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

Hey, everybody. Thank you very much for joining today's fireside chat with Fiverr. We have Fiverr's CEO, Micha Kaufman; and CFO, Ofer Katz. Fiverr is an online marketplace for freelance services, connecting freelancers to customers globally. During today's discussion, we'll have an overview of the company. We'll talk about key growth drivers, including trends in the broader freelancer market, initiatives to increase the number of active buyers and expand upmarket as well as international. My name is Mike Ng, Goldman's Internet and Video Games Analyst covering Fiverr. And I have the privilege of moderating today's discussion with Micha and Ofer. We have about 40 minutes for today's session. I have some prepared questions, but we'll also open it up to audience Q&A during the last 5 to 10 minutes of the session. [Operator Instructions] First, Ofer, Micha, thank you so much for making yourselves available. We really appreciate your time.

Just to start things off, Micha, you co-founded Fiverr back in 2010. Before we get into a more detailed discussion about the business, would you just set the stage for us, talk a little bit about Fiverr's history? How does the platform operate? And where are we today?

Absolutely. We're super excited to be here this morning. So thank you. So Fiverr started or went live almost 11 years ago. And as an idea, Fiverr is my fourth company as an entrepreneur. I've been working pretty extensively with freelancers before. And if there was something that I've noticed when I was doing this 10 or 15 years ago was the fact that this market, the market of businesses, companies working with freelancers was very old fashioned. The way of interacting with freelancers resembled dating. It's really getting a few recommendations from your friends and then meeting a freelancer at Starbucks and drinking up coffee together and figuring out if you want to do something. And what that looked to me was a massive market. I mean, when we started the company, freelancers were about close to 30% of the American workforce, which is a very sizable cohort. By the way, fast forward to today, it's about 40%. So it accelerated massively. And that -- I started looking into this market, and it seemed like a massive market, addressable market with very high level of friction and inefficiencies that I thought that using software, we can actually introduce something that would really change this market. And the vision that I had in mind was to make the experience of buying a digital service from a freelancer as easy as shopping on Amazon or on any other e-commerce website. It sounds very simplistic. But behind the idea was this notion of productizing services, creating a SKU like system for services, which nobody has done before. This is an area that is not standardized. It's not well categorized. And so the idea behind Fiverr was to do that. And essentially, the go-to-market strategy that we had at the beginning was that we would tackle this market by beginning at the very bottom of it with the micro services for micro businesses. And over time, we would go upmarket and offer more sophisticated services for more sophisticated types of customers. And the fast forward of this model to today is a very fast-growing company that offers services between the tens of dollars and the tens of thousands of dollars for customers that are solopreneurs up to the largest enterprises of the world. We operate in pretty much every country in the world, and our catalog contains now over 500 different categories. And it's growing really, really fast. So the endgame of this is really to be the everything store for digital services. But we think in recent years, we've even started thinking beyond that. We think that we have the opportunity of not just building a pure marketplace that does the matching and the platform on top of which people actually transact, but we can actually support this ecosystem of freelancers and businesses that are interacting, and I'm happy to expand on that if that is of interest.

Yes. I mean, I would love for you to expand on that. And while you're discussing that, could you also just talk about how a typical transaction looks like on Fiverr for those of us who may not be as familiar?

Absolutely. So I'll maybe start with that. So a typical transaction starts with a customer that has a need in their mind. Much like you would do when you go to Amazon or Alibaba or Etsy or eBay. Essentially, what you do is you either browse through the catalog because it's well structured. It has verticals, categories, subcategories and so forth. Or you do a search. And essentially, what you get is you get listing pages that allows you to interact with the catalog and really drill down into the specifics of your need. I can give you one example. So let's say that you are looking for a voiceover artist to record something for your business. So you can either go to music and audio and find voiceover underneath that or you can just type voiceover or you could be far more specific and say, female, American voiceover for radio advertising in the age range of 20 to 40. You can go as specific as that. And that's one of the strengths of our catalog, the level of granularity that we can provide, the level of metadata that we have is definitely one of our moats. As we think about the future, I would say the following. I think philosophically speaking, when we started the company in 2010, freelancing was starting to become mainstream. By the way, in hindsight, we know that this was very much thanks to millennials joining the workforce. But it was becoming mainstream. 15 years ago, most people freelance in between jobs. But today, it's not the case. Freelancers choose to freelance as a full-time thing because it's a career path. It's a lifestyle choice. And that -- that became cemented throughout the 2010s. Our view of the 2020s is -- and this was our thought process leading into 2020, was that if this is the case, if you have so many talented people that decide not to be full-time employed by anyone, then that means that businesses that would typically hire these people full time cannot enjoy that. But at the same time, if they have a system that allows them to integrate those freelancers into their workflows, that would be amazing because this would allow them to scale up or down as needed. It's great. And this is, by the way, one of the reasons why we built Fiverr Business. That was the first -- the cornerstone in building this operating system. So as we think about the future, we think about beyond just having the platform that does the matching. But we think about our role as a company, as a business, as a community in supporting that lifestyle, and there's many aspects that go beyond just matchmaking and providing the tools. Financial services or education, professional education, you can add to it. And some of these clues you can find in recent products that we've launched, like Fiverr Learn, which is our e-learning platform. But I think as we think about the future, we're very excited because we get to have a front seat in designing the future work in that perspective. So this year has been very exciting, and we look for an exciting decade ahead of us.

And let's talk a little bit more about this year. The stay-at-home measures have accelerated the shift to digital for a lot of businesses. While freelancing, to your point, has certainly become more popular, and I would argue, has been accelerated due to stay-at-home measures and more people working from home. As you think about the overall freelance market, what does the size and growth trajectory for that look like? How do you think about it domestically and globally? And has COVID-19 and stay-at-home measures changed the trajectory of the freelance market more broadly?

I think that in a sense, the shift to remote work that was imposed on everyone has opened people's eyes into this as an opportunity and the benefits that comes with it, which is something that we've been preaching for 10 years. And so I think that it definitely has potential of increasing the overall market, but the overall market is extremely large anyway. And the online penetration of that market is extremely small at this point. Now you may ask, why is it small? Or why is it not growing faster? And I think that the answer for that is the same answer that maybe Bezos would give to why it took 20 years for e-commerce to reach 10% of commerce. Because it takes time. It takes time to rewire the way people are used to do things. But we all know how that story turned out to be. And so we're very excited. I think this year has definitely -- has given a push forward for that understanding. By the way, on both sides because a lot of the professionals that were working as freelancers offline, almost overnight, lost their ability to interact offline because late March, the entire world went into lockdown. And so that opened up people's eyes into that opportunity. And I think what's really encouraging for us, what we're really excited about is the fact that those who have been exposed to the online opportunity that Fiverr presents hasn't made a U-turn afterwards. Meaning that those cohorts that have joined us, both on the supply and the demand side, using the -- during the pandemic hasn't left us. And their activity is very much in line with all of our historical cohort behaviors in the past. So we're very excited about this. And I think that if you -- again, if I take the analogy of e-commerce, it begs the question, is the fact that some of the commerce activity moved to the e-commerce actually cannibalized? Of course, the answer is no. Actually, commerce as a whole grew, thanks to e-commerce. I think the same would be for -- the same is going to be true for the freelancing addressable market. So we definitely think that that has the potential of massively growing.

Okay. That's really helpful, and it makes a lot of sense. I want to address the press release that you guys issued today. Fiverr has plans to have a Super Bowl ad this year. So could you talk a little bit about that specific marketing initiative? What do you see as the opportunity? And why is now the right time? And what are some of the costs associated with this marketing campaign that investors should know about?

So yes, absolutely. So one, we're super excited about that. We've spoken about the fact that the -- we saw a pretty substantial wave of awareness for remote work, for the ability to work with freelancers. And since the beginning of the year and definitely throughout the pandemic, we've been doubling down on it. Because we understood that there was an opportunity here. And as we ride this wave of awareness, we want to contribute to increasing that, the size of this wave. And we've always been doing this combination of brand marketing with performance marketing. Bear in mind, and I think -- I think this is worth mentioning, the majority of our new business on a monthly, quarterly, yearly basis comes organically. A lot of it is word of mouth. Some of the investment that we're doing on brand marketing creates that effect. And because the viral coefficiency of our marketing is very high, then our investment into marketing doesn't cannibalize, doesn't come at the expense of our organic, right? Which is great. So if there's one massive branding event, probably the biggest in the world, it's Super Bowl. And we thought that this was a very deserving time, very right time to do this. So we think that in that mix of doing brand awareness in conjunction with our investment in performance marketing, that was a great opportunity. We expect to incur approximately $8 million in marketing expenses in Q1, for the Super Bowl specifically, which includes both airtime production and [indiscernible].

That's really helpful. And I just want to dive into monetization and revenue growth and the buyers and spend for buyers, so we'll hit both in turn. Maybe starting out with spending per buyer, that's a metric that's grown robustly during the pandemic despite a high level of net ads for new active buyers. How do you think about spend per buyer trending in the long term? And what are some of the initiatives or strategies that you can share with us that should drive growth in spending per average buyer?

I think that spend per buyer has been -- over the lifetime of the company has been a very contributing pillar in our ability to grow GMV over time. And it's a composition of our products, our quality and engagement with customer, together with going upmarket strategy, which means targeting higher value buyer, those who have a major and have a bigger wallet. Specifically, for last year, it goes to the same drivers. I think we invest a lot in quality. And the fact that we have high-value buyer also bring more quality sellers. It's a flywheel effect. So the more we invest in targeting high-value buyer and bring them on board, we have a bigger opportunity on the seller side to increase the offerings and on board as well. So that's one. Second, in terms of products, I think that Fiverr Business is an excellent example. Over time, we have been able to release custom offer milestone payment. Many other initiatives, packages, many initiatives that enable different type of engagement for more complex orders. Products like Fiverr Studios that enable different sellers to capture more complicated long-term projects. So these type of initiatives on the product side, support the going upmarket. And then in terms of the high-value buyer targeting, I think our investment in sophisticated marketing machines that enable us to measure each cohort or each new buyer and make sure that every dollar or every cent we spend on performance marketing is targeted to higher lifetime value, enable us to increase the portion of high-value buyer as a percentage of the overall GMV over time. So all in all, spend per buyer is 1 key driver. And as we look forward, we think there is a tremendous opportunity. The spend per buyer is approximately $200 today. When we go out and interview our existing customers, it's almost 10x higher. Their annual spend for freelancer is almost 10x. As we interview the Fiverr Business audience, it's much higher. So we think that we are at the beginning of the curve. Still a lot to do, both in terms of products, in terms of marketing, in terms of expanding the catalog, the cross-pollination, I think what we have experienced last year in terms of spend per buyer is not only higher ASP but also higher frequency. So that in all [ 10 ], last year was extraordinary in terms of all KPIs. And as we look forward, we are super excited about so many initiatives that support this going upmarket strategy.

Great. And then on the other side of GMV, the active buyer count. Could you talk a little bit about some of the initiatives to grow the number of active buyers on the platform? You guys are doing a lot in terms of international expansion. So can you talk a little bit about that? But can you also talk about some of the trends that you expect in more mature markets like the United States? Is that more just industry growth? Do you expect marketing and branding initiatives to help a lot with that buyer acceleration? What's your outlook there?

I think it's definitely a mixture. When you think about the vectors of growth, we've been very consistent many, many quarters prior to the pandemic with focusing on very specific vectors of growth that we thought were strategic for our ability to continue presenting high growth. And all of them have played a great role in being able to capture that opportunity during the pandemic, but they're going to continue playing a role in the future. I think you've alluded to a few. So definitely, our investment in the catalog, we just crossed 500 categories. Just as a reminder, we took the company public about 1.5 years ago with 300. I think on average, we've been adding about 30-plus categories every quarter. It's pretty massive. That allows us to engage with newer types of customers that didn't have what they were looking for in Fiverr. But that also allows us to engage with our existing customers to offer more solutions for more of their needs. And that eventually turns you into the everything store or the go-to place for any -- so this is one vector. The other vector, you've mentioned it is geo expansion, which is great. It's opening up to newer audiences. And I think the investment that we've done again, ahead of the pandemic, not knowing this would be a black swan. On multilingual support, on multi-currency, on knowing how to do both brand performance and community activity on the ground in specific countries have played a great role in our success to capture these opportunities throughout this crisis. The going upmarket initiatives that allows us to engage with larger, more sophisticated types of customers that have more sophisticated needs. So when you think about all those vectors, all of them contribute to our ability to -- that alongside, obviously, all of our marketing efforts, both brand and performance. And the fact that we're now extending the amount, the quality of the channels that we address. If you take all of that, those influence, both our new buyers and our -- the activity of our existing buyers. And we talked about the fact that the -- when you look at the cohorts, both new and older cohorts throughout this year, they've been more active than ever. It's great.

We do have a long list of questions building up in the queue. Before I move on to audience Q&A, maybe I'll just ask one more question just around the take rate. There's a core marketplace take rate of 25%. Could you talk about some of the opportunities to increase that take rate higher? And what are some of the risks of that coming lower in light of competition? And as a follow-up to that, could you give us an update on Promoted Gigs? Obviously, that's been successful. It's in early days. What have you learned from that? And do you see a lot more monetization opportunity like that to improve the [ effectiveness ]?

So if you look at the almost 11 years of operations of Fiverr, we haven't changed -- as we were going upmarket and again, we started with micro transactions, it was limited to $5 or $10, and now with thousands or tens of thousands of dollars for a transaction, we haven't changed the core of our transactional take rate. If anything, we've increased that over time. And the reason for that is really the fact that it's very based on the value creation that we filled. And the majority is coming from the seller side, which is 20%. And just as a reminder, for those who don't know the story extremely well. What everyone needs to understand is that in the life of a freelancer, they spend so much time marketing themselves, trying to sell themselves, actively bidding on projects that they end up not winning, sometimes doing 20%, 30% of the work just to try and win it and essentially not winning. Fiverr really turned things on its head in the sense of the fact that on Fiverr, they don't need to do anything to win a transaction. They need to list their profile and services, and they wait the next time they hear from us, hey, you have an order, the customer already paid, here's their details, get to work, which is amazing. And it goes the same. It doesn't matter if it's a $200 transaction or a $10,000 transaction. They don't do anything to win it. It's amazing. So the value that that brings is definitely something that is worth 20%. That's why we're not getting pushback on it, right? Because they don't need to actively do all the work to try and win it. So we haven't seen pushback on that. I think in the future, I think that there's opportunities of doing interesting things around that. But on the transactional level, we view this as something that we think can remain pretty constant. We do see opportunities to have added-value services and products in the future that would complement on the transactional portion. So if the transactional portion is 25%, our overall take rate is 27%, those 2% comes from additional services on our platform, and we're going to introduce more and more. We have a very long -- I'm not going to provide any spoilers at this point. But we do see an opportunity for increasing that. I think it's a good segue to your second question, which was about Promoted Gigs. Promoted Gigs is one of those services that have the ability to contribute take rate as well. It's going well. We said many times that this is a slow, gradual release product based on the experience of many companies that have done it before, and we've spent time with our teams. It is somewhat ahead of time, meaning we just spoke about 60 -- we have 500 categories. We have about 60 categories that we've rolled in. This is what we reported about 2 months ago, it's now over 100 categories that we're in. So the pace is something that we're very happy with. That's it. Bear in mind that it's really early in that process in the sense that it's just 100 categories out of 500, and we're just having 2 or 3 slots of Promoted Gigs within every listing page and these are just listing pages, there's many different assets that we can incorporate that promoted listings engine. So the opportunity for that is something that we are excited about. It is going in the right pace. There's a lot of learnings out of that. But what we're most excited about is that sellers are very happy with it. Those who get the chance of participating are very happy. They -- their retention is very high. Their ROI is very positive. So they're making very positive return on that investment. And our customers are very happy with the uptake, meaning they're relevant. And if you happen to order from these placements, you are going to have a good experience, which is great. So that for us is really important. Hopefully, that -- have answered your question.

No, that was fantastic. I'll move on to the audience questions, and I apologize if I don't get to your question in the queue in the 5 or so minutes that we have left. The first question was on competition, right? Obviously, Fiverr has a number of offline and online competitors. How does the platform differentiate itself from online marketplaces like Upwork, for example? And then to add to that, sites like Facebook, Amazon, LinkedIn, have been doing things in the freelance employment staffing space. Do you view those as direct or indirect competitors as well?

Yes. So I think that on a very general level, we view our largest competitor to be the offline market. 95% of freelancing happens offline. If there's something worth doing is capturing that movement from the offline to the online. It's not about trying to compete with anyone. I think as a company, we've had our own very unique way of addressing this market, which I'm happy to say that it seems to be a way that works and scales faster than any other type of approach. And so we're not focused on trying to compete with anyone. We don't think that we -- you mentioned Upwork, I think at core, it's a staffing company, and it's very focused on the enterprise business, which are 2 things that we don't do. We don't focus on enterprise. We're not a staffing company. And so again, we're very focused on running very fast ahead and doing -- and land grabbing. It's about that. I think in terms of other brands or companies, we've seen some interest or attempts by other companies to get into that space. I think it takes a very specific DNA and approach to build a scalable business. I think what we've built throughout the -- more than a decade of running the company is -- creates tremendous amount of differentiation and moats for us. We're -- at core, we're a data company. A lot of -- you can copy any business. But it's impossible to copy what's behind the scenes. And the sophistication of running a machine that manages liquidity on such a massive scale has tens of millions of different services on hundreds of different categories and SKUs. It's something that I think creates a moat. And again, I mean, we're keeping our eyes open, but we don't obsess about that. We obsess about growth and the opportunities.

And then could you just talk about the geographic distribution of the opportunity? Where are the biggest pockets of freelancer TAM and supply across the globe? Is it more concentrated in developed English-speaking market? Do you see a big opportunity in places like India and Europe? Like -- or how would you kind of describe the supply opportunity across the globe?

Yes. So we've done -- I think getting prepared for the IPO at the time, we've done a pretty extensive analysis. And at that point, we had 300 categories, and we now cover more. But at the time, what we found that the addressable market for the categories in which we were operating at that time was over $100 billion in the U.S. alone, and Europe in total was about 1.5x bigger than the U.S. And these are just those 2 countries. So now that we have almost doubled the amount of categories, obviously, the addressable market -- we should probably update that. But essentially, the addressable market is even much larger. The adoption is much bigger. And you've mentioned India. India is an amazing market. It is a super interesting market. And maybe intuitively, people might think about that as more of a market for supply, it's not true. And the number of SMBs in India is mind-boggling, right? So we see a lot of that -- what's really interesting is you look at a lot of the transactions on Fiverr, most of them are across the border, by the way. So when you look at those transactions, seeing a transaction where it's an Indian buyer [ by ] an American freelancer is not rare, which is kind of the reverse notion of outsourcing as it used to be 20 years ago. So I -- there's definitely tremendous opportunity there. Obviously, there are markets that are slower to adapt to it. Markets where freelancing is still not as big as it is in the U.S. or English-speaking countries. But again, it's early days. We've captured such a small percentage of the opportunity that we see decades of growth ahead of us as this market evolves.

Fantastic. Well, we're about a minute over. So Micha, Ofer, I want to thank you both very much for all of your time and for your thoughts and for participating in the conference. This was fantastic.

Thank you, Mike. Thanks so much. It was a pleasure being here.

Thank you.