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. Very happy to have with us Fiverr's Co-Founder and CEO, Micha Kaufman, and CFO, Ofer Katz. Fiverr is a global marketplace that connects freelancers and businesses for digital services in more than 700 categories from graphic design and copywriting to voiceover music, AI services, many more. In the past 12 months, more than 3.5 million customers bought a wide range of services from freelancers working in over 160 countries. Micha is the Founder, CEO and Chairman, been CEO since the beginning, 15 years ago, serial entrepreneur, who has also founded and led several other tech ventures. Ofer has served as Fiverr's President since February 21 and full-time CFO since July of 2017. So welcome, both of you.

Thank you.

Thanks for having us.

Okay. Let's talk kind of big picture about the freelancer market. In the U.S., you talk about a kind of TAM of around $250 billion, including international, this would obviously be that much bigger. Maybe you can talk a little bit about some of the friction points that you feel like you need to address to unlock more of this TAM opportunity?

I think, first and foremost, it's about awareness. A lot of the freelancing activity in the world generally is very fragmented and still very old fashioned in the sense that when people require assistance from freelancers, they call their friends or they're looking for local agencies. And that is disregarding the fact that the efficiency of marketplace is so much higher. The time spent on finding talent and engaging with talent is significantly shorter. The average time that it takes to find a freelancer outside of marketplace is about 30 days and the time that it takes a visitor on Fiverr to place an order is about 15 minutes. So that's the compression of efficiency in very few words. With time, obviously, the awareness is growing up. And in terms of brand awareness, Fiverr is the leading marketplace in the world in that, but there is still plenty of room to grow into. Some of that has to do with the fact that historically, Fiverr has started as a market-based for micro services, for micro businesses. And over the years, we've extended the platform to engage larger customers with more complex needs. And today, we can -- we have transactions of anything between a few tens of dollars for very, very simplistic tasks, all the way to hundreds of thousands of dollars of spending with customers. I think the awareness for the higher end market is growing, and it's a strategy that we've been going through in the past 2 years and we're actually seeing very nice results in the past few quarters, as we've outlined in the letter to shareholders. So it's -- there's a lot of information and use cases there.

Yes. So let's talk about that a little bit. Certainly, a key strategic priority just going upmarket. You've had good success with Fiverr Pro. Maybe you can just talk more about how that product has evolved over the last couple of years? What kind of adoption you're seeing as you go upmarket?

Sure. So in recent years, we've done a concentrated effort to address this mid-market, all the way to enterprise. And essentially, what this has transformed us into is not just being a marketplace by becoming a platform, meaning that the marketplace is still the leading product within the platform, but there is a suite of different solutions and tools that allows more advanced customers to do more complex things and I'll give just a few examples. So rather than just thinking about simple tasks, our larger customers are actually thinking about projects. And so project management is definitely one of them, having engagement with the talent that are open ended so you can't actually have a set price in advance because you don't actually know what the engagement is going to look like over a period of time. So we've added the option to contract based on an hour basis, on an hourly basis. So this has been extending the ability to help customers understand how to break their goals into tasks and what involves in actually orchestrating a project, and how to -- assembly [ of ] that project at the end, that could be very complex projects like software development, digital transformation, all of this. And we've seen and as a strategy, we've been focusing our acquisition efforts in those types of customers, meaning that we -- we've developed the technology know-how of how to identify those customers as they come into our funnel, do a proper KYC to understand who this customer is and what brought them to Fiverr, and then bringing them or suiting them with the right solution, so that they have a great experience from which we can actually create a relationship and have customers engage with us over a longer period of time.

Got it. Okay. Maybe you can talk a little bit about the other key strategic priorities as you think about '25, kind of beyond Fiverr Pro and going upmarket. What are the 3, 4 things that you're most focused on?

So obviously, as a very dynamic marketplace, and you've said it in the introduction, we operate in close to 800 different categories of services. And as a natural movement of this marketplace, categories come and go. And it was very important for us to create a very effective machine that knows how to respond to these changes. So as an example, when LLM, ChatGPT burst into our lives, that was what, November '22, by January '23, we had 30 different categories relating to AI from model training to targeting to age in development, to software development, integrating AI to anything you can think of in the AI world. And this continues to be a focus for us because we want to make sure that as new jobs are being invented that never existed before, you would find them first on Fiverr. So that is a critical thing. The other, which also relates to AI is the investment in utilizing AI not just as a team to work better and faster, but use these tools to make the customer experiences better. So I made the statement that I think Google Search is dead. And you may agree or disagree with me, but I don't use search anymore for many months, it feels outdated. I mean you put keywords and you get blue links, that's weird. It feels like the '90s. And to me, the same applies for any modern search, meaning that even search within marketplaces need to change, right? You don't -- you stop thinking about keywords, you start thinking about prompting. And what can we learn outside as a result of that to improve the experience of utilizing the marketplace in a smarter way. How does this inform the way we do matching? How does this inform the way we think about not just tasks but projects and so forth. So we've been announcing a whole host of new products around this. Fiverr Go is one of these leading products, but there's a ton of them being built right now that I think is going to challenge the way marketplaces are being used and would encourage people to utilize more of the efficiency and the power of marketplaces to do more.

So I do want to -- I'll go back to Fiverr Go in a minute. But just to touch on your earlier comment, your view on search, I think, was in -- an internal or at least included in an internal e-mail...

Leaked.

Leaked. Well, it leaked on LinkedIn. So it's not that leaked. So basically, what you said was that AI is coming for your job, and you wrote this to your employees essentially?

To my team and also the community on Fiverr, I mean, if you're a freelancer, that holds true for you as well.

Okay. So maybe tell us if you can talk about that a little bit more and some of the stuff that you talked about there because I'm assuming not everybody has necessarily seen that.

Yes. I mean the title of the email was The Unpleasant Truth. And actually, what I wrote there was -- more than anything else, it was just a validation of the things that people feel on a daily basis. Whether you're a programmer or a legal consultant or being in finance or customer support or sales, you do understand that there is plenty of tools that are coming and are reshaping the way we work as individuals and teams. And the point was being that these tools are actually giving us superpowers. But if we continue disregarding them, instead of using them, then we're working like it's 2024, and that's a bad idea. And essentially, as I was gathering the team following this e-mail and I said, I'm happy to have conversations with anyone who wants to talk about how their jobs are going to look like. What I said there was that, look, AI is incredibly powerful, but it's not almighty. It cannot do everything. And most of all, what it does, it actually automates a lot of the things that we've used to do manually, right? So if you're -- I don't know if you're preparing a presentation or you're studying something, before what you've done is you went to Google and then you followed some links and you read articles and you've analyzed and you summarize, you need to point and then you translate this into a presentation, this could potentially take half of your time, maybe more. If you're still doing it, you're going to be out of job in the year because there is no reason why you should do it. And so to make the point there, I said that in an ideal world, what each of us should do is we should strive to automate 100% of what we do and let technology do this. This would not make you obsolete. This would make you indisposable. And the reason is that if you can now put 100% of your time into automation, you have 100% of your time free to do more strategic things that human beings are special at doing. And I think that maybe in a funny way, I think that AI in many ways allows us to discover our humanity again because it's really the thing that makes us special. It's the special taste that we have, it's the special eye for things. It's the special attention for details. It's the creativity, it's the ability to come up with unconventional ideas. This is what human beings are good at, and this is what we should be focusing on. And that was my point. Now my point was that we should strive as an organization to utilize these tools to the maximum, so that we can devote more of our time to actually do things that are worth our time and also reduce the cost of failure. Why? Because if it took us 3 months to build something that later on turned to be a failure, and we can now spend 3 days doing that, then the cost of failure is much, much lower, which means that by definition, we have more time to figure out what works, which means that we can, as an organization, move much, much faster. So it increases our velocity and it just improves our output per unit of time and the quality of our work. And to me, not doing this is a sin. It's like it's -- so that was the overarching idea of this e-mail. And it was received very well because people like when you're honest with them and you treat them as adults and not kids and you -- like it's -- I refer to it as radical candor, which is -- it's coming from a place of care, not to despite. So it was well received and it -- for whatever reason, it went super viral online.

Okay. So how does -- maybe you can talk about how Fiverr Go kind of plays into this. Newer product recently launched, specifically addressing kind of the AI opportunity that you're talking about for both sellers and buyers on the platform.

Yes. So there is a very deep philosophical background to how Fiverr came to be. And I what I recommend because we don't have enough time is just go on YouTube and see the keynote that I've given when we launched Fiverr Go 2 months ago in New York because it's like -- it's just 15 minutes over your time and I think it's a good outline of what was the background. But essentially, I'll do a quick summary for you. Essentially, the idea was that there is plenty of ways of actually designing AI in the first place. And the way most of AI is designed right now is a little bit exploitive in the sense that AI is eating everything, everything we've ever created and it's remixing it and it's generating stuff without giving rewards or compensation to the actual creators, which if you're a creator, that's not great, okay? And my fear as a human being -- and it has nothing to do with Fiverr, is that if it continues to be the case, then people's motivation to continue creating and sharing is going to reduce over time, which for humanity is bad news, okay? And so what we've done with Fiverr Go was really to introduce a different take. Whether it's the perfect one or not, who knows? History will judge. But essentially, the underlying idea was that you can build AI for creators that serves customers in a great way. And so what we've introduced is we've introduced the technology, both generative and the LLM technology that learns specifically from each creator and becomes their own AI. It's not general AI. You can obviously -- if you take the accumulative models, you can create agenetic. But essentially, it's becoming your AI. So we've introduced -- one of the first products that we've introduced, which after 2 months, I can say, is a huge success is a personal assistant for creators, essentially learning their entire body of work and their entire history of conversations, based on that becoming their personalized AI assistant. And by doing so, it can actually take all the admin work that creators do by ingesting information from customers, by answering the same question for the 400th time, by giving a price quoting, by giving examples of work, by creating even samples of work, convincing customers that this is the right choice. This is the right creator to work with. And the #1 KPI for that was conversion and it is not only absolutely converting much better than the actual freelancers, it's converting faster and it's involving less effort in conversion. It's killing it. It's incredible. And so this is a -- and what's the beauty about this is customers love it. And by the way, most customers hate speaking to chat bots. But what we've done there by humanizing the agents, reducing the likelihood of hallucinations and we've created something super powerful and it's working really well. So this is just one example of how we can utilize the power of AI to actually empower creators to succeed more, convert better, give better experience for their customers. And this was just the first taste. We want to do a test on that. And now we're moving into scale mode and we're going to introduce a line of new products around this.

So you started with the creation model, kind of moved an AI assistant as you just talked about. How do you expect things to evolve kind of from a product perspective? I know you don't want to give too much away, I'm sure. But...

Yes. Look, as I've said, I think that the notion of free markets and the place of a marketplace and our future is there. It's not going away. People love the ability to have selection and to be able to select. And if you can make that experience better, I think this is true for every marketplace, right? If today, the most basic functionality of our marketplace is search. When you do search on Amazon, you do search on Airbnb, do search on Etsy, do search on Fiverr. That experience is going to look like something very different a few years from now. And it's important for us to be pioneers in that because I think we have the ability to actually create these types of experiences from the ground up. And we do know that the better they will become, the more active customers are going to be because their experience is just going to be easier and faster.

Okay. Let's shift gears for a minute. You've been operating -- and Ofer, maybe you'll jump in here a little bit, too -- been operating in a -- it's been a tough backdrop for a couple of years with SMBs and everything. Maybe you can just give us an update on how you're thinking about that now? And what do you kind of see -- what are the things that would kind of need to happen for the market to improve in your view?

So I'll start by saying that SMBs is a huge market and the potential is still ahead of us. We do experience some headwind in the SMB. And I think the overall sentiment is negative and for us to keep the GMV steady in this environment is a challenge by itself. But we do believe that market is going to change. And as macro will improve, SMB will go back to a positive sentiment and invest back in their business and their growth, also SMB is more positive. We believe they'll be willing to take more risk by investing and not optimizing on survival or on their profit. So I think that -- what we offer is relevant for SMB, for the entrepreneur to build the organization. And over time, as Micha said earlier, with the Fiverr Pro, we are looking into a bigger organization that has less volatility and bigger wallet. We do that by optimizing the product and making sure we have the best product market fit, but also by focus our marketing effort into this class of customers, where lifetime value is higher and lifetime value to CAC is higher as well. And that's how we increase the spend of buyer over the last few years. And you can see that this is a very consistent growth in the amount of dollar that each customer has spent on Fiverr is growing over time. I think that as we continue to go up market, we expect this then to continue and evolve.

So maybe you can just flesh that out a little bit in terms of kind of like bought expectations in active buyers and spend per buyer, assuming kind of current environment continues?

Yes. I think that as long as the current environment continues, I think the dynamics of spend to buyer is going up and active buyer declining approximately the same rate will continue. I think the sentiment -- once the sentiment in market change will be more opportunistic and double down on lower value active buyer that can offset the decline, but we don't see that coming soon or until the market dynamic is changing. I think it doesn't make sense for us to acquire buyer with negative ROI. This is something that we didn't do before. And so as long as SMB are not spending much, we are focusing on the class of customer that keep investing in the business.

Okay. All right. Let's talk a little bit about services revenue where you've seen really strong growth over the last several quarters. Maybe you can just talk more about kind of what the key components are, what's driving such strong growth there? And then how you think about trajectory a little bit going forward.

Yes. I think the main 3 components within the services revenue is seller tools, Seller Plus. It's a set of tools where we offer a freelancer value-added services in order to better utilize Fiverr and eventually get more traffic and demand. So that's the first layer. The second is Fiverr Ad or Promoted Digs, which is our platform that again allows a seller to place themself and get more traffic. This is a product that we launched, I think, 3 or 4 years ago and is still expanding. And the last piece is AutoDS, which is the platform, a subscription-based platform that allow for drop shipper to find product, to market themselves and to build the -- to build their shop and on and on. So I think the 3 components are growing and would continue to grow throughout the year. It starts with the subscription on the Seller Plus where we are planning to launch an additional feature, a payable feature. One good example is the Fiverr Go that we launched 2 months ago, and we'll -- and will expand throughout the year. We have the Fiverr Ads, the Promoted Gigs that has some opportunity, more inventory that we haven't monetized. Again, so it's the plan again to expand this product. And lastly, AutoDS. That is expanding nicely after the acquisition with the integration with Fiverr that allows for both platform to contribute to the other. We do expect that the Seller Plus revenue will contribute approximately 30% of the overall revenue at this deal. And this the beginning of the year, it's growing very substantially. We do expect some overlap with the acquisition at the second half, and it will continue to grow, but in a slower pace.

Got it. Okay. So maybe we can just kind of roll that a little more into the numbers. You've seen -- I mean good revenue growth, low teens. More recently, your '25 revenue growth outlook of 10%. So it does imply decel, right, kind of into the single digits in the back half. I guess, how do you kind of think about normalized growth rates?

So again, normalized, it depends on -- for us, it's much dependent on the macro. I think that the overall sentiment in the staffing for professional services is negative 16% last year. So we are growing against the staffing index for professional services. And we think that when macro change when interest is down, when SMB are back to business, we definitely see double-digit growth. We think that in terms of spend to buyer, there's a lot of room. The average spend for SMB and freelancer is approximately $15,000 a year. We still get a small portion of that with plenty of room. And then in terms of number of active buyers, SMB is huge. It's more than 30 million. We serve approximately 3.5 per year globally, which means that the U.S it's approximately half. There is a plenty of room to grow both spend in active buyer. So we do believe that there is a room for us to grow much faster in a different macro environment.

Okay. let's talk about profitability a little bit. Just as you've kind of been in a tough environment, maybe you can talk about some of the ways that you've managed expenses, been able to continue expanding margins and what that means for you as things kind of ultimately improve?

I would start by saying that we have a high level of discipline. We navigate throughout this period while not only growing, but also improving EBITDA. The long-term target was and is 25%. We haven't changed that over the last few years, and we plan to get there by 2027. If you track our quarterly number for the last 3 years, you can see how we make the path through there. It's going by R&D, which have a little room and more to be efficient on the sales and marketing. And I think that as we are relying on retaining customers and we go upmarket and able to increase lifetime value to CAC, then there is room for us to expand further the sales and marketing as a percentage of revenue. It doesn't mean that we are going to spend less. It just means that the percentage of revenue, it has some room to further decline, and that's the plan. So I think that discipline with a highly measurable business, every dollar spent on the campaign is measured against the outcome. We have done that throughout the last few years successfully, and we plan to continue doing that until we get to the long-term target of 25%.

Okay. Micha, if you were advising young people just entering the workforce, what would you tell them?

Well. I think don't. Look, I think that this has been one of the most challenging questions. I mean, what would you advise your kids to go study? I mean the rate of change is really high. Look, I do believe -- I don't believe in this idea that developers are going away, and there is not going to be any more of these or the same goes for marketeers or any of these professions. By the way, the fact that some professions are not going to survive over the years is not a new concept. There was a study published in the economies that was done on 2018, and it showed that out of the jobs that exist in 2018, 60% of them didn't exist 50 years before, meaning -- think about this, how many of the jobs of your parents' generation have survived to our generation and/or grandparents? It's natural. It's evolving. I don't think that a lot of the professions that we know today are going to go away. But I do think that they're changing, their nature is changing, the type of labor, the things that we do as a professional are changing. And if anything, I mean, they've asked me once if I think that AI is going to replace professionals. And I said, no, I think that professionals that are going to master AI are going to replace professionals who don't. And so I think that this summarizes everything. I think that there's plenty of opportunities. I'm super optimistic. I do think that because we were given these new tools, the nature of work is changing. I think that this would create tremendous opportunities for entrepreneurs to start new businesses. There's never been a better time to start a business. We're going to see many more billion-dollar companies with teams of 3 people, 5 people. It's not going to be like -- it's going to be a common thing. So if anything, like I would encourage people to probably not waste time on going to institutions to study, but actually sit down and put time on -- there is so much information on that. There is everything you can study anything. So if not for the booze and the parties, I would actually spend more time standing on my own and getting into practice as fast as possible because it is doable, and this was something that was not possible 30, 40 years ago.

Okay. All right. We're going to leave it there. Thank you very much.

Thank you. Appreciate it.

Thank you.