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

All right. We're going to go ahead and get started. My name is Douglas Anmuth, Internet Analyst at JPMorgan. It's our pleasure to have with us today, 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 500 categories across 9 verticals, in areas such as graphic design, digital marketing, programming, video animation and many more. In the past 12 months, more than 3.8 million customers bought a wide range of services from freelancers working across more than 160 countries. So Micha is a serial entrepreneur, who has founded and led several tech ventures, and he's been Fiverr's CEO since the beginning, 11 years ago. Ofer has served as Fiverr's full-time CFO since 2017 and as consulting CFO of the company since 2011. He was also acting CFO at Wix. So welcome, Micha and Ofer, and thanks for joining us today.

Thank you, Doug. Good morning.

Right. One quick mention, just for the audience, and I know a lot of you have been on other sessions over the last 1.5 days or so. [Operator Instructions] So let's get started. Just -- over the past 15 months, Fiverr has really proven to be invaluable for businesses and skilled freelancers. Can you just tell us how Fiverr was able to help businesses and workers so quickly adapt to this new working environment?

Absolutely. So what happened during the pandemic has been a tremendous tailwind and the use case for what we've been preaching for the past 10 years -- 11 years, which is that remote work or tapping into remote flexible talent actually makes sense. Actually, it works. And the business sector in general has been very occupied in doing this digital transformation over the past many, many years. But the epidemic has made an urgent case for making that digital transformation, businesses that didn't have any online presence or those businesses who couldn't shift, deliver something in a digital manner, not a physical manner or out of business. And so all of these businesses had to find ways of making this digital transformation as fast as possible. And all of these categories from setting up your online presence, putting together a website, to incorporating e-commerce capabilities like integrating Shopify into your website or adding drop shipping or adding delivery services into your service, are things that are widely available on Fiverr. So we were there helping businesses take advantage of these services and using them to actually survive during that time. But these were services that existed within Fiverr and were very popular within Fiverr even before the pandemic. Just the pandemic fast forwarded everything because of the creation of that need. And on top of that, I think that many businesses realized during the pandemic that they should be more careful about how they manage their budgets. And so when they think about how they invest their fixed expenses, their full-time employees versus variable expenses, their flexible time that they can scale up or down is needed. There was another case being made for the benefits of tapping into remote work. And on top of that, I think the last thing that I would mention is the fact that the majority, if not all businesses and companies, had to move their entire existing workforce to work remotely. And lo and behold, that worked. It worked fine. This was a big fear by companies, like allowing your employees to work remotely without even work. And I think the pandemic has made a very, very strong case that this actually works. So if your full-time employees can work remotely, are you able to complement, augment on your existing team by adding flexible talent? I think the answer for that is a clear yes. And that created a very strong tailwind for our business during that time and continues from that time into today.

Okay. So we can clearly see that in the revenue growth where you accelerated from the low 40s percent range pre pandemic to triple-digit growth last quarter. You certainly talked about the growth being broad-based but maybe you can just talk a little bit more about kind of specific verticals or categories that you felt like were particularly strong during this time.

So Fiverr is a truly horizontal market base. We have well over 500 different categories in 9 very large verticals. And the distribution of the popularity of those categories is pretty even. Or if they have slight differences between them, they represent the site differences in the addressable market of each vertical. So that's -- graphics design is slightly bigger than music and audio creation, then it's going to be slightly bigger on Fiverr. But the balance between categories or verticals is a well maintained balance over time. What I've mentioned was that during the pandemic, during that time, there was even a greater demand for anything that had to do with the [indiscernible] transformation. So website creation, mobile app creation, digital marketing, advertising, e-commerce-related services, drop shipping, all of that was on high demand. But the reality is that even if your business needs those services to get started, then after consuming those services, you need to move into different categories because your needs evolve over time. So now you have a website, how do you market it? How do you optimize it to appear on search engines? How do you engage with your customers? Where do you produce content to engage? How do you promote your business on social media? How do you advertise your -- how do you retain them? So all of these services been evolving very strongly within our platform. It's not very unusual, but the levels of demand have been higher than usual.

Okay. All right. That's great. So you recently released your freelance economic impact report. And it suggested that U.S. skilled freelancers earned about $234 billion in 2020. Is it fair to think about this as your TAM in the U.S.? And then how do you think about the EU still 1.5x the size of the U.S.?

Yes. So when we look at the report, it includes services that are being delivered digitally and those who are not. And since our market base focused on digital services who are being consumed online versus off-line -- as a reminder, it's a huge town but the vast majority of freelancing services are being done and delivered off-line. 95% of services are being done offline. So the transition from the offline to the online is exactly what Fiverr is being promoting and capturing. Now when we look at the survey, the survey includes both things that are doing offline and online. The portion of things that are done online is in line with the addressable market that we've mentioned when -- in one of our recent updates. And yes, Europe, in total, in its 20-something countries, is about 2.5x larger than the U.S. in this addressable market. That addressable market should be noted keeps growing over time as we add more categories. The more categories that we cover, the more addressable market we have. When we define our addressable market in the U.S. to be $100 billion or $115 billion, what we said was that this covered only the categories in which Fiverr operates at the time of the survey and only the portion that is being done online. So the total dose market is much, much, much larger than that.

Got it. Okay. And when you think about just overall penetration rates, and I know it's a massively fragmented space, freelancing in general, but what do you think the hurdles are just in terms of moving it online, in general?

It's a good question. And one of the things that we've done internally is to try and analyze why did it take e-commerce to reach 10% -- why did it take almost 25 years for e-commerce to reach 10% of commerce? Why? I mean, you would imagine that it just -- it makes so much sense that more of the commerce is going to move online. The reality is it takes time to change the way people, the way companies, the way businesses, consume services. There's a factor of education. There's a factor of the creation of trust, there's a factor of the creation of awareness. And I think that what happened maybe with the pandemic at the beginning of this decade that there was a really high wave of awareness opportunity that was created, and we were there to capture it and double down on it. This is why we saw an opportunity to double down on what we do on our awareness marketing on brand marketing. This is when the pinnacle of that was Super Bowl, at the beginning of the year, right? But this was exactly that. To take the opportunity that the receptiveness of the audience is very high, and you can get a larger platform, a larger stage to tell the world that this is something that they can actually do. The majority of businesses do not even know that they can hire a freelancer online as easy as spending 5 or 10 or 15 minutes and you're done. It's a matter of awareness. So we are investing in that. And I think that some of it is just being done by the fact that there's also a very large trend in the supply side of the market, the employees, the talent, more and more people opt to become freelancers as a career, as a lifestyle. They want to have more freedom to work on the things that they are interested in and doing it on their own terms, which means that those people are not for hire for full time. So the entire market needs to recalibrate the way it thinks, right? And I think that from a timing perspective, we couldn't be in a better time right now to capture this movement. So I think that, that -- the moving from the offline to the online is accelerating. It is at the inflection point right now. And it's going to be very interesting to see what's going to happen in the next few years.

Okay. Great. If we think about categories, and I know you said it's horizontal, it's very broad-based. And I think you've increased from around 200 categories at the time of the IPO 2 years ago to now north of 500. Just curious where you see other opportunities going forward to expand the catalog?

Yes. I think we're just starting. There's -- the reality is that there's existing segments that we haven't tapped into. And one example is the data vertical. Data related services, that would be data mining or data research or visualization of data or whatever it is, has been around for many years. But the understanding or the demand for data related services that was once something that only enterprise businesses obsessed over, now it's a common practice. Now every type of business, every size of business needs access to data services mix. This is this is your competitive edge. This is how you build the business. And so that's a good example of a vertical that we felt it's the timing for it because the demand was much, much broader. The timing for it was great. On top of that, there are services that are being created as we speak, services that didn't even exist 2 or 3 years ago. 2 or 3 years ago, no one was interested in knowing how to advertise on TikTok. TikTok wasn't around or it wasn't big enough in -- or doing video editing for aerial drone footage. These are things that only exists in the past few years. So these are the types of services that we keep creating. The reality is that we are introducing about 30 new categories every quarter. So the breadth of the catalog keeps expanding. And out of curiosity, I was starting to dig into trying to figure out how big is Amazon's catalog, as an example. I don't know if you know. But Amazon has about 30,000 categories. 30,000. You can't even get to the directory of those 30,000. As you browse, you get into categories within -- you should expect Fiverr to be exactly the same. We're building the largest -- the world's largest SKU of services. And we're just starting. So the fact that we can introduce and populate and have it work, tens of categories every quarter, is something that we're very proud of, and we're going to continue doing that because it has correlation with our ability to engage more customers and take our existing customers and engage them through more categories. That's extremely strategic pillar of growth for us.

Okay. All right. That's great. Let's talk about KPIs a little bit. We'll start with active buyers, where growth accelerated to 56% last quarter. It was up, I think, about $1.36 million year-over-year. Can you just talk more about the cohorts that joined over the past 15 months? And how do they compare to some of the earlier existing cohorts more pre pandemic?

So there are a few different dimensions to compare when looking at the newer cohort comparing old. I think that one dimension is the size. You mentioned that. The size of the new cohort is definitely bigger. It composed of organic traffic, which was and still is the main challenge, where we gained a new cohort, a new buyer. But it's also about the paid channel, which become more aggressive on our end. We actually doubled the investment in performance marketing over the last few quarters, while keeping the tROI as efficient as it was prior to the pandemic. So we were able to expand the investment of double down and each of the channel and open more channel going into new territories, while keeping the efficiencies of this investment within the same tROI pilot. So that both on the organic and the paid in terms of the size of the cohort, the cohort are bigger. The second dimension is the type of buyers. What's the nature of the buyer that joined us recently? And I think our focus on growing upmarket matured to the level where we see more and more bigger organization, those who have a bigger wallet that lead more complex services joining our audience. This has been driven by product innovation and product release, like Fiverr Business, that happened to be in the middle of this -- 15 months -- within the pandemic, but it's not because of the pandemic, it was the time when the product was added. But also milestone and subscription, this type of product add-on allow different type of users to utilize the [indiscernible] but in terms about the marketing focus. I mentioned our focus on high value. It's not only about the quantity of the cohort, but the type of customer that we acquire. And I think that our ability to measure each campaign and each channel to the lifetime value of the buyer we acquired to the side of the award and the potential, the embedded potential of each cohort allows us to increase the bigger organization time within the cohort, which ends up in higher spend per buyer. I think that it's not only that the active buyer growth by 56%, the spent per buyer grow within the same period by 22%, which is enormous. Comparing the growth of spend per buyer in [indiscernible]. And lastly, the dimension of cohort behavior. And during the last few quarters, we talked a lot about the increased retention of old cohort. We mentioned that old cohort spend during the last quarter approximately 15% more than they used to in prior period. So newer cohort doesn't lag. The new cohort actually performed even better. Newer cohort seems to have at least the same retention, at least the same spend behavior over time. Those are strong cohort, we believe will contribute a lot to the revenue in the future here. I think one good indication for those who are trying to estimate -- they try to estimate and measure, one great indication for that is the tROI chart that we publish every quarter, if you look into the tROI of the last few quarters, you can see that the tROI on the first quarters is as high as 1.1x. It is higher than what it used to be in the past. If you look at the tROI after 2 quarters, it's 1.5x. It's higher than what it used to be. So even -- it's not about -- it's not only about the size, it's not only about the type, it's also about the habit and the return on investment which is well demonstrated within the tROI. Not only in the first quarter, but on second and the first, so that the lifetime value to CAC for those cohort seems to be even better than prior. But that's [indiscernible].

That's helpful. So if you put all that together, what does that mean for retention and churn rates just as we look at a world that's reopening pretty strongly here?

Well, what we have seen during the period up until the ailing is that even for countries which are reopening, we don't see drop in cohort behavior. We've seen that into countries like -- Israel is a good example, it's -- COVID is kind of well behind us, but customers keep coming back. And we think that it's not -- the COVID is not temporarily changed, it's the macro economy that limit towards freelancing more, both remote employees or digital transformation. But also, as mentioned earlier, is the product innovation that we managed to go through within the last 2 quarters. The spike in growth enabled us to invest further in product and release features ahead of time. Our ability to invest more during this period allowed us to release products that assist buyer and freelancer engage further than they used to. Increased engagement, the satisfaction, the retention, the frequency, the ASP, the overall spend, as I mentioned, so that we don't think those are temporary change. I think those changes are here to stay.

Okay. Great. All right. So let's shift. I want to talk about customer acquisition a little bit. So starting with the Super Bowl ad, which you spent $8 million on earlier this year, I think, between media and production and everything. I guess, just how are you thinking about the returns on that spend? And then maybe if there's any thoughts on next year? And then if you could comment just on the marketing environment overall, because I think we're broadly seeing a very strong online ad market, hearing more companies talk about elevated costs for inventory in certain cases. Just curious if you're seeing the same thing, or how that's coming across your radar?

Sure. So starting with the Super Bowl, I think I've mentioned earlier that the reveal has been as a bit of typical in our investment into brand marketing. But this was just a part of a larger investment that we've done into awareness. And it was -- it's probably the world's largest stage for addressing an unprecedented number of potential customers, and we took advantage of it. And we're very happy with it. In the -- if you use any public matric or tracking to look at the awareness levels of the fiber brand, you've seen that it has been superior before, but it's been gaining momentum and heights over time over and over. And the Super Bowl definitely gave it a lot of boost and momentum. And we're very happy with it. I think it really exposed us to a much broader audience than we communicate with on a regular basis. And it's well more important despite in traffic or business that you get in a temporary window frame. So continuing to invest in awareness or brand marketing and the combination of that with Performance marketing has been something that we've been playing with for many, many years. And we're going to continue investing in that because the better awareness you have, the more efficient your performance marketing becomes because the customers that come across your conversion marketing campaigns have already an awareness of who you are. So converting them becomes much simpler and cheaper. Now so that combination will continue existing and something that we're going to continue investing in. As to the cost of acquisition and trends that we're seeing, I think that one of the beauties -- and we've demonstrated that -- when you look at the -- this offer mentioned, we've doubled our investment in performance marketing. But when you look at the time to payback on performance marketing and the LTV to CAC, how much multiples can we get on that investment? Both have been improving, even though we've doubled our investment. How is that possible? The actual answer for that is Fiverr has less -- is less vulnerable or less sensitive to changes in prices or cost of acquisition. And the reason for it is because we operate in over 500 different categories or spaces of content. And because we have a very sophisticated performance marketing automation system, we can divert or shift or manage our performance marketing campaigns to move away from expensive keywords into less expensive keywords. So we can always optimize. So if something becomes expensive, the system would move from that category, that space, into a different space and run in that space. And if that changes, it moves away from it. But we have millions of different keywords to run on. And that's why we're less sensitive to changes that has to do with either competitive market in terms of like competitive keywords, or seasonality. Those 2 affect us much, much less because of our ability to market in thousands of different SKUs. And because of that, when you look at tROI, if anything, tROI as even become shorter. And the LTV to CAC has become higher, even though we're doubling our spend there.

Okay. That's great. That makes sense. Maybe we can shift and talk about product innovations. I think it's one of the things, as I look at the business over the last few years where you've just really kind of continue to innovate on the product side, continue to move the needle and put out new things for -- certainly for freelancers, but things that really just make buying more attractive as well. So when I think about kind of promoted gigs and fiber business, studio, subscriptions, milestones, I guess, what -- first of all, I guess, what internally -- how do you ensure that, that innovation that the wheels keep turning there at a really fast pace and then what initiatives here what products kind of stand out to you as being most impactful here over the next year or 2?

So first, I'll just take the general note that Fiverr is a tech company. We're a product company. That's who we are. And so this is where we can innovate the most. And I think that the entire Fiverr market concept is product based. It's an e-commerce platform. And much like you would expect Amazon or Etsy or Alibaba to continue pushing their e-commerce platform, adding new SKUs from one hand, but adding technology solutions to make it more robust, faster, create algorithms that would make search better that would make personalized recommendations that would create a better reputation rating system. All of that, everything you would expect from the best e-commerce platform in the world should extend from Fiverr. And this is what we expect from ourselves. So we keep pushing that and we keep the idea of productizing services, the idea of creating, of making -- turning services into an e-commerce experience of browsing through a catalog and finding what you need and clicking order is something that we pioneered and we'll continue pushing and advancing in what we do to ensure that this would be the case. It's just hiring the best talent out there and continuing nurturing and putting the customer experience, the obsession about the customer experience in the center of everything we do. And that allows us to really push it. And when the company grows faster and faster over time, we roll success into ensuring that we have a better and more robust product. And if you look at the normal list of different products that we've introduced, we're excited about all of them. But they're very different in size and nature. Some of them are features, and some of them are full-fledged products. So if you ask me about where a lot of our investment is going to be put in the coming years, Fiverr Business is definitely a multiyear strategic investment for the company. We said that the vector of going upmarket, being able to offer versus sophisticated types of services for the more sophisticated types of customers is strategic for us. And Fiverr Business is the infrastructure. It's the cornerstone of doing exactly that, with engaging with larger types of customers that have more sophisticated needs and making sure that we can able to cater. It's higher quality. It's the sophistication of having either individual talents or agents, it's virtual agents, it's work with those business customers and having those business customers engage with us as a team. We want larger companies to embrace Fiverr as to their freelancing solution. We want their entire team to have freelancers in a multitude of different categories. So out of these products, Fiverr Business is definitely a larger portion. But other products that -- I mean, you mentioned fiber promoted gigs is an example. This is our promoted listing engine for our marketplace, much like Etsy or Amazon has their own, or eBay. And this is something that we keep evolving and it keeps growing. It becomes bigger, more impactful. We can make it available for a wider spectrum of sellers in a wider spectrum of categories and areas within the mark pace. And it's generating -- beyond generating revenues and pottering take rate. It provides opportunities for sellers to become more engaged in their success.

Okay. Excellent. All right. We're basically at time. We're going to do a real quick word association, all right? Just a handful of words, whatever comes to mind. Reopening?

Reopening. What does reopening does to you? Optimism.

Freelancers?

Future of work.

Promoted gigs?

Empowerment.

Spend per buyer?

A huge opportunity, definitely.

Fiverr Business?

The future.

Right. And last one, long-term margins?

I think we said 25% back in the past, we haven't changed that.

Okay. All right. It was worth a shot. All right. thank you both. I appreciate it.

Thank you. Thank you, Doug.

Thank you, Doug.

Thank you, everybody, for joining.

Thank you. Have a great day.