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. It's our pleasure to have with us Fiverr's Founder; and CEO, Micha Kaufman and CFO, Ofer Katz. Fiverr's mission is to change how the world works together. It's a global marketplace that democratizes access to talent and provides talent with opportunities. That ranges from small businesses to the Fortune 500. More than 4 million customers worldwide worked with freelance talent on Fiverr in the past year. Micha is a serial entrepreneur who's founded and led several tech ventures and he's been Fiverr's CEO since the beginning, 14 years ago. And Ofer has served as Fiverr's full-time CFO since 2017, Consulting CFO for several years before that, and previously Acting CFO at Wix; so welcome Micha and Ofer.

Thank you.

Thanks for having us.

Absolutely. All right. Let's start -- let's begin where the conversation -- where most conversations begin these days, which is with AI. AI services on the platform nearly doubled their GMV in 1Q. You've talked about more than 50,000 customers having ordered AI services on Fiverr. So is AI a friend or a foe?

Mostly friend. We've been talking about this for the past few quarters, providing pretty extensive analysis showing that AI is net positive. Obviously, we understand the fear of job displacement coming from AI, and it's a justifiable fear. It is going to displace some jobs. The good news is it's going to create so many more. So it's going to produce more jobs than it's going to the story, in our view, and the numbers that we're seeing right now from the marketplace is actually backing this view. And I think it's very early in this stage to actually try to understand the long-term implications of it, because we're all wrapping our heads around the impact and what's it going to do. But it's very apparent that it is creating new types of professions and skills and demand. And we're -- obviously, it's net positive and we're net excited about it.

Okay, great. So you highlighted chatbot development as a popular AI service, certainly in 1Q. What other areas and services related to AI are you seeing strong demand for?

Things that have to do with model training, data scientists, prompt engineers. People think about prompt engineering is what do you write to Gen-AI to produce something. But the reality is that it is far more complex. Even the design of a highly sophisticated bespoke versions of chatbots require super sophisticated prompting. And sometimes the prompt engineering, the problem that you provide an engine might be several pages long to produce an answer which is one line. That level of sophistication and training to make sure that the technology avoids high level of hallucinations and inaccuracies, is extremely labor intense. So we're seeing demand for that. It's pretty much across the board. It's just new ways of -- or a new wave of skills that is being searched on our platform.

Okay. You have more than 10,000 AI experts on the platform. How do you vet these freelancers? How do you ensure that they're doing the highest quality work?

So I mean, we've been talking about the vetting mechanisms on Fiverr forever and we're continuing to perfect those. So we have our rating and reviews of proprietary technology that we've developed. And obviously, when it comes to more sophisticated types of offerings, whether they're agencies or highly professional, we have more rigorous ways of doing vetting. We have the combination of technology that we've developed plus people that actually do some of the vetting on these skills. And all of that is backed by feedback that we get from our community.

Okay. So complex services, so which are really where human skills are essential to kind of unlock the potential, those continue to grow at a healthy double-digit rate, now accounting for over 1/3 of GMV. Maybe you can just talk a little bit about how you kind of break out services across the platform a little bit, but how should we think about growth in that category in particular? Where can that go as a percentage and within the business over the next couple of years?

Yes. So essentially, this was a part of a way to provide transparency to the market in how we view the impact of AI. And so there were 3 groups: the simple; the neutral; and the complex. Simple were the ones who have been mostly, as the name implies, very simple types of services that over time technology can actually replace, or at least it can replace the entry point of these skills or services. Neutral are those who are not being impacted, whether AI doesn't serve those categories or where AI doesn't change the course of these categories. And Complex are categories where the human in the loop is extremely important, and therefore, we see those actually increase. I think that we're going to continue seeing this breakdown. As I've said, we're going to see some displacement of very simple types of tasks. And on the other hand, we're going to see many more skills on demand where you need to have the human in the loop in order to make the most out of technology. I think for those who are, again, going through the same process like us of trying to wrap our heads around it, what happens with AI, and GenAI in particular, is that while it produces -- set aside inaccuracies and all of the hallucinations, but if you look at what you can produce with GenAI, it's pretty incredible. The thing is everybody has access to this incredible new feet, right? So this creates the new baseline. And there's always going to be this idea, this chase after a way to actually produce something that is above the baseline, which is why the demand for human talent and creativity is always going to be there. It's just going to appear in different ways and categories.

Okay, great. Let's talk about product and innovation. You recently moved to a semi-annual product release cycle. Maybe you can talk about the change, how it's helped both your customers as well as kind of internal product and engineering teams?

Sure. So since last year -- I mean as a company, we're a product company. We continuously push product innovation every day. It's actually pretty incredible to think about a platform that serves -- this is the highest traffic platform in the world for digital services. And we're doing multiple deployments every day with our product changes a number of times a day, which is pretty mind blowing at this scale. And as we were continuing to push innovation out, we've realized that it's too much of a burden on our community to actually track the number of changes that we're pushing out. And it creates this issue of signal to noise. And so, that's one. The other is, internally we want to do less things, but do them with more force and with more time to actually push more meaningful things, so instead of doing incremental things to be able to invest in step functions. And therefore, we decided to do 2 major releases every year. And in those 2 releases, we always have news for all of our community for the buying side, the selling side and in a digestible way, in a way that we can communicate and our community in the market can actually understand. So this -- from an operational standpoint, this is -- this was incredibly well received within the team because it allows them to have more proper time to actually work on the larger things. And it makes sure that we -- in a planning cycle, we don't do it so many times a year where we waste a lot of resources in just getting dragged into these planning cycles. So right now, we've been doing that a number of times as of last year and this is working very well for us.

Okay. Anything we should be looking for in your July product release just as you continue to push up marketing?

Plenty of things, which we're not going to discuss for competitive reasons. I mean, yes, there is so many things that we're excited. Some of these things we've started announcing in previous releases. And we're going to continue investing in -- Neo is one of them, our smart co-pilot engine, the investment in agencies and many more then, that I'm not going to get into, but it's coming soon.

Okay. And then maybe you can talk a little bit about just how you're using Generative AI internally and what it means for your product teams for coding and engineering? A lot of companies that we cover talk about seeing efficiencies up to 30% for example, some have talked about even higher. I'm curious to hear what your engineers and product people are seeing?

I'm actually curious how companies measure increasing efficiency, because this is really hard. How do you measure that for a software developer, is that the number. Yes, but the numbers of -- I mean, I've been coding for 20-something years. Lines of code is not a good measurement of productivity. From an intuitive standpoint, obviously, we were using AI massively. And we've been doing that for the past, I don't know, 5, 6 years. And obviously, with GenAI, with LLM models as of, what was it, November of '22, this has been massively adopted. Intuitively, obviously, it does increase our productivity in the sense that a lot of what engineers are doing is copy pasting from open source, which LLM is created doing. So this saves them from doing the type of work that they hate anyway, right? So they can -- it frees up more resources to actually focus on the types of things that they like. The same goes with marketing. I actually think that marketing is the #1 space that is being disrupted by GenAI, in a good way, by the way. Again, it allows you to crunch tremendous amount of data and it makes sense of it in many ways. That is much less time consuming. And again, frees up the team's time to actually be creative, think about new ideas and spend less time on just crunching, processing data, trying to make sense out of the things that they're seeing. So definitely, from a team's perspective, I think that there is a step function in productivity. It's very hard to measure exactly what it is. And I think it's going to get better over time anyway, because technology is getting more and more mature, making less and less mistakes and being less generic, which is interesting and also allowing more companies to actually have private clouds where you can actually use it for the benefit of the company without exposing too much of your information to the general public.

Okay. Maybe we can talk about Business Solutions. Just kind of -- it's early in the enterprise opportunity. What are the top things that you think you need to do to expand your reach with mid and large business customers?

Yes. So we've talked about this many times. I think one of the great things about what we've been seeing on our platform is that it attracts every type of customer you can imagine, from the micro businesses to the Fortune 500. And it's -- what we need to do is -- we need to do a number of things. One is we need to identify them as early as possible to understand who is this visitor and how they should be treated. The second thing is we need to provide a host of different type of customer experiences that are dependent on the context of the customer. And what we've been doing with business solutions is really creating these new experiences. So obviously, we've been very well known for creating this e-commerce platform that allows customers to come in and just do quick searches, find what they need, click, buy and move on. However, in more complex types of jobs which are associated with more complex types of companies and needs, sometimes you need slightly different models. You need to pair a customer with a consultant that can actually help them figure out how to put together their product specification and only then match them with the right talent. In some cases customers would like us or someone from the platform to actually manage a project for them. In some cases it's providing them with the technology to write those in-depth specifications. In some cases they need access to account executives. And so creating this host, this very comprehensive solutions is something that we've been investing a lot in. And we're seeing the fruits of it right now as we're working with larger businesses. We're able to address more of their needs, build the right confidence and trust with them. And as we do that, we're able to have a much more, much deeper and longer relationship with them, and we see how that affects --positively affects their spend with our platform.

Do you need to have a higher touch sales strategy there to go upmarket successfully?

Well, so we have a tiny sales team. Most of it we inherited from an acquisition that we've done. But as I've said, I think the good news is that we have enough of that demand coming into our funnel, probably most of it organically just because we've built a very strong brand in our space. And it's just identifying them and being able to interact with them in a way that suits their style or their way of doing business.

Okay, good, all right. GMV accelerated a little bit in 1Q. So a decline in active buyers, but that was offset by solid growth in spend per buyer just as you continued to move upmarket. How do you expect the active buyers to trend going forward? And does the strategy change if macro kind of improves and you do more top-of-funnel marketing? How do you think about that?

We don't think -- we don't anticipate any change in the behavior or numbers of active buyer in the next few quarters. And yes, we think that the market turn. There will be an opportunity to acquire more of the smaller type of business. As of now, as top-of-funnel is shy. We are focused on high-value buyer where lifetime value to CAC is working pretty well for us and you can see how it behaved on the [indiscernible] diagram. But we believe that as the business turn, as the macro turn and SMB are going to go back and invest on their own business and growth, we'll see them coming to the platform with budget and the opportunity might mature to acquire more of them.

Okay. Seller monetization programs continue to show very strong growth. Maybe you could talk a little bit about how you think about penetration of promoted gigs and Seller Plus subscription? And what kind of runway do they have?

Yes. So both programs are working really well for us and for the audience. I think in terms of Seller Plus, we keep initiating more services, different tiers, different offering to different audience, and we anticipate this will expand over the foreseeable future, both in terms of tiers, audience and services and for promoted gigs. There is much unutilized inventory in the platform. So again, on both programs, we believe there is a room for us to further grow the program.

Okay. Maybe going back to talk about macro and just the backdrop, are you seeing any changes across SMBs or anything stand out across regions? I know you were pretty early to be impacted in 2022 really. And so I guess, just curious if you think on a rebound as things start to turn better, would you also be early to improve?