Upwork Inc. (UPWK) shares are taking a beating on Tuesday, down more than 12% after the freelance marketplace reported second-quarter earnings that, on the surface, looked pretty good. The company beat both profit and revenue expectations, but investors are focusing on the future, and the future looks a bit cloudy.
Adjusted earnings came in at 41 cents per share, beating the 34-cent consensus. Revenue hit $191.66 million, edging past the $189.96 million analysts were looking for, though it was down from $194.94 million a year ago.
Earnings Snapshot
The headline number that's worrying investors is Gross Services Volume (GSV), which fell 4% year-over-year to $966 million. Management pointed to three culprits: AI automation, weaker new-client additions, and a soft labor market. That's a triple whammy for a platform that connects freelancers with gigs.
But it's not all doom and gloom. Revenue from higher-margin initiatives grew 15% year-over-year, fueled by Ads, Dynamic Pricing, Connects, and Business Plus. That helped push the take rate up to 19.8%.
Active clients held steady at 763,000, and GSV per active client hit a record $5,230, up 5% year-over-year and marking the eighth straight quarter of sequential growth. Average spend per contract also set a record, extending its growth streak to six quarters.
Business Plus GSV jumped 174% year-over-year, and AI strategy and consulting GSV rose 51%. GSV from explicitly AI-related jobs climbed 22% year-over-year and 5% sequentially, reaching an annualized run rate of about $330 million. So while AI is hurting some categories, it's also creating new demand.
Adjusted gross margin was 77%, and free cash flow came in at $35.9 million despite restructuring-related payments. The company also secured a new $150 million revolving credit facility, with a $50 million accordion, to support debt repayment, capital allocation, potential M&A, and share buybacks. Upwork repurchased about 164,000 shares in Q2 and 8.3 million shares year to date.
Outlook
The real story is the guidance. For full-year 2026, Upwork cut adjusted EPS guidance to $1.38-$1.43 from $1.50-$1.55, below the $1.55 estimate. Revenue guidance was trimmed to $730 million-$750 million from $760 million-$790 million, versus the $776.3 million consensus.
The company's restructuring plan is targeting $70 million in annualized cost savings, with about $40 million expected this year. But that's not enough to offset the near-term pain.
For the third quarter, Upwork expects adjusted EPS of $0.31-$0.33, well below the $0.41 analyst estimate, and revenue of $176 million-$184 million, versus the $193.7 million consensus.
Management acknowledged that AI remains a near-term drag on some work categories but is also creating new demand for AI talent and human-AI teams. It's a classic transition story: the old way of doing things is shrinking, but the new way is growing, and the market is trying to figure out which one wins.
At the time of publication, Upwork shares were down 12.36% to $8.61.
