Upwork Inc. (UPWK) Earnings Call Transcript & Summary

Let's get started here. Good morning. I'm Josh Chan, business services analyst here at UBS. We're pleased today to have Upwork join us. They are an online marketplace connecting freelancers with clients globally. With us from the company is Erica Gessert, CFO and we're going to do a fireside chat. So feel free to send your questions in with the QR code or you can just raise your hand and we'll incorporate your questions. With that, Erica, great to have you here.

Yes. Great to be here.

Thank you. Yes. So I guess maybe you can level set the audience and talk a little bit about Upwork, its background and then some recent developments and then we can start.

Yes, sure. So like Josh said, we are the world work marketplace. We are a marketplace that is global, and we enable businesses of all sizes from very large enterprises all the way down to very small businesses to access independent talent all over the world. We operate in 180 countries, have over 125 job categories on our platform. We are the largest of our kind. We have over $4 billion of volume that runs through our platform every year. And then just maybe just a few highlights from our most recent quarterly earnings report. We reported revenue of $194 million, up 10% year-over-year. And also, we reported very strong progress on our pathway to a commitment of 35% EBITDA margin. We hit 22% in Q2 after just about 5 quarters coming from around breakeven. So I'm really proud of our trajectory there and also recently announced our second stock buyback of $100 million.

That's great. Yes. Congrats. Recently, you announced as part of the earnings, a fairly sizable organizational realignment initiative. So could you talk about kind of what led to that decision and what the streamlining entails?

Yes. So like I said, in January of this year, we announced a commitment to reach 35% EBITDA margins within 5 years. And I came into the business in May of 2023. And really, at that time, we decided to embark on a long-term kind of cost optimization program for our business. We took the first steps in kind of mid-2023. And I talked -- as I entered the business about cost optimization being really a multi-quarter endeavor. And so we looked across the business really kind of took some optimization actions, not just to reduce our cost base, but also just to make our internal organization more effective and with higher throughput by narrowing our portfolio of R&D investments to the highest potential, highest ROI investments within our business, and also optimizing our enterprise business to really be more segmented and targeted and lower both cost to serve and cost to acquire. So made changes across the board, and we see actually even more potential to come over time.

So part of the savings, I understand this is from kind of increasing your focus of your R&D. And so I want to talk about what's core first, but then I want to talk about what you kind of pulled back from as well what's core in terms of your spending?

So we -- yes, we took an approach of looking at, hey, where do we want to place our investments and where do we see the highest growth potential for investments in our business. And those are really in 5 places. The first is an enablement of our platform and of work delivery itself, which is a very important strategy for us. And we started this year, we launched what we call Uma, Upwork's Mindful AI conversational companion on our platform to enable search and match and other things and really to enable the end-to-end job execution. The next is an AI enablement of our talent by offering them preferred access and other things to AI tools to enable their work. Third is investment in our partnership program, which is effectively opening up new distribution channels for Upwork in context with our clients. The fourth is around our ads and monetization business, which is essentially ramping up continued ads and other monetization opportunities on our platform. And then lastly is the growth of our enterprise business, which is by far the largest TAM opportunity for Upwork. So we took that approach of really looking at, "Hey, where do we want to invest in, where do we think is highest potential and then reduced in other places?" And to the point on, hey, what's noncore? I would say that the areas where we cut back are probably things like investment in kind of the full-time products, other areas where we just saw slower growth like a product called Project Catalog that it's still available on our platform, but we don't see the need to continue to invest in.

Thanks for the color there. So I know the change of this magnitude can be -- take a while for an organization to perhaps absorb. And so could you talk about kind of organizational health at this point, 6 weeks after an announcement like that.

Yes, that's right. So we made the announcement on October 23. It was right about 6 weeks ago. And look, I would say, first of all, obviously, when you're making big wholesale changes, change is hard. And when you're making decisions about people, of course, you want to be extremely thoughtful. I think we had the -- in some ways, the luxury of having -- looking -- we're doing this work over several quarters. And so it was very thoughtful approach to how we realign the business and really made a lot of, I think, very understandable kind of smart changes. And so it's really the anticipation coming up to these changes that are the hardest. And once you get to the other side and kind of finalize everything, I think people are really excited about kind of the new strategies for our business, the enablement of our platform and all the opportunities that opens up for us. And so I think we're seeing a lot of resilience and people really just getting excited about the future now.

That's good to hear. On the actual savings, how should we think about -- you mentioned the $60 million. How should we think about that phasing in over the coming?

Yes. You'll see some of it come through in Q4. Although we still do have some projects that are ramping down and then you will see the majority of it show up kind of flowing to the bottom line in 2025. There will be a couple of offsets. We recently announced the acquisition of a company called Objective AI, which is an AI native search as a service company that we'll be using kind of tech and talent acquisition, using their technology to really enable our platform to be even more efficient and better. And so that will be a little bit of an offset to the cost reductions but most will flow into the bottom line.

So obviously, these savings take you a good distance towards your 35% target. So what would you say is the baseline margin now after these savings? And what's the path to get from there to 35%?

Yes. Well, we haven't given guidance on 2025 yet. And so we do expect meaningful margin accretion next compared to where we were in 2024. And we've guided that we will see margin accretion each and every year on the way to that 35%. And just for -- as a reminder to everyone, the 35% commitment we made at the beginning of 2024, and we said within 5 years, we would hit that. So we fully expect to do that. We've made tremendous progress just in a few quarters.

So how much revenue growth does it take to get to the 35% if it depends on that?

Yes. For those who are a little bit maybe less familiar with our industry, it's -- we have seen macroeconomic challenges across our industry. And from a pure volume growth rate, things have been a bit headwind over the past few years. Although we've been kind of flattish on our gross services volume, which is our volume-related metric. The rest of the industry has been down double digits over the past couple of years. So we're really proud of our results within this environment, and we continue to gain market share within this environment. But it's been a slower volume growth period. And so when Josh asked these questions about whether or not we need revenue growth, it's related to kind of some of those volume headwinds. And the reality for us is we see ongoing margin accretion opportunities both through take rate expansion and through kind of ongoing cost optimization regardless of the GSV growth environment. To be clear, we fully plan to grow GSV over the next few years, although we do see 2025 as likely a bit kind of continued macro headwinds.

Since we're at a technology and AI conference here, so could you talk about how that technology and AI at Upwork has evolved over time? And what are you working on those fronts?

First and foremost, I would say AI is our fastest-growing job category on our platform. So just simply the delivery of AI-related work has been -- is a tailwind for us. We had 36% growth in that category in Q3, and that's actually lapping very, very high growth in the previous year as well. So we see ongoing tailwinds just in the pure job category itself. But then even more importantly and profoundly, I think is the AI enablement of our platform. Like I said, we launched in 2024, Uma, Upwork's Mindful AI companion, conversation companion on our site, whereby clients can come and really converse with our companion and describe kind of what kind of work delivery they want. And instead of having to post a job and searching through to find talent, although, of course, there will still be that aspect in the marketplace, Uma can help them from end-to-end on work delivery. So that's a profound change and really removes a tremendous amount of friction within the experience itself. But even more than that is the AI enablement of work delivery itself. And what I mean by that is, this is really an ongoing evolution in how work will be delivered and we're at the forefront of that. And so we see, over time, continued development of a combination of technology and human delivering work products and customers more and more moving to more outcome-based delivery versus one-to-one identification of talent to do jobs. And so we're investing in that. We're enabling that in our platform and it's really going to be more of a human in the loop model as we kind of continue to evolve. So it's a super exciting step for our business.

Yes, absolutely. Maybe to dive into the impact of AI on your marketplace. Obviously, there's areas that have been impacted by the development of AI, but then also, like you said, the areas have been helped. So how are you thinking about the pluses and minuses of AI?

Yes. So there have been a couple of job categories that we have seen as headwinded. In particular, writing and translation are the 2 categories that we see ongoing impacts from AI disruption. That said, it's really at the lowest end of these job categories that we see the disruption. So for both writing and translation, while the total volume has gone down. The size of jobs, the number of hours worked per job and even the average wages per job have gone up because it is the highest end that we aren't seeing disruption. And even within the translation category, we see actually some demand from AI and AI work itself because companies are hiring translators to train models in different languages. So there's a lot going on. There's a lot of dynamism on the platform. But net-net, it's a tailwind for us with the growth of AI in the category itself, as well as some of this outcome-based delivery that's going to continue to evolve in the future.

And how are you using AI internally to drive efficiencies or something like that?

I think all companies are investing in automation opportunities. I think that -- the reality with kind of internal adoption of automation and AI, it's certainly happening, but I think it's actually happening more slowly than people might think. One of the things that we know, given our huge -- our access to kind of such a tremendous amount of data within the kind of job and working environment is, we see that our freelancers are about 5x more likely to adopt AI tools to enhance their work than a captive employee. Because captive employees are just overall a little bit less motivated to adopt new automation technologies. So we see that as -- that's one of the reasons there's so much demand for AI work on our platform. And while we, as a company, have invested in a certain number of automation opportunities, I wouldn't say it's the biggest catalyst for us in terms of efficiency.

Yes. That's fair. Maybe turning to the core platform. Could you talk about Upwork's competitive edge here versus other similar platforms that may be out there? And what do you think makes Upwork unique?

Yes, of course. So Upwork, as I said, is -- I think scale is the first and foremost thing that is a huge competitive advantage for us. Again, we're about $4 billion of volume going through our platform every year, over 850,000 clients are using our platform annually and millions of freelancers. And the reality is scale matters in any marketplace. And what ultimately matters most is availability of good jobs and availability of good talent. And so we've got the most of both. And so that's a huge enabler for us. And then the reality is on the enterprise side that we compete with some of the incumbent sort of traditional staffing agencies. And our tech enablement, just in general of our platform, the automation that is really part of our DNA are things that they're still catching up on. So I think that's also a big competitive advantage. And the reason that we find opportunities to sell into large enterprise.

So you do mention that you're competing with some of the staffing companies. And so how do you think about your addressable market and how similar or different is your business model versus some of the kind of the traditional players, I suppose?

Yes. I mean so we -- there are many things that are different. I think tech enablement is a big one. And I think the other reality for us is that -- we have -- we are an incredibly diverse platform. So we have, like I said, over 125 job categories. We essentially offer everything. And so that diversity is also often quite unique as compared to staffing firm especially as we're kind of approaching on the enterprise side. And I think, look, there's still a tremendous amount of just manual delivery in staffing, as we all know, with recruiters on the phone and other things like that, that we've already kind of innovated around.

So you talked about a little bit before about the slowness in the GSV trajectory. So how are you thinking about that? And what's been driving the relatively slow GSV trends?

Yes. I mean I think it's been -- everyone is aware that over the past couple of years, it's been a tremendous focus on kind of profitability within large enterprises and constrained -- a time of budget constraints. And that affects the spend on our platform. The other reality for businesses like us that serve all sizes of businesses is that the heightened interest rate environment really does affect our customer spend. It affects the availability of money and the cost of money for small businesses and just has a bigger focus on kind of corporate profits overall. And so I think that has created headwinds for us. We'd love to see interest rates come down a little bit. It's -- and one of the reasons we've signaled some caution for 2025 is because the outlook on that stuff is a little unclear next year. But over time, even if kind of the broader macroeconomic environment remains headwinded for a few years. We see opportunities for GSV growth through the areas that I've outlined and also opportunities for revenue growth, probably going into 2026 with kind of increasing take rate opportunity.

What are some of the key metrics you look at internally to gauge a GSV trajectory? And what are some of those metrics telling you now?

Yes. I mean, look, the past 6 months or so, particularly in June and July of this year, we saw some real weakness, kind of increasing weakness in top-of-funnel demand. And the metrics that we look at are a couple. One is what we call client-seeking work, which is a series of behavioral actions that clients take before they open up a contract. That in an active contracts, we saw some real declines June and July. And we've since then seen plateauing of demand. And so no more declines but still kind of negative year-over-year growth in some of these areas. So that's what gives us caution for next year. We don't particularly unfortunately, see things getting much better. Or if anything, I would say, more than anything, it's that -- the outlook is a bit more murky. Visibility is getting maybe even a little bit harder as we're waiting for the administration change and other things like that.

I guess as you think about potentially returning to GSV growth over time, I mean what do you feel are the drivers of this? And do the easier compares help at all towards the back half of next year, perhaps?

I mean who knows with the easier comps, of course, there will be a little bit of easier comps next year. And so we do anticipate over time that GSV will kind of resume growth. That said, we have -- our average contract size is about $5,000. Some other companies out there are smaller. And so that does play into some of the growth rates in the beginning of next year. But that said, look, we see over time with the investment portfolio we've got, with the shift -- the ongoing shift, even if budgets remain curtailed, there is an ongoing kind of industrial shift over to -- as companies are looking at their portfolio of projects and looking at wanting to invest in certain work outcomes that they need to do business. Companies over time are going to continue to look to lower risk, fractional labor, investing in work outcomes rather than investing in captive talent in order to get that stuff done. And so that should be a tailwind for our business kind of regardless of corporate budgets over time.

So in the recovering environment, would you expect client growth to lead spending growth? Or would you expect spending growth to lead? How do you think about those?

I mean, with our business because of the diversity of our platform, it will be both, I would say, because the reality is that active client growth -- the big volume active client growth comes from small and very small businesses. And then very, very high volume comes from kind of larger-sized businesses. And so because our platform is so diverse, and we really have run the gamut on kind of client size, I think it will come in both places.

Yes, that's fair. I think how are you thinking about your current, I guess, internal spending levels if the demand environment were to improve. Are you holding back any investments currently? I guess how are you thinking about that?

I think that we're in a pretty optimized place right now. I mean as companies grow, there are always some places where you can where you can identify incremental opportunities. But for example, from a marketing portfolio point of view, we haven't touched our performance marketing. That investment has very good ROI for us. And we continue to invest there. And I don't see the particular need to expand too much into brand marketing and other things. So we've seen, over time, good organic demand for our business. And then as we invest into the growth in enterprise, that will be more of an expand motion than anything else. So I don't see a huge need to greatly invest into growth as we move forward.

Maybe this is a good segue to talk about your enterprise strategy. So what are some of the changes that have been made recently? And how important is enterprise Upwork longer term?

Well, enterprise is by far the biggest TAM within our industry. So it's an important area for everyone, I would say. And we have very recently with the changes we made to -- with our organizational realignment, we really did kind of restructure and refocus our approach to our enterprise business in a much more targeted segmented approach to enterprise because the reality is it's not one size fits all when we say enterprise. There's a very wide spectrum of company sizes within that category, and they have different needs. So at the very, very high end, there's always going to be a bunch of kind of big whales, mega caps that we're servicing and they require and want very kind of bespoke hands-on treatment and some white glove service, and that's fine because the volumes are high there. But on the other end of the spectrum, there are lots of companies that -- and we actually have on our self-serve marketplace, plenty of medium and large businesses that are just self-serving. And the reality is they have a spectrum of needs. They don't necessarily need an account manager or someone who's constantly there for them, they just want someone who's on the end of the line when they pick up the phone. But they want a set of kind of enhanced premium services. So we've recently launched a new product called Business Plus, which packages up a few of these enhanced services, access to expert vetted talent access to premium customer service, and we're selling it at a higher take rate on the marketplace. And so that really enables the needs of companies kind of on the lower end, also lowers our cost to serve and our cost to acquire. So really a win-win for everyone. And that's a strategy that we're going to continue to advance. We've launched the first tier of Business Plus, very early days, only about 6 weeks out in the market. But we do anticipate there'll be kind of ongoing experimentation into new tiers there as well.

And as you sell through these enterprise accounts, what are some typical hurdles that you face? And how are they different than traditional -- selling to traditional marketplace clients, I guess?

Well, where do I start? I mean, look, enterprise always has a very unique set of needs. And also, like I say, at the very higher end large enterprise businesses expect bespoke treatment, right? And they expect kind of bespoke integrations and other things like that. They love the kind of nimbleness of our platform and the fact that from -- when they identify a talent need to actually accessing that talent is incredibly fast because our platform is fully tech-enabled. We're not using recruiters picking up the phone and that kind of thing. But they often want very specialized use cases and other things that can just be a bit more challenging overall. But these are the customers though that we are seeing probably the fastest beginning to shift over to more of this outcome-based delivery type of work, where they're asking for work products rather than just talent filling roles. And so that's, I think, that's going to be an even more profound change over time.

Maybe switching over to take rates, which has been a good story over the last couple of years. So could you talk about how, what's driven the increase from 14%, 15%, about 19% now? What's kind of been the driver there?

Over time, over the last few years, I would say about 3 years, we have grown our take rate about kind of 5 percentage points. We did make up a couple of pricing changes in 2023, we went from a tiered structure, pricing change whereby on the freelancer side, we were 5% take rate at the low end, 10%in the middle and then 20%. It's a very high end for bigger projects. We moved to a flat fee, 10% pricing structure, which did have caused a big increase in take rate in 2024. That said, there's also been very steady growth underneath of our ads and monetization products. So a set of ads products, which allows our freelancers to kind of boost their proposals and boost visibility to clients. And we just launched a client-side ad product called Boosted jobs, which enables our clients to also kind of boost the visibility of their jobs. So that's shown very good steady growth and as well as our freelancers subscription product, which is an enhanced set of value props to enable freelancers to kind of do their jobs better. So good growth over time. And we do expect that we should be able to launch additional subscription products going in kind of maybe in late 2025 into 2026.

What is the opportunity to increase your take rate from here absent another pricing structure?

We have multiple take rate enhancement opportunities. Like I said, ongoing growth of kind of ads and subscriptions. This new business product, which is sort of smaller set of enterprise value props now launched on the marketplace. That business plus product is actually about 3% to 5% higher take rate than our typical marketplace product. And so that's also a big opportunity, very early days, but a big opportunity for ongoing growth over time. And so those are the opportunities we see.

And as you look at the universe of 2-sided marketplaces, there's a really wide range of take rates. And so what are some of the reasons that Upwork take rate is where it is? And I guess, how do you expect to take -- what's the right take rate, I guess, for your business?

I don't know what the right take rate is. We see a lot of opportunity for ongoing increase in take rate. The reality is when you have a 2-sided marketplace like ours at scale, it's extremely difficult to build these because of the 2-sided nature, but it's even harder to disrupt. That said, you always want to be very thoughtful about implementing pricing changes in the marketplace. It's something that we need to test into and make sure that we understand the kind of the elasticity dynamics of any changes that we make. So hard to say what the exact right take rate is, but we are not even close to where some of the highest take rate competitors are in our industry. I would say some other competitors out there are more than 10% above where we are today. So there's obviously good room to grow over time.

And in terms of where you take the take rate, I guess, you draw from both sides of the marketplace. Do you feel like that's the right model over the long term? And does that create a lot of constituencies for you to really focus on?

Well, yes, we've got client side, we've got freelancer side. But in some ways, the way that we apply our take rate right now, this is something that -- an area that we will continue to do work in. But the way we apply our take rate right now is essentially very kind of flat in nature. And there's a lot more kind of experimentation and diversity we can do with adjusting take rate according to job size, and other things like that, that we can do. And then like I say, we're at the infancy, I think, of how we kind of offer value-added services, and package them up at a premium take rate. So a very, very long way to go there.

And I have to ask you a question on free cash flow. It's been a good story. And so how do you think about the conversion to free cash flow from EBITDA net income? How are you thinking about that?

So we're an incredibly low capital intensity business. It's -- thank you for asking because it's a huge benefit for us, highly profitable. Our gross margins are 79%. I mean one of the reasons that was so attracted to this business is extremely profitable, high gross margins and our free cash flow conversion is huge. It's more than 80% over time. So it's just -- it's a great business, and we have a ton of optimization still to go and opportunities for increasing profitability, increasing free cash flow each and every year as I see it going forward.

Maybe I'll end with a question on Objective, recently acquired the company in. So could you talk about what that adds to the business strategically and then how it could financially impact Upwork kind of going forward?

Sure. Yes, Objective AI is our second in a series of kind of AI tech and talent focused acquisitions. Very, very inexpensive, really low -- you'll see in our balance sheet when we report in Q4, but really, really low and super cost-effective for us and really increasing our AI talent bench on the journey to all of the AI enablement that I've talked about. But the great thing about Objective for us is that we actually tested their products before we even considered buying them. We know that the integration -- they're an AI-native search as a service business. And we know the integration of their tech into our platform will increase our search and match yields. And so I'm super confident that it's going to be a really accretive acquisition for us.

Great. With that, I think we're out of time. Thanks for being here and great to have you at the conference.

Yes. Thanks, Josh. Thanks so much.