Fiverr International Ltd. Q3 FY2024 Earnings Call

Good day, and thank you for standing by. Welcome to Fiverr Third Quarter 2024 Earnings Conference Call. All this time all participants are in a listen-only mode. After the speakers’ presentation there will be a question-and-answer session. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, Jinjin Qian, EVP, Strategic Finance. Please go ahead.

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, 2024. 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, adjusted EBITDA margin, and free cash flow. 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.

Thank you, Jinjin. Good morning everyone, and thank you for joining us. We delivered a tremendous third quarter with both revenue and adjusted EBITDA exceeding the high end of our guidance range. By successfully executing our strategy to go upmarket, expand value-added services, and deliver innovative AI-powered experience, we are able to grow a higher quality buyer base, drive robust growth in spend per buyer, and strong expansion in take rate. All of these efforts are clearly paying off, allowing us to accelerate our revenue growth this quarter. This is not an easy task, considering that the entire professional staffing industry is down double-digit year-over-year, and overall SMB sentiment still lingers around historically low levels. The fact that we are able to accelerate our growth under such macro conditions underscores the strength of our vision and strategy, and our impeccable ability to execute them. We also continued to deliver steady improvement in adjusted EBITDA and strong cash flow generation. Last quarter, we laid out a three-year target plan for adjusted EBITDA and free cash flow. With strong execution in Q3, I’m confident that we are well on track to deliver these targets. Our strong financial position allows us to aggressively invest in products and technology to drive growth while at the same time returning capital to shareholders and driving shareholder value. Fiverr’s strategy has always been to relentlessly focus on creating customer value and building the most beautiful, innovative, and simple-to-use products to transform the way people work. One thing that became clearer to me in the last year is that with the emergence of GenAI and the promise of AGI, the next generation of products we build must empower our community to fully leverage artificial intelligence. It also became clear to me that in the future, the best work will be done by humans and AI technology together, not humans alone or AI alone. With that in mind, the role of Fiverr must broaden from a talent marketplace to a comprehensive work platform, where incredible work happens. This means that every business that comes to Fiverr will have a world-class AI assistant to help them get things done, from ideation, scoping and briefing to project management and workflow automation. It means that they can seamlessly leverage both human talent and machine intelligence to create the most beautiful results. Fiverr has a long history of pioneering the industry with innovative products, and this is what we will do with AI as well. We are already starting to put a few pieces together to build towards this long-term vision. On the buyer side, we are building a new search experience that not only includes more dynamic catalogs but also incorporates Neo, an AI-powered smart matching tool, to help customers match with more contextual information. We launched Dynamic Matching to allow buyers to put together comprehensive briefs with a powerful AI assistant and then get matched with the most relevant freelancer with a tailored proposal. These products allow businesses to fulfill much more complex projects on Fiverr without losing the speed, simplicity, and convenience that they love Fiverr for. Even in the few weeks since we launched these products, we have already seen an enthusiastic reception from our community and promising performance. The projects that come through these products are several times larger than a typical project on Fiverr, and we believe it has a lot more potential down the road as the awareness and trust of these products grow on the platform. On the talent side, we are building the infrastructure to allow us to more efficiently distribute software tools that integrate with the work that’s done on the platform. Some of the tools are built in-house, such as Promoted Gigs and Seller Plus. Some of these tools are through acquisition such as AutoDS, and we believe there will be a lot of opportunities down the road to expand these value-added services through partnerships as well. Lastly, I want to say a few words about Fiverr Pro. As you know, Fiverr Pro is a premium offering we launched to grow our penetration into larger businesses with larger freelancing budgets. We started by providing businesses with collaboration tools, white-glove services, and a fully vetted catalog in order to drive better conversion, engagement, and retention among buyers with the highest lifetime value. Now, with our product expansion into Professions, Dynamic Matching, and Hourly Contracts and services such as project management, we are further leaning into these buyers to capture their budgets on long-term freelancer engagement. Many of you have asked us what our right to win is in this segment of the addressable market. I want to point you to two things. First, we have a very large top-of-the-funnel, which allows us to acquire enterprise customers in a super-efficient manner. Most Fortune 500 companies already have employees who are on Fiverr and using our services. This bottom-up approach allows us to scale with very light sales and accounts teams. Second is our technology stack. The speed, simplicity, and convenience of Fiverr is fundamentally different from a typical staffing solution. From onboarding to compliance to payments and reporting, Fiverr is so much easier compared to a self-serve solution, and is so much more cost-effective compared to a managed solution. And as I mentioned before, it is going to get even better as we implement AI capabilities further into our platform. To close, I’m super excited about the many opportunities that are ahead of us. With the strong results in Q3, we are looking forward to wrapping up 2024 on a high note and can’t wait to kick-off another year of growth and innovation. With that, I’ll turn the call over to Ofer, who will share some financial highlights.

Thank you, Micha, and good morning everyone. I’m pleased to report an exceptional quarter with both top and bottom-lines exceeding expectations. Revenue for the third quarter was $99.6 million, up 8% year-over-year, representing an acceleration from 6% year-over-year growth in Q2. Adjusted EBITDA for Q3 was $19.7 million, representing an adjusted EBITDA margin of 19.7%, an improvement of 180 basis points from a year earlier. We continue to demonstrate our ability to deliver both growth and profitability improvement despite the macro uncertainty and our commitment to execute with the highest level of consistency, efficiency, and focus. Unpacking the strong results for Q3, we continue to see our efforts of going upmarket and expanding value-added products work well. Spend per buyer was $296 in Q3, representing year-over-year growth of 9%. More buyers are coming to Fiverr for larger and more complex projects. While the active buyer growth was muted, we see continued growth in buyers who spend over $10,000 annually. On the macro level, we have seen some level of stabilization in trends since the volatility we experienced in June and July, however, the overall SMB sentiment remains weak, and the overall hiring environment continues to be challenging. We expect GMV will still take some time to recover; in the meantime, we believe our strategy to lean into products to drive wallet expansion and our work to unlock new addressable markets continues to be the right strategy to generate growth catalysts. Take rate for Q3 was 33.9%, representing a year-over-year improvement of 260 basis points. The continued strength of Promoted Gigs, the growth of Seller Plus programs with the newly launched Kickstart Program, as well as the strong growth momentum at AutoDS, all contributed to the take rate upside this quarter. As a reminder, Fiverr’s take rate consists of two distinctive components: first, is marketplace commission of approximately 26% and second is value-added services of an additional approximate 8% take rate. The marketplace commission is directly tied with GMV on the marketplace and has been relatively stable over the years. The expansion of value-added products has driven the vast majority of our take rate expansion. As Micha mentioned, Fiverr is increasingly building towards a comprehensive work platform that provides not only access to talent but also a suite of software and AI tools. Take rate expansion continues to be an important growth catalyst for us as we further expand our value-added product portfolio. The strong Q3 results also translated into strong cash flow generation. Free cash flow was $10.6 million. Free cash flow excluding one-time escrow payment for contingent consideration was $22.7 million, representing 22.8% of revenue. Together with a balance sheet of over $650 million, we have ample cash to continue investing in product and growth, while supporting other capital allocation priorities including optimizing capital structure, buyback, and M&A. With regard to the outstanding $460 million convertible note, our objective is to preserve maximum flexibility in this dynamic economic environment. We are confident in managing that liability through our strong balance sheet, but we will make that decision as we get closer to maturity. Given the strong execution of Q3, we are raising our full-year guidance for both revenue and adjusted EBITDA. For the full year 2024, we now expect revenue to be in the range of $388 million to $390 million, representing year-over-year growth of 7% to 8%. In terms of underlying drivers, we expect spend per buyer to continue growing at a robust pace, offset by the decline in active buyers. We now expect the take rate to increase by approximately 330 basis points year-over-year, higher than we had previously anticipated. For adjusted EBITDA, we expect full year 2024 to be in the range of $73 million to $75 million, representing an adjusted EBITDA margin of 19% at the midpoint. The updated full-year guidance implies Q4 revenue guidance to be in the range of $100.2 million to $102.2 million, representing year-over-year growth of 9% to 12%. Adjusted EBITDA for Q4 is expected to be $19.5 million to $21.5 million, representing adjusted EBITDA margin of 20.2% at the midpoint. I’m very proud of the exceptional results we delivered in Q3, and believe the strong momentum in Q3 will largely carry forward into Q4. I’m even more excited about what’s yet to come in 2025, including an action-packed Winter Release that’s coming up shortly, as well as many pipeline projects that Micha has alluded to in his remarks. With that, we’ll now turn the call over to the operator for questions.

Thank you. We will now begin the question-and-answer session. We'll take our first question from the line of Ron Josey from Citi. Please ask your question, Ron.

Great. Thanks for taking the question. Hi, Micha. Hi, Ofer. I wanted to follow up on two things. First is, in the letter you talked about demand trends stabilizing here, but then obviously the broader macro continues to have some challenges. And I think you highlighted hiring and SMB sort of challenges. So just talk to us a little bit more about what you meant by stabilization, Micha. I was wondering if maybe that's a newer thing post rates coming down or just any insights on stabilization. And then maybe a bigger question on the buyer base. I was wondering with all these new products like the new professions catalog, dynamic matching, and hourly contracts that just launched, I wanted to hear more about the product strategy to keep those buyers, call it on the platform, and how you think about your product catalog to continue driving greater overall higher quality buyers in the platform? Thank you, guys.

Thank you, Ron. Good morning. I appreciate the question. Regarding the first point, as we've noted in earlier earnings calls, there has been notable volatility in June, July, and August. Currently, we see September and early October showing a bit more stability. While we have noticed some improvement at the top of the funnel, we cannot yet define it as a definitive trend. It's also worth mentioning that with the election just days away, there could be seasonal factors that may cause fluctuations in trends. Thus, we aren't declaring a new trend; we're simply highlighting that after June, July, and August, there's been some stabilization and a slight improvement at the top of the funnel. As for the second question regarding our buyer base and product development, as we aim to move upmarket and serve larger clients with bigger freelancing budgets, we understand that they typically prefer working with agencies offline. Despite their familiarity with this method, we recognize several drawbacks, such as speed, convenience, clarity in pricing, delivery, and project management. Therefore, we are focused on eliminating these pain points and creating straightforward products for our customers. Looking at our strategy and its outcomes over the past year or two, we can see that these customers are expanding their engagement with us. They are growing at a faster rate than the overall customer base, spending more, and demonstrating better retention, spending habits, and frequency of use. This reinforces our commitment to investing in these products. Furthermore, we are among the pioneers in making significant advances in AI, not only by diversifying our product categories but also by enhancing the usability and robustness of our offerings, which previously required manual intervention. We believe that by eliminating these barriers, this segment of our business will continue to grow nicely, as it has been in recent quarters.

That's super helpful. Thank you, Micha.

Thank you. Our next question comes from the line of Bernie MacTiernan from Needham and Company. Please ask your question, Bernie.

Great. Good morning. Thanks for taking the questions. Two for me. First is with the guidance for revenue accelerating in Q4, how should we think about the puts and takes between take rate and GMV both, and is AutoDS having an impact on the revenue acceleration? And then secondly just on dynamic matching, I know it's only been launched for a few weeks, but can you talk about the metrics that you're using to gauge success of the product? And does it have any impact on advertising or the platform?

Good morning, Bernie. You were cutting off a little bit, but I think I got most of the questions. In terms of guidance acceleration, look, the macro hasn't changed, which means that we're working against a very negative market. If you look at the measures of or the trends of SMB sentiment or you look at the professional staffing market, they're down double-digit percentages. So, we're already offsetting in our profile, and we are offsetting pretty massively on the macro conditions. Our view on GMV, we've reiterated it, we've talked about this. I think that within this market, other than just offsetting on these negative trends, we're improving our product and building new products that are creating value for our customers, and those products are working extremely well. Customers are retained and happy to pay for these products because they're adding value for them. So, when you look at the makeup of what allowed us to grow, it's a combination of somewhat better top of funnel, the tools that we either introduced in the past like promoted gigs and seller tools; it's new tools like the addition of AutoDS and it is higher spend per buyer because of all of our going up market products. So we feel that as long as the macro does not significantly change, what we're doing now with the offset is the right thing. Obviously, we're pushing ourselves to even perform better and I think we are, and I think the numbers show it. But the strategy remains very stable, very consistent, we're not zigzagging, we're delivering on the same things that we said we're going to do and I'm happy to see that those developments are actually paying off for us.

That's great. Thank you.

On dynamic matching, I know it's only been a few weeks, but can you just talk about some of the metrics you're using to gauge the success of the product? And then does it have any impact on advertising or take rate? Just really want to know if it could be take rate dilutive if there's less of a need to advertise if all the sellers are fully matched? It's a good question. So first, as you said, it's very early. What we're seeing from early signs are extremely positive signs. I think that the beauty about this product is it allows customers to be more nuanced, specific, and detailed about the types of projects that they need. And it allows them to actually come up and voice much more complex projects within this product. We're using AI technology to help them create more extensive briefs and then get matched with a very specific type of talent, which saves them the trouble of actually going through and filtering talent and getting tailored proposals. Now, I don't think that because of the nature of these products, I don't foresee definitely not an immediate impact on advertising. The reality is we haven't seen that. I think that this product by itself is a little bit more relevant for very, very customized types of projects, whereas our catalog allows our customers to have a ready-made offering that they can just click and buy. So, I don't see this influencing, and the reality is that the promoted gigs continue to grow and we're very happy with it.

That's great. Thank you.

Thank you. Our next question comes from the line of Doug Anmuth from JPMorgan. Please go ahead, Doug.

Great. Thanks for taking the questions. Could you guys talk about what you're seeing early on with AutoDS and just how we should think about contribution there? And then also if you could talk a little bit more on the business rewards program, how that's increasing spending among some of your larger buyers and then any impact that you're seeing thus far on loyalty as well? Thanks.

Good morning, Doug. Thanks for the question. So on AutoDS, I mean we're very happy with the acquisition. I think as I mentioned, it is contributing to the take rate component. In fact, they had a better quarter than anticipated. Look, it's still a small business. So in contribution to the larger picture of Fiverr, it's still small which is why we're not reporting it separately. But we're happy with the performance and it's a great addition to the already in-house tools that we build. The loyalty programs are really tied in from both sides, from sellers and buyers, into a place where we're enabling more engagement both for our sellers and our buyers in a way that pays off. We know that the repeat and sometimes working with the same seller and same buyer is a very common thing on Fiverr. These are the types of things that we want to encourage. So we're very happy to see how these programs are shaping up because they're rewarding those who are doing it, which is influencing engagement, which is really important. So retention and engagement are the two metrics of how we measure the success of these programs.

Okay, thanks Micha.

Thanks. Our next question comes from the line of Jason Helfstein from Oppenheimer. Please go ahead Jason.

Thanks. Good afternoon, everybody. I guess good morning, depending on where you are. Can you talk about where you see take rates going long-term? Obviously, it's quite strong. The main driver really is, I guess, mix shift. It's not like this is all headline increases. But just I guess, where do you see long-term take rates playing out based on where you kind of see the mix of the business over time? Thank you.

Hey, Jason. So this is Ofer. I think that I'm kind of thinking about how to address this question because on one hand, we are very satisfied with the growth, the pattern of take rate over the last few years, starting with the basic 26% on the transaction, growing all the way up to 30-plus percent with value-added services. In reality, we do see more room to expand, both on existing product. We just launched the Kickstart subscription program for new sellers, which is going really well. There is more in the pipeline. During this period of volatility and macro headwinds, take rate expansion is a key driver for growth. I think that when the market opens and the macro turnaround starts to expand, the contribution of take rate is still going to be massive, but percentage-wise, it will be slower. For the time being, again with the existing program expansion and also new program in the pipeline, I think there is a good reason to believe that take rate will continue to increase, albeit modestly over the next few quarters.

Thank you.

Thank you. Our next question comes from the line of Brad Erickson from RBC Capital Markets. Please go ahead, Brad.

Hi. Thanks, guys. Good to chat. First question is, you mentioned the stabilization at the top of the funnel, but clearly some crosscurrents going on with SMBs and hiring trends. What do you guys need to sort of see to put marketing dollars back to work in the model? Like do you need to see kind of overt improvement in the macro? Or is there anything that's maybe a bit more like in your control that might cause you to lean in on the marketing spend? And then I have a follow-up.

Good morning, Brad. Thanks for the question. Essentially, the macro is putting more pressure on SMBs than it is on larger businesses. Therefore, acquiring SMBs is mostly a function of macro. Right now, with the current situation concerning LTV to CAC, it doesn't make much more sense to continue investing more than we are. At the same time, when you look at larger businesses, midsize businesses to enterprise businesses and you see the improvement that we've done both on going up market, and the increase in their spend on the platform, it does make sense to invest more, and we are, focusing our efforts there on high-value buyers. The top of our funnel contains every type of customer that we need. Yes, there is a bit less demand or traffic coming from very small businesses because they're not having the best time as a business. When that sentiment changes, even the smallest signs of improvement will prompt us to spend more as the marketing automation and sophistication of our marketing will allow us to respond quickly. But these are the main components that would influence our marketing spend.

Yes, that's great. That makes sense. And then just a housekeeping question, but one that we are getting from investors. Just curious if you can quantify how much you paid for AutoDS? I look at the balance sheet, see goodwill and intangibles ticked up pretty a bit. I guess, I wonder if that's maybe a good way to think about it or any other color you can give there? Thanks.

I think that we're not disclosing this deal. We've probably seen, but there are some items on the financial statement that indicate there is some cash flow component. Bear in mind that we did purchase some acquisitions earlier this year, so the amount is compounded from those two deals. I think it's a few million dollars; you can see that in the financial statements.

Got it. That's helpful. Thanks.

Thank you. Our next question comes from the line of Marvin Fong from BTIG. Please go ahead, Marvin.

Hi, good morning. Thanks for taking my questions and congrats on the quarter. Two questions for me. I would like to just drill down a little bit deeper on going up market. You mentioned in the shareholder letter things like dynamic matching, professions, and hourly contracts. Just wondering if you could give us some sense of which of those items you feel is having the most impact. I'm especially interested in hourly contracts; it seems like unlocking a major portion of the market. Could you provide any color on what you're seeing in terms of early start on how much of your mix is going to hourly contracts? And then I have a follow-up.

Alright. Hey, Marvin. Thanks for the question. Essentially, I think you mentioned yourself that these are extremely new products. What we're seeing gives us very high confidence that these are going to be successful products. They are dealing with very specific types of needs that Fiverr didn't address before. If you think about the market-based model where there are predefined, prepackaged, pre-priced services, it can be very suitable if you have a long ongoing relationship with a freelancer where it's mostly open-ended. These products provide additional flexibility. Again, these products are super new. They're really catering to the types of products and services that sell for many thousands of dollars, and they are by definition longer in duration. They're doing exactly what they were designed to do, while they don't compete with other offerings because we tailor each offering into a specific use case that makes it easy for customers to understand which solution is the best for them.

Got you. And totally understand these are very new products. Appreciate that answer. My second question is just on the guidance and I think you mentioned earlier, this is a pretty seasonal quarter. Correct me if I'm wrong, but typically a pretty seasonally strong quarter, Q4. So as we stand here at the end of October, do you feel like you have that visibility into that seasonal ramp? Or is it still too early to say and are you still waiting to see that develop? And how does that kind of play into your guidance? Thanks a lot.

I would make the question more interesting by adding the election in the US. That makes this quarter even more interesting. So that despite or on top of the seasonality and the fear with the last two weeks, the buyer attendance and priorities have kind of shyed. I would say that we feel we have enough confidence to guide. In fact, we improved guidance for the quarter, which is based on the exit point of last quarter combined with the stability of the top of funnel and the strong pipeline under value-added services. The simple answer is yes, we feel confident to guide against those trends.

That’s great to hear, Ofer. Thank you so much, guys.

Thank you. Our next question comes from the line of Rohit Kulkarni from ROTH Capital Partners. Please go ahead, Rohit.

Hi. Thank you. A couple of questions. One is just on the cost side of the equation. Can you talk about what your hiring plans look like? How have they trended over the last six months? And any color that you can provide in terms of what end-markets you're feeling about and how that translates into your hiring plans? And then secondly, I know take rate is something that investors kind of want to get their arms around. But over the last six months, there seems to be a nice step up in how take rate has expanded. Perhaps talk about whether there are some coincidental factors in terms of how you have expanded upmarket and if that has been successful. Any color around what may have led to that kind of slight step up in the expansion and how sustainable that is? Perhaps it's about going upmarket, or AI, or anything else that would be helpful? Thanks.

Good morning, Rohit. Thanks for the question. On the cost side, hiring has been done in a very disciplined manner, and we've been very disciplined on costs. But we are not shy about hiring where we have needs to further invest in product and in growth. I think we've done it in a very responsible manner. As for take rate, there aren't any surprises here. I'm proud of the fact that as management, this company has been very consistent in the way we've built the business. Despite high pressure on the macro side, SMBs and professional hiring, we've been able to offset a lot of it and continue growing. We have been able to increase the bottom line and our profitability profile even faster than we said we would because we had the opportunity to do so. We've done buybacks to create more value for our shareholders. We've built products that allowed us to go upmarket efficiently, and those products drive the platform higher as we've been very quick to respond to the opportunity of AI to make it a net positive for us. We are providing great products and solutions to both our sellers and buyers that they embrace, and this is why they engage more. There is no magic; it’s consistent work that pays off. To your question, we believe this trend will continue moving forward because it is a result of methodical work.

If I could squeak in a couple more in terms of capital allocations and debt and buybacks, any latest updates on the convertible notes, as well as the status of any additional share buyback authorization?

I will start by saying that we are fortunate to have sufficient cash to fulfill all obligations, including the convertible note when it matures by the end of next year. We have the flexibility to decide throughout this period in response to market conditions and any opportunities that arise. But again, we have sufficient cash to manage those liabilities. In terms of share buyback authorization, we executed some buybacks this year. We are actively monitoring this topic to prioritize shareholders' long-term value. There is nothing new to update as of now, but I recommend staying tuned to see how we react based on shareholder value.

Great. Thank you.

Thank you. We'll take our last question today from Josh Chan of UBS. Please go ahead, Josh.

Hi, good afternoon. Thanks for taking my questions and congrats on a good quarter. I've got two questions. One is on the take rate guidance going up. I guess, could you talk about what factors drove you to be able to raise your take rate guidance and what kind of surprised you in that regard? And then secondly, just on AutoDS, does that business happen to have a very seasonal dynamic in Q4 with the holidays? I'm just wondering whether revenue contribution is stronger in Q4 than other quarters? Thank you.

Good morning, Josh. Thanks for the question. Take rate guidance again, not massive surprises. It's just working and perhaps it's working a little bit better. I called out the fact that AutoDS had a better quarter than initially anticipated, which had some contribution, as did our other take rate driving products. So that is why we have the confidence, and that's why we guided the way we did. In terms of AutoDS, every business, including Fiverr, has seasonality factors. There is indeed a seasonal factor in Q4 for Fiverr as well as in Q1. The same goes for any of our other businesses. We're not guiding specifically to any one of our businesses; again, it's a small contributor at this point. We're happy with how it's growing and it gives us a nice contribution, but it's still small. We don't guide specifically; it's a SaaS business, which is in many ways different from a lot of our businesses, which is one of the reasons we like it as it allows us to extend our different offerings. As Ofer said, we guide based on how we see the previous quarter ending and this one starting.

Okay, great. Thanks for the color and the time. Congrats on the good quarter.

Thank you.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.