Fiverr International Ltd. (NYSE:FVRR) Q3 2023 Earnings Call Transcript

Fiverr International Ltd. (NYSE:FVRR) Q3 2023 Earnings Call Transcript November 9, 2023

Operator: Good day, and thank you for standing by. Welcome to the Fiverr Q3 Fiscal 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Brian Lan, Investor Relations Manager. Please go ahead.

Brian Lan: Thank you, operator, and good morning, everyone. Thank you for joining us on Fiverr’s earnings conference call for the third quarter that ended September 30, 2023. Joining me on the call today are Micha Kaufman, Founder and CEO, and Ofer Katz, President and CFO. Before we start, I would like to remind you that during this call, we may make forward-looking statements and that these statements are based on our current expectations and assumptions as of today, and Fiverr assumes no obligation to update or revise them. A discussion of some of the important risk factors that could cause actual results to differ materially from any forward-looking statements can be found under the Risk Factors section in Fiverr’s most recent Form 20-F and other filings with the SEC.

During this call, we’ll be referring to some key performance metrics and non-GAAP financial measures, including adjusted EBITDA and adjusted EBITDA margin. Further explanation and a reconciliation of each of the non-GAAP financial measures to the most directly comparable GAAP measures is provided in the earnings release we issued today and our shareholder letter, each of which is available on our website at investors.fiverr.com. And now, I will turn the call over to Micha.

Micha Kaufman: Thank you, Brian. Good morning, everyone, and thank you for joining us. Q3 was another strong quarter as we continued to accelerate our revenue growth and drive EBITDA margin expansion. Both revenue and adjusted EBITDA came at the top-end of our guidance range. A number of factors drove the strong performance. The cohorts in our core marketplace continue to stabilize from the COVID growth spikes and our push upmarket has allowed us to grow spend per buyer at a strong pace. Finally, healthy growth in our value-added services contributed to our take rate of over 31%. All of this was extremely well executed with continued expense discipline, which is reflected in the strong delivery of our adjusted EBITDA margin.

These results underscore the power of our business model and the progress we are making to solidify our position as the global leader of freelancing marketplaces. This, together with the strength and resilience of the Fiverr team, allows us to focus, adapt and thrive amid external changes. As you all know, Israel went through a horrific attack a month ago. Our first priority has been to help our employees, their families, and the Fiverr community, and support those the deadly attacks impacted. As some of our employees are being called up, we are ensuring their families will get what they need while they are on the front lines. As a company, we are quickly adapting so that we continue to operate and execute at the highest level of focus and consistency, thanks to our hybrid operation that’s already in place.

Since we laid out our strategic focus this year, to strengthen our core marketplace and accelerate our pace to push upmarket, we have been working on knocking down barriers that prevent buyers from shopping more often and fulfilling more complex projects. We know that Fiverr’s unique transaction model and global access to talent provide great convenience and access to our customers that are unmatched anywhere else. But there are also pain points, such as the difficulty of finding the best talent among so many choices, the uneasiness when a project is only partially scoped or the headache when a project requires coordination between multiple freelancers. This is why we created products such as Fiverr Neo, Fiverr Enterprise and the project planning service in Fiverr Pro to address those issues.

The vision for Fiverr Neo is quite wild. We imagine Neo will serve as a personalized recruiting expert that can help our customers more accurately scope their projects and get matched with freelance talent, just like a human recruiter, only with more data and more brain power. What we have done so far is leveraging the existing LLM engines to allow customers to express their project needs in natural language, which Neo will synthesize and define the scope before matching the client with a short list of choices pulled from the entire Fiverr freelance database. It’s a substantial step forward from the existing experience and streamlines the time the customer needs to make an informed decision. To improve the experience further, we continue incorporating cutting-edge technology into our production to advance the algorithm and provide a much faster processing speed.

We already see thousands of customers utilizing the service, and early results show a positive impact on match quality and delivery. On the Fiverr Business Solutions side, we are targeting higher-end customers, expanding our wallet share, and expanding our product suite to accommodate more use cases that are sometimes difficult to execute through a typical marketplace order. When a customer comes through the funnel without a well-defined project scope, sometimes they need a domain expert to help carry out a specific function of the business, say a social media marketing expert. Sometimes they have a vaguely scoped project with an evolving roadmap, say building a complex mobile app. In both cases, they are looking for a freelancer to engage for an extended period of time.

This is where Fiverr Enterprise comes in. Through Fiverr Enterprise, clients can manage an ongoing engagement with a pool of freelance talent, continuously updated tasks and project milestones, and ongoing budget management and payment tools. This allows us to address the freelancing needs of larger businesses that otherwise might be stuck with the complexity of creating detailed scopes for open-ended goals at the beginning of a project. Finally, in Fiverr Pro, we are seeing great traction for the newly introduced Project Partner service. Since its launch last year, we’ve seen many business customers utilizing the service to fulfill significantly larger projects. We’ve further expanded the offering to include separate project planning and project management services to cater to a wider range of businesses.

The project planning offering is a popular option among customers who need help with scoping and staffing, and we have found that most customers who use the project planning capabilities end up utilizing the full project management capabilities as well. As you can see, there have been a lot of exciting developments at Fiverr this year. Leveraging the flywheel of our marketplace built over the years, we are taking our business to the next level with new products and services that cater to a wider range of customers and their needs. There is tremendous potential for us to expand our customer base and grow their wallet share with us, and we should be able to build on these opportunities in the years ahead. With that, I’ll turn the call now to Ofer, who will walk you through our financial highlights.

Ofer Katz: Thank you, Micha, and good morning, everyone. We delivered another quarter of strong results driven by the resilience of our cohorts, our recent upmarket efforts, as well as growth in our value-added seller services. Revenue was $92.5 million, representing a year-over-year growth of 12.1%. Adjusted EBITDA was $16.5 million, or 17.9% in adjusted EBITDA margin. Both were at the top-end of our guidance range. For the second quarter in a row, we have also achieved GAAP profitability, thanks to our ongoing efforts in improving our operational efficiency. All of this demonstrated the impact of the strategy we set at the beginning of the year, the strong execution of our team, as well as the strength of our business model.

Our annual active buyers were at 4.2 million, and spend per buyer improved to $271, up 4% year-over-year and a $6 increase from Q2. Our Fiverr Business Solutions continues to make meaningful progress as we add more partners to Certified and onboard customers to our premium marketplace, Fiverr Pro. These efforts help to drive the accelerated pace of our spend per buyer increase as our buyer base continues to evolve towards higher quality, higher budget demographics. We continue to maintain strong efficiency and unit economics in our performance marketing. This quarter, our tROI for performance marketing remains very stable at slightly over three months. On a longer-term basis, our lifetime value to CAC over three years remains healthy at over 3x and for five years exceeds 4x.

We expect to continue to invest as efficiently as possible as we push forward on our upmarket efforts and focus our investments on higher-value buyers. Our Q3 take rate improved to 31.3%, representing a year-over-year expansion of 130 basis points, as we increased seller monetization of Promoted Gigs and Seller Plus. We continue to expand and optimize our ad placement for Promoted Gigs while Seller Plus benefited from the introduction of our two-tier pricing model that we launched a year ago. We are excited to report that Seller Plus subscribers have now reached 25,000, more than doubled from the end of last year. Our improving take rate signifies the value that we are able to provide for our freelancers and we continue to develop additional tools to help them grow their businesses.

Now turning to guidance. In the immediate weeks after the onset of the war, we experienced some volatility in our marketplace, primarily from buyers and sellers in countries in the region. This volatility has already created a headwind to revenue this quarter. While some of this volatility has subsided, the risk of it increasing again remains, and we have incorporated this risk into our outlook for the remainder of the year. As such, for the full year of 2023, we are maintaining our revenue guidance in the range of $358 million to $365 million, representing a year-over-year growth of 6% to 8%. We are raising the adjusted EBITDA range to be $58 million to $60 million, representing an adjusted EBITDA margin of 16.3% at the midpoint. This implies fourth quarter revenue guidance of $88.1 million to $95.1 million, representing a year-over-year growth of 6% to 14%, reflecting the increased uncertainty for the remainder of the year.

We expect adjusted EBITDA guidance of $14.9 million to $16.9 million, representing an adjusted EBITDA margin of 17% at the midpoint for the fourth quarter. That said, just as how we have navigated our business through a series of macro conditions in the past few years, we are confident in our ability to continue executing with the strongest discipline and focus, and the long-term thesis of our business and our strong market-leading position remain intact. With that, we’ll now turn the call over to the operator for questions.

Operator: [Operator Instructions] Our first question comes from the line of Ron Josey from Citi.

See also Top 12 Medical AI Companies and 25 Most Atheist Countries in the World.

Q&A Session

Ron Josey: Great. Thanks for taking the question. And I’d be remiss if the first thing out of my mouth wasn’t to say we’re thinking about you all and the team over there given all of the events. And so, would love to hear more just how things are going from an operations perspective. Ofer, you talked about the revenue headwind that’s subsided since the start. Any insights on there would be really helpful. And again, we’re — we cannot think about you all. And then, from a Fiverr Neo perspective, despite all this, Neo rollouts just continue to gain speed. And so, Micha, if you can just talk to us a little bit more about what you’re seeing there about some of the early wins and the roadmap would be great. Thank you.

Micha Kaufman: Good morning, Ron. Thank you for the first note and the question. So, first of all, I think what we called out — what we’ve seen since the events of October 7 is that we have seen some volatility in the region. As an example, sellers in Israel have seen weakness in their business for the first two weeks since October 7th, and at this point, mostly that have subsided. So, we see that element is being pretty stabilized right now, but with some factor of uncertainty depending on how things will evolve in this region. In terms of Fiverr Neo, we’re very pleased with the rollout. Obviously, very, very young product. But we’re seeing over 100,000 users that are trying the product. And what we’re seeing from their experience is that we’re able to provide more accurate matches, which is basically what we wanted to do, and have a higher engagement and satisfaction levels, which we’re very happy with, and the beginning of a repeat usage of — over the product.

So, there’s a lot of learning as we build this product, and what we’re doing is really a hybrid of technologies. Some of them are being developed by us. Some are off-the-shelf, most of the leading companies that are developing LLM, which have partnered with us. And we’re putting this to the maximum. I think a lot of these systems are not yet optimized for large scale and high performance, but we find our own ways of developing a lot of this technology to provide a very smooth experience to our customers. And, again, the feedback that we’re getting from them is extremely positive.

Ron Josey: Thank you, Micha.

Operator: Thank you. One moment for our next question. Our next question comes from the line of Doug Anmuth from JPMorgan.

Doug Anmuth: Thanks for taking the questions. And of course, I just want to echo Ron’s thoughts as well thinking about all of you at Fiverr. Two questions. Just can you talk more about Fiverr Pro and just how customers are using the platform differently? And if you could — if there’s a way to perhaps quantify some of the increased spending that you’re seeing there compared to in the marketplace? And then, secondly, you continue to make really good progress on take rate. Any way that you can help us understand as to how you think about the headroom and opportunity around Promoted Gigs and seller plots especially as you continue to expand kind of availability there? Thank you.

Micha Kaufman: Thank you, Doug, and good morning. So, on Fiverr Pro maybe I’ll start and Ofer can chime in. Essentially, the way we’ve built Fiverr Pro is really to tackle a number of different needs. One is the need for vetted talent. So, people that have more experience and have a better portfolio of existing work and the notable clients that comes with it. So, our clients that are using this product are by definition, quality centric. So, that is one of the reason why they’re using it. However, on top of that, we’re offering a number of added-value features that comes with being a Pro customer that they love as well. And we’ve — I think we’ve spoke about this before that we keep extending these features. So, the ability to work with the team on the platform, the ability to do a budget management, to have a more sophisticated types of projects getting done.

If you do require someone to actually manage the project for you, there’s an option to have a project manager to run those projects. So, by definition, those customers that are using this product are — have larger needs. They need more experienced freelancers or agencies. And therefore, they’re also spending more and retaining better. As for the second question on take rate, so basically, we — it’s the one question, I think, we continue to get since we took the company public. And essentially what we said is we do see headroom for growth. In every product that we’ve launched, and Ofer mentioned that in the opening statement, is growing; Promoted Listings is one of them, Seller Plus is another. And this has been really adding to the take rates we’ve had four years ago and how it has been steadily growing since then, which is exactly what we said is going to happen.

So, the message remains, essentially, we believe that there is more opportunity to continue investing and expanding these offerings, and we see that the more we do it, the better gains we get from these products.

Doug Anmuth: Thank you, Micha.

Micha Kaufman: Thank you.

Operator: Thank you. One moment for our next question. Our next question comes from the line of Jason Helfstein from Oppenheimer.

Jason Helfstein: Thanks for the question, and again, sending support and thinking of everyone over there. Can you help us understand — I mean, you’ve got like, I guess, kind of three factors, right? One is just the COVID roll off. The second is just some of the general weakness we’re seeing in the economy with SMBs. And then, the third is all the progress you’re making kind of moving upmarket. I mean, is there a way — I mean, at some point, we’d love if you broke out the kind of non-SMB business. But just maybe help us understand kind of where we are in that. And do you think you’ve seen the bottom on the SMB side? Thank you.

Micha Kaufman: Thank you, Jason, and good morning. I think you’re correct to list those different factors. At this point, we haven’t seen any major change that we can call out, meaning — I mean, COVID effect is pretty much lapped, which also had us enter a new era of remote work, which is now being challenged as people are being called to — back to the office. What we’re seeing with the general economy, the weakness around SMBs as a result of macro, has been pretty steady, meaning it is not becoming worse, but it is not coming — it is not becoming better. And this is why many quarters ago we said that as strategy, we are investing in going upmarket and acquiring or entertaining customers who the macro environment impacts less.

And if you follow the numbers and you follow the growth of these cohorts, you will see that we’re making great steps in increasing their portion. The cohorts that we acquire today are very different than the cohorts we’ve acquired a year ago. They — to the point where they spend about 20% more in their first purchase when they join us, which is massive. And then, their lifetime behavior is much different. Some of it is thanks to what we’re doing with Fiverr Pro, which has a multiple spend per buyer than our average, but it’s also how we find and engage with these customers. So, this has allowed us to really make a step forward and we’re seeing that in the spend per buyer as well. But we haven’t seen any material change in those trends so far.

And we’re just reiterating the fact that we believe that when the market will start recovering, we will have tremendous opportunities for growth. It is yet to come.

Jason Helfstein: Thanks for the color.

Operator: Thank you. One moment for our next question. Our next question comes from the line of Eric Sheridan from Goldman Sachs.

Eric Sheridan: Thanks so much for taking the question. Maybe one following on Jason’s. When you think about the demand environment and turning it back to incremental margins and investments to stimulate growth, you made a lot of progress this year on margins on a very consistent basis. How do you think about the balance of investing in growth as you see signals of a stable to rising environment versus elements of continuing to produce very solid incrementals in the business on the margin side going forward? Maybe thinking about in terms of key investments that need to be made and what signals you’re looking for to possibly turn on some of the demand investments on the cost side? Thank you.

Micha Kaufman: Thank you, Eric. Good morning. So, essentially, again, I want to reiterate our approach as a business. We are a growth company. And we double-down on growth when growth is a good option. And essentially, the way we manage the businesses, we’re pushing for the Rule of 40. It’s that simple, right? So, we’re optimizing growth and profitability profile and putting a sustainable path to maximizing long-term shareholder value. Right now, it seems that it’s more on the cohorts of mid-sized businesses and up, and less on the micro businesses and the very small businesses, which is why we’ve been doubling-down there. And bear in mind as well that even though we can theoretically invest more in smaller businesses right now because of the dynamics of macro, the efficiency of our marketing spend would get hurt, which I don’t think is going to serve anyone, not us and not the shareholders, for the long term, which is why we’re resisting the temptation of actually doing that.