Okay, welcome back. Hayden Brown is the President and CEO of Upwork. Hayden, welcome.
Thank you.
Good to see you, and thanks for supporting the conference. Maybe just level set everyone, you know, with what's going on in the overall environment, the business, kind of what you're seeing from your perspective at this point.
Yeah, it's definitely been a very interesting year so far. And in many ways, not the year we expected, but the business has been great. And we can talk more about some of these trends. I would start by saying, you know, in Q1, we saw some emergence of headwinds specifically related predominantly to macro. And just so I can unpack that a little bit more, you know, we look at our business, you've got about $100 million of enterprise revenue, that was unimpacted, that was completely unchanged, that part of the business is on track. We're expecting 25% GSB growth in that area this year. So those customers are really not seeing the pain. Also, we have an SMB product called Business Plus. We launched about 18 months ago, and customers in that product also did exceptionally well in the quarter. We were ahead of plan there. That product grew 34% GSB quarter-on-quarter. But where we did see this kind of dynamic environment was actually in our marketplace basic plan, which is about 85% of our revenue. the average customer in that plan is a very small business that has on average fewer than 10 employees so think of these as kind of the most exposed segment of the business side of the economy in terms of companies that really don't have a lot of cushion they've got to make fast changes when when things are moving and we saw in late February these customers start to spend a little bit less so their contract volumes came down and that progressed for a number of weeks in Q1 and then kind of leveled off in April. And we asked those customers, why were they spending less? It was very clear. They said, the economy is impacting my customers, my business, and I just don't have the budget I used to have to spend on not just Upwork, but labor and related services in general. Interestingly, as I drove over here actually from the airport this morning, my driver said to me, hey, do you work at Upwork? And I said, yeah. He said, I'm an Upwork customer. I run a fleet of six vehicles. I'm a small business. I've got two employees, me and my wife, plus some folks who do the driving, seven people who do driving for us. And I asked him, I said, how has business been? Because he was like, I use Upwork for marketing. I use Upwork for a bunch of things for my small business. And his answer was, this has been a really tough year for us. He said, it's been very up and down. And he was in the same motion while he was driving. I was like, don't drive off the road. But he was like, it's been very up and down. And we're seeing in our business, headwinds from less consumer spending. And he said specifically people aren't doing things like renting his buses for bachelor parties and big nights out. He said also customers that used to fly in from Canada and Australia to come to Disney are just down with jet fuel prices, et cetera. So he was like a perfect snapshot of what we heard from customers where they just don't have, you know, the cushion and they're seeing this volatility and are spending less. So that was the biggest impact we saw in the quarter and the biggest driver of our top line guidance change a secondary effect which i'm sure we're going to talk more about was ai a smaller effect there so we can talk about that now or later um just i mean when you think about
besides what the issues in the macro is anything else change in the core business in terms of
everything else seems pretty everything else is stable i mean again enterprise and smb are looking really good and are on on path it's really been with these smallest customers where we saw this volatility. And the volatility was widespread in terms of categories of spend, customer types. It wasn't just in one work type, which again is I think a clear indication. It's not AI that's doing this type of work. It's more that overall spending was just kind of under pressure for these
customers. And that was really the notable change in the quarter. To have 25% GSV growth in the enterprise, that's really healthy. What's driving that? Yeah. So as you know, our enterprise
plan was expecting kind of back-weighted growth this year. So that 25% GSB growth is going to come really in Q3 and Q4. And that's due to the work we did last year. We made two significant acquisitions for our enterprise business to bring on some critical capabilities that expand how we can serve enterprises in terms of the contract types that we can support. Previously, we were phenomenally well-positioned to do independent contracting work for large enterprise and some agency of record work. These are different kind of classification types for the workers. But when it came to things like EOR or more payroll relationships, which is really where 95% of enterprise budgets for contingent work go, is they do want EOR and payroll solutions from their vendors like us. We didn't have those capabilities in-house. So we bought a company, Ascend, last year that brought that capability to us. And on the back of that, we've seen tremendous expansion in our enterprise pipeline as we've been ramping up sales this year with the platform going live in June. Our new client pipeline was up 3x in the quarter from January to March, and our existing customer pipeline was up 9x in terms of the number of engagements. And so that's really setting us up to be migrating customers to this new platform in June and then ramping those programs in the back half of the year, and that's what's going
to drive that 25% GSV growth. And 34% growth in the SMB business?
Yeah, that was quarter on quarter in Q1. And just to put that in context, today that is a new product. We launched it 18 months ago. It's our fastest growing product in history. It's targeting businesses that have 250 employees and higher that are kind of in that small to mid market sweet spot. It only accounts for about 5% of our GSB today. So that product has been ramping quickly since its launch a little over a year ago, but we need it to continue to scale to kind of support the top line further, and so it will as it does that. But again, as we're kind of seeing these puts and takes between very small businesses that are having some more, you know, economic turbulence right now and the larger small businesses that can really ride through that and make bigger decisions, that's where we're seeing a real bright spot that we'll keep scaling.
Now we're on to AI. We're at the AI software.
Do you have enough time?
internet conference for ai what what you know is this just the these small businesses are like look i can i don't need to hire a adobe creative professional i can do it now on chat gpt and what are we seeing there i mean is that well that's what i'm doing uh personally so yeah um what what are you seeing in terms of what's happening yeah so what we saw um what we've
seen actually for several years is at the very bottom of our market so you think about on upwork The average contract size or really spend per client is about $5,000, but we have everything from, you know, very small projects all the way up through, you know, hundreds of thousands of dollars and larger engagements, of course, multi-million dollar engagements in enterprise. We've seen for several years now that the smallest jobs in the marketplace are getting automated. These ones are more like, you know, discrete tasks versus bigger complex role-based work, which has not had that same impact. we did a new analysis in Q1 as we saw changes in terms of client volumes and we were ourselves constantly looking at like how much of this is macro is it AI is it other things what we saw was Anthropic and Stanford had both released some new studies around how to measure AI job exposure in terms of automation risk we took those methodologies we built an AI based classifier that used those methodologies to basically take every job in our marketplace and decompose it into its subtasks and then graded the tasks on being automatable or not with AI. As a result of that analysis, we were able to measure that 10% of the GSV on our platform does have subtasks that are between 80% to 100% automatable with AI. So that was a new stat we were able to provide that kind of gives us an idea of the total automation exposure and potentially the near to medium term, although to put it in context, we only lost about one point of that in the last year. A year ago, it was about 11% when we did a back-tested version of that evaluation. Now it's down to 10%. And so again, that volume keeps declining in terms of its absolute size. But we did see in Q1 kind of accelerated automation, I think, on the back of some of the improvements with Anthropics tools and others. So customers have told us, consistent to kind of your question about, you know, what are they doing on the low end? They are definitely leaning harder into automation for the small jobs. So think of it as like kind of $500 and below is a good way to think about it, and that's consistent, although this measure gives us a kind of a more complete picture of that 10% exposure, which, by the way, does represent 15% of contract volume, because, again, these are the smallest jobs in our ecosystem typically that can be automated. At the same time, we're seeing a lot of AI tailwinds, and it's really just a matter of time for those to overtake the substitution that we're seeing at the low end of the market. We have an AI kind of business, so to speak, of categories, six different categories of AI work that currently is trending at above $300 million annualized run rate and it's growing 40% year over year, which is even an acceleration from its growth rate a year ago. So that's a fantastic indication of how these businesses are really coming in and finding Upwork to be the diffusion layer for how they can get access to AI talent and evolve their businesses. And this is, I think, early innings on just a massive opportunity for us.
So the natural question is, if it's seeping into the bottom 10%, why isn't this going to keep going up the ladder?
It certainly can keep going up the ladder, but the good news for us is there's a high refresh rate of work on our platform. And so as long as there is net new work that humans need to be doing, that work does come to Upwork, and it shows up pretty quickly. So as time goes on, even as previous legacy or historical work gets automatable, there's all kinds of new things, which I think the best proxy we have for that right now is these specifically AI categories of work, where the work is being demanded from humans on our platform because of this technology. But that's really an undercount of the volume of work that's happening around the edges of what AI is generating. And again, it's early. So you can imagine that automation will happen to kind of legacy job types, but then there's growth happening with all these new job types that show up and are already showing up as AI unlocks new roles and new experiences for businesses. This is very consistent with past trends. I mean, we know in the labor market broadly, I think 60% of jobs that exist today did not exist in 1940. On our platform, it's basically a microcosm of this where there's just this rapid refresh rate and new stuff is happening. And again, in any given quarter, you know, the deceleration and acceleration can show some volatility. But when you step back and look at multi-year views, our platform, the good news is we're not contingent on any one category of work or any one skill. Like our platform flexes to wherever client demand goes and the talent responds. And so we're really well positioned to just continue to serve wherever the labor market is going, wherever work is needed.
could there be like an initial shock where people start to like experience like i'm experiencing oh i can build a you know a card for my wife for mother's day and and chat gbt but then i'm like you know what this really isn't that good i need someone to come in and put the family and do the editing and do all this so i need like a like is there an initial shock and then everyone says well i need i need to take it to the next level so maybe they're gonna yeah circle back we hear that
very clearly from customers I mean the guy this morning was one example he said you know I could do a bunch of the marketing in theory on my own but I don't have time and I'm not a marketer and so I need someone who's using some of these tools to actually do that work for me and we hear loudly from customers that they want AI tools kind of helping deliver their work but they don't they want a human expert over the top of that both because of time and capacity but also because they want someone who can really quality control the output and make sure it's like the thing they really needed. So to that need, we're actually launching a product later this year, which will be our human supervised agent product, which gives our customers access to, you know, agentically delivered work, but with the benefit of a human who is overseeing that work, is quality controlling it, is ensuring it's really what it needs to be. And that is something we've heard from customers that are very excited about. And hence, we have a product that's kind of in beta on that right now. And again, we'll be launching more broadly in the next two quarters.
You've been here, I think, 15 plus years.
Yeah, 15 years.
Everyone asks, what's the magic that surrounds you that has kind of kept you so excited about the future? What's going on?
I mean, what's kept me at Upward, there's probably two things. One is this business has such a huge market opportunity. And to see a $650 billion enterprise market on the one hand, a $530 billion SMB market, both of which we are just scratching the surface with, and frankly, in the last year to 18 months, have new offerings specifically tailored for those customers and also built off of all of the learnings of 15-plus years of seeing what these customers need, what works and what doesn't work for them, that is incredibly compelling to me. Right now, there's another layer to that, which is we are playing a pivotal role for businesses as they navigate this AI transformation. If you look at OpenAI and Anthropic and Google, these companies are investing in these deploy co-models that are very focused on enterprise. They're really trying to go after these enterprise budgets only in terms of helping them with forward deployed engineers and the solutions they need to really navigate the transformation to AI. no one is doing this for SMB and our platform is already there as a known high-quality SMB related solution which has helped these businesses go through the transformation to the cloud the advent of social media like all mobile device stuff when I joined Upwork everyone was building you know their mobile app for the first time so we've always been the destination for SMBs that are trying to navigate these critical kind of tectonic changes and stay relevant and I'm just so excited there's so much more we can do and we're the early innings of doing that with some of these new products with ai agents coming to the marketplace you know with um all of the things we're doing around both ai enterprise and smb
um i know it's painful to go through a change in the team but a 24 reduction of force is not a not a small not a small number can you can you just talk about like what what's happened kind of
Yeah. So we've been really on this journey around profitability for several years now. You know, if I go back to, you know, 2020, which feels like, you know, more than six years ago, we were investing a lot in growth. We had a lot invested in our marketing spend. We were doing a brand marketing investment to really see if we could raise awareness and drive that through our funnel. and then starting around 2022 it became very clear the environment was changing economic buyers out there were being a lot more conservative with their labor budgets the kind of labor market post-covid was very different than than previously so we have been on this journey of really delivering on the profitability goals that we knew this business could have it's a highly profitable business you know 80 gross margins a fantastic digital acquisition model etc and that has involved both reducing our headcount over time as we become much more efficient at certain areas of both innovation, marketing spend, and deployment. Our sales team, we've really retooled also over the last few years. So we've done a number of things to really right-size our cost base on the employee side. And of course, today that includes a variety of things that's partly as AI automation, but certainly that's a minority of the story for us. Other things that really help us on our cost base are the fact we use our own product very heavily. About three quarters of our team is Upwork freelancers. So that's an advantage we continually lean into. And then, of course, we've also invested in kind of longer term efforts around kind of our processes, our workflows, reducing management spans and layers. And I would say in 2024, which is the last time we did a headcount reduction, we saw on the heels of that that our teams were more focused. They were moving faster. They were more agile. Like it really actually helped us from a delivery standpoint to have a smaller, more focused team. And so with the reduction we just announced, yes, super challenging to share that message with employees and say goodbye to some really talented people. But we were really building on the lessons from our last workforce reduction where we saw that actually smaller can be better and smaller teams can do so much and are not slowed down by additional noise in the organization. So that was some of what went into this latest change. And I'll say, as we did that, we really were careful to protect the key investment areas of the business. We did not touch, you know, a dollar of our marketing spend in terms of performance marketing and everything there because that's really working for us. We are, you know, investing heavily in areas around our enterprise business. As I mentioned, we didn't take any dollars out of that business with this reduction, as well as protecting our SMB and AI-related investments, which are so critical for the next, you know, frontiers of the business but there were places where we could trim and so we did that to really you know deliver on our promises around profitability and ensure that we could do that even in a year that may have you know a more volatile kind of environment and top line than we'd expected okay I mean I guess the last
time you went through the reduction you had 850 heads then you went to 630 now you're 480 someone's like wait just a few years ago you had almost double the headcount like is it is this because of AI advancements is this because the market shrinking is it obviously it's not the market shrinking but like it seems like how are you doing this is it AI internally they're using it I mean
certainly AI is part of it but I would be AI washing the story to say like oh this is AI because again there's places where we've built you know finance related automation we have an internal product called talk to data which lets anyone query our database and of course that means we don't need as big of an analytics team. So there are areas where we've had those types of investments really pay off from an AI standpoint. Our teams on the product engineering side, they're definitely smaller because we're doing more with, you know, cloud code and other tools. But I would say this has been more a function of kind of like constant discipline and like grinding out like places where we just see redundancy or a workflow that spans 10 people. And we realize that's super inefficient. We can collapse that or having managers who either don't code on the technical side or are not doing a player coach model in other functions like that's those are places where we've really leaned into an operating model that is very lean and very efficient and and just kind of doesn't have you know um extraneous priorities or activities kind of around around
it versus like staying really focused that showed up in the margin uh negative one in fiscal 22 to 29 and 25 and guiding to 33 so that's right we had this 35 long-term target that we're going to
hit this year two years early because of you know the level of rigor that we've put in here
and you think that somewhere in the low to mid 30s is sustainable over time absolutely yeah i mean
this business can definitely do 35 and then i think there's there's more over time to be able to do because it's also not just the cost management brand there's cost management side and then there's the growth of our higher margin products which is where we're seeing our fastest growth rates you know enterprise smb those are both higher margin uh products in the last four and a half, five years, we also built our ads and monetization business, basically from zero to now it's more than $100 million business. And that is obviously very high margin revenue. And in a tough environment like this one, on the one hand, a lot of the very small clients are spending less. On the other hand, talent is actually willing to spend more for these work opportunities. And that is a part of our platform where there is monetization. So there's a lot more we will continue to do on all of these fronts, higher margin products and cost optimization.
What are the big tools you're using internally that are really helping you on AI?
On the coding side, I'd say it's CloudCode. That's definitely a big one. I think, frankly, CloudCowork, since that came out, has been pretty mind-blowing to a lot of teams in terms of what they can do now in a matter of hours and without the level of resource intensivity that we would have had before. So those are probably the biggest two. But I would say our whole product and engineering stack now is kind of this integrated AI layer that uses Linear and Claude and, like, a bunch of other kind of bespoke tools that give us a lot of efficiency there. And then I'd say in other areas, like customer support, we've had a great deal of success there, as have others. I think 70-plus percent of our customer support inbounds are now resolved by an agent. And we know we can bring that number higher because the tools keep getting better. and we keep integrating more of our internal data and customer-specific data into those flows so that those agents can be more effective. So those are some of the ones that we need.
Is that from a service customer, like a service software company, or have you built your own agents?
No, we use a third party called Forethought, which was recently acquired by Zendesk. And we've looked at, you know, should we build something like that ourselves? Because certainly we have the technical chops to do it. But the debate is always like, is it worthwhile for our precious engineering resources to do that versus use a third-party tool that may be pretty cost-effective? So right now, we're using a third-party.
The enterprise strength, what's still kind of the code to crack there? I mean, we're leaning on a lot of third-party vendors, and I thought it'd be hard to get it through, but we're leaning a lot of, I mean, we're using a lot of expert networks.
We're doing a lot.
But I initially thought it would be harder to get it pushed through, but I think everyone's got a pretty open mind about it now. Where are the pockets of enterprise? Here are the next engines of growth that you think are coming.
So probably the biggest engine of growth for us on enterprise is with this kind of retooled product that we just launched in the last few months, really, and are ramping in the back half of this year with our first customer migrations in June onto this product lifted. What this does for us is it really opens up the addressable market for who we can serve. So previously when we were going into a large enterprise, and by the way, we're targeting customers who spend about $100 million to $1 billion plus on contingent work. That is our ideal customer profile for enterprise, and that's about 2,000 companies in the U.S. So if you look at those companies, about 5% to 10% of their spend goes towards independent freelancers or contractors. and the balance, 90-95%, goes to other contract types that are typically deployed through staffing agencies. So it's temp staff, staff augmentation models, and employee of record models, et cetera. Now that we can serve that other part of the market with our new capabilities, that just changes the game completely because not only can we bid for that work, we can also go into enterprise and say, look, you're spending $100 million on this program because we can optimize both the contract type for the most efficient lowest cost contract type for the work and the geographic location of that worker to give you the cheapest high quality person for that program we can save you 10 to 30 percent on this 100 million dollar program and that is a very compelling pitch for these businesses and that's why we're seeing so much pipeline acceleration we also were named by Everest group into their like top right you know star performer or quadrant for the solution we offer, and it's hardly even in market yet. So the feedback we're getting is extremely strong, and that's going to be, I think, a huge growth engine for us because it's just a share-winning game. We don't have to go create a new market. This is spend that's already happening, but we can do it better, more efficiently, more effectively, and at higher quality for these customers. The other engine for us is broadly what I'd call fractionalization of work due to AI, where we see enterprises that are deploying these AI tools still need humans involved, but those humans do not necessarily take the shape of a full-time employee and we have a number of solutions that really help us serve them in those needs and i think that's going to drive a broader trend in the market where full-time employees make up less of the enterprise workforce budget and contracted and kind of flexible labor becomes more a bigger part and we are perfectly served to
win a ton of that business as well. The stocks had a tough run. What do you think? What are you doing about it? From a buyback, from a board perspective, how should we think about this?
Yeah, we are staying the course on our capital allocation strategy. We have an open authorization from our board for a buyback. We did over $108 million worth of buybacks in Q1, which was more than we did in all of 2025. So that's going to be an ongoing part of our strategy for sure. And then, you know, we're focused on exiting the things we can control, which are building these three strategies around SMB, enterprise, and AI that are showing their performance. They're showing that they're working, and we just need to scale them up to be a bigger part of the total mix. And that mix shift is in flight. So we're just staying very focused on you know delivering the plan and the strategy that's working uh and you know we
know the stock price will catch up okay um any anything that you see that we can't see from sitting on the outside i mean what's what's the what's the most important thing that
yeah i think the most important thing is the ai really tailwinds that we see i mean looking at the categories that are growing on the platform the type of work that's really changing in the ecosystem and is showing up on Upwork as, you know, business demand changes, it's incredibly exciting. And yes, while there is automation happening, you know, in certain parts of the business, if you think about, you know, a 300 plus million dollar run rate growing 40% plus year over year in just that part of what we're doing, and that's before we layer in things like our AI agent solution with human supervised agents, that's before we get the benefit of our ecosystem strategy around like our chat gpt app and other apps that are launching inside these ai related tools and bringing us new demand channels i mean there there's so much happening there that i think is is really exciting and in the early innings we have an ai data opportunity that is also very much untapped because we are both the environment for and the kind of generation engine for a ton of data around work that all of these companies that are building ai agents and foundation models really want. So when we look at all of that and the fact that even enterprise, 20% of our pipeline is AI related projects, like this is, we're in the early stages of just a massive opportunity opening up in front of us. And I think it's clear that that's not fully appreciated in the market right now.
You're in the Bay Area. Yes. I was with an exec last night. He moved from the Bay to Austin. He goes, I want to come back. All the talent's in the Bay now. I mean, do you feel like there's this moment where we're we're we're seeing i live there too so i'm excited i was like what's it like to live in san francisco isn't it terrible i'm like it feels feels like things are better
things are better i mean but it's it is also a very um in some ways it feels very one-dimensional in the sense that you get off the plane in sfo you get to 101 and like 10 ai signs yeah every build board is ai ai ai i know like oh i know where i am like it's very clear um but it's exciting I think, you know, there's a lot of innovation. I think there's a lot of hype and a lot of misplaced, you know, fear about, like, the labor market and other things and that impact from jobs. It's interesting to see Dario and Sam Altman both walking back their comments about AI disruption of the labor market. Now they're both saying, look, it's actually not going to be bad. And their tune is very different. And I think that's probably because the data just isn't supporting some of these outlandish claims that they've made. But it's an exciting time. There's a lot of innovation. People are motivated. Our team feels it. And, you know, we're at the beginning of kind of the next era of work, which is going to be very different.
Thank you, Hayden, for coming. Really appreciate your support of the conference and good to see you.
Good to see you. Thanks for having me.