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

All right. Great. We're going to go ahead and get started. I'm Doug Anmuth, JPMorgan's Internet analyst. We're pleased to have with us Fiverr Co-Founder and CEO, Micha Kaufman; and CFO, Ofer Katz. So Fiverr's mission is to revolutionize how the world works together. The Fiverr platform connects small businesses and the Fortune 500 with skilled freelancers, offering digital services in more than 550 categories. In the past 12 months, more than 4 million customers bought a wide range of services from freelancers working in more than 160 countries. Micha is a serial entrepreneur who was founded and led several tech ventures, and he's been Fiverr CEO since the beginning 12 years ago. Ofer has served as a full-time CFO since 2017 and a consulting CFO to the company since 2011, and he was previously acting CFO at Wix. So welcome, Micha and Ofer.

Thank you. Good morning.

All right. So maybe just to start off a little bit high level. Can you talk about how the pandemic has changed how the world works together and kind of how that's played out on the Fiverr platform?

Sure. So if there's anything that the pandemic has done is really to accelerate trends that have been existing beforehand. So freelancing has been growing pretty massively since 2010 when it was probably in the high 20s in percentage out of the workforce in the U.S. And it's now 40-something percent. By 2030, 50% of the American workforce are going to be freelancers, which is an amazing move. And I think that if anything, what happened with the pandemic is an acceleration or a fast forward for the beginning of this decade. So we've been seeing much more talent coming into the marketplace on the supply side or the talent side. And we've seen more and more companies that are embracing this incredible access to talent and using platforms such as Fiverr to make their work more efficient and more cost-effective. Obviously, during the pandemic when the world went into a lockdown together in March 2020, off-line didn't exist anymore. The majority of freelancing in the world is happening offline to this date. It's about 95% of the activity, the freelancing activity is happening offline. So what happened in the beginning of 2020 when offline wasn't an option was a massive drove into the online solutions. And we've seen that both on the supply side and the demand side, as I've said. Historically, Fiverr has started at the pretty bottom of the market with micro services for micro businesses. And over the years, we've been growing into the SMB space and in recent years also into larger types of businesses. But what we're seeing is that SMBs move faster than larger companies. They embrace new technologies and new ways of working with talent much faster. But what we've seen during the pandemic is the need for larger companies, and that has to do with talent shortage in the fact that the entire world went into remote work. Larger companies have discovered the benefits of working with freelancers and we're seeing that being embraced in a much deeper manner. As I've said at the end of this decade, millennials are going to be 75% of the workforce. 45% of them are engaging in freelancing. Gen Z is engaging in a rate of above 50% in freelancing, and they're going to be a pretty large cohort. So this is definitely a trend that is not going away. This is how the future of work is going to look like.

So what are some of the ways that -- over the last couple of years that you've leaned into those trends. And when you think about enterprise, for example, and other things on the product front.

So as we were going upmarket, what we started doing is extending the product offering to cater into more mature types of companies. Now the difference is it might be nuanced, but they're very important because as a larger business, businesses need slightly different types of features, things like the ability to manage budgets for their freelancing, the ability to work as a team on specific projects, the ability to actually use freelancers for more complex types of projects and not just micro services. So all of these things have been built into a product we call Fiverr Business. And I've spoken about this before. I think that what we're seeing now as a change as a trend is really similar to what we've seen with cloud computing. I think that the way larger companies are thinking, and that's kind of the correlation with cloud competing, I remember 20 years ago, we used to code on our physical computers on-premise. We used to host our existing servers. We used to manage them and upgrade them and retain their high performance, which was really hard. And then we move into cloud computing and everything became very, very simple. Very similar trends we're seeing with talent as well. Many companies realize that finding the right talent, retaining that talent, training that talent is very, very hard, but that talent exists and it's a click away. I think that, that is exactly what we're doing. We're creating this idea of a talent cloud that allows companies to tap into that talent cloud in a click of a button. And so we're investing in building that technology, that infrastructure. And as a company that pioneered this idea of making the transaction or hiring a freelancer as easy as shopping online. I think that we have the technology to build out that network that would unlock a tremendous amount of TAM for us beyond the large sum that we're operating in right now.

And when you think about the tight labor market, how has that impacted supply and demand on the marketplace?

Yes. So I think we were less affected by the tight hiring market. We've seen -- when you look at Fiverr, Fiverr is a classical 2-sided market base, right? It has supply and demand, it has talent and it has customers. We're definitely more customer constrained than talent constrained. So talent comes to us pretty much 100% organically. We've never had to acquire talent. We actually have more talent than needed. And so our focus is really to make that talent accessible and available for a larger audience. During the pandemic, we've seen some trends where very highly qualified people or more qualified people have joined the market base because they've seen the benefits of using an online market base rather than essentially working offline and chasing customers on a regular basis. The convenience of joining Fiverr, which costs nothing for the supply other than just spending a few minutes setting up your profile. And then doing absolutely 0 effort to win your customers is unbeatable. It's an unbeatable offering. So I think more and more accounting people are realizing the benefits of that. So we've seen tremendous amount of talent coming in. And as a fast moving and fast responding market base, it allows us to also extend our catalog in ways that would allow access to very specific types of professional services. And again, when you think about the fact that most companies have a hard time training their talent to be professional at very specific things. Having this access to this incredible market base that gives you tremendous amount of metadata and very specific types of services, over 550 different categories. And it's -- I mean, last year, we've been growing by about 30 new categories every quarter. So that really gives this unparalleled access to talent.

Okay. Great. Let's shift gears. I want to talk about macro environment a little bit. We've seen, of course, many companies in our coverage universe impacted by macro over the last couple of months. January and February were strong for Fiverr, and then you saw some slowdown in March and April. Hoping you could talk about some of the drivers of the change in trends kind of across those periods and how you're thinking about it kind of in 2Q?

Yes. So I think what we've seen this year has been somewhat similar to what we've seen last year around that time, which, by the way, are very unusual years. So we've been operating for 12 years. In the first 10, we haven't seen any trends that are similar to what we've been seeing in the past year and this year. We've seen some softness generally speaking, that has to do with -- it started with some softer activity in Europe. When we look at the reasons for this, some of which we should say we're speculating because it's very hard to understand why trends happen and how to forecast them into the future. But what we're seeing last year and this year is this pretty massive wave of opening up the world that correlates with the fact that people spend more time away from screens. They spend more time traveling. If you look at the travel and leisure, you see that there's a pretty massive increase right now. And you see that on consumers, you have less activity right now. We're seeing that across a very wide sector. Now because we're mostly concentrated around SMBs, then SMBs by nature respond faster to those trends. When the pandemic hits, SMBs were growing their activity by 100%, while enterprise was growing its activity by about 10% only. And now they're over responding in the other side. So they're playing it a little bit more careful with inflation going pretty massively up with interest rate going up, with cost of living going up, with instability that comes with the war in Ukraine and other regions of instability, we're seeing this trend of slightly softer activity. We spoke about this that we're not seeing this in a very specific category or a very specific cohort. We're seeing that across the board, new and repeat, slightly softer. Now when we look at cohort behavior, they're much better than prepandemic. We're not going into pre-pandemic levels. But since we're seeing that level of slowdown, we've made some adjustments to the way we provide guidance to have a wider range that encapsulates the fact that it's -- there's a high level of uncertainty into when these trends are going to change themselves. Within those trends, we've seen Europe responding a little bit -- a little bit stronger to the instability in its region, and it's not surprising. And within Europe, we've seen probably a more serious impact on Germany, specifically, which is the fourth largest economy in the world, and it's #4 in Fiverr as well. And we've seen some softness in the U.S. but lesser softness than in Europe. These trends have been somewhat stabilizing in the past month or 1.5 months. But they're still softer than usual. And it's very hard to predict when this is going to change. However, what we're seeing from the fundamentals of the business, as I've said, the cohort behavior, customer behavior, they're -- the fundamentals are doing great, and they're better than pre-pandemic. So we don't think that there is any concern of going above the pre-pandemic levels. It's a much different company than we were. I mean we took the company public 3 years ago, and we're now 3x larger and profitable 2 years ahead of schedule. So as a company, it's a very, very different business. It's a business that remains to be a high-growth business, and we're gearing up for that. And what we're seeing now is really a temporary softness. It also has to do with the fact that we're lapping unbelievably large outsized cohorts from last year. And just as an example, Q1 of last year was 100% growth. So it's very hard to comp against those quarters. But we feel that moving forward, we're going to have a more normalized growth and go back to our compounded growth that we've been demonstrating for the past 12 years.

And Ofer, just to close out there, just thinking about the guidance range for this year, the 16% to 23%. Does that kind of assume stable from where you are or kind of leave room if things are a little bit softer?

Yes. So thank you, Doug. I think the wide range for the volatility that we are seeing and the uncertainties that we experienced throughout the projection, I think on the high end, it assumes back to normality -- normal trends, which are usually pretty strong Q3, even better Q4 with the last 2 weeks of the year, which are pretty silent because of the vacation. So that's on the high end. The midpoint stands for continuing trend as we are seeing today and the low range stands for even worse business economy that we've seen in the last few weeks. So that this is how we build the guidance to speak for the level of uncertainties that we are seeing in the behavior of our buyers.

Okay. That's helpful. Help us understand a little bit kind of the dynamic between active buyer growth and then spend per buyer as well. On the active buyer side, obviously, were up against a very tough comp from that 1Q of '21 peak. And I think you're expecting some further detail just through the balance of this year. On the flip side, spend per buyer is -- hit a record high in 1Q. So if you could talk about that.

Do you want to start?

Yes. So I think the mix between spend per buyer and active buyer is actually an output of our upmarket behavior, our upmarket initiatives. And over the last few years, we've been focused on expanding number of active buyers, but also focusing on high-value buyers, more business and bigger business with bigger wallet. So over time, when we look into active buyer, we need to bear in mind that we're not only after quantity, but also after quality. Micha spoke about the Fiverr Business initiatives and our investment in product. This type of investment end up with higher lifetime value. So when we look -- when we try to compare the number of active buyer growth in the next year -- in the following years, we should bear in mind that the mix of buyers in terms of business, bigger business in SMB is changing. I will add to that the fact that -- and again, it goes to Micha comment earlier, we are experiencing the lapping of unsized cohort from last year. This -- the normal behavior of cohort are going through stabilization period in the first year. So this unsized cohort from the beginning of last year is now stabilizing and creating some kind of headwind to the active buyer growth throughout the beginning of this year. And lastly, the headwind that we spoke about in terms of the macro environment, this is all causing us some kind of soft active buyer behavior in the second quarter of this year. But looking forward, we do believe that there is plenty of room for us to grow active buyer. Just as one data point, we have 4.2 million active buyers throughout the last 12 months out of which approximately half are U.S. SMB. Now looking at the size of TAM at the U.S. alone, there are more than 30 million active SMB. So I think that in terms of penetration, there is room for us to grow active buyer in the next few years, yet to be said in terms of SMB, as we expand the product, as we increase the number of categories, I think that the contribution of spend per buyer is going to be bigger than the growth of active buyer in the future.

Okay. Great. Let's shift gears. You hit on enterprise a little bit earlier. I just wanted to kind of drill down more on Fiverr Business. Talk about really what opportunity it addresses? And how should we think about kind of the growth. And I think you're north of 5% of revenue today from Fiverr Business. How can we think about that over the next couple of years?

Yes. So as I've said, the origins of Fiverr has been to start with micro businesses and go up into small and medium-sized businesses. In recent years, we've been starting to engage with larger types of customers not necessarily going for the largest enterprises of the world because that would actually push us faster into creating a more robust sales organization. And I think that what we've been doing is a smart move using our existing brand marketing and performance marketing with the light usage of inside sales or success managers to engage with these types of customers. And what we've done is we've created a Fiverr Business as a starting point of what will become this idea of a talent cloud that could serve larger organizations from larger organizations through SMBs and eventually to enterprise as well. We've seen very, very nice growth into that product, but we still believe that it's in its early days. It's -- we said when we started building it that this is going to be a multiyear investment for us. And we have the patience of building this product where we think it should be contributing double-digit percentage for our business. And we think that, that could take between 1 year and 3 years. And we have the patience of building that product to that extent. As we're thinking about this idea, we also added a new product that allows companies to manage their -- not just freelancers that they get through our network, but their existing freelancers. It appeared to us, we realized that most companies, including enterprise, don't even have a clue how many freelancers they employ because it's pretty much fragmented and scattered around the organization. And you would be surprised to know that most companies are actually managing those freelancers through Excel sheets, which, I mean 2022, it seems a little bit weird. So we decided to create this operating system that allows companies to actually manage their freelancers as an extension of their full-time talent pool. And all of that is going to be integrated into this idea of a talent cloud. And it's in the making right now. We've acquired a company a few months ago and we're integrating that product into our business offering. So again, we think that Fiverr Business is while it's contributing more than 5% of the business, it's still in its infancy. And I think it's going to take time to build it. And once it's robust enough, we're probably going to start providing more data about those types of customers. Ofer mentioned the quality of the customers that we're acquiring and some of that quality is being measured by the size of their wallet or their capacity to spend money on talent on our network. And we're seeing those numbers increase steadily and very nicely, and we're very happy about that. So their contribution to our overall business is increasing, and that's a very important KPI for us. And we'll continue investing in that. And over that time, over the course of the next quarters, we're probably going to start speaking about much larger types of customers. as we expand Fiverr Business offering.

Okay. Great. I wanted to switch to take rates. Your base fee is a little higher than 25% yet as you look at the financials, your total take rate is approaching 30%. Can you talk about some of the components that are helping with take rate in some of the newer products, for example, that are helping to kind of remove friction and helping you increase that over time.

Yes. So I think -- let's start with the basic. The basic is 25.5% for all transactions across all categories or size. It goes for Fiverr, it goes for Fiverr business. So it's pretty simple. And it is 20% on the seller side and 5.5% on the buyer side. On top of that, we do offer some additional value-added services all the way from Seller Plus which provides tools for sellers to enhance their quality, the transparency into the performance. Then we have Promoted Gigs, which enables sellers to promote themselves within the marketplace. We have some financial services on the seller side, and we do offer some additional tools on the buyer side to enhance their usage when using group of freelancers on areas like content marketing. So that all in all, we feel pretty satisfied with the level of take rate we're showing today. We do believe there is room for additional upside, more moderate in terms of growth and what we've been seeing in the last 12 months. As a quick reminder, last year, we have increased the buyer side, take rate from 5% to 5.5%. So this is -- there is no plan to change the buyer side take rate shortly. So that's why we think it's going to grow because the product that we have launched are being used intensively with high retention rates. That's where the comfort comes from. But we do believe it's going to prove more moderate in the next few quarters.

Okay. Well, I think we have a mic. So if you have questions, you can raise your hand. Let me just ask one, and we'll see if any come through the room here. I wanted to hit on gross margins. You've stayed kind of 3% to 4% above your 80% long-term target really since the pandemic, but looking for a little moderation this year from the 84% last year. Just if you could talk to us about gross margins, how you think that, that can trend going forward.

Yes. The first comment, we feel very happy with the level of our gross margin. And we do think it's going to sustain north of 83% for the long term. We haven't calibrated our guidance, and the long-term EBITDA neither the gross margin. I think there will be some kind of fluctuation from time to time, whether it's 83% or 84%. We are catching up in terms of investment. We have decided to maintain this catching up despite the softness because we do believe there is a long-term goal for us that we plan to achieve. But again, there's no calibration in terms of the guidance. We don't think it's going to be north of 80%, and that it's pretty steady.

Micha, maybe you can just pick up there and talk a little bit more about the investment philosophy. You are going to continue to invest in growth initiatives through the course of this year. If you could talk about how you're thinking about that in the current environment?

Yes. Well, as someone who has been through a few turmoil's in the market, starting with 2001 and then going through the recession of '08 and more recent ones. I know that sometimes in the market, there is a pendulum between growth and EBITDA or profitability. And that's fine. I think for us as long-term thinkers that want to maximize the opportunity and want to maximize the opportunity for our shareholders, we decided that we're not going to play defense right now. By saying that, what I mean is that, as a company, we've been -- we've decided a year ago looking at that level of instability that started around Q2 of last year that we're going to be very careful about how we manage our capital and want to ensure that we have sufficient free cash flow and remain profitable, and that's the case. And we think that this is a good way to weather storms because it gives you a very long runway without burning your capital. And we think that this is the right thing. We don't think that it's the right thing now to fall down into a space of optimizing EBITDA because it's optics and then compromising our long-term growth. We think that for the sake of our shareholders, the right thing to do is to maintain course and continue investing in long-term products and investments. so that when we go out of this period, we're going to go out as a very strong company and not as a company that needs to recover from massive cutbacks. So that's kind of our philosophy. We started it way before it became trendy. So being very careful in how we do hiring and how we manage our capital. And that's our intention to continue being cash flow positive and continue managing the business to optimize it for future growth. The opportunity out there is just unbelievable and it would be a mistake to not capture it in the future.

Okay. Great. Do you have any in the room? One that's just coming through the digital conference book. Maybe you could just talk a little bit. We only have a minute or so left, but just around what you're seeing in terms of churn-related trends on active customers. And if there's any way to think about like gross and kind of net dynamics?

I think I mentioned it earlier, there is a mix of different initiatives and headwind stepping into this bottom line of active buyer. Some of those are related to behavior of existing cohort or old cohort, which seems to be super consistent over the last few years throughout the pandemic and beyond. Yet to be said, there is a headwind in terms of softness that implies for all cohort, whether it's a new cohort and old cohort. The second is that we do maintain a very, I think, exciting add-on, what we call a new buyer, FTB, exciting in terms of unit economy, even throughout this period of the first quarter, we've been able to execute tROI of approximately 4 months. So we have increased the investment, been able to acquire new cohort yet to return the investment within 4 months. And I think on top of that, bear in mind that lifetime value to CAC on a longer term, is as high as 3x for the cohort of 2020 and 5x for the quarter of 2017. So I think that we maintain the ability to acquire a new cohort that behaved pretty solid over the lifetime -- the lifetime of the cohort, a very consistent spend. And we talked about spend per buyer, which is increasing over time. And I think that lastly, there is kind of uncertainty that during this time, it will -- if it continues, it will impact the growth of active buyer in the next few quarters. And lastly, I think that I mentioned that earlier, because of the unsized cohort, the abnormal size of cohort that we have acquired throughout the first half of last year, and the normal stabilization period of each cohort throughout the first few quarters, this is impacting the growth of active buyer on the second quarter of this year. Looking forward, as I said, we are pretty optimistic about the ability to grow active buyer, whether on the SMB and bigger organization I think the opportunity ahead of us. We have all the fundamental of the business is working properly, which is why we are super optimistic as for where we are heading.

All right. Great. We're going to leave it there. Thank you, Micha, Ofer.

Thanks, Doug.

Thank you, so much.