Upwork Crushes Profit Estimates and Raises Guidance Amid Stagnant Top-Line Growth

Upwork delivered a second-quarter performance that showcased remarkable profitability and operational discipline, leading to a significant guidance raise. However, this bottom-line strength masks a concerning stagnation in revenue and a continued decline in its active client base, creating a complex picture for investors.

The Profitability Juggernaut Forged by Cost Discipline

The standout story of the quarter was Upwork's extraordinary expansion in profitability. The company achieved a record 29.3% adjusted EBITDA margin, a testament to aggressive and targeted cost management. Total operating expenses were trimmed by 9.6% year-over-year, a move that has fundamentally reshaped the company's financial profile and boosted free cash flow by an impressive 85% to $65.6 million.

The cost-cutting was not uniform. The reductions were concentrated in growth-oriented functions, with Sales and Marketing expenses slashed by 22.5% and Research and Development spending cut by 14.5% compared to the prior year. This strategic trade-off—sacrificing near-term growth investments for immediate profitability—is central to the company's current strategy.

"With encouraging growth signals from key product and platform enhancements and continued rigorous cost discipline, we are raising our full-year guidance for both revenue and adjusted EBITDA. We have proven our ability to grow revenue while increasing profitability, and we reiterate our long-term 35% adjusted EBITDA margin target."

— Erica Gessert, CFO

A Widening Chasm Between Profit and Growth

While profitability metrics soared, the top-line narrative was one of stagnation. Revenue grew a mere 0.9% year-over-year to $194.9 million, a stark deceleration from the 15% growth seen in the same quarter last year. This divergence between a robust bottom line and a flat top line illustrates the core tension in Upwork's current performance. The market's positive reaction to the earnings beat is rooted in profitability, but long-term value creation will hinge on reigniting meaningful revenue growth.

The Shrinking Marketplace: Client Base Continues to Erode

Digging deeper into the top-line weakness reveals a concerning trend in user metrics. The number of active clients on the platform fell for the fourth consecutive quarter, dropping 8.3% year-over-year to 796,000. While the company has successfully increased the average spend from its remaining clients—with Gross Services Volume (GSV) per active client rising 5.0% to a record $5,002—the persistent client attrition is a significant red flag for a marketplace model that depends on network effects. This erosion of the user base poses a long-term risk to the platform's vibrancy and competitive positioning.

Enterprise Segment Falters, Prompting M&A Pivot

The Enterprise segment, once a key growth driver, has become a significant drag on performance. Enterprise revenue fell sharply by 7.9% year-over-year to $24.3 million, marking a material deterioration after several quarters of flat growth. This decline underscores the failure of the company's previous enterprise strategy.

In response, management has executed a decisive strategic pivot through M&A, acquiring Bubty and agreeing to acquire Ascen. This move aims to build a new, full-stack enterprise offering for contingent work solutions, targeting a massive $650 billion market. While this bold strategy addresses a clear weakness, it introduces significant integration risk and represents a complete reset of its approach to the high-value enterprise market.

AI Initiatives Positioned as Future Growth Engine

Amid the challenging top-line trends, management is heavily promoting its AI initiatives as the primary catalyst for a return to growth. The company reported that GSV from AI-related work accelerated to 30% year-over-year growth, and highlighted that clients engaging in AI work spend over three times more than the average marketplace client. The adoption of "Uma™," Upwork's AI companion, is also increasing, with new features credited for lifting average spend per contract.

"Our strong Marketplace performance was driven by AI features that delivered tremendous value to our full range of customers, from SMBs to large enterprises to talent. With our two announced acquisitions, we have enhanced our full-stack offering giving enterprise clients access to a complete array of contingent workforce solutions fueled by Upwork’s deep global talent pool."

— Hayden Brown, President and CEO

This narrative repositions Upwork as an AI-powered work marketplace, providing a rationale for its strategy of favoring product-led growth over traditional sales and marketing spend. While these AI metrics are promising, they are not yet substantial enough to offset the broader client churn and revenue stagnation, making this a critical, yet still unproven, thesis for future growth.

Forward Guidance and Outlook

Upwork issued strong guidance that surpassed prior expectations, reflecting management's confidence in its ability to maintain cost discipline. The company raised its full-year 2025 revenue guidance to a midpoint of $770 million and its adjusted EBITDA guidance to a midpoint of $210 million, implying a robust 27.3% adjusted EBITDA margin for the year.

However, the near-term growth outlook remains muted. Guidance for the third quarter projects revenue between $190 million and $195 million. At the midpoint, this represents a slight year-over-year decline of 0.7%, indicating that management does not expect a significant re-acceleration in top-line growth in the immediate future. The guidance confirms that profitability remains the primary focus, while a return to robust growth is a longer-term objective.