Upwork Inc. (UPWK) Earnings Call Transcript & Summary

I think with that, I know there's going to be people that it's amazing how in 5 minutes, people drifted out of rooms. But let's get started in the interest of time, just to keep the trains running. It's my pleasure to have Upwork back at the conference again this year, Hayden Brown, CEO. Hayden, you are always so generous coming every year. Thanks for [ all the conversations ].

Thanks for having me.

Absolutely. So, let's just start. I always do like to start a little bit big picture for the folks who don't know the company as well. Talk a little bit about what you're building, what you're scaling, what your key strategic priorities are, and then we'll build off that answer a little bit deeper.

Yes. Upwork, I think, has always been more than meets the eye. I've been at the company for 15 years. And I think one of the things people discover when they really get to know the business is it's much more than just a talent matching platform or a place for people to come find freelance talent. We really serve customers on both sides, clients, which are small businesses through large enterprise, as well as independent talent with the full end-to-end product around not just finding great talent or finding great work, but also delivering on and getting paid for, paying for that work. And so it's really an end-to-end platform that spans the entire work life cycle. And so we call it a work marketplace because it's more than just kind of talent matching. And I think that's particularly important in the era of AI when so much is changing, talent discovery methods, recruiting, all of this is kind of, I think, being rewritten in real time. But for us, our ability to provide the trusted platform that gives clients and talent the knowledge that what they need to get done is going to get done and that they only pay for work that's been delivered is incredibly important. I'd say in the last 12 to 24 months, some of the thematics for us have really been around 3 growth levers that are really working in the business right now. The first of those is our push and our expansion upmarket to serve larger SMB customers. What we're doing there is a custom product called Business Plus, which is really meant for larger businesses operating in our marketplace. It gives them a set of tools, including AI recruitment tools, including access to net 30 payment terms, access to collaborative hiring features, all of the things they need to really run their business at larger scale and with larger programs using independent talent on our website. And that product is really our fastest-growing in company history. It grew 174% year-over-year last quarter and is ahead of plan. We had set a goal for it to be 5% of our total GSV this year, and already it's at 6.6%. So, it's growing super well. We're seeing a lot of demand for -- from customers that are bigger looking for this type of offering. The second growth strategy we have is also around moving upmarket, but this time into large enterprise. And in this instance, we've had an enterprise business at Upwork for many years. But last year, we actually reconceived and relaunched that business and really had rebuilt it end-to-end. We bought 2 companies that now are part of that new Lifted business that give us broader ways to serve large enterprise customers. So, this is a huge market. It's $650 billion of enterprise spend. And now with Lifted, we're able to serve all of that spend inside customer accounts across not just independent talent that's doing 1099 or independent contractor arrangements, but also other engagements as well. So, we can do staff augmentation. We can do EOR, or employer of record, AOR, agent of record. We can do managed services and SOW work. So, that change to our Lifted strategy means that now we can sell into the largest enterprises in the world, a solution that really meets the needs of their compliant and contracting and contingent workforce programs. We can sell into those programs in a centralized way to compete for much more of those budgets, which typically are in a single account might be $100 million or more of contingent spend. So, the Lifted strategy is off to the races. We're seeing really great traction and pick up with our sales team and with kind of conversion in that business. And so that's something that's also performing really well for us this year and is on track for 25% GSV growth in 2026. The third piece of our growth strategy is really around AI. And I'm sure we're going to talk a lot about AI today in this discussion because it's a big thematic for us and certainly is, for us, a tale of both like headwinds and tailwinds. From a tailwinds perspective, what we're seeing is really the acceleration of demand for talent on our platform who can help small businesses and enterprises with their AI-related needs. And so this entails all of the work around things like AI video generation or AI Strategy & Consulting, which is a category that grew more than 50% year-over-year last quarter. We're seeing lots of demand for this type of talent because SMBs are trying to figure out how do I adopt AI, like where do I get the talent that can do this for me and get value out of this new technology? And the answer is they can find that talent right on our website. The other piece of our AI thematic is really around our own kind of tooling and rebuilding of our platform to be AI native and specifically to actually integrate into all of the AI tools such as Claude or ChatGPT, which customers are using to get work done. And so just in August, we launched our MCP, which means now customers inside of these AI environments can invoke Upwork and get talent directly inside those environments from our platform and can also execute their workflows related to Upwork from within those tools. This is also the stepping stone or the building block for us to expand our marketplace to not just serve human talent and human business owners, but also their agents and the agents that are coming to Upwork to actually find human talent, which is a trend we've already seen happening as well as enabling the ability to bring agents into the equation to deliver work on behalf of clients over time. So, these are really important growth building blocks as we think about where the business is going and evolving it not just from a demand standpoint and kind of a channel standpoint, but also in terms of the core offering and who can participate.

Okay. So, there's a lot to unpack there, and I think we're going to go down most of those roads as we talk. But maybe just to level set, with what you've learned about AI over the last 12 to 18 months, you highlighted some of the headwinds and tailwinds that the business is facing today. How has it informed any changed view about the long-term opportunity that presents for your company as a result of AI?

There's probably 2 things. One is this is a business -- we are a broad horizontal platform that serves more than 130 categories of work, more than 10,000 skills. Basically, every type of knowledge work happens on our platform already. And that means that through every past era of work changing, whether it was the advent of social media or the introduction of customers trying to move things to the cloud, like every time work has changed, we have seen those changes in our platform, and we've supported the birth and death of like every type of work that's happened in the last 20-plus years. AI is, in many ways, no different. There's new demand that's forming around expertise and skills that people didn't even think about a few years ago. And now we're seeing those across our platform, and we're home to more than 300,000 AI practitioners globally on Upwork. We're also seeing the death of certain types of work. And again, that story is not new for us. I think what we're -- the only thing that's different now is kind of the speed of that happening. The AI categories are growing faster than any categories you've seen in our history. We're also seeing at the low end of our market, automation and displacement of work at a very rapid rate, which is, again, something a cycle we've seen before, but it's kind of being compressed right now. I'd say the other AI thematic for us that's really emerged over the last 12 to 24 months is this idea of moving Upwork from being a destination to being infrastructure. And what I mean by that is previously, in the pre-AI era, you had to come to our website and sign up and manually take steps and actions as a customer to get the value of Upwork. Now today, with our MCP, you can actually get all of that value through directing your agent to act on your behalf or bringing forward into your own third-party AI tools, the value and the talent that Upwork has to offer like right inside those environments. And so this is an important evolution for us as we think about the world moving in terms of work moving into these AI tools and more of the demand sitting there with customers that are executing work inside these tools. Now Upwork is integrating directly into those experiences and can be called upon, including with true on-demand talent solutions where you can invoke a fractional CFO or a marketing leader immediately from our platform to come in and review and purchase data work that you're doing inside of a tool like Claude. So, this is really kind of a new direction for us as we expand kind of how and where we're serving customers given AI.

Okay. Let's turn to Business Plus. What do you believe is resonating the most with customers with respect to Business Plus? And how do you think about the market opportunity it continues to open up broadly against the SMB landscape?

Yes. The #1 thing that customers tell us they love about Business Plus is the access they get to our highest quality, kind of most curated talent in the ecosystem. So, they get preferential access to that talent. They also love the AI recruiting tools that do things like AI interviews on their behalf. So, they can ask our AI agent, Uma, to review and generate a short list of candidates from an applicant pool to actually go and interview those candidates and bring back snippets and like a summary of who is a good fit based on that specific client, that specific job. So, these are some of the things that I think are really drawing in customers on the Business Plus side. And furthermore, the ability, Eric, to scale their work across multiple participants. So, this is really -- we have a multiplayer mode, we call it, in Business Plus where they can really collaborate around work, around hiring, have multiple participants. And again, if you're a larger small business with a team or multiple departments that are using Upwork, these are the types of features that they really need. And this is proving to be a great, not just like upsell for existing customers who are in our marketplace being very active, but also an attraction and an entry point for new customers who are coming in. We see them on Business Plus spending 2.5x as much in Business Plus as they do coming into our standard marketplace basic product. And we also benefit because this is a higher take rate product. We monetize this at 10% on the client side instead of 5%, which is how we monetize our basic product. And so as we're seeing this really fast growth in Business Plus, it's helping us not just drive GSV and revenue from these customers, but also kind of our take rate is improving as well.

Okay. You mentioned Lifted earlier. Can you talk a little bit about how that is also changing the nature of the business in terms of opening up the larger enterprise opportunity?

Yes. This is such an exciting one for us because the market is so huge and the customers who've been serving enterprise for many years have said to us again and again, Upwork, we love your talent. The talent we get from you is better, it's more qualified, it's more engaged, like everything about it, and frankly, it's more cost effective because it's across 180-plus countries globally. But they've said, we don't want to just consume it as independent freelancers. We have these other programs that, by definition, need to be serviced with different contract types. Can we please consume your talent in these other ways? Historically, the answer was no because we had not built the in-house capabilities to do that. But since we launched Lifted last year, now we can say, yes. And we are winning RFPs and are in contracting with customers for these new engagement types that include staff augmentation, employer of record engagement, things like that, which previously we were not able to access. So, this has really changed the conversation with our customers, both the existing customers who know us in certain areas and have wanted to expand with us in other ways. It's also letting us land new customers who would never have historically considered working with us. Just last quarter, we landed one massive multinational company for -- that spends probably north of $100 million a year on contingent work. They are now contracting with us for a type of work that we were not even eligible to compete for in the past before Lifted. And so I think we're really seeing with our sales funnel and the feedback that this is a very differentiated offering, and it's something that's really opening up a lot of new doors with both current and new customers.

Okay. One of the questions I get the most is as you go through this transition to where AI is taking the business longer term, how do you think about which clients to sort of emphasize from a growth standpoint versus elements of clients that are in transition where maybe the nature of the work or the nature of the relationship they have with the company won't be where you want to be from a mix standpoint a couple of years down the road? And how do you think about managing through that transition?

Yes. We've been very focused on a shift that we've really executed over the last couple of years from more volume-based customer acquisition and servicing to much more of a value-based approach. And that shows up both in our marketing spend and our acquisition, our digital acquisition, where we're focused on targeting and converting these larger SMBs who can self-serve in the marketplace and then, of course, through our sales channel, larger enterprises and listed. It also means that we're building out and putting our product dollars against these newer products like Business Plus, which we know can really attract and convert a set of customers that were maybe bypassing us or not thinking about us before because we didn't have these custom kind of offerings for them. And so I would say for us, it's a view of expansion. We're not saying goodbye to the smaller customers, the very small businesses who are still a bread and butter in our core marketplace. But we know that there's a lot of smaller transactional work that a lot of these customers do that doesn't represent the future of where the business is going. And so we're really building both for that future that we can already see in our numbers around larger customers with more complex work needs spending more on a per project basis. We hit this past quarter another record high in terms of GSV per client, which is over $5,000. We've seen continued increases in spend per new client because these acquisition approaches are bringing in larger customers. And that is going to continue to happen, I think, as we grow with these bigger customers and just focus less on some of the smaller transactional stuff that even may be here today, but over time, will be gone with AI in the future.

Okay. And to that point, what do you continue to learn from the most forward-leaning clients with respect to AI as to what AI native demand is going to look like for this platform somewhere down the road when there's a greater percentage of the mix being driven by AI-first companies?

I mean we have some real enthusiasts in our customer base who are on the bleeding edge of this stuff. And I think there was a moment earlier this year when a customer was saying to me that like I really wish Upwork would like to use all of what you do like inside these environments. And with these use cases where I could like superscale my work on Upwork because I could have AI 10xing how I use the platform today. And that was a great moment because that was exactly what we were building with the MCP, but hearing it from customers who are saying, look, give me more access to do more on your platform through this capability. I mean that's kind of a dream come true. And so I'd say we're seeing on the talent side, these very pioneering customers who want to scale their activity. They want to use AI to do more and get more leverage themselves out of their time and their serving clients on our platform. And then on the client side, we see businesses that want to be integrating more of this talent into more of their workflows, but they want it to be seamless, and they want it to be inside the AI environments that they've already invested in building out and tailoring. And this is really where we're taking the product on behalf of these customers and kind of where they're showing us they want to go.

Okay. One of the other things we've talked about on some of the more recent earnings call is agentic workflows and how there's going to be agents that talk to other agents and you sending your agent out into the world. How do you think about positioning the platform medium to long term for the nature of work and sourcing of work becoming more agentic workflow dominated?