UPWK Q4 Deep Dive: AI Expansion and SMB Growth Offset Weak Guidance

Online work marketplace Upwork (NASDAQ:UPWK) met Wall Street’s revenue expectations in Q4 CY2025, with sales up 3.6% year on year to $198.4 million. On the other hand, next quarter’s revenue guidance of $194.5 million was less impressive, coming in 3.1% below analysts’ estimates. Its non-GAAP profit of $0.36 per share was 15.5% above analysts’ consensus estimates.

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StockStory’s Take

Upwork’s fourth quarter results were met with a significant negative market reaction, as investors focused on challenges highlighted by management. CEO Hayden Brown attributed the quarter’s performance to ongoing investments in AI-powered marketplace features, the rapid growth of the Business Plus offering for small and midsize businesses, and early wins in the enterprise segment. CFO Erica Gessert noted that while the company achieved record adjusted EBITDA margins and improvements in client retention, softness persisted in lower-value contract categories, and automation continued to pressure segments like writing and translation.

Looking ahead, Upwork’s guidance reflects management’s focus on ramping growth levers such as AI-driven platform enhancements, Business Plus, and the Lyfted enterprise platform. Brown emphasized that 2026 will bring a more integrated experience, especially as human and AI agent collaboration expands. Gessert cautioned that first-quarter results will reflect ongoing investments in enterprise integration and marketing, but she expressed confidence in achieving sequential revenue and margin improvements by the second half of the year, stating, “We expect to exit 2026 at a margin in the low thirties, as a number of longer-term cost optimization strategies start to bear fruit.”

Key Insights from Management’s Remarks

Management attributed the quarter’s results to platform investments in AI and SMB, while noting that enterprise sales cycles and category headwinds impacted growth.

• AI-driven platform enhancements: Upwork expanded AI features in its marketplace, including improved search and Ooma Recruiter, which contributed to a 50%+ increase in gross services volume (GSV) from AI-related work. CEO Hayden Brown highlighted that AI work now drives three times the average client spend compared to other categories.
• Business Plus traction: The SMB-focused Business Plus solution experienced 49% sequential client growth, with 38% of new users being first-time Upwork clients. Marketing campaigns in Q4 accelerated adoption, and these clients spent roughly 2.5 times more than the platform average.
• Enterprise strategy shift: The introduction of Lyfted, enabled by recent acquisitions, marked a transition away from legacy enterprise offerings. Although enterprise revenue declined as anticipated, management emphasized a strong pipeline and early onboarding of two large clients as milestones ahead of broader adoption.
• Category and contract mix headwinds: Declines in lower-value and highly transactional projects, and continued automation of writing and translation jobs, weighed on GSV growth. Management noted that focusing on larger, longer-term client relationships improved churn and increased average contract value.
• Cost discipline and share repurchases: Upwork maintained strong non-GAAP operating expense controls and used free cash flow to fund organic growth, M&A, and $136 million in share buybacks during 2025, signaling ongoing capital allocation priorities.

Drivers of Future Performance

Upwork’s 2026 outlook is shaped by scaling AI functionality, enterprise integration, and targeted SMB expansion, but faces ongoing market and category-specific headwinds.

• AI platform and agent rollout: Management expects the next phase of AI development—including deeper human-agent collaboration and continued rollout of Ooma and related features—to further boost client productivity and increase spend per customer. The partnership with OpenAI is intended to expand the pool and quality of AI-skilled freelancers.
• Enterprise ramp with Lyfted: The integration and onboarding of enterprise clients to the Lyfted platform is projected to drive a significant acceleration in gross services volume and revenue in the second half of the year. Management targets a small number of high-value clients to achieve outsized impact, but notes that long sales cycles and client ramp times remain risks to growth timing.
• SMB and pricing strategy: Upwork aims to double Business Plus’s contribution to GSV and will expand the variable freelancer fee model across more categories. Management believes these initiatives will support active client growth and improve monetization, but acknowledges that broader labor market softness and competition for SMBs could limit near-term upside.

Catalysts in Upcoming Quarters

In the coming quarters, our analysts will watch (1) the pace and breadth of enterprise client onboarding to the Lyfted platform, (2) continued growth and monetization in AI-related categories, and (3) further penetration and retention improvements in Business Plus among SMBs. Progress on the rollout of the variable freelancer fee and execution of cost optimization initiatives will also be important markers for Upwork’s ability to deliver on its growth and margin targets.

Upwork currently trades at $14.38, down from $18.79 just before the earnings. Is the company at an inflection point that warrants a buy or sell? The answer lies in our full research report (it’s free).

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