All right. 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.
Yeah.
We're gonna 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.
Yeah. Great to be here.
Thank you. Yeah. 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.
Yeah. Sure, so like Josh said, we are the world's 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 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 five quarters coming from around break-even, so really proud of our trajectory there.
And, also recently announced our second stock buyback of $100 million.
That's great. Yeah. Congrats. Recently you announced, as part of the earnings, a fairly sizable organizational realignment initiative.
Yeah.
So could you talk about kinda what led to that decision and what the streamlining entailed?
Yeah, so like I said, in January of this year, we announced a commitment to, you know, reach 35% EBITDA margins within five years, and you know, I came into the business in May of 2023, and really, at that time, you know, we decided to embark on a long-term kinda cost optimization program for our business, we took the first steps in kinda mid-2023, and you know, I talked, as I entered the business, about cost optimization being really a multi-quarter endeavor, and so you know, we looked across the business and really kinda took some optimization actions, not just to reduce our cost base, but also just to make our internal organization more effective and, you know, 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, you know, actually even more potential to come over, you know, over time.
All right, so part of the savings, I understand, is from kind of increasing your focus of your R&D, and so I wanna talk about what's core first, but then, you know, want to talk about what you kinda pulled back from as well.
Yeah.
What's core in terms of your spending?
Sure. So we took an approach of looking at, hey, where we, you know, where do we wanna place our investments and where do we see the highest growth potential for investments in our business? And those are really in five places. The first is in AI enablement of our platform and of work delivery itself, which is a very important strategy for us. And, you know, we've started this year. We launched a 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, you know, job execution. The next is in AI enablement of our talent by offering them, you know, preferred access and other things to AI tools, to enable their work.
The third is an investment in our Partnerships 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, you know, ramping up continued ads and other monetization opportunities on our platform. 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, you know, where do we think is highest potential, and then reduced in other places.
You know, to the point on, you know, hey, what's non-core, I would say that the areas where we cut back are probably things like investment in kind of full-time products. Other areas where we, you know, we just saw slower growth like a product called Project Catalog that is still available on our platform, but we don't see the need to continue to invest in.
Okay. Yeah. Thanks for the color there. So I know the change of this magnitude can be, you know, take a while for an organization to perhaps absorb. And so could you talk about kinda organizational health at this point, you know, six weeks after an announcement like that?
Yeah. That's right. So we made the announcement on October 23rd, so that's right about six weeks ago. And look, I would say, you know, first of all, obviously, when you're making big wholesale changes, change is hard. And you know, when you're making decisions about people, of course, you know, you wanna be extremely thoughtful. I think we had, in some ways, the luxury of having you know, looking, you know, doing this work over several quarters. And so, you know, it was very you know a thoughtful approach to how we realign the business, and you know, really made a lot of, I think, you know, very understandable, kinda 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, you know, and kinda finalize everything, I think people are really excited about you know the kind of new strategies for our business, the AI 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.
Okay. Yeah. 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?
Yeah. You'll see some of it come through in Q4, although, you know, that we still do have some projects that are ramping down. And then, you know, the, you know, you will see the majority of it show up kinda employing to the bottom line in 2025. There'll be a couple offsets. We recently announced the acquisition of a company called Objective AI, which is an AI-native search- as- a- service company, that will be using kind of tech and talent acquisition, using their technology to really enable our platform to be even, you know, 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.
Okay. 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%?
Yeah. Well, we haven't given guidance on 2025 yet, and so, you know, we do expect meaningful margin accretion next year compared to where we were in 2024. And, you know, we've guided that, you know, we will see margin accretion each and every year on the way to that 35%. And, you know, just as a reminder to everyone, the 35% commitment we made at the beginning of 2024, and we said within five years we would hit that, so we fully expect to do that. We've made tremendous progress, you know, just in a few quarters.
Yeah. Absolutely. How much revenue growth does it take to, to get to the 35% if it depends on that at all?
Yeah. For those who are a little bit, maybe less familiar with our industry, you know, we have seen macroeconomic challenges across our industry. You know, from a pure volume growth rate, you know, things have been a bit headwinded over the past few years. Although we've been kinda flattish on our, you know, 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, you know, we're really proud of our results within this environment, and we continue to gain market share with this, within this environment. It's been a slower volume growth period.
So, you know, when Josh asked these questions about whether or not we need revenue growth, it's related to kind of some of those volume headwinds. The reality for us is, you know, we see ongoing margin accretion opportunities both through take rate expansion and through, you know, kinda ongoing cost optimization regardless of the GSV growth environment. You know, to be clear, we fully plan to grow GSV over the next few years, although we do see 2025 as, you know, likely a bit, you know, kind of continued macro headwinds.
Sure. Okay. 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?
Sure. You know, first and foremost, I would say, you know, AI is our fastest growing job category on our platform. So just simply the delivery of AI-related work has been, you know, is a tailwind for us. We had 36% growth of 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, you know, we launched in 2024 Uma, Upwork's Mindful AI companion, conversation companion on our site, whereby, you know, clients can come and really, you know, converse with our companion and describe the 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 on 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, you know, 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, you know, this is really a you know an ongoing evolution in how work will be delivered. And we're at the forefront of that. And so we see over time, you know, continued development of, you know, a combination of you know technology and humans delivering work products and customers more and more moving to more outcome-based delivery versus, you know, one-to-one identification of talent to do jobs.
And so we're investing in that. We're enabling that on our platform. And it's really gonna be more of a human-in-the-loop model as we kind of continue to evolve. So there's super exciting stuff for our business.
Sure. Yeah. 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 that have been helped. So how are you thinking about the pluses and minuses of AI?
Yeah. So there've been a couple job categories that we have seen as headwinded. In particular, writing and translation are the two categories that we see, you know, 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's at the highest end that, you know, that we aren't seeing disruption. And even within the translation category, we see actually some demand from AI in, you know, 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 gonna continue to evolve in the future.
Sure. And how are you using AI internally to drive efficiencies or something like that?
You know, I think all companies are investing in automation opportunities. I think that the reality with, you know, kind of internal adoption of automation and AI is that it's certainly happening, but I think it's actually happening more slowly than people might think. One of the things that we know, you know, given our huge access to kind of such a tremendous amount of data within the, you know, kind of job and working environment is we see that our freelancers are about five times more likely to adopt AI tools to enhance their work than a captive employee. Because, you know, captive employees are just overall a little bit less motivated to adopt new automation technologies.
So we see that as, you know, that that's one of the reasons there's so much demand for AI work on our platform. And while we, you know, as a company have invested in a certain number of, you know, automation opportunities, I wouldn't say it's the biggest catalyst for us in terms of efficiency.
Yeah. That's fair. Okay. Maybe turning to the core platform, could you talk about Upwork's competitive edge here versus other platform, similar platforms that may be out there, and what, what do you think makes Upwork unique?
Yes, of course. So Upwork, as I said, is, you know, I think scale is the first and foremost thing that is a huge competitive advantage for us. You know, it again, you know, 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, you know, scale matters in any marketplace, and, you know, what ultimately matters most is availability of good jobs and availability of good talent. So we've got the most of both, and, you know, and so that's a huge enabler for us. Then, you know, the reality is on the Enterprise side that we compete with, you know, some of the incumbent sort of traditional staffing agencies.
And, you know, our tech enablement, just in general of our platform, the automation that is really, you know, part of, you know, kind of 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.
Sure. 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, you know, how similar or different is your business model versus some of the kind of the traditional players, I suppose?
Yeah. I mean, so, you know, there are many things that are different. I think tech enablement is a big one, and, you know, I think the other reality for us is that, you know, 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 firms, 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 and staffing, as we all know, with, you know, recruiters on the phone and other things like that, you know, that we've already kind of, you know, innovated around.
Sure. Yeah. 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, you know, everyone is aware that it's over the past couple of years, it's been, you know, a tremendous focus on kind of profitability, you know, within large enterprises and, you know, 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, you know, has a bigger focus on, you know, 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 hard, and one of the reasons we've signaled some caution for 2025 is 'cause it, you know, the outlook on that stuff is a little unclear next year. You know, but over time, even if, you know, even if, you know, kind of the broader macroeconomic environment remains headwinded for a few years, we see, you know, opportunities for GSV growth through the, you know, through the areas that I've outlined and also, you know, opportunities for revenue growth probably going into 2026 with, you know, kind of increasing take rate opportunities.
Right. What are some of the key metrics you look at internally to gauge GSV trajectory and what are some of those metrics telling you now?
Yeah. I mean, look, the past six months or so, and you know, particularly in June and July of this year, we saw some real weakness, you know, kind of increasing weakness in top of funnel demand. 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 and then active contracts. We saw some real declines June and July. You know, we've since then seen plateauing of demand. So, you know, no more declines, but still, you know, kind of negative year-over-year growth in some of these areas. So that's what gives us caution for next year. We, you know, we don't particularly, unfortunately, see things getting much better.
Or if anything, I would say more than anything, it's that, you know, 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.
Okay. 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, you know, do the easier compares help at all towards that 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, you know, we do anticipate over time that you know, GSV will kind of resume growth. That said, we, you know, our average contract size is about $5,000. You know, some other companies out there are smaller. And so, you know, that does you know, play into the kind of some of the growth rates in the beginning of next year.
But that said, look, we see over time with, you know, the investment portfolio we've got, with the shift, you know, the ongoing shift, even if budgets remain curtailed, there is an ongoing kind of industrial shift over to as companies are, you know, looking at their portfolio of projects and looking at, you know, wanting to invest in certain work outcomes that they need to do to do business. You know, companies over time are gonna 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, you know, over time.
Okay. So in the recovering environment, would you expect client growth to lead spending growth, or would you expect the spending growth to lead? How do you think about those?
I mean, you know, with our business, because of the diversity of our platform, you know, it'll be both, I would say. Because the reality is that, you know, active client growth, you know, the big volume in a ctive Client growth comes from small and very small businesses, and then, you know, the very high volume comes from kind of larger size businesses. Because our platform's so diverse and we really, you know, have run the gamut on kind of client sides, I think it'll come in both places.
Okay. Yeah. That's fair. I think, how are you thinking about the, your current, I guess, internal spending levels if the demand environment were to improve? You know, are you holding back any investments currently? Or I guess, how are you thinking about that?
You know, I think that we're in a pretty optimized place right now. I mean, you know, as companies grow, there are always some places where you can identify incremental opportunities. But for example, from a marketing portfolio point of view, you know, we haven't touched our performance marketing. That investment has very good ROI for us. And you know, we continue to invest there. And I don't see the particular need to, you know, expand too much into brand marketing and other things. So, you know, we've seen over time good organic demand for our business. And then, you know, as we invest into the growth in Enterprise, that will be more of an expand motion than anything else.
So, you know, I don't see a huge need to greatly invest into growth as we move forward.
Okay. Maybe this is a good segue to talk about your Enterprise strategy. So.
Yeah.
You know, what are some of the changes that have been made recently and how important is Enterprise to Upwork longer term?
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, you know, to with our organizational realignment, we really did, you know, 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 high end, there's always gonna be a bunch of kind of big whales, mega caps that we're servicing, and they require and want very, you know, 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, you know, constantly there for them. They just want someone who's on the other 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 gonna continue to advance. We've launched the first tier of Business Plus, very early days, only about six weeks out in the market, but we do anticipate there'll be, you know, kind of ongoing experimentation into new tiers there as well.
Sure. And as you sell to these Enterprise accounts, what are some, you know, typical hurdles that you face and how are they different than, you know, traditional selling to traditional marketplace clients, I guess?
Where do I start? I mean, look, Enterprise always has a very unique set of needs. Also, like I say, at the very higher end, large enterprise businesses expect bespoke treatment, right? They expect kind of bespoke integrations and other things like that. They love the kind of nimbleness of our platform and the fact that, you know, from, you know, when they identify a talent need to actually accessing that talent is incredibly fast because our platform's fully tech-enabled. We're not using recruiters picking up the phone and that kind of thing. You know, they often want very specialized use cases, and, you know, other things that, you know, can just be a bit more challenging, overall.
But, you know, 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 a, I think the approach, that's gonna be an even more profound change over time.
Okay. Maybe switching over to take rate. So 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% to about 19% now? What's kind of been the driver there?
Sure. Over time, over the last few years, I'd say about three years, we have grown our take rate about, you know, kind of five percentage points. We did make a couple of pricing changes. In 2023, we went from a tiered structure pricing change, whereby on the freelancer side, we were a 5% price, you know, 5% take rate at the low end, 10% in the middle, and then 20% at the very high end for bigger projects. We moved to a flat fee 10% pricing structure, which did have a, you know, a big increase in take rate in 2024. That said, there's also been very steady growth underneath of our ads and monetization products.
A set of ads products, which, you know, allows our freelancers to kind of boost their proposals and boost visibility to clients. We just launched a client-side ads product, called Boosted Jobs, which enables our clients to also kind of boost the visibility of their jobs. That's shown very good steady growth and as well as our Freelancer Plus subscription product, which is an enhanced set of value props to enable freelancers to kind of do their jobs better. Good growth over time. We do expect that we should be able to launch additional subscription products, going in, you know, kind of maybe in late 2025 into 2026.
Okay. Yeah. What is the opportunity to increase your take rate from here absent another pricing structure change?
We have multiple take rate enhancement opportunities. Like I said, you know, ongoing growth of kind of ads and subscriptions. This new Business Plus product, which is, you know, sort of a smaller set of enterprise value props now launched on the marketplace, that Business Plus product is actually about 3%-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.
Okay. And as you look at the universe of two-sided marketplaces, there's a really wide range of take rates. And so, you know, what are some of the reasons that Upwork's take rate is where it is? And how, I guess, do you expect the take, what's the right take rate, I guess, for your business?
You know, I don't know what the right take rate is. We see a lot of opportunity for ongoing increase in take rate. You know, the reality is when you have a two-sided marketplace like ours, at scale, you know, it's extremely difficult to build these because of the two-sided nature, but it's even harder to disrupt. That said, you always want to be very thoughtful about implementing pricing changes on a marketplace. It's something that we need to test into and make sure that we understand you know, kind of the elasticity dynamics of any changes that we make.
So hard to say what the, like, exact right take rate is, but, you know, we are not even close to where that, where some of the highest, you know, take rate competitors are in our industry. I would say, you know, some of, some other competitors out there are, you know, more than 10% above where we are today. So there's obviously, you know, good room to grow over time.
Sure. And in terms of where you take the take rate, I guess, you know, 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, you know, we've got client side, we've got, you know, freelancer side. But in some ways, you know, the way that we apply our take rate right now, and this is something that, you know, 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, you know, and package them up at a premium service at a premium take rate. So, very, very long way to go there.
Okay. And I have to ask you a question on free cash flow, CFO.
Please.
Yeah. You know, it's been a good story, and so how do you think about the conversion to free cash flow from EBITDA and then 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 I was so attracted to this business is, you know, extremely profitable, high gross margins, and our free cash flow conversion is huge. It's, you know, more than 80%, over time. So, you know, it's just a great business and we have a ton of optimization, you know, still to go and opportunities for increasing profitability, increasing free cash flow each and every year, as I see it going forward.
Okay. 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, you know, how it could financially impact Upwork kind of going forward?
Sure. Yeah. Objective AI is our second in a series of kind of AI tech and talent focused acquisitions. Very, very inexpensive, you know, really low, you know, you'll see it, you'll see it on our balance sheet when we report in Q4, but, you know, 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 product before we even considered buying them. We know that their 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 gonna be a really creative acquisition for us.
Great. With that, I think we're out of time. Thanks for being here and a great time here at the conference.
Yeah. Thanks, Josh. Thanks so much.
Thank you, Erica.