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

Okay. Great. I think we're live. We're really excited to have Micha Kaufman, Fiverr's CEO; Ofer Katz, CFO, here with us today. If you need my disclosures, please e-mail me or corporate access, so we can get those to you. But maybe to just kick things off, Fiverr has been public for a while now, a couple of years. It's a leading digital marketplace, connecting freelancers with people looking to get a variety of jobs done. But maybe for those who still are a bit new to Fiverr's story, can you give us a quick background Micha on the business and the potential it has in the freelancer market and the flywheel effect of the marketplace approach you guys have built?

Absolutely. Good morning, Nick. Thanks for having us. So Fiverr operates in a massive market that is almost a blue ocean. There's big macro changes in the past decade or decade plus. Fiverr started in 2010 right around the time when millennials started getting into the workforce. And what we've seen is acceleration of independent work or freelance work as a percentage of the workforce in total. Right now, about 40% of Americans are independent workers and probably based on data that we see by the end of this decade, it's going to be close to 50%. That's a massive market of people that do not want to be full time employed. But it's a tremendous amount of talent, and it's global. And what Fiverr really sets for itself to do is to simplify make the process of working with a freelancer or getting a digital service done so much more easy. Now we need to understand that freelancing was not invented in the past 10 years. What happened, though, was that right now, freelancing is not something you do in between jobs, but it's actually a career and it's a lifestyle decision. And we wanted to enable that. The average time that it takes to find and hire a freelancer anywhere is about 30 days. It's a very lengthy process that has a lot of complexities built into it, reference and trust and then how do we actually do the transaction and invoicing and the payment and confidential information, all of that and contracting. And what Fiverr has done is it's made the experience of buying a digital service in over 550 categories as easy as shopping on Amazon. We productized services. We created a SKU-like system that allows a customer to come in with a need, say, I need a graphic design for my website, do a quick search on the catalog, find the different offerings, find the right one, click order and they're done. The average time that it takes a visitor that lands on fiverr.com, to take their credit card and place an order is 50 minutes. We reduced 30 days to 50 minutes. And we're not done yet. We're going to continue compressing that and making that as efficient and as quick as possible. So that's in a nutshell why we started this company and why we're so excited about this. It's a company that started from 6 different categories, which are now over 550 and they're growing at a rate of about 30 new categories every quarter. It's a massive, massive community with millions of freelancers and millions and millions of businesses of all sizes. And there's a tremendous flywheel effect as both sides of this 2-sided marketplace continue to grow. As each one grows, it fuels the growth of the other one. And this is why 11 years after starting the company, the majority of our new business is coming from organic channels. It's a flywheel effect, it's high viral coefficiency. Customers love it. Freelancers love it. And they both bring more customers and more freelancers. That's the beauty of the model.

Yes. No, that's a great overview. Thanks, Micha. Maybe could you expand a little bit more on really the market kind of e-com like experience? Why is this the right approach? And does that create a limiting factor? And how complex the jobs can get? And how the buyer and the freelance interact? Is there less communication? Or are they very kind of connected to the process that they do want to do something more complex?

Absolutely. So if you look on the buyer's side, for buyers, the e-commerce experience provides a tremendous amount of transparency that never existed before in work with freelancers. Because actually, what they see is they know exactly who they work with because they have a profile with us, and that profile is being fueled by our rating reputation system that includes ratings, and we collect hundreds of data points on every transaction, plus the reviews of previous customers of that specific service. And you see the profile of that freelancer to know their notable clients, their experience and so forth. So they have a lot of information on that on the person offering -- the person or agency offering that service. In addition, they know exactly what's being offered because that has been defined by the freelancer or the agency. So they know what the contract is. They know exactly when they're going to get it because that's also defined in the offering, and they know the exact price of that service, not the hourly price, not an estimation of time, the exact price of that service, getting that thing done. And that level of transparency never existed before. On the other side, the supply side, the freelancing side, the revolution is even bigger. Because for the first time, I think, in freelancing history, freelancers do not need to actively try and win projects. All they have to do is come in; create a profile, it's free; create their offering through the usage of our tools that help them productize their offering; and then sit back and relax until we bring them work, we bring them customers, customers that have already paid said, I want this paid and now they're being introduced. This is mind-blowing for freelancers because people keep forgetting that freelancers spend a huge amount of their time trying to find the next customer. When they start their career, they spend exactly 100% of their time chasing customers. And over time, that reduces, but from our research even the most successful freelancers and agencies spend about 30% of their time trying to get the next customer. And sometimes that attempt is extremely costly. They sometimes need to do a portion of the work just to bid on that project, and they have a good chance of not winning that project. On Fiverr, we don't have this. It's very simple. It's all about the power of the e-commerce model. And because of that, they can actually focus on the things that they are passionate about, which is not chasing customers, right, but just doing what they love, what they're good at. And I think that this has fueled the success of Fiverr and its business.

Got it. That's really helpful. Maybe before we get into the TAM and some other elements, we could talk a little bit about what you saw through COVID. It was an interesting kind of last 18 months, how has buyer and freelancer behavior changed throughout the pandemic? And how does it look today in terms of retention? Are the cohorts performing as well as you thought? Could you provide an update and a view there?

Absolutely. So we took the company public mid-2019. And as we went public, we went in with pretty massive tailwind in terms of the fundamentals of the business working and accelerating. So we were a high-growth company getting into the public market. And what happened with COVID was simply an acceleration of everything that we've seen in the fundamentals. Because in a sense, what happened with COVID-19 and maybe the high point of everything was end of March of 2020, when the entire world went into lockdown together. And what happened was that the off-line activity died off at least for a certain amount of time, which made everyone, from employer working with their employees to companies using freelancers, to think about remote work in general and to think about the digital aspect of remote work. And what happened was that everything in that we've been preaching for 10 years happened overnight. And that created this massive, massive jump or pull forward that we've seen into the business, both on the supply side and the demand, meaning that more companies were saying, why are we spending 30 days trying to find someone off-line that we need to meet at Starbucks and spend tremendous amount of time just getting the work done or started; when we can just go online, spend 5 or 10 or 15 minutes and have that project striked from our to-do list. That was an eye-opener. And because of that, we've seen a pull forward in the business that made the business jump ahead by a year or 2. Actually, if you look at Fiverr, Fiverr, this year, is going to be 3x larger than the company that went public 2 years ago, and it's growing faster. Now what's really interesting is the sustainability of those trends because what we've seen is, we've seen that cohorts are not just higher quality, and they spend more and they spend across more categories, but their revenue retention is better. They become more involved over time. And I think that the investment that Fiverr has done in its strategic growth vectors, one of them is going upmarket, meaning that we constantly innovate and develop newer tools to allow larger businesses to engage with the platform. If you've asked about the limitation of the e-commerce model into more complex projects, we're dealing with that. Some of that solution is Fiverr Studios that allows agencies to be able to service customers for more demanding types of tasks. So we've seen these that those trends have sustained throughout the changes since COVID. And by the way, let's not make the -- let's not fool ourselves. We're not post COVID right now. We're now experiencing a phase in what probably would be another year or 2 of COVID hanging above our heads in a way. And we've seen the differences. We have offices -- it's an international company. So we have offices all around the world. In the U.S., obviously, in Europe, in Israel, where Israel was kind of in the forefront of vaccination and then going out of lockdowns and then seeing the variants and all of that. We're in the midst of the pandemic, and it's not done yet. But what we're seeing is that there's the openness or the embrace of remote work is not reversing itself. Now it's here to stay because, I mean, we're having this discussion remotely, right? And it works. It's amazing, right? We use -- all of us used to travel from almost all around the world to meet which was fun, but it's still doable, and it's still as efficient. So we're definitely thinking that this is going to be with us in the future. And Fiverr is a perfect solution for that. It enables that connection which is why we're very excited about the future for us.

Great. That's really helpful. Maybe before we move on from the COVID topic, on the 2Q call, there was kind of mentioned more challenged environment and winning new buyers maybe through the back half, the seasonality normals. Now does that mean things are not as sticky as maybe we all thought they would be? Or is this kind of the normalization that we knew kind of would come one day that maybe came a bit quicker? And I guess, ultimately, it's kind of the adoption curve of people using digital solutions. Is it steeper exiting the pandemic, though, we're not fully out of it than kind of entering?

Yes. So generally speaking, I'll say that we came out of the pandemic much, much stronger than we've entered the pandemic and this is to this day -- and by the way, we now have more history than we have when we reported on Q2. So we have some visibility that we didn't have a month or 2 ago. What we're seeing -- we've talked about this, was that we've seen Q2, the fact that Q2 is not our strongest quarter is not new. It has been the case for 11 years. We know that. The only difference was that this year, we've seen that seasonality being stronger than usual. We called it hyper seasonality. And the reason for that, we explained. The reason for that was the fact that people were locked for 18 months at home and all of a sudden, were given the option to go out when it's summer. And the reality was that the level of vacationing alone was pretty amazing. We looked at like public data on Internet usage, the traffic for Amazon decreased by 15% -- like it's a -- there's less people online. People are tired from spending all their time in front of the computer, they needed a break. And we said that it's very hard to define when will people recharge and get back to kind of normal life, whether it is from home or from the office. And we said that there is a chance that when summer is going to end and on top of that, you have the variants and all of that, then we might see those trends, but we don't have a crystal ball for that. But what we can say is that the effect of COVID hasn't been temporary. And we see that from the numbers. It's sustainable, right? And that's what we're seeing right now. And definitely, it's fascinating to look at those trends and how September is starting to shape up and with back to school, and it's autumn and it's like -- it's very interesting to look at the numbers. Again, we're very excited about the future. And we haven't seen that as a onetime effect. I think that the impact of how companies think about integrating freelancers and augmenting their teams by working with freelancers is here to stay and it's going to be stronger and stronger throughout the current decade.

Great, thanks. We have a question from an investor that's kind of along the same line. I'm going to squeeze it in here. But do you see these hyper seasonality trends continuing after -- over halfway into Q3?

I will say that we are seeing some change during the quarter. Again, it's very -- I want to be careful here because, again, I'm saying very clearly, we don't have a crystal ball. However, what we're seeing from the trends or the business is that there is a change. We actually said when we reported on Q2, that the hyper seasonality effect started creeping in during Q2. It didn't show up overnight. And we were -- when we reported, we said that we think that we've passed the peak point of that hyper seasonality, which, I think, now we know is the case, meaning that we are seeing some trends of improvement or that hyper seasonality changing course. Again, very hard to know because it's being impacted by new variants and the fact that the variant is penetrating the U.S. right now more aggressively. And it's also being impacted by the fact that Europe is kind of closing itself and trying to keep itself safe. And there are some trends on that. But generally speaking, yes, it's being more moderate during September.

Great. Great. Thanks. Maybe switching gears a little bit to the total addressable market. I think that's an area investors need a little bit of help of trying to understand the -- really the size of the opportunity within the vertical. How do you view this opportunity? And how should we, as investors, look at this? Is it really -- is people looking for kind of [ late ] development or logos or marketing or data entry? I mean there's so many categories. What is the best way to frame this opportunity? And you kind of call it a blue ocean, is there -- is part of this educating buyers as to what they can even do through the platform to complete tasks maybe they're not doing today?

Yes. So the way we are looking at the market, and, I think, it's pretty conservatively, is to say, when you look at the overall market of freelancing, the reality is that about 95% of it, maybe slightly more even, is off-line. Meaning it's the old-fashioned traditional way of, like I'll ask my friends if they know anyone good that can do a project for me and then getting in touch and maybe ending up working with that person or agency. And only a small portion of the freelancing activity is online. And when we estimated the methodology that we used was to actually look at governmental data and research that looks at the size of business and slice it by the categories that we operate in, only those categories; and focus only on digital services, not look at the overall pie of freelancing in general. Because freelancing probably also includes gig workers that work from Lyft or Uber or DoorDash. And so focusing on the categories in which we operate right now, we said that our study showed that in the U.S. alone, it's a market of about $115 billion, and Europe from our studies is about 1.5 -- Europe as a whole is about 1.5x bigger than the U.S. So if you look at only those categories in which we operate, and as a reminder, we open about 30 new categories every quarter so that, by definition, increases the time. In only those categories, this is the addressable market. Obviously, the freelancing market, as a whole, is much larger. But we've tried to take a more conservative approach to it. And I think that even though it's conservative, you can understand that it's an endless opportunity, only a small portion of it is online. And of that portion, we see ourselves as a leader in that space, but it's a small portion of a small portion, which, again, is why we are excited because it's -- there's so much upside ahead of us, definitely much more upside than there is behind us. So that's how we think about the addressable market.

Great. That's helpful. And maybe switching gears to kind of the competitive landscape, and we have a question from one of the listeners that I'll squeeze into kind of my broader question, but this -- gig economy kind of digitization is still in its early days. How do you view the competitive landscape? And maybe how do you maintain a long-term competitive advantage, considering freelancers do have kind of an expanding menu of options to find work?

Sure. So -- and I think this -- I mean, my previous answer was a good segue here. Because when we look at opportunity and when we think about competition, we think about opportunity, we view the off-line activity, which is 95% of freelancing activity, as our biggest competitor, right? We're the alternative for that. And we should win, right, and ensure that people can enjoy the off-line experience and that experience should be 10x better of their other options. So if we think about competition, this is #1, by far, because if you think about who we're competing online against they have a small portion of the online pie. It's not worth going against anyone because even if you eat their lunch, it's still a small portion in comparison to a huge opportunity that is out there. So that's how we think about competition. Now in terms of activity and overlap, what we're seeing on the market is, obviously, there's -- within the online space, I'm not even talking about the off-line traditional staffing and all of that. If you look at the online, there's vertical players, those who are niche players, and those could be large niches that are offering a very specific solution for a very specific need. That could be translation or design or software development or whatever. These are specialized players that are focusing on a very specific category. In those categories, for us, that might be one category out of 550, but still, on those categories, those might be considered as competitors. Again, because the opportunity is so big, we don't see ourselves going head-to-head with anyone because there's so much availability. There's so much demand out there that you don't need to take a competitor out of the equation. Nobody owns any market, even a vertical, right? And the other types of competitors or potential competitors are those who are trying to do more horizontal solutions like Fiverr. But typically, they are in a different segment of the market, right, and are offering a different type of service like freelancer.com or Upwork, which are kind of more of an online digital staffing or staffing service for enterprise business, which are 2 things that we don't do. We don't do staffing, and we don't focus on enterprise. So that's kind of the landscape in how we see it, again, is -- to sum it up, the off-line is the opportunity. That's where the huge market is, and we're very focused on capturing that opportunity as fast as we can.

Great. Great. That's very clear. Maybe switching gears a little bit towards kind of products and solutions. Earlier this year, you launched subscriptions. Can you talk about how that's going? And give your thoughts on a number of categories that you think this approach can work in?

Sure. So when we talk about going upmarket and when we talk about adding more sophistication for the types of services that we offer for our customers and our customers is also, over time, more and more sophisticated. We think about the types of services and type of engagements that are slightly more long-run engagements. The types of services that require that you would provide them over time. A good example for that is anything that has to do with search engine optimization, which is a huge thing for businesses, right? They want to optimize their position on Google or other search engines. And to do that, it's not like a task that is done once and you are done. It's a task that you need to do over a period of time, sometimes months, sometimes years to see that improvement going on. And for these types of services, what we wanted to make simple for customers is the ability to engage in a subscription type of model with the freelancers so that they wouldn't need to renew that service every month manual because that was just a unnecessary labor. So we give that optionality to freelancers where they can offer their service one-off or they can offer it on a subscription basis. It's probably not relevant for the entire catalog size, but it's definitely relevant for hundreds of categories. And we've seen a very strong adoption for this feature. Freelancers love it and customers love it because the repeat relationship between customers and freelancers on Fiverr is extremely high. And that is another tool to do these longer-term engagements.

When you think about the products and solutions you're offering the freelancers or active buyers today, what kind of runway left -- how much runway do you have? Do you add more enhancements or solutions or technology updates to kind of improve the upper funnel and then also down to conversion?

Yes. Obviously, I can't go into too many details about what we're planning for the future. We're just getting [ warmed up ], that's my answer. There's so much in the pipe. There's so many super exciting things that we're working on right now that there every aspect of what you see right now could be further innovated on. And as we think longer term, as we think for the end of this decade, we think about Fiverr as a platform that really allows businesses to integrate freelancers into their workflows in whatever manner or way you may think of. And I know that we're going to have big announcements in this area coming up in the next few quarters. And I'm sorry to keep you in suspense. But obviously, for many reasons, both competitively and forward statements, we can't get into too many details, but there's tremendous amount of runway in innovation and what we're doing, tremendous.

Great. No, that's great. That's great. Maybe can you touch on partnerships? You recently announced a partnership with Salesforce and Wix. What's the opportunity here? There are a lot of partnerships out there that can be made that are mutually beneficial to Fiverr and the partners.

We're excited about this. That said, I think, it's still early into the partnership. We're forming the programs. We're getting -- we're starting to kick off these programs. And I think, in a sense, we don't -- I don't want to be in a position where we talk about this too much too early because there's going to be a learning curve here. Definitely, the types of partnerships that we're excited about, and I think that in the even medium term are going to be extremely strategic for us. But I want to be careful to not get into too many details. As we're internally learning this, we'll be very, very happy to start sharing what we're seeing there. Yes. We're excited. We're excited about this. It's important, and I think you're going to see more of them.

Great. Great. I know we have about 5 minutes left, and we have a question came through that I want to ask you guys. The question is whether Fiverr is more focused on lower hourly wages for gigs versus maybe more traditional consulting, hourly compensation rates that may be in the several hundred dollars range. So I guess the question is, is Fiverr more focused on kind of low hourly rates? Or are there also higher hourly rates on the platform as well?

So to answer this question, I'll start by saying that we're not focusing on hourly rate at all, period. So I've talked about the benefit of having full transparency into how much specific things cost and that the hourly model makes this very complex and opaque. And therefore, the pricing method on Fiverr is that you get fixed prices. And by the way, these fixed prices are being defined by the professionals that are being -- that are offering those services. Now on Fiverr right now, we have services that range from prices as low as $20 or $50 to prices that go above $10,000 per project. So we're definitely not focusing on the low end services. But instead, what we're seeing or what we're targeting is that the catalog should contain the simplistic, standardized, simple-to-define small projects that oftentimes are being associated with also lower prices up to as complex as you can imagine, and that could be developing an entire product for you on the platform. And again, the strategy is we're going up market. So as we go up market, and again, the historical start was micro services for micro businesses, we now have some of the largest enterprises in the world coming to us and using the platform. And we want to make it -- we want to ensure that we have a catalog that is the right catalog for all of this range of different businesses. So we're definitely not focusing on the low end. And I think we're extending the catalog to include both simple and sophisticated types of services.

Great. Great. We've got a couple of minutes left. So maybe we touch on take rate. I know it's a popular question for Fiverr. It's above kind of the peers today and even pretty high for marketplace standards. So can you talk about how you think about the take rate today? Can it move higher? Or does it come under pressure over time and move lower?

I think that this is indeed a very common question we are getting during the last few years. And while addressing the question, we were able to increase the take rate. So we actually believe it's not only sustainable, but there's also some room of opportunity for us to increase. Our way to increase take rate historically is usually by providing more services on both sides, whether on the buy side or sell side. As Micha mentioned earlier, we have a full pipe of -- full map product plan for the foreseeable future, which does give us the confidence that there are a few services that will enable us to slightly increase rate -- take rate over time. So again, historically, take rate is increasing slightly quarter-over-quarter. We believe this is the case for the foreseeable future. And just to augment on that, we believe the take rate represents the value we provide on each transaction. You can -- none of the marketplace, neither us can take more than seller nor buyer are willing to pay. Over the time, as [ central ] buyer grow and ASP grow and we're probably much more mature and established business, we haven't got any pushback on take rate neither from the buyer or the seller, which give us the confidence that the take rate is here to stay. And again, by providing more services, we've been able to increase that. So to summarize, we feel confident, and we think there is a room to expand.

Great. Well, I think that takes us to the end. So Micha, Ofer, thank you so much for joining us today.

Thank you, Nick.

Thank you, Nick. Thank you so much. Thank you. Bye-bye.

Great. Take care, everybody.