Fiverr International Ltd. Q1 FY2021 Earnings Call

Good morning. Welcome to the Fiverr first quarter 2021 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Maya Tracey, Investor Relations Manager. Please go ahead.

Thank you Operator, and good morning everyone. Thank you for joining us on Fiverr’s earnings conference call for the first quarter ended March 31, 2021. 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, whether as a result of new information or otherwise. A discussion of some of the important risk factors that could cause actual results to differ materially from any forward-looking statement 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 non-GAAP financial measures. A reconciliation 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. Now I will turn the call over to Micha.

Good morning everyone and thank you for joining us on the call today. Today we reported an outstanding set of results after a landmark year of incredible growth and resilience. We kick off the year with revenue growth accelerating to 100% year-over-year, doubling our revenue to $68.3 million. Underlining the growth is strength across our business matrix. Active buyers grew 56% year-over-year to over $3.8 million. Spend per buyer increased 22% year-over-year. We see consistent and increasing spend across our existing cohorts and continued growth in revenue from high value buyers in the midst of a massive digital transformation. Companies across the globe are adopting remote working models and shifting to hybrid teams by integrating more freelancers into their businesses. This past year has been a whirlwind for small businesses, forcing many of them to quickly adopt and find new ways to serve their customers. For many, this meant the need to digitally transform, and they turned to Fiverr to rebuild, pivot and launch their businesses. For some, this meant adapting from brick and mortar to having a digital storefront as we saw massive spikes in searches around e-commerce, website design, and sales management tools. Others turned to Fiverr for tools to help enhance and rebuild their businesses, like building your own in-house food delivery app. As the crisis reinforces and accelerates the trends towards adopting remote work and moving businesses online, we believe our market base is well positioned to address current needs and serve as a key resource when the economy re-accelerates. It’s critical to remember that the majority of the market is still operating offline, presenting a massive and still largely untapped opportunity to bring that business online. Businesses around the world and across all industries continued to invest and spend more of their budget on transformation. When they make the leap, there is no turning back. They will continue to spend and invest in their digital channels and our business model gives us visibility and confidence that this cohort behavior will continue far beyond the pandemic. Our market-based model benefited from the compounding transaction volume by the effect of the pandemic driving outsized cohorts to the platform last year and increased spend across existing cohorts. As we mentioned earlier this year, on average existing cohorts from 2018 and older grew spend 15% in 2020 compared to 2019. We believe that there is a long growth run rate ahead of us and we are confident that with continued excellent execution, innovation and investment in the creation of valuable tools for our community, we will continue to grow. We believe that our proven ability to successfully create revenue-generating products that expand our total addressable market, backed by powerful macro industry tailwinds, is highly encouraging for our future. These factors lead to a strong new baseline for our guidance. To ensure this growth continues as the tailwind effect fades, we are continuing to focus and aggressively invest in our key initiatives and growth engines. After a year of significant growth and powerful Q1, I’m even more excited for what’s in store for the rest of the year and beyond. We have continued to make exciting progress towards our key strategic markets, expanding internationally and developing and enhancing new capabilities for our products and tools while heavily investing in our brand and marketing. On the demand front, we’re deepening customer loyalty and engagement with our subscription and milestone products, increasing the lifetime value of our existing and new cohorts. Fiverr Business also continues to grow rapidly and we have implemented strategies to further build brand awareness and have an amazing pipeline of new products planned for the Fiverr Business community. On the supply front, we are excited to have a new vertical centered around data services. This is our latest example of building on our successful playbook with vertical launches. By opening a vertical focused solely on data services, we create a path for elevated category expansion in the data analysis space and further capture and capitalize on the high demand for these services. International expansion is a key component of our up-market strategy. We continue to aggressively invest on a global scale with a focus on deepening our penetration in existing markets and our local marketing efforts. We are encouraged by our localization efforts so far and we are investing prudently in building our infrastructure to support further expansion into new geographies. Finally, promoted services continue to enjoy healthy seller growth, contributing to our take rate expansion we saw this quarter. Fiverr is becoming a household name. Investments in brand awareness are generating a continuous long term drive for organic traffic and growth in spend. Our Super Bowl ad was viewed by millions of potential buyers and sellers through our TV campaign, digital and social channels, significantly boosting our brand, and we look forward to expanding on our momentum. The last year has shown us that Fiverr’s business is stronger and more resilient than ever. We have never been more proud of our talented and dedicated team. We have shown that in times of great uncertainty, our ability to execute on our strategy and mission has only grown more robust. We are operating at high efficiency, driving scale on our platform and investing in our product ecosystem to further fuel our business. We took Fiverr public less than two years ago. This year, we are going to be about three times larger while growing approximately 50% faster. All of this is reflected in the significant upward revision of our 2021 revenue growth rate guidance of 59% to 63% compared to our previous guidance of 46% to 50%. We are confident and highly bullish on the ability to deliver and execute on our goals. We are just getting started. With that, I will turn the call over to Ofer who will share a few Q1 highlights as well as some color for the rest of this year.

Thank you Micha, and good morning everyone. As Micha mentioned in his remarks, we are very excited to deliver another set of amazing results. In Q1, we achieved one of the strongest revenue growth rates in our history with an outstanding 100% increase to $68.3 million, doubling our revenue from the same period last year. This was driven by a spike in active buyers, expanding 56% year-over-year to over 3.8 million. Additionally, we saw accelerating growth throughout the quarter with outsized trends in the back half of the quarter driven by a jump in traffic and registration in the U.S. shortly after our Super Bowl ad. Spend per buyer was $216, up 22% year-over-year and up by $11 compared to Q4 2020. This was driven by the compounding transaction volume of the outsized new cohort we acquired last year combined with increasing spend across existing cohorts. As businesses accelerate their pace in digital transformation investments and start to integrate more freelancers into their workflows, we expect the spend to remain at this elevated level going forward. To continue capitalizing on these trends, we are investing aggressively to extend the lifetime value of our new cohorts by providing products such as milestone and subscriptions. Fiverr Business remains a key contributor as we target buyers with larger budgets and larger businesses while rolling out new enhancements and capabilities. In addition, we will continue to make significant investments in our brand building and our growth momentum from our most recent brand investments. Our platform continues to enjoy a market-leading take rate and a 10 basis point expansion to 27.2% compared to Q1 of last year. This trend of modestly increasing take rate is expected to continue in the coming quarters as we continue to grow value-added service offerings in our robust pipeline and recognize the 0.5% transaction increase introduced at the end of the quarter. We reported adjusted EBITDA of negative $0.7 million or a negative 1% margin, significantly above the high end of our Q1 guidance of negative $4 million to negative $3 million. The adjusted EBITDA of negative $0.7 million includes the long term investment of approximately $8 million on the Super Bowl ad. We will continue to prioritize growth and at the same time we expect to make continued progress toward our long term target model. Now for our guidance. For the second quarter 2021, revenue is expected to be $73 million to $75 million. This would represent year-over-year growth of 55% to 59%. Adjusted EBITDA is expected to be $5 million to $7 million. We are also upgrading our full year 2021 guidance. We now expect revenues to be in the range of $302 million to $308 million, representing year-over-year growth of 59% to 63%. Adjusted EBITDA is expected to be in the range of $19.5 million to $24.5 million, representing an adjusted EBITDA margin of 7% at the midpoint of the range. The compounding strength of our existing cohorts and confidence that they will sustain at an elevated level of spending, along with the addition of new cohorts sets a strong new baseline for our guidance. As we begin to lap the COVID tailwinds, starting from Q2 2021, we expect our growth to become more normalized but stronger than when we entered the pandemic period. As we have said, we are at an intersection of a new generation of workforce participants and the increasingly sophisticated will of businesses to have a digital strategy. We see this digital services shift via the freelancer market as a global secular trend that will continue to grow. Fiverr has been and will continue to power this shift with our unique platform. We have robust pipeline plans for the rest of the year and I’m excited to share these updates with you throughout the rest of the year and beyond.

Our first question is from Mike Ng from Goldman Sachs. Please proceed.

Thank you for the question. I just have two. First, I was just wondering if you could talk a little bit more about the characteristics of some of the newly acquired cohorts and how that compares to your historical cohorts. Then second, I was just wondering if you could give us a sense of how we should think about the pace of active buyer growth throughout the rest of the year, particularly as growth becomes more normalized. Thank you very much.

Thank you for the question, Mike. Good morning. As we've mentioned, the characteristics of the newly acquired cohorts are quite similar to our historical cohorts, but with a greater emphasis on high-value buyers. This is reflected in the increasing percentage of high-value buyers, including new customers joining Fiverr Business, who are spending about three times more than regular customers. So far, we've observed this trend across all countries, including those starting to emerge from the COVID situation, such as the U.S., U.K., Israel, and others, where around 50% of the population is vaccinated. We haven't seen any changes in this trend, which is very encouraging. The momentum we've maintained throughout the pandemic remains strong and continues to thrive.

Hey Mike, this is Ofer. For the second part of the question, as we look forward into Q2 and the rest of the year guidance, we anticipate that the lapping of the last four quarters is starting and we anticipate some level of normalization, or normalized growth will get to that much faster than what we experienced pre-COVID-19. If you recall at the beginning of last year, we were always mentioning that we anticipate balanced growth in terms of spend per buyer and active buyers, so that we anticipate that this kind of momentum will continue into the future.

Great, thank you Micha, thank you Ofer.

Our next question is from Doug Anmuth from JP Morgan. Go ahead.

Great, thanks for taking the question. First, Micha, I was hoping to get your view on supply and demand on the marketplace and just where you are in terms of balance going forward. Just wondering, is there any potential of sellers just going back into primary or previous types of jobs with reopening as hiring picks up more, or do you just think that the pandemic has forever changed the operating environment? Then second, could you expand a little bit more on Fiverr Business in terms of that higher frequency buyer and more expensive gigs, just how you’re thinking about progress there. I know it’s still early as well. Thanks.

Good morning, Doug, and thank you for your question. First, when examining the ratio of active buyers to sellers, it has remained quite stable, although we recognize that sellers have varying goals and motivations. For some, selling is a full-time endeavor, and they aim to attract as many customers as possible, while for others, it’s a part-time job with limited hours. Having a system that understands these dynamics and effectively manages liquidity has been crucial for our market for many years. During the pandemic, we've noticed new cohorts of more sophisticated and experienced sellers joining us, some of whom have recently been featured in the media. There were two significant stories on CNBC about U.S. sellers who joined Fiverr last year and are now earning hundreds of thousands of dollars annually. We believe the pandemic has shifted how freelancers perceive this opportunity. Freelancing is increasingly seen as a legitimate career path, leading to a new lifestyle. We haven't observed any of those cohorts retreating or returning to traditional jobs, often because they are earning significantly more on Fiverr than they did in their previous 9 to 5 jobs or attempting to find customers through offline freelancing. Regarding Fiverr Business, as you mentioned, it is still early, but what we're finding is quite interesting. Fiverr Business offers numerous capabilities that are appropriate for both individual roles within organizations and entire teams. For instance, a manager in a company may manage an account that grows over time, and we have accounts that reflect teams of nearly 100 people. This is encouraging. While it's still in the early stages, we're noticing that the cross-category activity and the ability of organizations to leverage Fiverr to enhance team performance allows them to source talent they struggle to hire or don’t require on a full-time basis. Our perspective for the decade ahead is that Fiverr Business will become the go-to platform for companies to integrate freelancers into their workflows, and this is precisely what's occurring.

Great, thank you for the color. Appreciate it.

Our next question is from Ron Josey from JMP Securities.

Great, thanks for taking the questions. I have two, please. If you could talk a little bit more, Micha, just about brand awareness. You mentioned in the letter building Fiverr into a household name and the growth and awareness around SMBs and also for medium sized businesses, which talks about going upstream and NPS scores accelerating. But post Super Bowl and all the different benefits that came from that, can you just talk a little bit more about the marketing strategy as brand awareness continues to grow, and I think you’re doing that in multiple different countries? Then Ofer, you mentioned an increase in transaction fee, I think you said in the back half of the quarter. Just talk a little bit more about that increase and how you see that going forward. Great quarter, guys. Thank you.

Thanks so much, Ron. Good morning. We’ve been talking for a few quarters about brand awareness and about building a household brand. Maybe the peak of that effort for this year has been definitely the Super Bowl ad, but definitely what we’re seeing is we’re seeing that brand awareness in general, both before the Super Bowl and after, is on the increase, which means that we’re gaining more organic traffic that is coming to us, and a lot of it contributes to the efficiency of our brand which makes our performance marketing more efficient or cheaper. That is really important for us, so the idea is to continue pushing on that front because we are making Fiverr into a synonym for accessing talent, accessing freelancing talent in a very easy to use platform. So it’s definitely something that we will continue investing in. Unfortunately, there is not an additional Super Bowl this year, but we’re definitely seeing a lot of opportunity to invest around that, and some of the stories that have been popping up there on the news have been happening organically. The story that I mentioned on CNBC is a story that was picked up by media with no intervention on our side, and this is exactly the cycle that we want to create. We’re seeing also the contribution of organic and brand awareness through the positioning of our services online. Logo Maker is one of those examples, where you see the service that we launched a few quarters ago and have been increasing its placement on search engines, and because of its high placement at this point, it is generating organic traffic that we’re not paying for to the Logo Maker and to the entire site. We’ve extended that strategy to more than just the U.S. We’ve done TV campaigns outside of the U.S. and obviously online campaigns, and all of them have shown tremendous efficiency. As long as this continues to be the case, we’ll continue to invest and continue to expand those efforts. They’re still a minority of our investments, but the combination of brand awareness with performance marketing is something that has proven itself to work really well.

Then Ron on the second part of the question, on the service fees, the take rate and the service fee, what triggered the change in the service fee is the fact that cross-border transactions cost us more. The structure of the fee has been changed and it caused us to transfer this cost into the buyer. We did some tests throughout the quarter to confirm the fact that customers are completely agile and there is no effect in terms of that conversion, which leads us to add this 0.5% across the entire platform at the end of the quarter. We see that as the start of the new structure. This will definitely impact the take rate throughout the year, but again to conversion and the active buyer, we don’t think there is an impact. It actually gives us a little bit more comfort on the value that we provide throughout the platform, where our ability to increase take rate even beyond the 27% has been well accepted on both the buyer and seller sides.

That’s great. Thank you, Micha and Ofer.

Our next question is from Nick Jones from Citi. Go ahead.

Great, thanks for taking the questions. I guess two. One, could you just provide an update on geographic expansion, the traction and progress you’re seeing, and just given COVID is having kind of varying impacts by region, is there anything different there or is it kind of tracking similar to the U.S.? Just any color there, and then I have a follow-up. Thanks.

Good morning, Nick, and thank you for your question. Regarding our geographic expansion, it continues to be a key area of growth for us, and we are actively investing in it. Currently, we operate in six languages: German, French, Dutch, Portuguese, Italian, and Spanish. We entered the Brazil and Mexico markets in November and have conducted TV campaigns in the U.K., Germany, and Australia, where we are experiencing strong growth. Our approach is simple, and we've previously discussed it; when we enter a new country, our goal is to see improvements in baseline growth. The first step is to change the existing trend, followed by ensuring that the growth rate of that country exceeds the overall market growth. Encouragingly, we have seen more than half of the newly opened countries experiencing rapid growth, with some achieving triple-digit increases. This success has allowed us to develop a playbook or blueprint for launching more countries in the future to further fuel our growth. As for the impact of COVID, I mentioned earlier that we are closely monitoring how different regions are coping with the virus. We've observed that performance remains unaffected; in fact, it continues to improve in regions exiting the pandemic. Israel serves as an extreme example, with a high vaccination rate making it seem as if COVID hardly existed, and we've seen no disruptions there—rather, a positive trend persists. The same holds true for the U.S. and the U.K. Although areas like India and Germany are facing new outbreaks, we've noted traffic increases similar to those during the pandemic, mainly due to a greater supply reaching the market. However, we haven’t identified trends suggesting a return to previous baseline levels post-pandemic. Ofer highlighted that while we expect some normalization as we transition, it doesn't imply a return to historical levels. Our new baseline is significantly higher now, and we are growing much faster.

Great, thank you. I have a separate question. Yesterday, the U.S. Labor Department canceled a regulation proposed during the Trump administration regarding the employment status of gig workers. This brings us back to the Department of Labor rule from 2008, which I believe is the seven-factor test. Could you remind us how we should consider the impact of this on Fiverr in the U.S., if there is any impact at all? Thank you.

Absolutely. There should be a clear distinction between the gig economy and the freelancing economy or the talent economy. The latter in which we fall into focuses on providing freelancers with the freedom to work on whatever they want, whenever they want, and charge whatever they see fit for their services. Our service resembles the relationship that Amazon has with its merchants or Etsy has with its sellers. We don’t believe that the current regulations are relevant for the e-commerce platform. We do continue to monitor the developments, but we definitely think that the rules that are within the regulation and within court decisions do not apply to Fiverr.

Great, thank you.

Again if you have a question, please press star then one. Our last question is from Jason Helfstein from Oppenheimer. Go ahead.

Thanks guys. Two questions. One, just on marketing, you’ve obviously seen significant, I guess, marketing efficiency tailwinds - a big chunk of that is COVID, but also you’ve built meaningful brand awareness, so help us think about how you see marketing efficiency going from here. We can all kind of run numbers and we have a sense of probably, based on the guidance, what you’re going to spend on marketing, but how should we think about marketing efficiency and what it means for net adds for the rest of the year? How do we think about that, and do we hit a point where you start adding more adds, more net adds but perhaps they spend less? Just how do we think about the relationship for the rest of the year? Then the guidance for the rest of the year, any meaningful contribution from Fiverr Business or subscriptions in the guidance the rest of the year? Thank you.

Hey Jason. The way we measure marketing efficiency is illustrated in the ROI chart. If you look at it, you'll see that we can recover our investment costs within the first quarter, meaning the ROI is around three months. This has been consistent since we went public and is improving. We're able to invest more money, attract more buyers, including those with larger budgets, while still maintaining a highly efficient ROI. We've also increased our marketing investment and brand awareness, with awareness growing more than conversions, and we've reduced our sales and marketing costs as a percentage of revenue over time. This is how we measure our success. The buyers we attract have a high lifetime value, which doesn’t fully materialize in the first quarter. Many of these buyers remain active for several years, and when we look at the ROI again, after two, three, and four years, the lifetime value to cost ratio exceeds four and continues to grow quarterly. Looking ahead, we believe we can sustain these favorable ROI metrics by adding more channels, investing in technology, expanding our categories, and increasing buyer lifetime value. This connects to your question about products like Fiverr Business and subscriptions, as well as others. Each quarter, and this has been true since the company's inception, the quality of our buyers has improved. We can afford to pay more for each buyer due to their lifetime value while still achieving high ROI. Regarding guidance, once Fiverr Business and subscriptions become more established within the business, we'll provide more insights. The product launched a quarter or two ago is still gaining users, and we are in the process of collecting data, so it's early yet. Over time, we aim to share more information. The latest data point highlights the growing upmarket and contributions from all our released products. We believe we've shared how high-value buyers contribute to our overall revenue, which has now risen to 59% of our quarterly revenue, up from 58% last quarter. Although it's premature to model their contribution precisely, it positively impacts our overall high-value buyer segment, and you can see how this number has increased since we went public, largely due to our planned initiatives.

Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Micha for closing remarks.

Thank you Kate. Thank you everyone for joining the call today, and have a good rest of the day. We’ll talk to you next quarter. Thank you.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.