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

All right. 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 and more than I think we're close to 700 categories now, such as programming, 3D design, digital marketing, content creation, video animation, architecture, lots of others. In the past 12 months, more than 4 million customers bought a wide range of services from freelancers working in more than 160 countries. So Micha is a serial entrepreneur. He's founded and led several tech ventures, and he's been Fiverr's CEO since the beginning, about 13 years ago. Ofer has served as Fiverr's full-time CFO since 2017, consulting CFO of the company since 2011, and he was previously acting CFO at Wix. So thank you both for joining us.

Thanks for having us.

All right. Let's see, so Micha. Let's start where most tech conversations are starting right now with AI. So companies and investors are sorting through the opportunities here, the areas of disruption. How do you think about the impact of generative AI on Fiverr?

So first off, we've been involved in AI for many, many years. Actually, as a company, we launched several AI products within Fiverr in the spaces of voice and graphic design, and we're super excited about the recent developments. And first of all, we're excited because AI as a step function in technology just allows us to build a better product. And that's a huge plus. The second part of it is that it seems that everybody is winning because of AI. I mean if you look at professionals, so we're at 2-sided marketplace. We have supply and demand or sellers and buyers, freelancers and businesses. And everyone can enjoy it. I mean our freelancers can use technology to work less hard and focus more time on their creativity, which also means that they can deliver faster output for their customers. Their customers receive higher quality and faster products. So it's a great plus. And if anything, I think that this is just -- it's just changing the nature of skills and professions. I said that many times. I don't think that AI is going to replace human beings but I think that human beings that are going to master AI are going to replace professionals who don't. So if anything, it's a shiny new tool. It's incredibly powerful but everybody has access to it, which means that this is going to be the -- since everybody can use AI, that's going to be the new baseline. If you want to create something above the baseline, you're going to need to either become a professional or hire professional to do it.

Okay. Great. You've talked recently about some of the tailwinds that AI is creating in the business. You've rolled out a lot of services and kind of categories tied to AI. How fast is -- what are you seeing so far? I know it's only been a few months but what are you seeing so far? And how do you think that will trend going forward?

Yes. So it's -- since it's been around for just a couple of months, it's very hard to call anything a trend. But Fiverr is a horizontal solution, it is a marketplace with multiple verticals and categories. As you said, close to about 700 different categories. We've launched in a matter of 3 weeks, we've launched between 20 and 30 new categories that are dedicated to AI-related services. And these categories are booming. Searches for AI-related services skyrocketed for over 1,000%. And obviously, the demand for these services is booming. And it's great because Fiverr wants to be the place where you can always find those next professionals. The professionals, the types of skills that were invented 5 minutes ago. You want to be able to find them all on Fiverr. So we've been seeing very high demand. Just as an example, areas of data science, developers -- software developers who specialize in integrating AI in apps, prompt engineers. Anything that has to do with AI is going up right now. So that's a good first sign for us.

When you have a category like this that's growing so rapidly, how do you vet freelancers and ensure that buyers are receiving high-quality work?

So essentially, obviously, there's the rating and reputation system that is baked into our product. So once activity starts, when conversations start with -- when orders start it's very easy to measure because we have so many signals within every transaction that allows us to understand the quality of that transaction. And beforehand, there's many ways of doing such. We have an automated vetting mechanism. And in some cases, we also have team specialists that are actually -- and domain experts that are actually looking into applicants or sellers that are coming into categories to ensure that their profile is intact and some of it is by way of connecting their professional networks into Fiverr, so we can actually get access to information from there. So we have a multi-tier process of vetting and ensuring that we get top tier. And in the case where we offer talent that is the top percentile of talent like what we offer within Fiverr business and Fiverr enterprise, we have a whole vetting process that includes interviews and so forth.

Got it. Okay. All right. And then just to wrap on this topic. Just when you think back through Fiverr's history, have there been any similar points where maybe people have questioned kind of opportunity versus threat or technology shifts where a vertical has grown so quickly?

Yes, I think -- the good thing about being in horizontal is that you're not dependent on any specific category. We don't have any overconcentration in any category. So -- so categories by nature are a moving object, right? If last year, everything was about NFT and crypto, now nobody is talking about that. So we've been able to take a great advantage at the time and now it's something else, right? So I think that this is one of the strengths of being this everything store that can respond super quickly to any change in the market. And the market is changing very rapidly. But I mean, the fact that the skill market is changing is not a new thing. I mean if you think about this historically, how many jobs survived between my grandfather's generation to my father's, my father's to my generation, my generation to my kids? Very few, right? So now it's another step that is changing this. And there's going to be so many new skills. And if some skills are going to be obsolete, that's fine. I mean it always happens. I understand why there's a lot of interest right now, and maybe some of it is a little bit of a panic. But -- but it's just another phase in technology. It's a step function, but step functions happened before with big data and with IoT and with smartphone and some of -- each one of them has been an opportunity for disruption. And this is going to be another wave as a company that knows how to ride those waves. We feel very confident of being able to take advantage and enjoy.

Okay. Great. All right. Let's shift gears, talk about macro a little bit. I know another fun topic.

I guess everybody is used to it.

That's true. I remember a conversation at this conference a year ago, right, when it was kind of really early in kind of seeing some of those impacts. But in any case, Fiverr has actually stood out, right, in the work economy space. I think having kind of a more stable environment, let's say, over the last several months versus some platforms kind of seeing further softness. What do you think is driving some of that relative outperformance?

I think that this -- I mean, we're experiencing a cycle right now. So within that cycle, I think the different segments in the market enter the cycle at some latency and some will get out of it faster than others. And since Fiverr historically has been very concentrated in the small business side, we're super, super sensitive to macro. So being such, we felt macro ahead of everybody else because it's -- I mean, small businesses are very similar to consumers. So you feel it very, very quickly. What I think you're seeing now is more companies that are from the SaaS space or enterprise space. Bigger ships takes longer to turn. They feel macro slightly slower. They have committees to decide that they want to cut back on expenses blah, blah, blah. Smaller businesses don't have that. They just see the wrong headline in the newspaper and they're done. They're just -- they're playing defense instead of offense. And so we've seen the cycle slightly earlier, I think, than other businesses, maybe similar to consumer businesses. But I think that on the flip side, we're going to be one of the first companies to actually see the rebound from this cycle, which we've seen before in other cycles. So -- so that's probably the reason why there's a little bit of an offset between different segments of the market.

And do you feel like you're seeing any of those -- I mean, are there parts that are improving -- do you believe, like from a geographic perspective or anything?

Unfortunately, not really. It's more of a steady state since probably Q4 meaning that it's not becoming worse, and it's maybe a little bit less all around the place. So a little bit less hectic going up or down. It's more normalized, more stabilized. It's still -- we're not sensing a recovery, and that goes pretty much global. And by the way, different regions of the world have their own issues, right? I mean, EU is -- has its own issues versus the States or other parts. But largely, what we're seeing from a business standpoint is that businesses right now are more in maintenance mode than in growth mode. So they're not doubling down, which means that they're not sensing that the market is about to recover yet. We'll be happy to call trends that tells otherwise, but this is the case right now.

Got it. Okay. So maybe -- I mean, within the -- your guidance of 5% to 8% revenue growth this year, with some acceleration in the back half. So the assumption there on macro is steady state from here basically.

We didn't factor any -- we didn't factor any change in macro. It's the kind of nature of what we see with this flat active buyer throughout the year and a growth in spend per buyer, which is based on investments we are doing and the end of some lapping in terms of spend behavior over the last few quarters.

Got it. Okay. All right. Okay. So that's a good kind of shift into talking about active buyers and spend per buyer. Last year, you saw moderating growth in active buyers. You kind of just said flattish this year. You had some churn last year associated with the COVID cohorts. Where are you in terms of that cohort stabilizing and having new buyer growth kind of coming into the business?

Yes. So in terms of cohort behavior, cohorts are stable. And this goes to old cohort and new cohort and gives us a lot of confidence in as we look forward. In terms of loyalty of our buyer base and ability to acquire a new cohort that behave pretty much similar to the old one. In terms of the top of funnel due to the softness in the appetite of SMB to invest in their growth. What we have accommodated our investment to match the level of intent and the performance marketing environment, which is why the active buyer has flattened. As we don't anticipate, at least in terms of modeling any change of this environment, we think that active buyer and as we look forward, will be flattened.

Okay. Is there any -- I guess, when you look across kind of cohorts from smaller businesses to larger enterprises, and I know, of course, the business is overall much more skewed to smaller businesses, but any bifurcation in trends or behavior that you're seeing?

Not specific worth noting. I think that -- we are focused on high-value buyer and a bigger organization. But I think that the softness is across the board, slightly more -- slightly more aggressive on the SMB on the big organization. The retention is better. This is why we are focused on those type of organization. But all in all, I wouldn't know any -- I wouldn't note any specific or gap between the 2 type of audience.

Okay. And you've talked about spend per buyer growth kind of gradually improving in the back half of this year. I guess how much of that is comp dynamic, right, just the easing versus more organic improvement?

I think -- as I mentioned earlier, during the last few quarters, we've seen SMB reducing their spend. This has been partly compensated by the investment we are doing in going upmarket in terms of product release and focus on high-value buyer. Now that this period is lapping, we anticipate spend per buyer to go back to what we call normal growth, which is approximately $5 per quarter. Again, this is driven now that the baseline is flat. This is driven both by the investment we are doing in product and quality, but also in terms of focus on high-value buyer and the acquisition channel.

Okay. Let's talk about Fiverr business a little bit. So I know it's early, but also a major initiative, right? As you've talked about, I guess, overall, how would you gauge your progress so far on Fiverr business?

We're very happy with it. it's going extremely well. It is outgrowing in its pace, the growth of the market base, which is a great sign. And -- it's a product where we're investing a lot in understanding the life cycle of a customer and being able to identify and segment the right customers, identifying them as they land on Fiverr and making sure that we can move them into the right solutions as fast as possible. And what we've demonstrated is that by moving them into Fiverr business, we're able to extract multiple times their investment and multiple times their lifetime value as a customer. So we continue developing this product. We've been -- some features, we've announced, some we just released and are working extremely well because it's not just the ability to match larger customers with the right talent. It's being able to tackle more complex projects, it's introduction of solutions like project partner, which is allowing our customers to actually outsource entire projects into our platform. It's aspects of the product that has to do with the way they -- these large companies pay or get invoiced. It has to do with team collaboration, and so there's -- from that perspective, that really allows us to get into a much different segment of the market, which Ofer mentioned has a better retention as a much, much higher lifetime value that we can engage with in many more categories and what we're learning to do is not just identifying them and moving them into the product, but making sure that their success is being maximized. So if we start engaging with the customer through a small team, extending from that team to department, from that department to multiple departments and eventually becoming their tool of choice for managing their entire freelancing talent base is what we're offering. So it's a suite of solutions. And I think that what we're doing now is essential to be able to cater for all these needs. We see from the progress of adoption and new customers that are joining that type of engagement is -- I mean we're super happy with it. Still early days for that, and it's a very different mentality for us. It's not like moving from a B2C to a B2B kind of thing but the team is doing a great job, and it's progressing. I mean we're very happy with the progress.

What's the -- you talked about kind of identifying to be able to like pull out kind of existing customers, right, existing buyers, right? We're actually really enterprise business, right, buyers and moving a bit. But what's the -- what other changes are there in terms of like go-to-market strategy or sales to go into the bigger businesses?

So the vast majority of the funnel is driven by the existing go-to-market strategy. We don't plan to change it anytime soon. And I think as Micha said, the challenge is to segmentize this funnel into the appropriate product and as early as we can starting with the lending experience and it goes all the way to identifying existing customer and route them through or offer them to move to a more advanced offering. So I think that this is where we are focused. It goes to product. It goes to customer success and being able to communicate with this audience while transforming to the new service. I think this is where the majority of the investment is being.

Got it. Okay. Maybe talk about take rate a little bit. Take rate in 1Q, you're over 30% for the third straight quarter. I think it's up about 400 basis points over the past 4 years. Maybe if you can talk about some of the drivers here and how you think this can go going forward?

So I think take rate has been a question since we went public. And happily, as we go upmarket, we also increased take rate. So take rate is based on 2 different components. One is transactional, which stands for approximately 25.5%. And all categories, all transactions. And then we have additional layer of value-added services both on the buyer and the seller side. Part of that is Promoted Gigs. Other part is Seller Plus. We do have some subscription on the buyer side. So all in all, [ this stands for ] the additional layer. And as times goes and we introduce new services and been able to monetize against take rate is going up. So we feel the take rate is sustainable. And as we further adopt more products and as Promoted Gigs, Seller Plus and other services that have been introduced a while ago are being well deployed, we see some potential for upside.

Okay. Anything you can add there just in terms of how you think about penetration of Promoted Gigs or growth in that business?