Fiverr International Ltd. (FVRR) Earnings Call Transcript & Summary

Great. Good morning, everybody. Thanks, everyone, for joining us today virtually on Day 2 of our conference, and apologies for just being a couple of minutes late here starting. Before we get started, I just want to remind everyone that we'll take some questions toward the end from the audience via ZOOM. So feel free to submit through the Q&A button there. So I'm Doug Anmuth, JPMorgan's Internet analyst. We're pleased to have with us Fiverr, Co-Founder and CEO, Micha Kaufman; and CFO, Ofer Katz. So Fiverr's mission is to change how the world works together. The Fiverr platform connects businesses with skilled freelancers, offering digital services in more than 300 categories across 8 different verticals. Last year, more than 2.4 million customers bought a wide range of services from freelancers across over 160 different countries. So Micha is a serial entrepreneur who's founded and led several tech ventures, and he's been Fiverr's CEO since the beginning 10 years ago. Ofer has served as Fiverr's full-time CFO since July of 2017 and as a consulting CFO to the company prior to that, he was also acting CFO at Wix. So welcome, Micha and Ofer. Thanks for joining us today.

Thank you for having us, Doug.

All right. So to start off, maybe if you could just talk more about the business. Fiverr is a transactional marketplace for Gigs, with the mission to change how the world works together. With that as a brief intro, can you help the audience, maybe some of those who are less familiar with the story, just understand the platform and how it works, and the problems that you're really trying to solve?

Absolutely. So essentially, when you think about the transaction that is being done between a business and freelancers, these transactions are not simple. There's a little friction that has to do with it. The average time to find and hire a freelancer is about 30 days. And this is just to find that hire. There are so many other issues that comes with that transaction, which is, how do I get to reference on that freelancer? How do I negotiate the terms of that deal, both the scope, the timing, the price of it? How do we communicate? How do we exchange our information securely? What if something goes wrong? How do I pay? How do I deal with tax forward? So it's extremely complex. What Fiverr has set to do is ultimately, we wanted to make the transaction of buying a digital service from a freelancer as easy as going online on Amazon or Etsy or eBay, going through a catalog, finding what you need, clicking order and you're set. And that's exactly what we've been doing in the past 10 years. And essentially, we've done the transaction as simple as that through the usage of pretty sophisticated technology. And we've been the first to have really created a e-commerce experience to buying services, which sounds very simplistic, but it's very, very complex to pull off. And the history of the company has been that we started -- our focus was always what we call the zero-to-enterprise, which is essentially SMBs, anything from micro businesses to large businesses that represent 99.9% of businesses in the world. And we've -- as a growth company, we've been able to consistently rapidly grow without having a sales force. So the majority of our business is word-of-mouth -- is organic. And this has been the case ever since we started and recently, with all the devastating effect of COVID-19, has just accelerated. Doug, I think you're on mute.

Thank you, Micha. You're correct. Trying to avoid any noise here in the house. All right. So freelancing, the large segment of the economy extends across numerous industries. Help us understand how you think about TAM in the U.S. and perhaps some other regions as well.

Okay. So the way we assess TAM is we look at the categories in which we operate in, which are now over 300 different categories. So Fiverr is really set up to create this everything store for digital service -- digital services. So essentially, it's a horizontal market base that keeps expanding over time. Now we look at the activity of freelancing within those categories, and I think it's important to note that the majority of financing activity is still off-line. And sure, it is accelerating now into the online, but the majority is still off-line, and we looked at the activity in those categories. In the U.S. alone, in the categories in which we operate in right now, the addressable market is over $100 billion, and this is just the U.S. If you look at Europe, EU as a whole is 1.5x bigger than the U.S. So definitely, a huge market, a blue ocean, in terms of the growth that we have ahead of us. And the majority is off-line, which I think nobody has any questions about the off-line moving to the online. It's just a matter of time. And I think that what we've seen essentially with the recent crisis is that everything that happened to that point just happens faster right now. And so essentially, we're getting much more momentum in a very short amount of time because of the awareness that our type of business has been getting in the recent couple of months.

Right. Understand, it makes sense. Okay. So when you think about this opportunity obviously very large. You're also not going after it alone. You've got some competitors out there. But just curious how you think about what really differentiates Fiverr, what makes it unique? And then also, if you could talk about just the benefits of the horizontal model and just kind of the -- how the go-to-market basically within the marketplace, that transactional process and how that's different?

Yes. Absolutely. So essentially, as I've said, the idea of productizing services and offer them through a e-commerce experience is something that Fiverr pioneered. And as such, I think that we defined our own market, sort to speak, that allowed us to really focus on growth and expansion throughout many, many years, and this is the plan for the years to come. When you look at what that model created for both sides of the equation, it's really interesting because for buyers, for businesses who interact with freelancers, I think that for the first time in freelancing history, they have this extreme transparency into who they work with because we have our own reputation system that allows you to look at the way different freelancers are getting rated by previous customers. You know exactly what you're buying because this is well-defined as a product. You know exactly when you're going to get it because this is also defined, and you know exactly what's the price. The prices on Fiverr are not hourly rates. These are the prices. When you click Order and you pay that, this guarantees that you're going to get exactly what you're ordering. That level of transparency never existed in working with freelancers that give you an estimate, then give you hourly base and so forth. When you look at the supply side, the freelancers. I think that in this side, the revolution is even bigger. And the reason is on Fiverr, and again, I think that this is pretty much the only place where freelancers do not have to actively bid to win projects. Essentially, they show up. It's free. They set up an account, they set up their offerings through our system, so they have well-defined products. And then, we do the rest. We source their business, which is a game changer for freelancers that are usually spending everything from 100% of their time when they're starting to tens of percentage of their time in finding the next client. On Fiverr, there is none of that, right? So that level of efficiency within the marketplace has been a game changer. Now the horizontal approach is the understanding that we want to be there to provide as many solutions for our customers as we can to a point where we're agnostic to their entry point. They might be looking for someone to translate the document from one language to the other. They might come in because they need something to be graphically designed or a software developer. We know that in our relationship with them, they're going to start spending more and more over time across many different categories. And so the more we extend our catalog, the more coverage we get. Not to mention the fact that we -- because we have so many services across so many different categories, the SEO value of it, because all of these pages are getting listed and they're essentially an answer for someone's question. That contributes to a massive organic effect as well.

Okay. So let's talk a little bit more about the freelancers or kind of the sellers on the marketplace. What do they look like? Like what are their backgrounds and kind of characteristics? And how do -- how does Fiverr and the marketplace generally vet them? Yes, if you could start with that.

Sure. So when you look at the supply side, the freelancing side, there's a large variety of professionals, some with a few years of experience and some with 10 or 20 years of experience. Some of them are individuals who are looking for ways to augment on their 9 to 5 job. And for some, it's a full-time thing. Some are just individuals, and some are groups or teams, agencies or studios. And so there is a very wide variety. And we also have peers within our sellers where there's Level 1 and 2 sellers. We have top-rated sellers, we have Fiverr Pro sellers and so forth. And so -- and basically, all of that is based on our reputation system, which means that basically, the best, most efficient way to vet our sellers is based on customer reviews. Obviously, we have a lot of tech that has a lot of the onboarding of sellers. But what we trust the most is the experience that sellers have with buyers and how buyers rate that experience. And so the -- one of the most important things for us is that reputation and rating system that we've developed on our own, which gives us the most accurate data. And basically, based on that reputation that those sellers build for themselves, they can progress. So the more ratings you get, the higher they are, the higher the satisfaction of your customers, the more exposure you get, the more flexible you are in increasing your prices and staying competitive. So essentially, it's really how every pure 2-sided market base works.

Okay. That's helpful. Let's flip to the buyer side. So just to give a couple of numbers here. Top line growth has been basically between 40% and 50% for the last 2-plus years. We think about the drivers of that growth, both active buyers, also spend per buyer. So as of 1Q, 2.5 million active buyers, $177 of spend per buyer. What's the composition of those buyers? How do you think about it across large companies versus SMBs? And how that's potentially shifting a little bit here? And what are the projects that they're -- kind of projects that they're looking to accomplish through the platform?

So historically, the way Fiverr started was as a market base for micro services for micro businesses. And over time, we extended that to have -- to include more sophisticated types of services for larger types of customers. And we see that trend. If you look at the numbers and the economics of the business, you see that the portion of those larger buyers is growing over time. Now the core is SMBs across the board. But over time, what you see is that those high-value buyers, those who spend at least $500 or more with us every year is increasing steadily and has been 54% in recent quarter, and a few quarters before that, it was less than 50%. So it's increasing over time. And I think that a lot of the product that we're building into the marketplace are designed for more established companies and teams within companies to do more with the platform, do more sophisticated things. One of -- one example for that is the launch of Fiverr Studios, which is essentially a very interesting product because it allows a number of sellers on the platform to team up and create a virtual agency, where you have a number of skills across a number of few people that have 1 point of contact that interacts with the customer. This is a great example for a way for us to allow our customers to achieve more on the platform, without additional complexity. And the simplicity of Fiverr is one of our most important core values. Keeping everything super simple as much as the transaction is 1 click, everything else should be as simple as that. And I think that facilitating a complex project that has a team behind it, without adding complexity on the buyer side, is a great example for that.

Okay. You mentioned those kind of high-value buyers, the 54% of revenue from buyers above $500 per year. But Ofer, maybe you can just talk a little bit about repeat buyers and cohorts. And kind of if you go back over time, what the consistency levels of buyers have been? And now of course, as you're adding at a fast pace, what have you -- what do you know? What have you learned about the most recent set of buyers, for example?

Let me start by saying that the recent set of buyer, the new core that joined us recently are pretty much similar to [ Auto Hawk ], those who joined us during the last 10 years. So we still see the same level of their consistency after behavior and spend, whether on the headcount level or the dollar level, which actually give us confidence that the marketplace is performing not as an exception, but rather on a long-run basis, and what we are experiencing in terms of growth is substantial. Second, when you look into very old cohorts, whether it's from 10 years ago to cohort from the last recent 5, 7, whatever you choose, you can see the annual spend, starting year 2, is more or less flat over the lifetime of the cohort. We still have cohorts participating on the marketplace on an annual basis, year-after-year for the last 4 decades. And what is more interesting is that during the last few weeks, we've been seeing those cohorts even increasing their appear, increasing their spend on the headcount level and dollar-wise. So despite the fact that we don't have subscription agreement or commitment of buyers to keep being active and appear on the marketplace and make transaction, it's a need-based platform. By definition, those cohorts are loyal and key being active for a very long period. It doesn't mean that they buy on the same category. It doesn't mean that they buy from the same seller. They appear based on what they need and they reelect sellers to engage with. But we do enjoy a very long history of consistency. And I think that just to end my answer, 58% of our revenue on an annual basis is driven by existing cohort. We don't do reactivation. We don't do anything other than sending them e-mails using our CRM. We don't think that any dollar to third-party to buy them out. But they're still coming back pretty much the same level of tendency and generate revenue in the marketplace. So there is no cost associated. This is why we are able to leverage. This is part of the reason why sales and marketing are declining over time, and give us the leverage of efficiency into the P&L embedded.

Okay. That's helpful. Let's shift gears a little bit. Let's talk about take rate. So 27% in 1Q. In general here, sellers pay about a 20% take rate; buyers, about 5%; and then, you have some value-added sources that make up the rest. What gives you the confidence going forward that kind of 25% or so higher, let's say, take rate is sustainable? What kind of feedback you get here from both sellers and buyers? And what if a competitor wanted to try to come in here at a lower take rate?

So thanks for the question. The -- a lot of the confidence in the sustainability of the take rate is the fact that we've been doing this for 10 years. And we know that this has been sustaining as we develop the market base, as it goes more sophisticated, as we add more high-quality supply and demand. We're not getting pushback for that take rate. And the reason is the value creation. Because of the e-commerce model, because of the values that I've mentioned on the buyer side, the fact that they have extreme transparency knowing who they work with, what they're getting, when and how much they're paying, and the fact that we give them the confidence that if anything goes wrong and luckily, that's very rare. But if anything goes wrong, we're there to make sure that they're going to be satisfied. If you look at the NPS of our buyers, it's 66. It's even higher than Amazon's, right? If you look at the NPS of our sellers, it's 73, right? This is off the chart. So level of satisfaction, really high. And on the seller side, the fact that they don't need to bid to win projects is a game changer. This is worth a lot for them, a lot of time, money, frustration. The fact that they don't actively need to do anything and they get to price their own transactions, right? So they get to price. They know what's going to be taking out of that in terms of percentage, and they can price accordingly. And the reason -- and the fact that we're not getting any pushback gives us the confidence that we -- that this is sustainable. And additional take rates that we take, we don't take from the transaction. We take from added value services or products that we introduce.

So talk about those products a little bit. What goes into value-added services today? It's kind of a couple of points, let's say, on the take rate. What are you most excited about there? Where could that go over time?

So essentially, just to give you a few examples. So we have a content marketing platform that has a subscription component into it, which is a combination of services and software. And that has a slightly higher take rate, which contributes a little bit. We have a e-learning platform that has content that we produced ourselves with professional instructors, that allows sellers to take advanced courses and become better at what they're doing. That also has a higher take rate. We have a software solution for freelancers that are not using Fiverr and are working off-line to allow them to manage their business in an efficient way, kind of a back-office for them, which is a SaaS product that has a higher take rate. So all of these are examples of products that are actually contributing a few percentages. And when we think about take rate, take rate by itself is not like a growth metric. This is not something that we -- that has a goal of being 100% at some point obviously. But what we said is because we know what's in the pipeline, we know that we can continue extending take rates over time in a gradual way. So the way we think about take rate for this year is pretty similar to what you've seen in the trends of take rate last year, which means that it's a gradual increase over time. And we have very exciting products in the pipe that could contribute to take rate over time. One of them is Promoted Gigs that we just recently announced, that is a -- essentially a 100% take rate product with a high gross margin and potentially high revenue contribution over time. We know that it's going to take anything from 2 to 3, 4 quarters to optimize. But if you look at the contribution of Promoted listings to Etsy, Amazon, Alibaba, eBay, you know that the potential is very high. And this is not even factored into any of our models.

Okay. All right. So we've got about 5 minutes, a few things I want to still get through here. Let's just talk about kind of the last couple of months, COVID-19 impact to your business. You were initially hit a little bit, but very quickly saw strong growth resume here. So you -- the marketplace has proven pretty resilient. And of course, for a long time now, you've kind of been this ultimate remote work company basically. So what are you seeing here? What's going on with current trends during this time?

So I think you pointed correct that the period of volatility for Fiverr was about something between a week and 10 days. That was it. And this was mid-March. And I think that this was a moment in time where the world stopped for a second and panicked, just for a second. And people got the understanding that they need to stay home, keep themselves and their families safe, and they were really self-focused for a very short period of time. After that, we saw a pretty immediate uptick going back to normal, but continuing from that to pretty substantial growth. Essentially, so much so that everything that used to happen just happened faster. And what we've seen is we've -- essentially, we gained a year in just a few week, right? So the increase in supply and demand was such that the momentum was very high. And this started just at the end of March and is lasting, right, right now. And so it's really hard to predict what's going to be down the line. But what we're seeing is very encouraging. And the reason is we're seeing that behavior, post-COVID-19, to be very similar to the behavior pre-COVID-19, which is very similar types of buyers and sellers. We're seeing activity across all cohorts, young and old. We're seeing activity across all categories. I know that on e-commerce platforms, there are sometimes cases where there's areas within e-commerce like masks or stuff like that, which are now rising and may later decrease. In our activity, we see activity across the board. So we see that across the board, also in geography. And what's really interesting to see is that there are countries that are starting to relax the lockdown. Israel is one of them. You see, you have Germany, you have Spain, you have Denmark, and we started looking at these countries to see if once this lockdown start relaxing, do we see any changes in trends? And the reality is that so far, at least, none of that happened. So whatever momentum that we've gained within those countries continues to be the same momentum, also when they start relaxing the lockdown. So everything we see is very encouraging because in essence, even though -- I mean there were so many devastating effects to this virus, I think that the situation created a massive awareness effect for what we've been preaching for a decade, essentially. And so right now, we're seeing a very strong momentum.

Okay. All right. We're actually out of time, just hitting 9:45 Eastern. So we are going to leave it there. But thank you, Micha. Thank you, Ofer, appreciate you joining virtually today.

Welcome.

And stay well. Thanks, everybody.

Thank you so much.

Thank you so much.

You, too.