Fiverr International Ltd. Q1 FY2020 Earnings Call

Hello, and welcome to the Fiverr First Quarter Fiscal 2020 Earnings Conference Call. Please note that today's event is being recorded. I would now like to turn the conference over to Jinjin Qian. Please go ahead.

Thank you, operator, and good morning, ladies and gentlemen. Thank you for joining us on Fiverr's earnings conference call for the first quarter ended March 31, 2020. Please note that this call is being webcast on the Investor Relations section of the company's website. Full details of our results and additional management commentary are available in our shareholder letter, which can be found on the Investor Relations section of our website at investors.fiverr.com. Joining me today on the call are Micha Kaufman, founder and CEO; and Ofer Katz, CFO. Before we start, I'd like to remind you that certain matters discussed today are forward-looking statements that are subject to risks and uncertainties relating to future events and/or the future financial performance of Fiverr. Actual results could differ materially from those anticipated in these forward-looking statements. Additional information that could cause actual results to differ from forward-looking statements can be found in Fiverr's periodic public filings with the U.S. Securities and Exchange Commission, including those factors discussed under the Risk Factors section in Fiverr's 20-F filed with the SEC. The forward-looking statements in this conference call are based on the current expectations as of today, and Fiverr assumes no obligation to update or revise them, whether as a result of new developments or otherwise. And now, I'll turn the call over to Micha.

Thank you, Jinjin. Good morning, everyone, and thanks for taking the time to join us on the call today. Before launching into our financial results, I would like to acknowledge this challenging time that we are all facing. My hope is that you are all staying safe. And our immense gratitude goes out to the doctors, nurses, first responders, and everyone who worked on the front line of essential services to keep us all safe and healthy. Today, Fiverr reported strong Q1 results with revenue growing 44% year over year. This represents a third consecutive quarter of accelerating growth and beating our prior expectations across all metrics. We also significantly narrowed our EBITDA loss by 1,430 basis points and are on an accelerated path toward profitability. All of this was achieved amid a global pandemic that has shocked, humbled, and tested our society as a whole. At Fiverr, we are proud and fortunate that we have the ability to step up and be there for our community. For buyers, Fiverr is a place to build and expand their online presence even if they don't have the skills or tools to do so themselves. It is a place to find a team and collaborate even when hiring an employee becomes impossible. And it is a place for businesses to get more things done with more efficient budgets and resources. For sellers, Fiverr is an increasingly important source of income as we enable them to find remote work opportunities, engage with their clients, and deliver digital services, all without leaving their homes. In our COVID-19 update to shareholders in early April, we mentioned how our business experienced a brief period of volatility in mid-March and quickly rebounded and resumed strong growth within a couple of weeks. Since then, we have continued to gain significant momentum every week across all cohorts, all verticals, and all geographies. Weekly GMV on our core marketplace has accelerated on a year-over-year basis for every week in April for a total of six consecutive weeks since mid-March. We hit all-time daily revenue records four times in April, despite the fact that April typically is not a seasonally strong month with Easter holidays. All of our existing cohorts have rebounded strongly from March volatility, not only back to their historical pattern of contributing a consistent stream of revenue, but also beyond those levels with increasing revenues. We believe this resiliency underscores the loyalty of our existing buyer base. We are also experiencing a strong uplift on new buyer acquisition, driven by an unprecedented jump in organic awareness and attractive opportunities in performance marketing. All verticals have rebounded with similar trends to the overall market pace. And we have seen particular strength in categories related to moving businesses from offline to online, as well as digital content-related categories such as gaming, social media, online lessons, and e-books. Last but not least, we are seeing the strength of our business, not only in the U.S. but across the world, especially in several European countries where our timely investment in local expansion was in place right around the time when global stay-at-home orders intensified. Both new sellers' and new buyers' registrations have been particularly strong in Spain and France in recent weeks. I'm incredibly grateful and proud of the resilience, adaptability, and dedication of our team across the world. Circumstances evolved rapidly. And not only did our team rise to the occasion in terms of executing numerous initiatives to help our buyers and sellers navigate through COVID-19, but they also succeeded in executing our existing roadmap, often ahead of schedule. Complex and groundbreaking products such as promoted gigs and machine translation to localize our user-generated content were successfully rolled out. Beautiful marketing campaigns were created and executed even when everything in the original plan had to be scrapped due to the global travel bans. A record number of community events with a record number of global participants were hosted virtually during the quarter, at a time when social distancing has cut down our human interaction everywhere. To ensure that we leave enough time to take your questions, we have included a detailed account of our extensive list of initiatives following the COVID-19 outbreak in our letter to shareholders. Our team has demonstrated the strength of our culture by moving smoothly to the stay-at-home reality and embracing the responsibility we have to our community in these testing times. I will be happy to take questions regarding our approach to helping our community. While the future is in many ways still uncertain, when we take a step back and look at the ways COVID-19 has touched Fiverr, our buyers, our sellers, and the way we enable work, we have never been more confident about our mission, our business model, and our growth path forward. Fiverr's mission of connecting businesses and freelancers around the world and enabling remote work to be done digitally through our platform has never been more critical. As the crisis reinforces and accelerates the trends toward adopting remote work and moving businesses online, we believe our marketplace is well positioned to both address current needs and to be a key resource when the economy reaccelerates. We run a horizontal marketplace with one of the largest service catalogs in the world. Our revenue diversification across all the categories and our ability to identify market trends and expand our catalog to meet those trends quickly provide us with a tremendous amount of defensibility and growth ammunition given the constantly evolving user preference and macro environment. We enjoy an expansive and well-diversified global buyer base that stays active with us and contributes to the continuous and durable revenue streams for a very long time. Our bottom-up approach of our go-to-market strategy is highly viral, and we enjoy increasing word-of-mouth benefits as we scale. Our agile, data-driven, and efficient marketing strategy also allows us to find, target, and acquire relevant buyers without the need for a sales force or a long sales cycle. Talent is global, and so is the demand for talent. Our recent progress on international expansion and the encouraging results in those countries continue to reaffirm this belief and signal the huge market opportunity globally. We are taking a disciplined approach and developing a repeatable playbook in order to drive long-term and sustainable growth in those countries. Fiverr celebrated its 10th anniversary in February, and there was much to celebrate. But we have barely scratched the surface of the large opportunity ahead of us. I can confidently say that as a company, growth will continue to be our top priority for many years ahead. And with that, I'm going to turn it over to Ofer, who will share with you a few financial highlights.

Thank you, and good morning, everyone. I'd like to join Micha in acknowledging this difficult time. I hope that you and those important to you are safe and healthy. As Micha mentioned, Fiverr's business has stayed strong and resilient during this uncertain time. In Q1, revenue grew 44% year over year to $34.2 million. This was driven by 17% growth in active buyers, 18% growth in spend per buyer, and a 90 basis point improvement in take rate. The strong momentum we had during the first two months of the quarter, together with the strong rebound when we exited the quarter due to the impact from the short period of volatility during mid-March, helped us deliver growth metrics that were stronger-than-expected across the board. We also continue to be highly efficient on the marketing front. Trends from both organic and paid channels continue to be strong and benefited from the continued momentum from last year, the increase of channel diversification, and the uplift from international expansion. The development of COVID-19 also drove higher word-of-mouth impact for Fiverr as people spent more time online, engaged via social media, and consumed online content. We have also moderately stepped up our marketing investments in recent weeks as the less competitive advertising space opened additional performance marketing opportunities for us. The flow-through of strong top-line growth in Q1 2020 has led to strong gross margin, EBITDA margin, and operating cash flow improvement during the quarter. Non-GAAP gross margin was 81.6%, representing a 60 basis point improvement year-over-year. Adjusted EBITDA margin was negative 8.4%, a year-over-year improvement of 14 leverage in R&D and seller marketing. Operating cash flow turned positive in Q1, as strong top-line growth and improvement in gross margin and operating leverage led to significant EBITDA improvement, together with some timing benefits from accounts payable. Looking forward, while the long-term impact of COVID-19 remains highly uncertain, we are cautiously more optimistic about the upcoming Q2 and the remainder of the year. As a result, we now expect Q2 revenue to be $35.5 million to $36.5 million, representing year-over-year growth of 37% to 41%. Adjusted EBITDA for Q2 is expected to be negative $2.5 million to negative $1.5 million, representing negative 5.6% at midpoint. We are raising our full-year revenue guidance to $145.5 million to $147.5 million, or 36% to 38% year-over-year growth, up from prior guidance of $139 million to $141 million, or 30% to 32% year-over-year growth. We are increasing full-year EBITDA guidance to negative $9 million to negative $7 million, up from guidance of negative $15 million to negative $13 million. In addition, we expect our timing to profitability to accelerate by approximately one year from what we expected. We now expect to reach EBITDA profitability in the second half of 2021. We expect that our strong cash position, together with strong top-line growth and path to profitability, allows us to continue to hire and make long-term investments in strategic initiatives such as going upmarket, catalog expansion, international expansion, and innovative product development in order to support growth. With that, I will now turn the call over to the operator for questions.

And the first question today comes from Doug Anmuth with JP Morgan.

Thanks for taking the questions. I have two. First, just, Micha, if you can talk more about the six straight weeks of accelerating GMV, a little more on your views on how you think COVID-19 is changing the business and potentially what new opportunities it opens up for you beyond the crisis? And then, Ofer, you just talked about EBITDA profit kind of pulling forward roughly a year or so. Just hoping you could expand a little bit on what gives you the confidence on pulling that into the back half of '21.

Doug, thanks for the question. So as to the accelerating GMV, I think that in our update in April, we said that the volatility period has been very short for us. It was about 10 days. And afterwards, we didn't just bounce back, but actually grew. The good news is we're seeing that growth across the board. We see that across all categories, we see that across all cohorts, new and old, and we see that across all geographies. Now, I think that in some special way, although the COVID-19 had some devastating effects, it also made the case for what Fiverr has been advocating for 10 years: the ability to hire a workforce remotely and to engage remotely in a very efficient way has become something of an increased awareness. And I think that Fiverr is becoming, in a sense, a critical tool for both businesses and freelancers. So the fact that we are seeing that growth coming very strong in April, in some verticals, we see that growth being nearly double the growth on a monthly basis. And we see that across all of our categories. Our new customers, those who joined Fiverr post the COVID-19, their behavior is very consistent with our older cohorts in terms of their activity and the categories in which they purchase. I think that in a sense, Fiverr has enjoyed a massive awareness jump due to this situation and the fact that people were locked home and were forced to think about how to do things remotely. So although it's very hard to predict what's going to happen in the future, I think that the resiliency of our cohorts, both new and old, reaffirms our assurance that Fiverr is indeed a critical go-to-market base for our needs.

And Doug, this is Ofer. The second part of the question was about the pull forward of the profitability in one year and what gives us the confidence. I think that the confidence is based on what we've been seeing in Q1 followed by the last few weeks into Q2. I think the behavior of the old cohorts together with new cohorts, and our ability to scale the business in such a short time in terms of efficiency of sales and marketing, in terms of gross margins curtailing high, fast. And together with the update of the guidance, it actually accelerates our previous guidance and expectation, giving us the confidence that we can reach this point with the scalability of the business and the foundation of the business, which is based on existing core that keeps contributing more, and we are just going to meet this point of time earlier. So this is what we are basing this on.

And the next question comes from Nat Schindler with Bank of America.

Yes. Hi guys. Is there any characterization you can give me of the new buyers would use more of your traditional small company buyers looking for help on single things? Or have you done more to penetrate the large buyers given the environment? Also on the seller side, I know you said across all categories, but has there been any particular change on what has shown up on the platform that is new and interesting since the change in kind of stay-at-home orders?

Good morning and thanks for the question. So to begin with, there is an increase in our high-value buyers, which now represents 58% of our revenues. And what we're seeing is we're seeing that the behavior of all of these new buyers is very consistent with what we've seen. We have a combination of small businesses, medium businesses, and larger businesses, with maybe a little bit more skewed in recent cohorts toward the larger. That said, the SMB continues to be very vibrant, and this is shown by the fact that our older cohorts, those who have been with us for even 10 years have been going back into growth. So we're seeing this really across the board. In terms of categories, I think that in April, we discussed in our update the fact that there were four phases to this crisis. The first was denial, where most countries didn't think that it was their problem. Then it turned to panic, where people began focusing at home. Then there's self-preservation where people are home and figuring out what to do. And very fast from that, there's adaptation. So when people started being at home, we've witnessed a few new types of interests that are more around online tutorials, taking courses, things that have to do with the stay-at-home reality. But that trend shifted very fast. Now we reacted to it by launching 30 new categories and adapting very quickly to it. One of the benefits of being a horizontal marketplace is that we can react super fast to any trend that is within the market. But we saw that in essence, the categories were all picking up and there wasn't any concentration around any specific category. Whatever trends we're seeing, we're reacting to. The key takeaway is that many businesses are realizing that they need to move a lot of their offline activity online. There's no better place to do that than on Fiverr, and this is why a lot of our initial campaigns were reactions to COVID-19 and our engagements with our community were to help them do exactly that. So use the fact that this lockdown would be an opportunity for businesses to move their activity online, and we've seen a lot of activity around that. But to my point, this was across the board.

Just on a separate question. We've heard a lot about the changing media dynamics as other companies have pulled back because of the negative impact this has had on their business. Are you doing anything to really adjust your media spending? And are you seeing new areas that are opening up for you in order to increase engagement? We know that search will probably hold on in your categories for a little bit, but I could imagine that you have a lot of opportunities in brand and other offline ad campaigns.

Yes. Thank you. So we're definitely reacting to changes. The first one is the fact that, as I've noted, there is a huge increase in awareness, which means that the organic portion of our marketing is growing very, very fast, and we can use that in the mix with our performance marketing. The changes or the trends that we're seeing with performance marketing are that very large advertisers have pulled off from the market. As an example, the travel business or the hospitality business have really pulled off the market, creating an opportunity for acquisition at much lower prices. Obviously, we are there to capture this opportunity and respond to it. Because we're a horizontal marketplace, we're able to diversify our marketing campaigns, optimizing the keywords and categories at each point to ensure that we're paying as little as possible and converting as high as possible. We've seen those changes. And I've noted that we've been able to produce marketing campaigns using our own platform because we were imposed not to travel and not to work with any production companies; we've done everything on the platform. A lot of the beautiful campaigns that we've been shipping during the first quarter and into the second quarter were performed and produced on the platform. We're not the only ones taking advantage of that, our customers are taking advantage of that as well.

And the next question comes from Ron Josey with JMP Securities.

Great, thanks for taking the question. Micha, I really appreciate the increased guidance and insight here. Maybe changing tack a little bit and talking about just newer products and on promoted gigs; you talked about five categories, an 80% adoption rate and retention rates. I'm wondering if you can talk about what you're seeing early days on just the ROI of promoted gigs to the sellers. The rollout plan for more categories. And Ofer, I think you mentioned in the letter, it wouldn't have an impact this year. Wondering why not, I guess is the question.

Thanks, Ron. The adoption plan has been ahead of schedule, which we're very happy with. The original plan, as we discussed in previous earnings calls, was to gradually release that, test it, optimize it, and perfect it over time. The idea was to start, and just again to emphasize, what's really important about promoted gigs is that those ad placements are going to be relevant and are going to be high quality. So what we've done is we've launched with five categories with limited offering and a limited group of sellers to start testing a number of things. Relevancy and quality and the conversion are very strong. The ROI on promoted gigs is very high. Because of that, we see significant retention, among those sellers who started testing it due to the strong ROI. The adoption of this plan to those whom we offered to participate in it was very high, over 80%, and the retention was close to 100%. Everything we see from that is very high. The same goes for the buyers who are actually using it. This is demonstrated in the click-through and conversion, but the levels of satisfaction are very high. With that, the plan is to start scaling this product to more sellers, more categories, and more areas of the product. We just started the test with the subcategory pages and will extend it to our search and other areas of the site. This will rollout gradually throughout the year. We've made a note that from the experience of other companies that have implemented this, and in touch with them, we know it can take up to 12 months to optimize this product. Because of that, we've taken the cautious measure of not factoring any wishful thinking into it. This is why we didn't factor this into our guidance.

Thank you. And the next question comes from Brad Erickson with Needham & Company.

Hi guys, thanks. First one, and this may have already been asked. I jumped on a little late, so I apologize. But I guess just when we think about the real GMV composition of these categories where you saw activity increase as a function of work-from-home and stay-at-home. I know you called some of them out, gaming, social media, online lessons, and e-books. So when we think about those categories that are especially stronger lately, what portion of those situations from a business planning assumption standpoint, where do you think we've fundamentally changed online from offline permanently versus maybe some of the effects are a bit more temporary? I know it's a really hard question to answer, but just wonder if you could help investors understand that, what your gut tells you there given how broad-based the categories you address are. And then I have a follow-up.

Thanks, Brad. So essentially, I've noted that many businesses are taking this opportunity to move from offline to online. I don't think that this is going away. I don't think that this is changing. The awareness of the importance of doing business online is not going to fade away. That said, if I relate to some of the categories we mentioned, like gaming, social media, e-books, etc., what we're seeing is that even if you have customers who have joined through gaming, these customers continue to buy with us across many other categories. In essence, we don't think because of the cohort, at least from what we're seeing right now, and again, I want to put the caveat that nobody really knows how this will develop, but what we've seen in the five weeks since the outbreak or the rebound from volatility is consistent cohort behavior that is not limited or concentrated into specific categories. These new cohorts behave very similarly to our older cohorts, and all of them are growing, with all of them, including older cohorts, resuming their activities and spending more on the marketplace. So to your point, it's very, very hard to forecast what's going to happen and nobody can actually do that, but what we're seeing from the data right now is very consistent and a very resilient activity of our customers across all cohorts, including new ones.

I would like to augment and say that we have the capacity to monitor behavior, not only on a category level but also geography, which gives us a huge advantage. As we speak, we can see how different countries and different audiences in countries that experience this pandemic in different time zones are reacting, whether they work from home, how this impacts the number of orders, and their behavior across categories. What I can share is that while some countries were pretty much locked down in terms of working only from home, and some of them have already released restrictions, we see and experience continued strong activity despite the fact that people are working back from the office and returning to a normal course of running a business. This is why we don't think it's necessarily a temporary rise driven only by the pandemic.

That's super helpful color. And then maybe just a follow-up for Ofer just related to the raised revenue guidance for the year. Is there any contribution from the Spain and France rollout? It sounds like it's going a little bit better than expected or is it just more a function of just the broadly stronger activity you were talking about with everyone being at home right now?

So obviously, France and Spain and Germany are super performing, and part of the raise of guidance is related to the successful launch. I think you probably went through the document we shared earlier today. We released the machine learning translation that actually already gives us a good signal about usage. Together with emerging traffic and better conversion, I think we are continuing to see the maturity of our investment in geographical expansion in different languages.

The next question comes from Jason Helfstein with Oppenheimer.

Hey guys, thanks. I guess two I don't think were answered as yet, but I apologize if they were. Any update on traction you're seeing in Fiverr Studios? And then kind of just how you're thinking about that for the rest of the year. And then it seems that you are going to lead into marketing in the second quarter and beyond because marketing is more efficient now given what's happening in the market and how well you're able to actually convert new traffic. Just how should we be thinking about the cadence for the rest of the year? And then perhaps domestically versus internationally?

Jason, good morning and thank you for the question. So as for Fiverr Studios, Fiverr Studios is growing very nicely. In fact, it is just the beginning of what we're planning around this area. With the great signals we've seen from Fiverr Studios, we are planning right now to extend that product and actually grow it into something more extensive that will not just allow sellers from Fiverr to team up into virtual studios but will also allow existing agencies to join the platform and use it as an agency. So again, early days in that product, but we have great plans for it. It is growing and it is doing well, but we think that this is just the beginning of a larger offering that we have around that.

And Jason, this is Ofer. The second part of the question about marketing. Historically, the investment in marketing ramps up in Q1, and that has been done approximately 20% compared to last year. Typically, it's stable throughout the year. We are taking advantage of the circumstances and the fact there are lots of opportunities for us to scale. You should expect that investment in marketing in Q2 and beyond will be bigger than Q1. We are being opportunistic, being aggressive as unit economic framework allows us, and we are doing that.

And the next question comes from Eric Sheridan with UBS.

Thanks for taking my question. Two questions if I can. One, in terms of the behavior you're seeing on the platform, any updated view on what that might mean longer-term for take rates in the business, especially driven by the adoption of value-added services by the demand side you're in the current environment? And then, Ofer, with pulling the profitability forward into '21, curious if that also has an update for your long-term margin thoughts.

So Eric, on the take rate, we have been demonstrating over the past few quarters our ability to increase take rate moderately, and we plan to continue to do that by providing more value of the service. Micha spoke about promoted gigs earlier. This is one type of additional services on the seller side that can contribute to take rates. We feel very comfortable with the take rate as it is. I would take the advantage of this timing to share that we don't feel any pushback either from the buyers or the sellers on pricing and take rate. We feel very confident about the existing structure of the take rate. We haven't made any changes and don't plan to change the fundamental take rate, which is transaction related. So any additional take rate that you see in the future will be tied up directly to additional services, and we have a few of these in the pipeline. In terms of our long-term margin thought, it hasn't changed. It's still at 25%, as we've said before, and we are heading there. It's just a matter of scale of the business. The efficiency is embedded in everything we do, from gross margin to R&D, further marketing, and G&A. We have been able to demonstrate how we do that during the last four quarters since we went public, and we are confident we can keep delivering the same rationale in the future.

And the final question today comes from Drew Kootman with Cantor Fitzgerald.

Thanks for taking my question. Just one for me. I wanted to touch on annual guidance. You guys are one of the few companies that have continued to give guidance, which is great. So just curious, what economic conditions you're assuming in guidance? And any thoughts on how your revenue growth reacts if the economy is faster or slower to recover?

This is Ofer. We have been tracking the behavior of cohort in the marketplace on a daily basis since inception, including the last few weeks, where we track it even more intensively. We opened a data hub home where many people around the company participate in a daily update on behavior across all dimensions, including territory, categories, cohort behavior, and many other KPIs that we measure here in the company. Moving forward, we’ve always said that we guide based on what we know, and we feel confident based on existing cohorts, not only new cohorts. Even in a scenario with continued uncertainty due to the COVID-19 pandemic, we feel confident there are circumstances for us to benefit. There are positive and negative impacts from the continued uncertainty, but from what we've seen recently, we have the confidence to upgrade our guidance for the remainder of the year.

Thank you. And that does conclude the question session. I would like to return the call to the speakers for any closing comments.

Yes. I just wanted to thank everyone who participated in the call today, wish everyone a great day, and continue to say safe, everyone. That's the most important thing. Thank you.

Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.