Katie Perry (00:00):
38% of the US workforce that's 64 million Americans performed freelance work in 2023. Were you one of those fractional workers? The pandemic accelerated the desire for companies to hire more flexible alternative workforces and for workers that brought about new challenges primarily. How do you find these roles and how do you connect with the employers? Today we dive into the very competitive landscape of freelance hiring marketplaces and whether or not AI will be a risk or an accelerator for these companies moving forward. I'm Katie Perry, and this is after earnings with Upwork CFO, Erica Gessert. Wow. Erica Gessert, welcome to After earnings.
Erica Gessert (00:38):
Thank you so much. It's so great to be here.
Katie Perry (00:40):
Great to have you. Let's get right into it because I'm fascinated by Upwork. It seems like you are at the intersection of a couple of major trends going on right now. On one hand you have the rise of fractional work, alternative workforce, if you will. On the other side you have the acceleration of AI applications and that's impact on the workforce. So how do you think about those two trends in the context of what you're building at Upwork?
Erica Gessert (01:07):
Yeah, great question. Great way to start it off. First and foremost, for those who don't know Upwork, we are the world's work marketplace, so we bring together freelancers and businesses from all over the world to get work done. That's right. We are in the middle of a really a multi-year trend towards fractional labor, towards alternative workforce alternatives for businesses of all sizes. That trend has been going on for some time, obviously really boosted by the pandemic and the technological advances then and really has gone to a permanent change in how businesses think about getting work done, and that's going to continue for many, many years to come as businesses transition to lower cost, lower risk types of labor to get work done at the same time. You're absolutely right, AI is just the newest technology to help enable different ways of getting work done and we Upwork are using AI in multifaceted ways to help our freelancers become more tech enabled than ever and for businesses to use AI to create solutions. I don't know if you know this, but our AI category on our platform is our fastest growing category at Upwork and grew 67% year over year in q2.
Katie Perry (02:33):
I believe it. I was even looking around there the other day and it even seems like some of the projects and roles typically that weren't AI probably have AI elements built into them as well if they're not straight prompt engineer task.
Erica Gessert (02:50):
That's absolutely right. And in that 67%, that's really kind of direct AI jobs. The reality too, I think that people don't realize about freelancers in general is that they are some of the scrappiest, most innovative, most creative people out there in the workforce. Recent survey data on Upwork showed that over 50% of our freelancers are using AI tools to get their work done, and that's about five x what captive employees at companies are doing today. So our freelancers are truly the most AI enabled workforce out there, and we're building out tool sets and other things on our platform and enablement on our platform to enable our freelancers to get better and better through AI enablement.
Katie Perry (03:38):
That's such a fascinating stat, but it makes sense. If you think about freelancers maximizing their time, monetizing their time to be more efficient versus at a full-time job, you're not necessarily thinking of in the hourly necessarily of how much output can I put? You might be on a set salary. Do you think that's part of it?
Erica Gessert (03:58):
Look, I think that freelancers first and foremost, right? They're putting food on the table every day. They're super motivated to help themselves get their work done faster, better, more easily. And freelancers, like I say, they're the scrappiest people out there. Captive employees certainly are motivated to help themselves get their work done, but it takes time. It takes a lot of effort by companies to enable these solutions internally and actually it's some of our freelancers who are helping them do that. So the freelancers are the most motivated out there.
Katie Perry (04:37):
And I want to talk a little bit about you have two sided marketplace on one side, the business side, people looking for this sort of flexible fractional talent, and I want to dive into what the benefit of that is for companies. My first job was at an ad agency and I would see all the time where we would win a new piece of business and then maybe we would lose it a few months later. And you have a situation where you're, to your point, there's risk of hiring people full time, maybe winding down. Why is it that enterprises are so eager to find talent on platforms like yours that is a little bit more flexible?
Erica Gessert (05:15):
Yeah, sure. I mean, there's so many reasons that companies come to us. I mean, to be honest, if you can think of a digitally enabled use case out there to get work done, it's happening on our platform, but there's so many reasons that companies come to us to find workers one speed. So if you have a project you want to get it started quickly, it's much, much faster to be able to hire someone who's kind of contingent labor workforce than it is to try and go through the hiring process of hiring a permanent employee. Two is cost. So companies can find incredibly cost-effective solutions to get work done. Don't forget that our freelancer workforce is fully global. Companies can hire workers all over the world for in some cases lower cost. In other cases, they can hire people in different time zones so that they can have a follow the sun execution and really use the clock to their advantage to get work done all over the world. And then the third reason is agility. So if you have a surge project in many, many, many companies, we serve all size companies from very small businesses with under 10 employees to mega cap enterprises, and everyone has surge work that needs to get done. I was just talking to a client the other day, a company of about a hundred employees and they want to build an app, so they need a couple extra pods of software engineers. Upwork is the perfect place to come and find that kind of labor.
Katie Perry (06:46):
Yeah, it's fascinating too, just the specialist nature of some of the tasks. I saw one the other day that was, I need help with an investor deck. I'm a CEO, I want to get on the phone with someone who's a good storyteller and it's a very straightforward ask. You tell, it's a defined project, but they just need to find one person who's great at that and being able to seek that out and read reviews and find that person that must save companies so much time.
Erica Gessert (07:14):
Yeah, it's so funny that you say that. I was just at a client conference the other day and I was talking to another client of ours who said that he used Upwork to get his first pitch book done for when he was pitching to VCs to get a cash infusion. I was talking to another guy who actually was a former Bain consultant. He started his own photography business after leaving the consulting world and he uses Upwork to get email marketing and actually social media marketing done. So really, like I say, if you can think of a digitally enabled use case to get work done is happening on Upwork somewhere.
Katie Perry (07:53):
And I think it's important in looking at the landscape of fractional work or hiring platforms app to think about the applications. I know some of us, we will use a platform because we need someone to Photoshop our friends' face on a birthday invite. And what you guys are doing is a little bit, I'm sure that kind of thing exists, but thinking more strategically of where can you plug in experts to various aspects of a business, sometimes very large businesses. I know you have a lot of enterprise clients, but it seems like the nature of the work would matter a lot when you talk about your take rate and how that adds up to revenue over time.
Erica Gessert (08:34):
Well, that's absolutely true that all different kinds of work are getting done. One thing to remember about Upwork is that our average project size or what we call GSV growth services volume per client, so the amount of volume crossing the platform or the size of a job is about $5,000 each. So these are on average, larger, more complex bodies of work. Of course, we do have small someone getting a costume made for themselves or something else like that that are happening on the very small end, but that's actually less than 5% of the volume that runs through our platform. So it tends to be larger, more complex bodies of work and longer term in size, our average duration of a job is about two months. So you can think of this as companies, businesses coming to us, forming relationships on our platform and the way that our platform works, it's a marketplace. So a client posts a job, freelancers bid for the work, and then they find that perfect match. So that's how it works. And to the point of take rate, our average take rate is about 19% and it's been growing pretty well about 300 basis points year over year as we continue to identify different value added services and other things that we offer to our freelancers and clients on the platform.
Katie Perry (09:58):
Yeah, I noticed you have a credit system where you could actually kind of bump yourself as talent within those proposals. So I think there's a lot of kind of smart levers you can pull. Maybe there's something super relevant, you're perfect for it, and you just want to make sure you get to the top of that pile.
Erica Gessert (10:15):
Yeah, that's right. So most marketplaces, we have a business, it's an ads business. In essence, our freelancers can pay to boost their proposal up to the top of the list. And what we've found actually is that it's helpful for freelancers who are really convinced, like you say, that they can do that job. It also helps with marketplace efficiency because when freelancers do boost their proposals, they're really, really confident that they've got the skillset that that's right to do it. And so it actually helps for clients to be sure that the freelancers who are proposing putting proposals for their jobs are really qualified to do it.
Katie Perry (10:57):
Yeah, it makes a lot of sense. Shifting to earnings, I know you guys recently reported, can you share some of the highlights for our listeners, retail investors as they think about Upwork as a potential investment?
Erica Gessert (11:11):
Yes, absolutely. We're incredibly proud of our results over the past several quarters. In Q2, we reported revenue growth of 15% year over year, and our highest ever both adjusted EBITDA and net income adjusted EBITDA of $40.8 million and 21% margin, which is significantly higher than it was a year ago, which was about eight and a half percent margin last year. So we're super proud of it. We also have a very, very strong free cashflow profile, over 33 million of free cashflow in Q2, and our EBITDA typically converts to cashflow at over 80%, so a really, really strong growth trajectory for our business.
Katie Perry (11:59):
When you look at you guys, you have strong free cashflow, some great cash equivalents on the balance sheet. The market doesn't seem to be fully getting it. There seems to be a disconnect there. And I'm curious if you think these AI fears of the job replacement and the types of roles, do you think those are overblown and isn't the street getting about what you guys are building? It seems like there's a bit of a disconnect.
Erica Gessert (12:26):
Yeah, no, there absolutely is. We completely agree that our stock is undervalued right now, and if you just look at our growing profitability profile and free cashflow profile by any measure, we certainly feel the stock is undervalued. Look, I think you're absolutely right when you observe that there is I think an AI overhang over the human capital industry at large. The fact is Upwork compared to really anyone else in our industry, our performance has been much, much better and stronger. The human capital industry. The reality is it's been a relatively tough operating environment over the past six quarters. If you think about the combination of high interest rates really compressing corporate budgets and when money's expensive, companies are focused on profitability and so they're just spending less. And we see that with our enterprise clients. We see very, very steady and actually ongoing growth of our enterprise client list, but corporations have curtailed their budgets in recent quarters, and so they're just not spending as much inflation on the small business and consumer side is also just affecting spending over the past many quarters.
(13:37)
And so more broadly in the human capital industry, we grew our revenue 15% In Q2, the broader human capital industry was actually about negative 7%. So it's been a slower growth period overall. Upwork's been holding up much better, but it's against a backdrop of, you're right, a narrative out there that AI may come in and replace people's jobs. Now what we're seeing is sort of the opposite actually. What we're seeing as I talked about earlier, is our freelancers are coming on. We really see it as a human plus machine kind of future. Our freelancers are coming on, they're adopting the most relevant, most recent tools and technology to help get work done. We're also using AI to enable our platform through uma, which is our Upworks mindful AI companion. And this is also going to be an absolute game changer for us where we are going to be able to launch and extend AI into our platform to help clients and freelancers come together faster more easily than ever before.
Katie Perry (14:44):
Yeah, it seems like your role specifically, you're in such an interesting place because on one hand, you're obviously trying to drive durable, profitable growth. On the other hand, there's this storytelling component, and I know you have a background that includes investor relations. So I'm curious, what story do you need to paint so people understand these nuances in your business as it relates to AI to help people understand that you believe you'll be growing into the future,
Erica Gessert (15:11):
Right? I mean, look, absolutely. I think what we need to make sure that people continue to understand is all the ways that AI is really enabling work today. First and foremost, what I described, which is just the growth of AI jobs themselves is absolutely enormous. And really we see no end in sight on the lower end data labeling and other things like that. On the higher end, prompt engineering and the building of AI models themselves, we serve many enterprise clients to actually help develop and build their AI needs. And we also actually serve enterprise clients who are our AI enablement businesses themselves and use our talent in order to create solutions for their client customers. So there's an enormous industry that is going to be the next wave of growth for human capital workers. The reality for businesses like ours, Upwork's been in business for over 20 years and we've seen pretty much all of the technology revolutions, the rise of mobile, the rise of e-commerce, all of these things have been enabled by talent on our platform, and we really see our freelancers, like I said earlier, they go to where the puck is and develop new abilities and talent as new technologies develop.
(16:34)
We're also developing in order to enable that side of it and AI tools enablement for our freelancers, we have an AI services hub that our freelancers have access to get preferred access to new and exciting AI tools to help how they get work done as well. So there's so much going on in this space and we really see it as really a booster or an enabler to our business rather than something that should be an overhang. And I think the market's starting to get it. It's taking some time, but I think people are starting to understand just what a great possibility this is for businesses like ours.
Katie Perry (17:08):
You're right in that it's quite nuanced, and I think that's a good segue into your partnership with OpenAI. So tell us about what that looks like. I know you recently announced that. How's that going to impact your business?
Erica Gessert (17:21):
Our partnership with OpenAI has several facets to it, but one of the most important is what we call expert vetted talent. So we work together, and OpenAI is actually just the first of several partners that we are working with in areas like this whereby we work with partners in order to interview and vet talent on our platform that are specialized in order to enable solutions for their customers. And so we together with OpenAI, identified a pool of talent that are specialized talent that can help OpenAI to develop their own strategies and enable their customers. We have lots of other companies that are also doing this with us, GoDaddy, others like that, where we're identifying specialized talent that they need in order to help their customers actually execute or launch the products that they buy from 'em. So Upwork's a great place to do that for many, many, many types of businesses.
Katie Perry (18:15):
That seems useful as well because if you think about the context of people adopting these tools within their jobs, there almost needs to be an arbiter of who is an expert, what level do you need in terms of skills to reach that? And I assume there's a lot of people who just in the day-to-day of their jobs, they're becoming quite sophisticated at OpenAI, at GoDaddy, and that's almost an opportunity for that person to have a side hustle where they just happen to emerge as one of the best people at their company at it. And hey, look, I can actually do this on the side.
Erica Gessert (18:49):
Yeah, I mean, look, there are literally thousands of use cases for this type of talent. Think about even cloud enablement and other things like that for small businesses who need search capacity, specialized talent to enable some of these technologies into their businesses, and Epic is a perfect place to do that. We can create specialized talent pools so that companies can easily access that talent to enable those solutions across all types of use cases and businesses.
Katie Perry (19:20):
Shifting to r and d, I noticed last year you all had a 20% jump in r and d investment, and I was curious reading that because I couldn't picture in my mind what r and d would look like at a company like yours. Can you paint any color around what types of exploratory projects or exercises you are doing to future proof?
Erica Gessert (19:43):
Well, certainly. I mean, a lot of the AI solution enablement that I've talked about is a big part of our r and d spend. We did an acquisition last year at Upwork, a small acquisition of a company called Headroom, which is a technology platform, a collaboration platform for the enabled collaboration. We also, through that acquisition, we also thought of it partially as an acquihire. We acquired some really great AI talent, Andrew Rabinovich, who's sort of a legend in Silicon Valley and was the founder of headroom, is now our head of AI at Upwork and really leading the charge in terms of the AI solutions that we're enabling on our platform. So if you can imagine in the future, I mentioned uma, our mindful AI companion, we are developing an AI companion and enablement through our platform so that if you can imagine a client coming on and instead of having to write up a job post and post it and then a freelancer having to a proposal, a client can come on, have a conversation with our companion and say, what was our use case that we talked about earlier?
(20:56)
I want to write a pitch deck for a VC I'm pitching to about my new healthcare healthcare business on online healthcare business. Uma will identify the talent, help him build a website, help 'em build a PitchBook, whatever our customer needs in order to get that work done, and she can identify the talent pool and even put together a project plan in the future so that where it can get done. So if you can imagine the future whereby all this will get done really in minutes rather than having to work over several days to enable these strategies.
Katie Perry (21:36):
Yeah, super powerful. And I'm curious on the topic of m and a, what's the current appetite or what's sort of the philosophy when you guys look ahead at m and a opportunities?
Erica Gessert (21:48):
Sure. We have an incredibly strong balance sheet. As I talked about earlier. Our free cashflow is growing roundabout 30 to $40 million per quarter every single quarter and growing. Our EBITDA margins are growing, and so our free cash flow will continue to grow as well in concert with that. And we have over $500 million on our balance sheet. So for a company our size, we have a very, very strong cash profile and we intend to use it. This year we bought back a hundred million dollars in stock and returned that to shareholders. We certainly expect to continue to do that, but we also want to continue to grow our business both organically and inorganically and so intend to identify other opportunities for either technology enablement or possibly continuing to add to the strength of our workforce through identifying great tech talent out there for our business.
Katie Perry (22:52):
And Erica, you're about a year and a half, a little over around there, so it seems like you've been quite busy, curious. We all enter new roles, enter new jobs for someone. At your level though, what's sort of the biggest challenge of starting a new role at that CFO level?
Erica Gessert (23:13):
That's a great question. I think any new role is challenging coming on, and I always say it takes about six months in any job to get your sea legs, if you will. I would say, look, I think that coming into the human capital industry was a new one for me. I've been in lots of other industries before, FinTech, telecom, lots of others. So getting to know the business, wanting to make sure that you can have an impact quickly and building as much depth as possible as quickly as possible, I think is always a big challenge when you're in a leadership position and you really want to make sure that you are steering the ship correctly. And then really just getting to know the team and making sure you connect deeply with your team is incredibly important. I am really big on trust and collaboration with my team. I think it's incredibly important for everyone to have a voice and to help guide the ship. And so I think those are probably some of the bigger challenges as you're coming on in one of the key leadership roles in the company.
Katie Perry (24:25):
Makes sense. And I know I referenced this earlier, but I know you have way back in the day, you've held senior roles in investor relations, and I'm curious, I'm sure that's part of your purview now, albeit to a lesser degree, but looking back in the last 15, 20 years of how IR has evolved, what are the biggest changes from when you were in that seat to today? It seems like with the proliferation of different publications, outlets, shows like this, how has that role shifted over time?
Erica Gessert (25:00):
That's a really interesting question. So first and foremost, for those out there who are working finance themselves or are interested in making it to the CFO position, I always recommend people take a turn. In investor relations, it's incredibly fulfilling work. It's difficult. You're constantly getting asked tough questions by lots of really smart people, and it really forces you to think about the industrial logic of what your company is doing versus the competition and versus the macro trends were at large, so I always recommend people take a turn to do it. It's incredibly fulfilling and interesting, difficult work. To answer your question about the way that the investor relations position or craft has changed, I think that IR has really become, I would say more important internally. I see investor relations, people doing investor relations and then moving into strategy or corporate development and those kinds of things because they are really quite closely related investor relations. People really need to know everything that's going on in their industry with, I say, with their competitors, even in kind of adjacent industries to their own. And so I think it makes for a really well-rounded person and team, and the management teams are relying on IR people more and more to kind of help with the strategic development of business.
Katie Perry (26:34):
By the way, I completely agree with you. That is a profession I wasn't aware of in college, things like that. And whenever I talk to younger people, I'm like, look into that, because it seems like, to your point, left brain, right brain access to executives, it seems like a really fascinating place to be, and not a lot of people talk about those roles.
Erica Gessert (26:55):
Yeah, I was fortunate that I kind of fell into it early in my career really just through a series of opportunities and getting to know CEOs and CFOs in the businesses. I was in the early, the first internet boom was when I started out back in the late nineties. But you're right, it's a really, really unusual profession, but one, I think that is growing in importance more and more.
Katie Perry (27:28):
I got one last question for you, Erica. We are at the week of NFL kickoff. I read that you're a Niners fan. What are your thoughts going into this season?
Erica Gessert (27:40):
Oh, man. The Niners are going to take it this year. I think we're all very, very confident. Actually, I lived in Kansas City for three years also, so we do have some chiefs allegiance, but we're niners all the way this year, and we think they're going to take it all the way to the Super Bowl.
Katie Perry (27:55):
Hey, if you're going to have two, that's not a bad too. I know you guys are playing my bills, my beloved bills on December 1st, so we'll have to check in after that, but should be a great game and a fun season all around.
Erica Gessert (28:09):
Well, I've always had a soft spot in my heart for the bills also since they lost the four Super Bowls in a row back in the nineties, so I always sort of root for them a little bit in the back of my head as an underdog. So it'll be a good game.
Katie Perry (28:23):
Yeah, plus it's fun to watch people jump on tables as long as there's no permanent injuries. Well, Erica, thank you so much for spending time with us today. This was super insightful. I really appreciate you making the time.
Erica Gessert (28:36):
Yeah, well, thank you so much Katie and I enjoyed it myself.
Katie Perry (28:40):
I'm Katie Perry. Thanks for tuning into After earnings, the show that brings you up close and personal with the executives behind the world's most interesting publicly traded companies. If you learn something today, don't forget to like, subscribe, share with your friends. You can listen to past interviews with CEOs and CFOs from Cava, elf Beauty, Winnebago Life 360 dozens more at afterearnings.com or wherever you do the podcast thing.
