers there in Q4, we have the highest new client acquisition that we’ve seen on the platform in two years. And I just want to remind people that the performance marketing engine is performing extraordinarily well, and we’re super pleased with optimization there. We think we can drive more growth in 2024. But 75% of our new client acquisition comes from organic or unpaid channels. So we really do have some nice tailwinds behind us on this.
And so at this point in time, we don’t feel the need to reinvest in brand marketing. And all of our marketing planned expenditure is contemplated in the guidance for this year. Going forward, over the future years, we — this marketplace business, it’s a highly profitable business. We have 75% gross margins now. I think we see opportunities over the medium term to even improve that. And I think we have the flexibility in the model to consider reinvestments in growth whether it be ongoing investments in R&D or back into brand as we go forward and still produce the growing profit margins that we’ve committed to. So I feel comfortable with a lot of different scenarios there, but we’re confident in growing both profit margins and pre-cash flow.
Brad Erickson: Got it. Thank you.
Operator: Thank you. One moment for the next question. Our next question will be coming from Rohit Kulkarni of Roth MKM. Your line is open.
Rohit Kulkarni: Hey, thank you. A couple questions. First, just on this AI contributing to GSV growth, 70% growth in GSV from AI. Maybe if you could call out any anecdotes or any emerging new use cases where you feel there is a bigger opportunity for you to do the matching around AI use cases and what can Upwork do more to tap into this new opportunity? And then second, just on the active client growth, encouraging couple quarters in a row, uptick in new clients. Perhaps talk about the why and how sustainable is that? What are you embedding into your guidance around the near term client growth, perhaps macro tech hiring or whatnot?
