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

Good morning. Thank you for joining us on the second day of the Bank of America Global Tech Conference. I am very happy today to have Fiverr. I have the CEO, Micha, here; and VP of IR, Jinjin. And we are excited to talk about what's been happening in this company. I have to say, Micha, you are -- if I have to pick the single, fastest -- well, maybe not the single fastest grower for the pandemic in my space, but the one that has held the consistency in the acceleration as it's gone forward, probably the longest, especially if you consider your guidance.

Can you talk to us a little bit about what happened that caused the pretty substantial acceleration you saw at the beginning of the pandemic? And what are you seeing now and how that's driving your business?

Good morning, everyone. And thanks for having me. Excited to be here. So we've discussed this throughout the pandemic. The pandemic has given a very substantial tailwind for our business. It has made the case for what Fiverr has been preaching for the past 10 years. I think most of the businesses and companies have moved into remote-only work with their organic teams. And they've noticed that this is obviously a pretty viable way of working. And because of that, they've been also more open to figuring out how to integrate freelancers into that mix. So that has been a massive tailwind at the beginning of the pandemic. With the entire offline market shutting down, everyone was driving to the online, both the supply chain or freelancers and businesses that how to engage with online talent as a way to survive, to move their business to go through this digital transformation and the ability of adding e-commerce capability to their businesses. And these are the things that the talent on Fiverr thrives on. So we've been definitely getting a lot of momentum from that and a little bit came with an increased portion or the awareness side. And we've been doubling down on it and maybe the pinnacle of that has been the Super Bowl ad. But we're taking that awareness wave, and we've been doubling down on it. And that has created a very substantial growth on the organic side, which is great. And that also allowed us to keep our paid marketing, our invested marketing very, very efficient. What we're seeing now, which I think is a good sign, is that we're seeing that for the first time maybe from the beginning of 2020, we're seeing a back to normality in terms of seasonality. May is a month that is known for having lot of events around the world, a lot of holidays, the Christian world, the [indiscernible] world. And in 2020, there were no holidays. People didn't go on vacations. They were stuck at home, and they continue to [Audio Gap] this year, the first time during May, we are seeing the impact of seasonality. That's been a predicted factor on our business. We knew that this would be the case. But the fact that we're seeing people going on vacations, taking holidays more as a personal time is definitely a good sign in terms of getting the economy back to normality but all in all, in terms of the behavior of our market base, it's business as usual.

Now that's an interesting point. So the seasonality is returning, but is it at a step function level higher now that your spend for buyers or your number of buyers on the system, are they all acting as if they -- this was -- they were a user pre pandemic, and these were the metrics you would look at pre pandemic and suddenly you now just have more or is it a reversion to the mean?

Yes, it's a good question. So we've said many times, we're not going into pre-pandemic levels at all. We were at the new baseline from which we're not going down. What we're seeing this year in terms of seasonality or the holiday impact during the month of May is that it's maybe slightly more emphasized in terms of -- there are more people that are thirsty for having time off that are -- that want to go on vacation, that want to take holidays as a way for time off, and you're seeing that across the board, it's not just Fiverr, you're seeing those trends across the entire industry. And it's true for e-commerce and all of that, but again, nothing out of the ordinary. This is -- it's very much in line with everything we've seen up to 2019 and before. And so this has been something we have predicted. And again, it is mostly a positive sign that the world is gaining back its sanity.

Sounds good. Well, hopefully, yes. And looking at -- your company has been very hard to really determine your TAM, especially as you have rapidly increased the number of categories you're in and really actually trying to differentiate what you're replacing. You're not replacing work that was probably done in many cases by a professional. You're taking someone who might have done a bad job on something themselves because they weren't an expert. And letting them frictionlessly connect with an expert in order to get that product done well. So 2 sides of this question. One, on just the broad basis as you added, what, nearly 50 new categories this last quarter, you're up to 500 now [Audio Gap] And secondly, how do you really walk through what the total addressable market is if there isn't an offline analog for most of the work that is done on Fiverr?

Sure. So on that definitely, there's a close correlation between the size of the catalog and the addressable market because the more categories we include, the more customers we can actually serve and some of these customers did not have the solutions that they were looking for on the marketplace before. Now the way we have estimated that come is we're using public information to understand the size of activity in the freelancing space, which is limited to the online. The reality is that more of the freelancing businesses is moving from the offline to the online, which by definition increases the TAM and the more categories that we add, increase the TAM as well. Now public information is slow to update. So it's hard to give an assessment every few quarters because the Census of Bureau -- the Bureau of Census update their information once every 5 years or so. But the reality is that it definitely has a tight relationship with our ability to grow, and we've said as part of -- as our IPO that increasing our catalog is going to be one of the vectors of growth for this company, and we've been -- ever since then, we've been introducing about 30 new categories every quarter. And that has had a close correlation with our ability to engage more customers, but also with our ability to engage our existing customers across more categories over time. So that to us is very important.

And when you think of these category expansions, in many ways, they're probably existing businesses happening on your system and that you are just calling out as a separate category. And also, is that the case in most of it? Is that -- so when you add a category, things, you make it easier for buyers to find what they need, but the sellers were already there?

Yes. In some cases, this is the case. I think -- I would say that -- and I'm speaking mostly from my head, not hard data, but I would say that it's probably 50-50 in terms of the split categories that are getting more granular within the catalog versus categories that are created from scratch. I think that the way we're actually doing that and the way supply comes to us 100% organically allows us to populate new categories very, very rapidly. Usually on the supply side, within a matter over a few weeks, we have enough supply to start introducing that category and usually within a couple of months, that category is already working, right? And you can either -- it either grows organically or sometimes you make a little more focus on it to add more supply or to expose it more to your existing customers through your -- our retention funnels. But usually, it's a very quick process, which allows us to introduce so many new categories every quarter.

And not to belabor this point on categories, I'm actually wondering if, in many cases, are we over focusing on it, given that our -- is the low-hanging fruit on the tree of category is already picked? Is graphic design, which is the obvious example that people use to discuss you -- but is it just such a major category? Or are there only a few categories like that, that are so important that new ones like you added data, which is a pretty big deal, but is it -- how much does it affect you?

So when you look at -- the way to look at the catalog is that the catalog is made out of 9 large verticals, underneath we have categories and subcategories and more granular levels of services. When you look at the verticals in general, graphic design is slightly larger than other verticals because its TAM is slightly larger as well. So when we look at the distribution of different verticals as a whole, they're a fair representation of their TAM. So if there's one that's going to be slightly larger than the other, it's going to be slightly larger on Fiverr as well. But no one category dominates the catalog and graphic design is definitely not the majority of our business. It's just very larger than others.

Yes. There's no killer app of, this is the thing that Fiverr is -- Fiverr sellers are really good at, and that would just do the major part of the business.

Yes. No, and that's a good sign for us because it's low concentration and low dependency. So there's low risk of that concentration on the business. The same goes with customers. We don't have customers that are responsible for even 1% of our business, which, again, low concentration, which is great for us.

Now walking over to your sellers and trying to understand who your sellers are and how they do business. Have you done surveys to know how many of your sellers are doing your -- Fiverr as their principal method of income?

We haven't published hard data on that. But what's really interesting to understand, and this is pretty tricky when you run a large-sized market base is understanding that different people come with different motivation to you. Some sellers have a 9 to 5 job. And this is their way to supplement their income. And for them, they would want to either work not more than 2 or 3 hours a day. The system needs to understand that because they -- it's important not to overload them with work because if you make them work all night long, they're going to -- they're just going to leave, right? But at the other end, if someone wants to actually build and make Fiverr their full-time thing, the system needs to understand that. So there's algorithms that are responsible for understanding capacity within the market. And by the way, not all sellers are individuals, some sellers are agencies. They're larger groups. They can actually deal with larger capacity. So the system needs to understand that. And definitely, those who are interested in making and have the talent, well, without talent, it's not going to work, but if they're talented, and they want to make Fiverr their full-time thing, they can. I'd say one more thing about that and that is there is a -- you need to understand that different sellers that comes from different countries, the meaning of full-time in terms of dollar is very different. Now the amount of revenue that someone from a developing country needs to make versus someone from a Western Country is very, very different to make a living, right? And so that really differs. There's no one definition. What's really worked for us is that, one, those who want to make the full-time living, can and that over time, more people are making more money on the platform. And this is exactly what we're seeing over the years.

Okay. And so -- and if you think about most -- the number of -- or some percentage of the transactions that occur on your system, how many of those are completed within a day? Most -- in some ways, you've been compared as almost the Etsy of small business services. You're fast -- complete, fast more e-commerce than, let's say, Upwork, which is management of non -- contractors. So how do you look at that business? And how do you distinguish yourself? And is there a broad swath across your portfolio of what your -- what transactions look like?

Yes. So the average number that doesn't represent anything that is on the 2 ends, the things are super quick and the things that take more time. But if you look at the average, the average is definitely less than a week. It's a few days. That's the average that it takes to fulfill and deliver full service. With that said, we now have subscription as one of the products that allows customers who actually engage with freelancers on a repetitive basis, on a monthly basis, time after time. Maybe on a monthly basis, the time that it takes to deliver a service is not very long, but then it renews itself every month. And there are more complex services that oftentimes are delivered by agencies that could take a week or 2, but the majority are just a few days.

That short period of time of interaction and the fact that most of your buyers are using 1 service here and then a totally different seller over here for different products or services allows you to maintain what some consider high take rates in that there is no incentive to go off the system. Inside your subscription service and other -- and in certain categories where things become more continuous interactions with the same seller, how do you avoid gray marketing of your platform?

Yes. So first, I'll say that one of the reasons that allowed us to have a meaningful take rate is the fact that we are generating tremendous amount of value for both buyers and sellers. For sellers, Fiverr has been the first place in freelancing history, where freelancers do not need to do anything to win a project. They just need to list themselves on the platform, which is free. And so the time that we save them on chasing customers, trying to bid projects and end up not winning those projects, the time that we save them on chasing customers on actually collecting their payments, all of that is being saved, and this creates a massive upside for sellers. And for buyers, it's not just the access to talent and the fact that we connect them, and we do so in a very, very simple smooth manner, but the fact that they don't need to deal with any platforms, invoicing, different payment methods, different communication, everything is baked into the platform. So that allows us to keep that very high. Now when you look at the way interaction happens on Fiverr, Fiverr rewards sellers that are doing transactions and are keeping their reputation high, meaning that the quality of the service that they provide is high. And that is reflected in the ratings and the reviews. The more ratings and reviews you have, the more business the system drives to you. So by definition, if you try to take some of that business off platform, you're not going to enjoy that -- those reviews and that rating, which means that your business is going to start going down and it's going to eventually die. And that disincentivizes. But we will not -- we give tools for sellers and buyers to incentivize them to work on longer term. We provide tools for retention, CRM for our sellers that allows them to engage and find ways to interact with their customers on a longer term. And what we see, actually, we've seen that before our subscription model is that the case for same buyer and same seller that are working through the platform for a long period of time, doing many -- multiple transactions is not rare. It's actually very, very common. And this is why we've introduced subscriptions because we just wanted to make that experience even smoother and simpler. But the reality is that it's not new. And again, the incentive of doing that -- of trying to take the transaction off platform, then dealing with all the minutia that comes with actually having a transaction -- and by the way, not enjoying the protection that we provide with buyer protection and seller protection for our community. Not enjoying that and dealing with direct payments and with everything that comes with it, makes it really not worthy.

Would you say you're more akin then thinking about your take rate and thinking about what it should be compared to? You're more like Google App -- the Apple App store and the Google Play store take rates versus comparing it to Upwork, which is doing a very different business?

Yes. It's less of comparing ourselves. I mean, we think -- when we started Fiverr, we introduced Fiverr with a 20% take rate. It's now 25.5% on the transactional side, and then there's added value services and products that pull this take rate to 27.1%. So it's hard to really compare -- it's definitely probably easier to compare it to Apple or Google just because it's in the vicinity of their take rates. But in general, the way we like to think about take rate is that it's tightly correlated with the value that we create for our community. As long as this value is very high, the take rate can remain high. And over time, it has been growing because we're adding more services and products that add value because they add value that allows us to grow the take rate. It's never arbitrary, right? It always comes with value creation. That's how we like to think about that.

Yes. And it makes sense. And as you grow quarter-over-quarter, your take rate is going up not because you're raising your take rate, but because your sellers are taking more value-added services, right? They're choosy, I think.

Right.

So -- and one thing that hasn't come up. And you seem to be going in the direction of kind of really dominating the market. Can you walk through, though, how you think about competition? There have been multiple online talent marketplaces. They're usually are fairly vertically focused. How do they affect you? And how has this market developed over time? And what keeps you up at night in the competition side?

Yes. So you're right to say that there is more concentration in competitive activity on the vertical side. Now running a vertical business has its benefits, obviously, because you can obsess off on being very, very specific and perform well on that category, but the trickier part with running a vertical business is that you need to find very specific types of customers that will require your service over and over again. Retention is something very complex in your vertical business. And this is why when you look at verticalized businesses, the majority of which are actually driven by enterprise business, okay? If you are a translation business, if you're a small business, you might need translation once every 3 years. But if you're a publisher or if you're a large law firm or if you're a large enterprise, you might require translation 17 times a day. So verticalized businesses are very dependent on very few customers that have that need over and over again. The benefit of having a horizontal market base is that you're pretty much agnostic about the entry point of a customer. They might need something very specific. But then over time, you know how to drive this customer into seeing your service, your platform as a go-to place for anything else they need, right? So the way we treat verticals is mostly as an opportunity for us as an inorganic growth. We've acquired 3 such businesses before. And we see that as a way to enter a new vertical or go upmarket in a certain vertical. In terms of the larger market, I think that the thing that we obsess most -- I obsess mostly over is the offline to online opportunity. Because if you look at all the companies, private or public, in our sector, none of these companies, including ourselves, is not a giant. It's not a huge player that is worth going against. Instead of that, there's such a huge opportunity moving offline activity, which is 95% of the activity, to the online. This is where the true market is. 95% of freelancing activity is happening offline. It's not going to stay like that. It has been accelerating in the past few years, and this is why we're not obsessed about a certain name, and those names pop up here and there. We're really focused on doing what we're good at, which is taking that inefficiency from the offline activity and moving into the online in a very efficient manner keeping in a very efficient unit economy within the company that allows us to grow probably at least twice faster than any company in our space. I mean when you think about it is this year, we're going to be 3x larger than the company we were less than 2 years ago when we IPO-ed, and we're growing 50% faster. That ability that reaching this inflection point where you can actually accelerate your business is what's interesting us -- it's what's interesting for us. It's less about a specific player in this market.

That brings over a couple of things. One, it's very interesting. So on your small business clients, obviously, they have a lot of different needs. And that's where a verticalized product isn't that useful. They might need -- as you said, they might need translation once for 3 years. And you have that -- you have their ability to come for that, but also their ability to come for a logo design and their ability to come from video editing and every other concept they could have and even their kid could hire a Fortnite coach when they're -- on their credit card when they're not looking. But if you think about that, one thing you should be -- I would imagine you're tracking is, if I look at the spend per buyer, how much of that spend per buyer over a given year or given period of time is in different verticals? So how frequently does someone come in and want one thing and then move into something else?

So the general answer for that is that the majority of our customers are cross-category -- or multi-category customers. Only the minority buy in just one category. And sure, we have some cases where you have a certain type of business that has a very particular type of interest within the marketplace. But the reality is that over time, you are going to drive even that business across many categories. And sometimes, it's because the first person from within an organization might belong to a certain division within the company, certain team within the company. But then over time, as we engage with more people within the company, there's going to be more needs across more categories. And the majority -- and the fact is that even if you work with some from a very specific department, let's say, the marketing department, within marketing, there's so many different needs. When we think about marketing at the modern age, it's not a 1 truck thing. It's not like you're just running an SCM marketing campaign, you need to think about your social campaigns, you need to think about content marketing, you need to think about off-line and online advertising tools. Each one of them are categories within Fiverr, which is why it's very easy for us to start with someone even if they have a repeat purchase in one category and over time drive in to other categories. And this is why the majority are cross -- are multi-category purchases.

And on that example, though, that you gave of the publisher or a law firm that might use translation 17 times a day, you also have upmarket initiatives where you're going to bigger businesses. Is there -- how far along are you in that -- in capturing that opportunity moving away from just the SMB people who want a lot of different things moving to the type of people like that publisher or like that law firm?

We're in the very, very beginning of it. And again, we haven't changed our strategy. 2 years ago, when we took the company public, we said that our focus is what we call the segment that we focus on. So what we call the 0 to enterprise, meaning that we don't focus enterprise specifically. We think that enterprise business is a very specific business. And the majority is that outside of enterprise business, if you look at SMBs, which includes, let's say, from the small to the large-sized businesses, these represent 99.9% of businesses. This is where the majority of businesses are, and we're targeting them. So our movement upmarket hasn't been from the very small business to enterprise businesses. Our target right now -- by the way, that doesn't mean that we don't have some of the largest enterprises in the world as customers. But they come to us organically. The customers that we actually target are the mixed size of customers that we have, which is customers with 100 or 150 employees, not those with 10,000 employees. And so it's not jumping into enterprise business, and we do it gradually. And what we're seeing at least now is that the behavior of the customer is very different. Their spend, as an example, is 3x larger than an average Fiverr customer, right, which is great. And it's the very, very beginning of that cycle, the very beginning of that product.

Two last quick questions because, unfortunately, we're coming up on the end of the time here. One, your marketing efficiency is just kind of going through the roof. I know part of that was the acceleration caused by the pandemic. Probably couldn't spend enough money to figure out -- to -- given how fast people came in the door. But with your -- basically, your tROI is down to about 3 months. Do you see pushing that further? And do you think that you're underspending at this point?

Yes. So we gave ourselves space to spend up to a tROI of 12 months, which means that, yes, we have room to grow. That said, it's not just about how fast can we actually collect back our investment and start making multiples on that, but it is also about the marginal contribution of the last customer that we acquire in that cohort. And the reality is that the last customer is always more expensive than the first. The more you acquire, the more expensive it becomes. And what we want to ensure is that the last customer that we acquire is also net positive on ROI. If they're not, we're not going to spend that dollar. Because in the long run, it's a bad investment. It's not an investment that is going to pay itself back. And sure, you can do that. A lot of companies are doing it because they're focused on increasing their numbers, and that's fine. But in the long run, that creates efficiency and profitability issues. We're increasing -- the reality is that if you look at the past 2 years, we have been increasing our marketing spend consistently and aggressively. But as we were doing that, we also increased the efficiency of our marketing, and a lot of that has been done through the automation of our marketing. The beauty about the Fiverr business is that -- and this has, by the way, nothing to do with the pandemic specifically, is the fact that when you look at the cost of acquisition across many different keywords or categories, they differ across time. Sometimes they go up, sometimes they go down. The beauty about running a truly horizontal market base with over 500 different categories, not to mention the number of subcategories, not to mention the nuance services, is the fact that we can run campaigns on hundreds of thousands of different permutations of the services that are being offered on the market base. So if something becomes expensive, we move away from it to something that is more cost-effective. And since we automated the majority of this process, we can do that in real time, which allows us to always remain extremely efficient. And then what we mostly care is can -- is the last customer within that cohort makes sense from an ROI perspective or not. As always, the answer is yes, we will continue increasing our spend.

Makes sense. I'm going to have -- we are overtime, but I like to go over. So one last question. And this is -- if you put on your visionary hat and obviously, as an entrepreneur, you're visionary, and you look at that number, 95% of freelancing is off-line still. What will the world look like? And what will Fiverr look like when that number, that 95.5% it's true equilibrium, whatever that may be?

Yes. I think for me, looking at the process of digitizing things, moving them from the offline to the online, I think the closest proxy is e-commerce, right? So when I look at the movement from -- of commerce to e-commerce, it took e-commerce about 20 years to get to 10%, right? And one of the reasons wasn't inefficiency or the time that it took e-commerce companies to move offline to online, but the fact that when you engage efficiently online with e-commerce, you actually increase the overall size of commerce, right, as you do that and because commerce becomes bigger because you enabled more of it then gaining more percentages is also harder. But the reality, it took 20 years, right? And today, if I'm not mistaken, it's about 17%. That's been accelerating massively in the past 10 years, took 20 years to get to 10%. Now less than 10 years to get to another 7%. So I think that there will be an inflection point that will accelerate all of this. And now think about this. More and more people around the world and you see that the U.S. is a big example for that, 40% of American workforce are freelancers. We're talking about tremendous amount of talent that does not want to be full-time employed. That means that companies and businesses do not have this talent for hire. The only way to engage with it is through freelancing. And they can do it offline or they can do it online. Offline is spending a month just finding someone and hiring it and online takes 5 minutes. What would you do? So the world is going there. And this is why we think that as this process accelerates, and I think we're contributing to the acceleration of it, then this -- Fiverr and many other platforms as well would become massive platforms. Think about e-commerce. It's a blue ocean opportunity. And we're just at the beginning of it. And the future of work is now, and it is ever changing, and we're enabling it. So I'm super excited. I think that if this accelerates, it's just -- the opportunities are just going to be larger. The business is going to be much, much larger. But also, it will allow us to engage with other types of needs of our community. When you think about freelancing, freelance -- to become a freelance is to run a certain lifestyle. And that lifestyle is -- it starts with having customers and making money. I think there are so many other needs. What do you do with this money? How do you manage it? How do you think about your work life balance? How do you travel? How do you deal with your insurance needs? And how do you think about the stability of your income? And how you plan your business? How do you grow your business and become an agency? All of these questions are things that we can be a partner for our community. And so these are things that I'm super excited about. And I think, again, we're just at the beginning of the cycle.

Micha, wonderful. Thank you very much for doing this with us. And I think it's fascinating seeing what you're doing, democratizing access to expertise and creating liquidity for labor. I think it's a fascinating long-term trend.

Thank you so much, Nat. It's always great to speak to you.

Thank you.