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

Good morning, everyone, and thanks for -- morning, everyone, and thank you for joining our next session here at the UBS Global TMT Virtual Conference. For those who don't know, my name is Eric Sheridan. I'm UBS's U.S. Internet and interactive entertainment analyst. It's my pleasure, for our next session, to have a fireside chat with the team from Fiverr, joined today by Micha Kaufman, the CEO. Micha, hope all is well. Thank so much for being part of the UBS TMT conference this year.

Thanks for having us.

So I wanted to start with maybe a big picture question. You -- the market you're going after, the opportunity you're trying to solve for as a company in terms of the broader freelance market and some of what you're trying to build, you obviously came to market last year with an idea of what that addressable market was. We've had the impact of the COVID-19 pandemic this year, which just had different impacts on your business. Maybe talk a little bit about how your world view of the opportunity that you're going after has evolved over the last 12 months.

Yes. So when we went public, we said the opportunity of the adverse market was enormous. When you look at the just the addressable market, the category that we operate in right now. In the U.S., it's over $100 billion, and Europe is 1.5% bigger than the U.S. So it's a very sizable opportunity. And I do know what was interesting was 2 things. One, I think that the -- we stated that the majority of freelancing activity is happening offline. And what I really poised to do is really to facilitate that movement from the offline activity into the online, and we see this happening big time. In -- alongside that change, what we also did is we've opened a long list of additional categories. So by doing that, we've actually increased the addressable market for Fiverr, moving from about 300 categories when we went public to now, I think, well over 450 different categories. So by doing that, we're able to cater to more customers and we're able to solve for more of our existing customers' needs. So we're definitely very optimistic about the evolution of the market. It is changing. It is growing, and I think that, if anything, what COVID-19 did is it just gave it a boost in the embrace of this economy by more and more businesses.

Maybe just following up there because you've spoke about this on recent earnings calls, and I think it's sort of helpful for investors who maybe don't know the company as well. You've talked about how different use cases have evolved, different demand curves that you've seen in terms of the way in which people source opportunities on the platform. Maybe talk about some of the most interesting learnings from the last 6 to 8 months and how it might actually inform product road map or the way you're thinking about addressing some of these new use cases over the medium to long term.

Sure. So on the macro level, the way we view the market is pretty much as followed. When we started the company back in 2010 -- in '10, I think that the 2010s represented a decade in which freelancing became mainstream. It's no longer something you do in between jobs. It's a career choice. It's a lifetime -- it's a lifestyle choice. And because of that, and we've seen that in the numbers. I mean, today, over 40% of the American workforce opt to go freelance. Because of that, we think that this decade, the 2020s, represent a decade in which companies would have to figure out how to integrate freelancers into their workflows because so many talented people want to freelance by choice. They can't be hired full time. And so around that notion, we started last year, actually, before COVID-19, to develop a new product called Fiverr Business. And really, the idea around this product is exactly that. It's creating the operating system that will allow businesses to integrate freelancers into their workflows. And by doing so, what they can do is they can tap to a flexible talent and either augment to their team, meaning extending their team and scale it up or down as needed, but also cover types of talent that they don't have in the organization. And this has to do with a lot of what we're seeing right now, not just small businesses that are moving through the digital transformation of increasing their online presence and adding e-commerce capabilities, which is extremely important. It's critical in this era. But also bigger, larger businesses that want to figure out how to tap into that talent but integrate that into the way their team is used to work. So we've seen a lot of that. Obviously, because of COVID-19, we've seen so many businesses that wanted to increase their online presence and move their activity from the offline into the online. So we've seen a lot of these types of use cases that could be anything from the basic setting up of a website to adding e-commerce capabilities, drop shipping and so forth to larger companies that need to figure out how to engage better with their existing audience, so services around marketing, advertising, creation of content and so forth.

Understood. Maybe we could talk a little bit about customer cohort behavior. You guys are a very data-driven team. You focus on acquiring the right type of users on your platform. Maybe contrast what sort of behavior in cohorts you saw pre-Covid versus what you're seeing in a post -- or COVID-19 world going into a, hopefully, a post COVID-19 world at some point, and how you've adapted your strategy based on what you've seen in terms of cohort behavior?

Yes. So the good news for us is that, a, cohort behavior has been very consistent, meaning that the cohorts that we've gained during COVID-19 has been very consistent with the historical behavior of all of our cohorts. In fact, what we've actually seen is that newer cohorts have been performing slightly better than historical cohorts, but also the old cohorts have been active more than usual. So this is great because as we look at the -- we've talked about the cohort behavior along many, many years, and we talked about revenue retention as a way of measuring it. And what we've always said is that if there's a slight decrease between year 1 and year 2 of a cohort, from year 2 and on, cohorts continue to contribute the same amount of revenues to the company every year. What we've seen around that is that there's a slight increase in their contribution to revenue. And t;hat goes for new cohorts and old cohorts, which is obviously great. And one of the interesting points of view on that is that we wanted to measure what happens to cohort once lockdown is being relaxed. And some countries, some regions are getting back to normality. And what we've actually seen is that, that doesn't change the behavior, meaning that this is not a temporary effect that dies off over time, but actually, those cohorts that we've gained throughout the pandemic are staying and remaining within their high activity on the platform.

Great. That's great color. Thank you, Micha. I just want to welcome, I think Ofer Katz, the CFO, has joined. Ofer, I just want to say to you. Thanks for getting -- appreciate you getting on. And we'll just keep going with the questions, but just want to say, all as you joined on the webcast. Maybe talk a little bit about spend per buyer. This is an area we get a lot of questions from investors on how that evolves? You're continuing to sort of -- you've had a lot of success so far in continuing to evolve people coming back as clients, spending more on the platform, evolving the relationship with you as a company. Can you talk a little bit about your -- just your holistic thinking about how that evolves over the medium to long term?

So maybe I'll start by saying when we look at spend per buyer, it's out of the frequency of activity and also the average selling price. Meaning, our buyers buying more sophisticated, more advanced types of services, but also what is their frequency in purchase. And we gave color on the fact that we are focusing on the high-value buyers, those who spend more with us, those who have a larger wallet from which we can take a larger wallet share, and that has been increasing consistently in the past quarters. And because of that, we have contribution to the spend per buyer. So it has to do with the ability of moving customer through categories, the cross-category pollination, which is very high and is continuously improving. The fact that our largest buyers are actually being more active on the platform and Fiverr Business is another way of increasing that because now we engage not just with individual customers, but with teams within organizations and with the fact that they're buying more sophisticated products. And all of that have been contributing together to the increase in spend per buyer.

And along those same lines, probably the product you've announced in the more recent past that I think has garnered a lot of interest is promoted listings. Can you talk a little bit about how you came to thinking about that product, what you've learned from launching it? How do you think it evolves if you look out over the next couple of years?

Yes. So promoted listings is a great product because it allows our sellers, our freelancers to get more involved in their success. It allows them to get more exposure. And actually, when you look at the traditional e-commerce models, where you have companies like Alibaba and eBay and Amazon, Etsy, you see that all of these companies have promoted listings as a major contributor to their business. And what we said was that we see this as an opportunity to increase activity, to increase revenues and have additional contribution to take rate, which is exactly what we've done. We've spent a considerable amount of time with these companies to learn from their experience, with the teams at Amazon and eBay and Alibaba. And what we've learned from all of these companies was that this is a product that takes time to roll out. And the reason is that to have your own ad engine, so to speak, what you need is you need to ensure that the ad placements, those promoted listings, are relevant and they're high quality. You need to ensure that sellers that participate in that program have a positive ROI on their investments. So if you invest in promoted, you're promoting your listings, you're going to have a positive return on that investment. But you also want to ensure that customers that gets exposed to these promoted listings find them relevant, find them high-quality and are satisfied when they order them. And this is why you need to make sure that you roll it out gradually. And we said that this is a product that would take -- we estimated about a year to roll out and optimize. And what I can say so far is that we're slightly ahead of our own anticipation in the pace of rolling it out, which means that we're happy with the results. We're seeing very high retention on the seller side, meaning that sellers that have tried this product continue to use it over time, and they receive a very nice ROI on their investment. And we're seeing the level of satisfaction from customers that have ordered from these promoted listings to be very, very high. So based on that, we continue to roll out this product across more categories, open it to more sellers. And we're now figuring out which other assets within the website we want to integrate the promoted listings into.

You talked a little bit -- maybe I can follow-up there. You talked a little bit about the impact you would have on take rate. I know you're focused on growth given what you've seen in terms of success. But how should we think about promoted listings and products like that and what it might do to long-term profitability for the company? Though with the full caveat, I think you've emphasized, we've had this conversation on public calls, where I've talked about more -- asked about margins. I think you've made it very clear you're focused on going after growth and optimizing for margins today. But longer term, do you think this leaves the company in even a more profitable position than maybe you thought it would be because this would be a high-margin product?

Well, I -- sorry. Go, Ofer.

So I mean we haven't changed the long-term model. And I think we have been able to demonstrate a steady and growing take rate over time. I think the product like promoted listing or other services that we have been introducing, both on these on the supply and demand side, have mature to impact take rate as we've seen and are definitely contributing to the EBITDA margin and gross profit. Those products have a very high gross profit by definition. But generally speaking, we haven't changed the long-term EBITDA margins. It will -- we'll get them earlier. We'll get there earlier than anticipated because we have gained some significant uplift during the last few quarters. But the target by itself is still the same.

Great. Maybe turning to additional services and subscription revenue. I would love to understand, for folks who don't know the company as well, maybe you can lay out what that does for the platform, how -- what element that is of the business and how you think that might evolve over the next couple of years as well.

Go ahead, get it. That's what happens when you're not in the same location.

Hopefully, we'll do this live next year. That's my goal for the last couple of days.

Yes. Ofer, please continue.

So there are a few services that we've been introducing over time. And as that -- it goes both on the supply and the demand side. I think it was last year when we introduced the Fiverr Learn platform, where seller and buyer are able to pay for education course. This has been well adopted by the audience. It is going through the end core platform that provide the back office services on the seller side. It gives freelancer the ability to manage the invoicing CRM, a time management for projects which are outside the platform on the offline world. And then it goes to ClearVoice, the company that we acquired early last year, that is a content marketing platform for organization that needs not only finance services but also calendar management for long-term and content marketing generation and publication. So this type of platform increase the engagement but also provide a line of service that contribute to our top line. We haven't provided specific guidance for those services because so far, it hasn't been significant enough to guide for separately. When the time come, it would definitely be disclosed separately. So you guys can know that again.

That's great. We did get one on the audience that I think, Micha, touches upon a theme, you had earlier on about transformational shift in the way work is evolving. It was a question down below from someone in the audience about what you're seeing from younger users and the younger generation that maybe will grow up in this manner of thinking about flexible work and wanting flexibility in their life? Maybe talk a little bit about what you're seeing from younger users on the platform, and what -- how that might fit into the narrative you introduced a little bit earlier about changed behaviors?

Yes, absolutely, I think. And this goes for both sides of the equation. On the demand side, the younger generation is obviously faster to adopt this change. For them, doing things online is the norm. So embracing solutions like the Fiverr marketplace has been very natural for them. On the supply side, you're right to point. I think that this revolution coincided with the entrance of millennials into the workplace, and that actually started back in 2010. So it's not a coincidence that this mega trend of increase in freelancing happen at the same time. And I think that, again, financing becoming mainstream in the sense that they are seeking more balance, they are seeking more freedom in the sense of picking when and where and on, once they work, their tendency of trying new things and changing their focus in their career pretty often, again, works well with a freelancing career. And I think that what they are able to get out of platforms such as Fiverr is this consistency in generating income over time in building their online reputation. They build their online persona, their online brand, that allows them to have a very steady stream of income regardless of the fact that a lot of them are actually traveling when they work. Before the pandemic, we've had a lot of what's called digital nomads, which are freelancers that are actually roaming the world as they continue to work. This is something that when we started our career 20 years ago, we couldn't afford. So this is why I said that this is not just a career choice, but it's a lifestyle decision.

That's great. Maybe following up. One more for you, Micha. Fiverr Studios, maybe talk a little bit about what you've learned, what you've built, how you think again. There are many elements here. But again, what do you think that offering does in terms of amplifying the platform approach that you guys are trying to build for the long term?

Absolutely. So Fiverr Studios was really a very interesting experiment. And I think that there's a slight misconception when people think about platforms such as Fiverr. That on the supply side, you have individual freelancers only. The reality is that not all of them are individuals. Some of them are studios or agencies. And when we thought about this, we wanted to provide a way for freelancers on the platform to team up and create those digital agencies so that they can tackle more sophisticated types of services that require more than one skill set. And that was the purpose. And this, for us, was the early first iteration of that. That actually gave us a lot of confidence and motivation to develop a specific product for agencies, which is something that we're working on, understanding that when multiple people use the platform on the supply side, you need to provide them with the back office tools to be able to effectively run their business. So for us, Fiverr Studios was really a great experiment in the ability to prove that concept. So we're now in the phase of developing the next versions of it.

And maybe one for both of you. I don't know who wants to take it or how. You talked a little bit earlier about the margin, longer term, that you've given since the IPO transaction. But between here and the longer term, it seems like one of the consistent themes is you have this growth opportunity in front of you. When you put a dollar behind it, it seems to accelerate. And you have a good degree of success of surprising to the upside. How do you think about balancing growth versus profitability over the next 1 to 3 years? How should investors think about what are the key elements where you feel like you need to make investments against what you're trying to unlock or solve for versus just the natural lift in profitability that comes with greater scale as the revenue continues to compound? So I don't know how you guys want to split it up, but maybe there's elements in that question for both of you.

Our #1 priority in our hand is definitely growth. Yet to be said, we have much discipline, and a mature organization that work very efficient. So our way to grow is not by overspending. The way we accelerate is definitely under control. We are able to measure any dollar spend to make sure that it's profitable in the long term. We are optimizing the short-term profitability, just a matter of scale. The way we grow faster is either by product initiatives or performance marketing investments that complement our [ missing ] organic traffic that keeps growing. And by investing in performance marketing, we are able to measure and capture any opportunity. I think we have demonstrated double and triple the investment in marketing while making the company profitable. I don't think there is any channel, any territory, any keyword that is available for us to capture that we aren't. So that the way we would think about that is not on an average rather than the marginal cost of any new buyer. And when we find an opportunity to acquire more buyers on a decent unit economy, we just do that. So to summarize, it's definitely -- definitely, growth comes first. The business is profitable and efficient by definition and as a matter of state.

Micha, anything you want to offer in terms of like your key priorities, things against that backdrop that Ofer has just laid out that you just see as mission-critical to invest against, or products that you think will continue the momentum of the platform?

Yes. Without getting into too many details, I'll say the following. I would say that ever since we started recording to the market and when we took the company public, we came up with this very simple and consistent message where the company continues to invest in all of its main growth vectors. We've done so well before COVID-19, and COVID-19 hasn't changed our course. And I think that those investments have played a critical role in the success that we've had throughout the pandemic. Just to name a few, we said that we view the expansion of our capital as one of our ways to grow, and we have. So on average, if you look historically, since we took the company public, we've introduced about 30 new categories every quarter that has been a driver for growth. We said that we are going to go upmarket, not just by focusing on the high-value buyers but by providing products that will support it. Fiverr Studios is one of them. Fiverr Business is another and so forth. We said that we are going to continue expanding through geographical -- expanding our geographical footprint, and we've done so. We've opened 7 countries, and we continue opening in new ones. All of these initiatives have played a critical role in our ability to continue growing. And as Ofer said, we are prioritizing growth because we feel that we are very, very early in the cycle of growth. The majority of growth is ahead of us. 95% of freelancing is still happening offline. It's a massive market to capture. And so everything that we build is around those things, around capturing that, is around moving that offline activity to the online. I think nobody can challenge the fact that the world is going online. And the efficiency of doing that business online is unmatched. And so that has been the theme that we've been consistent around, executing around those themes. And I think that this has contributed to our ability to grow. And I'm happy that I think after 1.5 years of being a public company, that the market actually understand that simple but consistent message, and we're being rewarded for it.

Yes. There are a couple of questions down below from investors. I want to try to get to maybe 1 or 2 quickly because I think we only have 5 minutes left. One of them is -- you've said in the past that buyer demand is the primary constraint on growth. Do you see that changing as a result of the COVID environment? And how should buyer demand continue to fuel active user growth on the platform over the medium to longer term? It's basically a question about factors you think that continue to unlock demand on the platform.

Yes. So COVID-19 hasn't changed that. It's still, when you look at the constraints, it's more demand constrained than supply constrained. We haven't acquired the supply side. Actually, during COVID-19, we've had a pretty massive increase in supply coming in, and very high-quality supply. I'm guessing some of it has been contributing to the fact that there was an increase in unemployment. And we've had some incredibly talented people coming into the platform. The other is the fact that, at least for a certain amount of time, offline activity wasn't possible at all, which meant that those who were operating offline were moving online on both sides, demand and supply. And so we've had a very nice increase in both. When we think about demand, Ofer said that, that the majority, even though the company is almost 11 years old, the majority of our new business is coming organically. There's a massive word-of-mouth effect. The viral coefficiency of the dollars that we spend on marketing is extremely high. So the more we spend, the more organic we actually get. There's a massive flywheel effect where supply brings more supply, but supply also brings demand. And the same goes for demand that has high satisfaction. Our NPS score is actually higher than Amazon's. So the level of satisfaction is very high. It means that, that makes our -- retaining customers easier. But that also means that happy customers bring more happy customers. And the investment that we've done in marketing, both in brand marketing, which is creating more awareness to the fact that people can do, businesses can do things online and they should try it, but also the performance marketing that we automated, the fact that we can run thousands of different campaigns on every given moment, the fact that we're not keyword dependent because we operate in hundreds of thousands of different keywords, all contribute to the robustness of the business. And again, we see tremendous path to continue growing in the next decade because of that.

Maybe just following on that, I'll ask one maybe last question I'll sneak in that summarizes some of what's below. You've launched new geographies, you've also launched new industry verticals. I know we only have 2 minutes left. But what have you learned so far? How should investors think about the pathway forward into new industry verticals and new geographies because, obviously, then that feeds into the compounding growth narrative that you've sort of talked about, Micha.

The very short answer is both work very, very well. Meaning the investment in the catalog, including industry stores and other assets that we have on our capital work extremely well and enable us to attract new customers through those gateways into the market base. And new geographies are working very well. With the first example, which is Germany, that went -- very quickly, went beyond its initial baseline growth into hyper growth, now growing triple-digit percentage faster than the marketplace itself. It's the fourth largest economy in the world, it wasn't #4 on Fiverr. It is right now. And so based on that playbook, we've launched other countries, and we're taking them through the same process of growing, then hyper growing and getting to their -- to the size in which we believe that they should be in. So all of these playbooks that we put together are working well. So you can expect us continuing to invest in both fronts, both catalog in industry stores and other assets and in geographical expansion as well.

All right. Well, we covered a lot of ground quickly. Thanks. It's great to see you guys. Thank you for being part of the UBS TMT Conference again this year. Hopefully, next year, it will be in person again like last year. And from me and the team here at UBS, we want to wish you and your families happy and safe holidays, and I look forward to catching up in the new year.

Thanks for having us here. And thank you, everyone, for joining the call.

Take care, guys, and you're welcome.

Thank you.