Earnings Call Transcript - FVRR Q3 2022

Operator, Operator

Hello, everyone, and welcome to the Fiverr Q3 Fiscal 2022 Earnings Conference Call. My name is Julie, and I will be coordinating your call today. I'd now like to turn the call over to Jinjin Qian. Please go ahead.

Jinjin Qian, Moderator

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, 2022. 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 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. And now, I will turn the call over to Micha.

Micha Kaufman, CEO

Thank you, Jinjin. Good morning everyone and thank you for joining us today. We are pleased to report strong results today. In the third quarter of 2022, revenue was $82.5 million at the top end of our guidance, and adjusted EBITDA was $6.6 million, above our guidance range. This performance is the direct result of the actions we took to strengthen the flywheel of our marketplace. That is improving our efficiency in buyer acquisition, optimizing our catalog, building a better product experience and, in turn, driving more buyers to buy more from our platform. Our decision a few months ago to optimize our cost structure and accelerate our pace towards long-term margin targets is also paying off. Our Q3 adjusted EBITDA margin of 7.9% represents a 250 basis point improvement from Q2 with a strong gross margin of 82.8% and cost savings across all expense lines. The scalability, efficiency and highly diversified nature of our business model is setting us apart in navigating through this economic cycle. We operate a global market base where millions of buyers purchase digital services from our platform across over 550 categories. This allowed us to detect the shifting macro conditions as early as March. Our bottom-up go-to-market strategy with a highly efficient and data-driven approach allows us to stay disciplined when overall SMB spending is facing headwinds. In fact, we took a step ahead and even accelerated our pace of improving the bottom line when growth became more expensive. In addition, we have a strong balance sheet and are generating strong cash flow. We believe maintaining a healthy cash flow and cash balance is essential in protecting shareholder value in the current macro environment and gives us the ability to focus on long-term value creation. We tremendously value the trust we have earned from you and we are committed to staying responsible and transparent with our shareholders. All of this, in my opinion, is providing us with a great setup for future growth. For the rest of my remarks, I want to talk about why we have confidence, conviction, and optimism in our future growth. First, the opportunity in front of us is huge and the secular trend of moving towards freelancing is only growing. According to our latest Annual Freelance Economic Impact report, US independent professionals earned a total of $247 billion in 2021. To quantify this further, according to a recent survey by McKinsey, 36% of the American workforce makes their living through independent work, a considerable increase from 27% back in 2016. Talents are increasingly demanding freedom, flexibility, and control over their own work-life balance. Furthermore, macro volatility is also driving talent to embrace freelancing more. We saw this during the COVID pandemic and in fact, in recent months, with inflation driving up the cost of living and a flurry of companies conducting layoffs, we saw a record level of sellers coming to our marketplace. Now, many of you have asked me why we haven't seen the marketplace benefit from those trends yet. The answer is twofold: one, we looked into the industry hiring trends around the last economic cycle and noticed that during the economic downturn, freelance demand gets hit first before full-time hiring and oftentimes, leads broader GDP trends. That said, freelance demand is also expected to be the first to recover as we climb out of the downturn and the rebound is typically of a bigger magnitude compared to full-time employment and the GDP growth itself. So, the first part of the answer is a matter of timing, and we believe Fiverr will be the first to benefit from the upswing down the road. The second reason is the gap between talent and businesses in terms of adopting freelancers. As evident in our recent upwork survey, businesses lag behind freelancers in terms of willingness to embrace remote work and flexibility and engagement. This is why we see smaller businesses ahead of larger businesses in terms of utilizing freelancers for a much bigger portion of their talent needs. That said, we believe large businesses are getting there. The recent news around Amazon's $8 billion annual cost of employment attrition just illustrates the urgency and necessity of a change in talent strategy. All of this is to say that we are in the right place at the right time, and we expect significant tailwinds for our business. Now, the strong flywheel inherent in Fiverr's business model will allow us to benefit from those tailwinds much more than others. You have witnessed a significant uplift in scale we experienced during the COVID cycle. I am super proud that we are able to hold on to most of those gains. Active buyers were 4.2 million, nearly double what we had three years ago. Spend per buyer grew over 60% and take rate grew 340 basis points. This speaks to the loyalty of our buyer base, their increasing need for digital transformation, Fiverr's increasing wallet share as well as us extending our role in the value chain. And we are going to continue investing in our flywheel during this economic downturn, building products, improving supply and delighting our customers, so we will be in a stronger position to take advantage of the rebound. The last thing I want to highlight is our progress on Fiverr Business. The vision we have there and the innovations we are making. We are going to significantly speed up the bottleneck in business adoption that we talked about earlier. We are not building another staffing business to help you hire a contractor, developer or project manager. Rather, we want to provide businesses with the simplicity and nimbleness to engage with freelancers without the overhead of onboarding, contracting, time tracking and compliance. Think of the difference between leased data centers versus a cloud computing solution. You'll have much faster setup, much lower management overhead and much more scalability and flexibility. We are already seeing many midsized companies using Fiverr's solution extensively today. Our cover story in the shareholder letter highlights how the head of a creative studio and a gaming company utilizes Fiverr as a content generation hub, leveraging services across voiceover, 3D animation, video projects and banner ad design. It's amazing to see how much productivity and efficiency Fiverr can bring to his team. This is one of the many examples that give us the confidence and ambition to extend those tools to every business. We are investing in many areas, including increasing brand awareness among business customers, building partnerships and educating potential customers on use cases, improving our product across matching, transactions, communication and productivity tools, and lastly, expanding our supply into more specialized skill sets with demonstrated industry experiences. There is a lot to do, and there is no better timing than now to dig deeper and remain relentlessly focused on building out these innovations. I'll wrap it up today with advice I received when I was a young entrepreneur. There are only two ways to fail a startup. You either run out of money or you give up. We are probably a long way from what you would consider a young startup. But I think in many ways, the advice still applies. The scale we have and the strong cash flow we enjoy will allow us to build towards long-term sustainable growth and our passion, commitment, and excitement toward the future are absolutely unwavering. With that, I'll turn the call now to Ofer, who will walk you through our financial highlights.

Ofer Katz, CFO

Thank you, Micha, and good morning, everyone. We delivered strong results in Q3 across all metrics. Revenue of $82.5 million came in at the top end of our guidance, representing year-over-year growth of 11%. Adjusted EBITDA was $6.6 million, above the top end of our guidance with an adjusted EBITDA margin of 7.9%. We were able to improve our marketing efficiency, strengthen our product focus to drive conversion and retention and continue to make progress in upmarket, all of this benefited from the realigned focus in our core marketplace and Fiverr Business. The cost optimization exercise we did in July also paid off, allowing us to improve organizational efficiency as a whole and accelerate our trajectory towards long-term adjusted EBITDA margin target of 25%. Our adjusted EBITDA is also indicative of the strong cash flow we generate and together with the healthy balance sheet, it demonstrates the strength of our business and provides us with a strong financial position to pursue long-term growth opportunities. Active buyers were $4.2 million, up 3% year-over-year. We are encouraged to see active buyers stabilize, especially given the large cohort sizes we acquired in the past two years, as well as the macro headwinds that we are facing today. The resilience of our active buyers reflects the strong cohort behavior in our marketplace. Even in an uncertain environment like now, Fiverr provides an essential platform for SMBs to execute their digital strategies with speed and cost efficiency unmatched anywhere else. We also had strong execution on the new buyer growth form. We saw improvements in marketing efficiency, some of the work we did in optimizing our fusion and influencer channels as well as more granular campaign optimization contributed to the efficiency gain. We also saw a nice uplift in traffic following our launch of the new brand campaign Team Up in August. Lastly, I think that coming out of the peak summer travel season provides some uplift for September and October activities. Spend per buyer for Q3 was $262, up 12% year-over-year as we continue to make progress in growing upmarket. The number of buyers that spend over $10,000 annually grew over 50% year-over-year. We continue to round up our offering in Fiverr Business. This includes our continuous investments in the quality of our business supply, the iteration on the product and building targeted marketing funnels. This quarter, we also started rolling out some value-added services for our business customers. Project Partner is such an example that removes not only critical friction in our customer experience but also creates additional revenue opportunities for Fiverr. Take rate for the quarter was 30% in Q3, representing a year-over-year expansion of 160 basis points. This is consistent with our long-term strategy, where we believe our take rate will be sustainable with modest upside over time, driven by value-added services. Promoted Gigs continue to expand its exposure in the marketplace, which now includes accommodation, project listings, and mobile app listings. Seller Plus implemented a two-tier pricing model this quarter in order to expand adoption and allow more sellers to take advantage of the advanced tools in the program. Now let's turn to guidance. For the fourth quarter of 2022, revenue is expected to be $79.8 million to $85.8 million, representing year-over-year growth of 0% to 8%. Adjusted EBITDA is expected to be $7 million to $8 million, representing an adjusted EBITDA margin of 9% at the midpoint. For the full year of 2022, we expect revenue to be in the range of $334 million to $340 million, representing year-over-year growth of 12% to 14%. Adjusted EBITDA is expected to be in the range of $22 million to $23 million, representing an adjusted EBITDA margin of 6.7% at the midpoint. Our Q4 and updated full-year revenue guidance are largely consistent with our previous outlook in August. We do not have a revision on the macro assumptions underlying the Q4 guidance, and given the continued macro uncertainty, we think it's prudent to provide a guidance range a bit wider than our typical Q4 guidance. The adjusted EBITDA guidance reflects our continued discipline and commitment to accelerate the path towards our long-term adjusted EBITDA target of 25%. To close, I want to say that Fiverr is in a much stronger financial position compared to when we went public over three years ago. We are three times larger in terms of revenue with strong adjusted EBITDA profitability, an improvement of over 23 percentage points, and we enjoy strong cash flow and a healthy balance sheet. We believe that the macro headwinds we are facing are temporary in nature. I am confident that we are well-positioned to navigate through this macro cycle and we as a company are making prudent and smart investments to capture the exciting opportunity of shaping the future of work. With that, we'll now turn the call over to the operator for questions.

Operator, Operator

Thank you. We will now begin today's Q&A session. Our first question comes from Doug Anmuth from JPMorgan. Your line is now open.

Doug Anmuth, Analyst

Thanks for taking the questions. Micha, you talked about getting more sales to existing buyers and saw spend per buyer up 12% in the quarter. Can you just talk about your efforts there and perhaps that includes growing up market as well? And then just thinking more from a macro perspective, you talked about seeing the macro pressure early, perhaps as early as March? And then if you look back, freelancing requests come back somewhat quicker in the past? Are you seeing any signs of pickup there or signs that perhaps greater supply could help drive some more demand as well? Thanks.

Micha Kaufman, CEO

Good morning, Doug. Thank you for the questions. Regarding the spend per buyer, we identified an opportunity for increased acquisition late in the quarter, which means those new buyer cohorts haven't had the chance to spend yet. This explains the higher-than-expected number of active buyers and the lower spending per buyer. Market conditions began stabilizing around June, and this trend has continued into October. We were among the first to notice this stability. Currently, we're observing supply trending above usual levels, which is typical as supply often leads. This is partly due to layoffs, which may significantly increase our supply in the coming quarters, as many of those laid off are encountering companies that are limiting hiring, leaving fewer options available for them. Fiverr presents a strong alternative for these individuals. While we're starting to see this shift on the supply side, demand will eventually follow. As I mentioned earlier, this sequence is a matter of timing. Companies often reduce freelancer use first since it's more flexible compared to cutting full-time staff. However, over time, as companies strive to meet their objectives, freelancers will become essential again. Right now, we're witnessing some stabilization, which informs the guidance we provided. There's still considerable uncertainty, as highlighted by numerous earnings reports this season, making it challenging to forecast Q4 and its impact on next year. I believe we will be among the first to experience recovery, similar to our experience during COVID. It's important to note that we were classified as beneficiaries of COVID not by chance; our pre-COVID investments, like moving upmarket and expanding our catalog and geographic reach, allowed us to thrive during that time. We're following this same strategy now and anticipate being well-positioned to capitalize on the upcoming rebound.

Doug Anmuth, Analyst

Very helpful. Thanks, Micha.

Operator, Operator

Our next question today comes from Brad Erickson from RBC Capital Markets. Please go ahead.

Brad Erickson, Analyst

Thanks. Maybe just a follow-on to that last comment. You talked about the accelerated supply coming to the marketplace, how much unfulfilled demand would you say is on the platform, where you think there's an appetite to buy, but they're just not able to find the freelance or that they want for whatever reason. And I guess the question is, could you add additional percentage points of growth upcoming if you are able to just improve utilization beyond just active buyer growth and spend per buyer? Thanks.

Micha Kaufman, CEO

Thank you, Brad, and good morning. So in terms of unfulfilled demand, I think that this is kind of a moving target. And the reason is that the more we sell the supply side, the more we fill it with more professional offerings and supply. The more we fill it, we did those who can actually perform more sophisticated and larger projects. So is the demand for that. So if there's an offering, we know how to match it with demand. So, I would like to think that when we look at matching and unfulfilled demand, it's pretty stable, meaning that the more supply we have, the more demand we can trap to it. But essentially the size of the catalog and the variety in the catalog allows us to have a relatively, I think, small degree of unfulfilled demand, and demand grows with supply. And I said so before, supply comes first. So when we bring supply, when we open new categories, demand comes most of it organically, very, very fast. And through our marketing machine, we know how to bring additional demand to it.

Brad Erickson, Analyst

Got it. Got it. Thanks. And then just a follow-up. Take rate obviously continues to go up. Where are you, would you say on ad load for Promoted Listings? And I guess, should we just generally maintain that trajectory here going forward? Any reasons why take rate would increase faster or slower as a function of either Promoted Listings or other value adds you're including in there? Thanks.

Micha Kaufman, CEO

Thank you. We are very pleased with the growth of Promoted Listings, which we've mentioned in previous quarters. We believe there is significant potential for further growth, and this positively affects our take rate. Much of what you observe in the take rate can be attributed to Promoted Listings and the additional value services we provide that are being increasingly utilized by buyers and sellers. We are confident that there is substantial opportunity to expand these products, which is why we often mention the potential for modest improvements in the take rate. Our consistent performance over the past few quarters has illustrated this point.

Brad Erickson, Analyst

Got it. Thanks.

Operator, Operator

Our next question comes from Matt Farrell from Piper Sandler. Please go ahead.

Matt Farrell, Analyst

Thanks, guys. Congrats on the really strong execution here in this uncertain environment. For my first question, taking a step back, it's been a couple of months now since the cost realignment actions. What are some of the biggest takeaways you have from those efforts, either on execution, culture, product momentum, anything there would be helpful? Thanks.

Micha Kaufman, CEO

Good morning, Matt. Thank you for your question. We were among the first to implement cost-saving measures and enhance cost efficiency, which has yielded positive results. However, it’s important to note that we haven't fully realized these improvements yet, as layoffs involve severance payments that affect our profit and loss statements. Over time, we expect to see these benefits more clearly. Our focus has been on strengthening our core business while also making strategic investments. We are concentrating on enhancing our revenue-generating activities, improving customer acquisition, and targeting high-value and larger buyers, particularly through Fiverr Business. These efforts have contributed to growth and efficiency in terms of EBITDA and costs. Overall, we are pleased with the results, which have positioned us well to build cash reserves. This enables us to act swiftly when market conditions improve, providing us with opportunities for growth that we can pursue effectively.

Matt Farrell, Analyst

And I know you aren't providing 2023 guidance right now. But as we think about bigger picture product teams or macro dynamics, how are you just thinking about the major tailwinds and headwinds as we move over the next couple of quarters here? Thanks.

Ofer Katz, CFO

This is Ofer. And I think, as you said, we're not providing guidance at this point of time. And there is a lot of uncertainty ahead of us, both mainly in terms of economics and geopolitics. Yet to be said, I want to tackle on two items. The first is the first year EBITDA, which we have control and plan to maintain this test for long-term EBITDA. We plan a meaningful upside next year in terms of EBITDA, so again, despite the fact that this is not a time to talk about guidance, we do feel confident with our ability to improve EBITDA next year. And the second comment on my end is more on the long-term. Given where we are in terms of the number of active buyers, but also center buyer, we feel there is an infinite. It's a blue ocean ahead of us. Not only on the SMB but also bigger organizations. And we have much to accomplish. And we think that once the economic circumstances stabilize and get better, I think that Fiverr would be one of the companies to enjoy a significant uplift in growth both in terms of active buyer and center buyer and top-line growth. So we are very positive. And I think we navigate pretty well during this uncertain period. So that's kind of the best guidance that we can provide for the next few quarters.

Micha Kaufman, CEO

To expand on what Ofer mentioned regarding the product side, I believe there are two main areas to focus on. Firstly, there's the core business where we continue to enhance the efficiency at the top of the funnel, improve conversion rates, and boost retention. There is still much to be done in a true e-commerce marketplace, which will further strengthen the flywheel effect. In the current challenging macroeconomic environment, we have the opportunity to look internally and discover growth avenues. The second area is Fiverr Business, where we aim to build that segment by identifying customers who should transition to Fiverr Business, allowing us to provide them with excellent service and enhance their engagement. There is a lot of promising work happening here. A positive sign for us is that at the top of our funnel, we have a sufficient number of customers. We have enough customers for whom Fiverr Business is an ideal fit, and we are focused on optimizing the process of identifying these segments and directing them into Fiverr Business, where their spending is significantly higher than that of the average customer on Fiverr. Thank you.

Matt Farrell, Analyst

Thanks, guys. Congrats, again.

Micha Kaufman, CEO

Thank you.

Operator, Operator

Our next question today comes from Andrew Boone from JMP. Your line is now open.

Andrew Boone, Analyst

Hi, guys. Good morning and thanks for taking my questions. You talked about stability within cohorts, within the letter, ROI remains healthy at I think a 90% payback period this last quarter. Can you just shed some additional light on what you're seeing in terms of existing buyer spend and just the consistency there versus past quarters? And then I'm curious about the personal consumption of Fiverr. The letter, I think, mentioned 75%+ of buyers can use Fiverr for business purposes. What's the other side of that? Can you talk about the minority spend that is personal, what are people buying? And is there an opportunity to lean into that? Thanks so much.

Micha Kaufman, CEO

Thanks, Andrew, and good morning. Regarding core behavior, our message remains consistent with what you've heard in previous earnings calls. We are observing that cohort behavior is currently better than pre-pandemic levels. While it isn't as strong as at the peak of the pandemic, it also hasn't reverted to pre-pandemic levels. Overall, we are seeing positive core behavior. Though macro headwinds affect both new and repeat business, our customers' loyalty remains intact. When they have a need, they come to us. Moving to the second question about business versus personal consumption, it's important to remember that individuals engaging with our platform might do so for multiple reasons. For example, someone who needs editing or illustration services for a book they're writing for personal reasons may also use the platform for their job. We have observed overlap where business buyers occasionally utilize the platform for personal projects, such as hobbies. Conversely, someone who begins using our services for personal interests, like music composition, may eventually transition to being a business buyer due to the vast range of offerings we provide. We felt this was noteworthy to mention.

Andrew Boone, Analyst

All right. Thank you. There are no further questions at this time. I'll hand you back over to Micha Kaufman for closing remarks.

Micha Kaufman, CEO

Thank you, Drew, and thank you, everyone for joining this morning. We look forward to seeing you at one of the conferences or to speak in person and see you next quarter. Thank you. Have a great day.

Operator, Operator

That concludes today's Fiverr Q3 fiscal 2022 earnings conference call. You may now disconnect your lines.