Earnings Call Transcript - FVRR Q2 2023

Operator, Operator

Good day and thank you for standing by. Welcome to the Fiverr Q2 Fiscal 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Brian Lan. Please go ahead.

Brian Lan, Speaker

Thank you, operator, and good morning everyone. Thank you for joining us on Fiverr’s earnings conference call for the second quarter that ended June 30, 2023. Joining me on the call today are Micha Kaufman, Founder and CEO, and Ofer Katz, President and CFO. Before we start, I would like to remind you that during this call, we may make forward-looking statements and that these statements are based on our current expectations and assumptions as of today, and Fiverr assumes no obligation to update or revise them. A discussion of some of the important risk factors that could cause actual results to differ materially from any forward-looking statements can be found under the Risk Factors section in Fiverr’s most recent Form 20-F and other filings with the SEC. During this call, we’ll be referring to some key performance metrics and non-GAAP financial measures, including adjusted EBITDA and adjusted EBITDA margin. Further explanation and a reconciliation of each of the non-GAAP financial measures to the most directly comparable GAAP measures is provided in the earnings release we issued today and our shareholder letter, each of which is available on our website at investors.fiverr.com. And now, I will turn the call over to Micha.

Micha Kaufman, CEO

Thank you, Brian. Good morning everyone, and thank you for joining us. We are excited about the Q2 results we’re sharing today. Not only did we deliver strong financial results, but it has also been a highly productive quarter where we launched several game-changing products that build towards our next leg of growth. For the second quarter of 2023, revenue came in near the high end of our guidance at $89.4 million, representing year-over-year growth of 5.1%, an acceleration from 1.5% year-over-year growth in Q1. We delivered adjusted EBITDA of $15.3 million, meaningfully ahead of our guidance range and representing an adjusted EBITDA margin of 17.1%. These results show how we have become financially stronger as a company through the efficiency steps we’ve taken in the past few quarters. It also underscores the consistent execution that we strive for, especially in a continued uncertain macro environment. We have successfully built a strong operational foundation, and our focus remains on our long-term strategic goal of investing in product development and marketing efficiency to drive increasingly profitable top-line growth. In Q2, we reached several significant milestones in our product efforts. With the all-new Fiverr Pro, the introduction of Fiverr Enterprise, Fiverr Certified and Fiverr Business Solutions, and our latest launch, Fiverr Neo, a few days ago, it is frankly the most exciting and action-packed quarter on the product front that I can remember. This is not to mention the many new features and optimizations we have constantly made, which continues to drive incremental improvement in conversion, engagement and retention of our marketplace. Building beautiful, simple and innovative products is in the Fiverr DNA and something close to my heart. I can’t tell you how energizing and fulfilling it is to see these endeavors in full swing. Now, at the beginning of the year, we talked about two focus areas for us to drive growth. First, investing in core fundamentals of the marketplace to drive better discovery, better catalog experience, and improved engagement and retention. Second, continue investing in going upmarket to unlock large buyers’ wallet share and new addressable markets. I want to touch on how each of the projects I called out earlier represents a major opportunity within these two focus areas. In general, the fundamental experience of the e-commerce marketplace hasn’t changed much over time. Browse, search, listing pages and buying, these are the basic functionalities any e-commerce site offers today. That is until the launch of Fiverr Neo. Leveraging the latest large language models, neural networks, and natural language processing, Fiverr Neo fundamentally changes not only the search-to-find experience, moving from a structured catalog experience to a free-form conversational experience, but also drastically change how the underlying matching is done. The algorithm is not passively taking information based on buyer keywords and actions, but has the ability to drive the conversation and pull information from the buyer to form a more complete view of buyer requirements and generate the perfect matching results. That is a complete game-changer. Think of Fiverr Neo as having the potential to get infinitely close to a human talent recruiter, only with more data, knowledge, patience, and a far faster turnaround. We have also taken significant steps in the evolution of our upmarket efforts. We launched Fiverr Business nearly three years ago because we saw an opportunity for larger companies to incorporate a global freelancer workforce to help fill skill gaps and provide cost savings. That opportunity has only become more relevant today, and we recognize that these organizations are in even greater need of solutions that can simplify the process of finding and hiring talent online. Today, the launch of Fiverr Business Solutions represents the culmination of our strategic efforts to move upmarket and create multiple impactful solutions that will bring and serve higher lifetime value buyers. With Fiverr Business Solutions, we offer larger companies a suite of products, each with a unique value proposition. Fiverr Pro enables the marketplace experience for corporate buyers, offering a curated pool of professional experts, along with advanced business tools and dedicated customer support to ensure they have the right talent to meet their complex demands. This end-to-end solution allows us to achieve better conversion and wallet share expansion among high-value buyers. Fiverr Enterprise enables us to offer services to larger organizations where compliance and avoiding work misclassification is important. It allows buyers to onboard their existing freelancers and find new freelancers via Fiverr’s unified talent base for longer-term engagements. This allows us to tap into a part of the addressable market that has historically been underserved by the marketplace. Finally, Fiverr Certified opens entirely new acquisition channels through partnerships, providing our partners with a tailor-made marketplace with predefined services and certified talent. We are already working with several of the world’s most recognized brands, and we have proven that this playbook can be quickly replicated with many more partners, allowing us to penetrate targeted SMB communities in a highly scalable and efficient manner. This array of products has significantly enhanced our ability to address the more complex and multifaceted talent strategy that bigger companies deploy today. We’ve received strong positive feedback from our early adopters, and our customers are as thrilled about these solutions as we are. As I mentioned at the beginning, it’s an exciting time at Fiverr as we enter the second half of 2023. I’m incredibly proud of our team for stepping up and delivering so much in such a short time, and I’m really looking forward to the continued progress across these long-term initiatives, both in terms of product progress as well as business impact. We are on track for the rest of the year to continue driving revenue acceleration and margin expansion. I'm optimistic about the road ahead, and I want to thank all of our shareholders for being on this journey with us. 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 are pleased to report another great quarter as we continue to grow while significantly improving our operating efficiency. Revenue of $89.4 million, up 5.1% year-over-year, was towards the top end of our guidance and adjusted EBITDA of $15.3 million, or 17.1% in margin, exceeded the top end of our guidance. For the latter, this represents a nearly 1,200 basis points improvement from a year ago and over 400 basis points improvement from the previous quarter. We continue to focus on expanding our TAM opportunities while maintaining cost discipline to drive further improvements in our operating leverage towards our long-term adjusted EBITDA margin target. Our annual active buyers were at 4.2 million, consistent with a year ago, while spend per buyer was $265, up 2% year-over-year and a $3 increase from Q1. Over the past few quarters, we have accelerated the pace of our upmarket investments as demonstrated by our recent releases under Fiverr Business Solutions. Aligned with this strategy to move upmarket, we focus our marketing efforts on targeting higher-value buyers with larger spend capacity. We expect this will impact our active buyer count in the near term but will also increase our spend per buyer as we shift our acquisition budget toward the higher end, all while reducing investments in certain channels that primarily attracted low-value customers. We have already seen positive results of this change as the average spend from our first-time buyers in our 2023 cohort has increased compared to first-time buyers in prior cohorts. In addition, our unit economics remain very strong as the tROI for performance marketing improved to slightly over three months. We expect spend per buyer growth to pick up in the second half of the year as we invest upmarket into higher-value buyers and Fiverr Business Solutions grows faster than the overall marketplace. Q2 take rate improved to 30.7%, representing a year-over-year expansion of 90 basis points, as we continue to scale our value-adding Promoted Gigs and Seller Plus programs. We are seeing healthy growth and adoption from both programs. Now turning to guidance. For the third quarter of 2023, revenue is expected to be $89.5 million to $92.5 million, representing year-over-year growth of 8% to 12%. Adjusted EBITDA is expected to be $14.5 million to $16.5 million, representing an adjusted EBITDA margin of 17% at the midpoint. For the full year of 2023, we expect revenue to be in the range of $358 million to $365 million, representing year-over-year growth of 6% to 8%. Adjusted EBITDA is expected to be in the range of $56 million to $60 million, representing an adjusted EBITDA margin of 16% at the midpoint. Given the strength of our business, we are increasing the midpoint of our full-year revenue guidance, while raising our adjusted EBITDA guidance. We are focused on accelerating revenue growth and maintaining strong operating margins in the second half of the year as we launch our latest products, accelerate our upmarket motion, and optimize our performance marketing efforts. In closing, we have a strong balance sheet, positive cash flow, and we are well positioned to capture the enormous opportunity we see in the future of work. Our business is healthy and scalable, and we are excited about the new offerings we are bringing to the table. With that, we’ll now turn the call over to the operator for questions.

Operator, Operator

We will now take the first question from Eric Sheridan from Goldman Sachs. Please go ahead.

Eric Sheridan, Analyst

Thanks so much for taking the question. I wanted to know if we could just get a little bit more granularity or color on how you're thinking about deploying the investments in the coming quarters to move upmarket and how we should be thinking about the timetable of return on those investments and how that might feed back into new client growth, revenue reacceleration, just a little bit of the pathway going forward of how you think about the returns and the timeframe? Thank you.

Micha Kaufman, CEO

Hey, Eric. Good morning. Thanks for the question. Essentially, we've done a tremendous amount of progress along the investment in going upmarket, with the introduction of a long list of products which we've packaged into what we call Fiverr Business Solutions. So the shift or the new Fiverr business, which we've turned into Fiverr Pro, it's an all-new product, but building on the success of Fiverr Pro and making it even better. The introduction of Fiverr Certified and the incredible partnerships that we've already signed and the many others that are in the pipeline, Fiverr Enterprise, which is the enterprise solution product. So all of these products support going upmarket and, I think, represent the consistency of what we've been saying all along. A few quarters ago, we spoke about the fact that the business solutions has already contributed about 5% of our business. They're now close to 10%. So, we're obviously very happy with the progress, doubling the size of that part of our business. In the current environment where smaller businesses are obviously more sensitive to the current macro environment than midsize and larger businesses, it is the right thing to do. And we're very happy with the results. And we'll continue reporting on the progress.

Eric Sheridan, Analyst

Thank you so much.

Operator, Operator

Thank you. We will now take the next question from the line of Ronald Josey from Citi. Please go ahead.

Ronald Josey, Analyst

Great. Thanks for taking the question. Micha, I wanted to ask a little bit more on just all the products that are coming out and on Neo specifically. You talked about Neo, and just pulls info from the buyer to generate a better matching result, I think you said. But dive a little deeper here and help us understand how this algorithm sort of does that? And when you did your test to launch Neo, any insights on how you saw or what happened in terms of improved matching? Were you seeing better results on conversion rates or pricing improvements? What was it that, that sort of launched that made you to launch Neo? And I have a quick follow-up. Thank you.

Micha Kaufman, CEO

Good morning, Ron. Thanks for the question. Essentially, what we've done with Fiverr Neo is to tackle head-on the largest challenge every marketplace has, which is matching. Being able to produce a great match is far more than just doing a search. I mean, search by definition is very limited because customers provide three or four words. And based on that, you need to understand their intent, their needs, and everything surrounding that need. Providing good matching for us is really about not just pairing a business with a professional or with an agency, but actually being able to produce a product and end result where the two parties through that transaction are very happy together. To do this perfect match, you need a lot of information because that allows you to create a very, very precise type of match. And what we've developed with Fiverr Neo using the latest technologies alongside our deep data tech that we've developed over the years and the tens of millions of transactions that we've already processed and the learnings from that is a product that can have a human-like discussion where our technology deeply understands and can guide the customer to define their exact need. Sometimes those needs are more complex than just being able to be paired with one service. Sometimes it's a complex project, and you need to pair that customer with an agency or with a number of professionals. All of that we baked into that technology. And I just want to stress, what we've done in such a short time is close to impossible. We've developed this incredible product that is highly conversational and can understand every aspect of the customer's needs and guide them through the process. Sometimes customers are vague; they know they want to achieve something but don’t know how to articulate it in terms of a product or how many services they need to accomplish their goal. Neo does exactly that. Playing with it is really hard to believe how accurate, precise, and enjoyable it is to have a conversation with this new technology. We just launched it, so there's not much to call, other than the first conversations that Neo had with customers were successful and customers were as excited about the new product as we are.

Ronald Josey, Analyst

That sounds pretty exciting. This is live on the site today, right? Also, when we discussed the shift towards the upmarket, has there been any change in the profile of the active buyer? Thanks, everyone. I appreciate it.

Micha Kaufman, CEO

Sure. So in general, we've been consistently talking for many quarters about the fact that we focus on what we call high-value buyers: those who have a higher spend capacity, those who have more frequent needs, and those who are the perfect match for the solutions that we offer within Fiverr. That is our focus. This is where we're putting a lot of our energy. Fiverr Business Solutions is really a package of solutions that allows our customers to self-identify with the right type of solutions. If you're a midsized business or a larger business that would like a marketplace experience coupled with tools that businesses require, then this is the tool for you, including customers that care about payment terms and confidence and quality assurance. Fiverr Enterprise allows you to find talent and bring your own talent, but also have capabilities relating to compliance and the avoidance of work misclassification. Essentially, this is becoming a suite of tools that allows our customers based on their needs, company size, and budget to choose the right tools to achieve their objectives. By focusing on these types of buyers, we see better first-time experiences; they spend more with us. First-time buyers right now are spending 15% more on the first transaction than historical first-time buyers, which is incredible. But not only that, their lifetime value is higher. So we acquire highly loyal cohorts to mix with our existing cohorts. We believe this is the right strategic investment on our part.

Ronald Josey, Analyst

Thank you, Micha.

Operator, Operator

Thank you. We will now take the next question from the line of Doug Anmuth from JPMorgan. Please go ahead.

Doug Anmuth, Analyst

Thanks so much. Just want to follow up on the last couple, but hoping you could update us on adoption, and just uptake you're seeing on the AI service categories since you've launched over the last several months. If there's anything to update or share there, from what you disclosed at 1Q? And then, on the strategy, shifting investments to go after higher-value buyers, can you just talk about how you think that will impact active buyer and spend per buyer growth in the back half? And is that the driver of what looks like accelerating revenue growth in the fourth quarter? Thanks.

Micha Kaufman, CEO

Hey, Doug. Good morning. We actually received the first question. I'll respond to it, and then perhaps you can repeat the second one. I apologize for that. Regarding the AI services, it’s largely consistent with last quarter. We have launched numerous categories related to AI, and the interest remains very strong and healthy. We are continuing to invest, adding more categories that pertain to AI in general and GenAI specifically. Our customers are enthusiastic about it, actively using it, and we are pleased with the results we're observing. Could you repeat the second question?

Doug Anmuth, Analyst

With the shift in investments moving away from lower-value buyers, how do you anticipate this will affect active buyers and spending per buyer in the second half of the year? Is this contributing to what appears to be an acceleration in revenue in Q4? Thank you.

Ofer Katz, CFO

Hey, Doug. This is Ofer. Thanks for the question. I think the shift from low value to high value is not new. This is something we are discussing in those calls and have been doing for a while. One of the pillars of our growth over time is going upmarket. This shift is not only acquisition-wise but also product-wise. I think there's a step function with the introduction of the business solution. In terms of acquisition, we are shifting budgets from low-value channels to high-value channels for some time. The output, it's what we had mentioned earlier. The overall spend and the new cohort is better than what we've seen before. Almost by definition, the cost of acquisition on high-value buyers is slightly higher than low-value buyers. The implication of this shift is that the number of buyers will be slightly lower, but their spending and lifetime value will be higher. What I would anticipate in the next few quarters is that spend per buyer is going to drive growth. We've seen that in Q2 and will see that in the next quarter. Active buyer count is going to lag behind. This is part of our strategy. It's not about quantity, it's definitely about quality, and we plan to continue with this step.

Micha Kaufman, CEO

Yeah. Ofer said that perfectly. I would just like to add that, as a reminder, that unlike top-line and bottom line, which are binding KPIs that we guide, active buyer and spend per buyer are input numbers, not output numbers. These are the two levers that we constantly manage based on market conditions and opportunities that we see. As Ofer said, this has been very consistent with how we've done it. Focus on the quality of our buyers, rather than the quantity. This is why these numbers fluctuate from time to time based on how we decide to manage input numbers, not outputs. That is an important point, and I think the proof at the end is in the top line and bottom line, which we are obviously very excited about.

Doug Anmuth, Analyst

Great. Thank you both. Very helpful.

Operator, Operator

Thank you. We will now take the next question from the line of Andrew Boone from JMP Securities. Please go ahead.

Andrew Boone, Analyst

Great. Thanks for taking my questions. I'd like to ask about macro. Just bigger picture of what are you guys seeing? Is it now more stabilized? It seems that way from the guide and results, but anything you can add there? And then secondly, as we think about cohorts, can you provide any insights in terms of pre-COVID cohorts and where they are today? Right? So cohorts going back to 2019, are they higher? Are they lower? Are they about the same? Anything you can provide there would be so helpful. Thanks so much.

Micha Kaufman, CEO

Good morning, Andrew. Thanks for the questions. As to macro, I think you called it. It's pretty stable at this point. I've mentioned this in my previous answers, which is that macro affects different segments of our buyers in different ways. Essentially, in the current macro environment where the cost of borrowing is really high, and there's definitely not peaked consumption, small and micro businesses are currently on the sidelines. They're playing it cautious at this point and are definitely not aggressively investing in anything. With midsized businesses and larger businesses, it's different. They have budgets planned for the year, the necessary allocations for these types of services and the professional help that they need. This is why we are focusing more on the type of business solutions we offer. These cohorts behave differently. So that's what we're seeing with macro, and it's pretty stable.

Ofer Katz, CFO

Yeah. And on the second part of the question, Andy, specifically regarding the cohort pre-COVID, we are seeing an elevated spend compared to pre-COVID. During the COVID period, the elevation was very high and then we saw a decline, but now it's stable again. It has continued to perform at an elevated level compared to pre-COVID spend.

Andrew Boone, Analyst

Thank you.

Operator, Operator

Thank you. We will now take the next question from the line of Matthew Farrell from Piper Sandler. Please go ahead.

Matthew Farrell, Analyst

Thanks, guys. Congrats on the really strong results. You've done an amazing job in driving leverage in the model over the last couple of quarters. But based on the updated guidance, it kind of assumes flattish adjusted EBITDA margins in Q3 and Q4. Is that kind of you leaning back into some of the investments around the new products as revenue reaccelerates, or is this kind of a level that you just feel comfortable maintaining moving forward after driving leverage for several quarters here in a row? Thanks.

Ofer Katz, CFO

Hi, Matt. Thank you for the question. It's not about leaning back to investments. Just, kind of, catch up in terms of headcount that we are anticipating in this quarter in Q3 and a little bit in Q4. That might bite a little bit into EBITDA. We did a significant change so that it can lift this quarter. Part of that is recruitment that we're anticipating. That's all. We do believe that the long-term EBITDA is still the target. If you go back a few years, you can see how quarter-over-quarter, we are achieving the target, improving EBITDA. This is the plan looking forward. Sometimes there is a catch-up, which is happening as we speak. But the plan is to continue this task and drive for better EBITDA, quarter-over-quarter looking forward.

Matthew Farrell, Analyst

And then my second question is just, it's impressive your ability to continue to drive take rate higher here quarter after quarter. As you push promoted gigs and some of your other value-added services, just how much further do you think take rate could expand? Is there sort of a ceiling that you guys see at some point, or could we see this sort of steady improvement quarter-over-quarter for the next, call it, year or two ahead? Thanks.

Ofer Katz, CFO

We do see good momentum in terms of audience adaptation and acceptance of the products we have already launched. We have other products that we plan to launch in the foreseeable future. I would say there is an opportunity here to increase the take rate over the next few quarters.

Operator, Operator

Thank you. We will now take the next question from the line of Jason Helfstein from Oppenheimer. Please go ahead.

Jason Helfstein, Analyst

Thank you. If I consider the projected revenue for the fourth quarter, it suggests a slight acceleration. It seems like you're experiencing positive momentum in the business based on your guidance and the past few quarters. Could you share what factors are influencing your outlook for the fourth quarter? Are you being cautious because of previous challenges, or do you have a specific reason for not expecting more than 12% revenue growth? Thanks.

Micha Kaufman, CEO

Good morning, Jason. Thanks for the question. Essentially, we've been talking this year about the fact that the second half of the year is going to be the part where we go back to growth and the numbers reflect that. There’s no surprise on that end. I do think that, from a guiding perspective, we shouldn't be overoptimistic because we've seen that macro is still here and it's pretty steady. So there's no reason to incorporate wishful thinking into it. You guys are going to be the first to know if that changes. I think our market is extremely sensitive to macro. So we'll see when things pick up. Essentially, this is just in line with our growth.

Ofer Katz, CFO

Yeah. I think, Jason, historically, we've always said that we guide based on what we know and what we are seeing. Based on the momentum we are seeing, both on the active buyer and spend, this is where we're going to land. That’s the philosophy we always use and communicate, and that's what we're doing.

Jason Helfstein, Analyst

Okay. That's it for me. Thanks.

Operator, Operator

Thank you. We will now take the last question from the line of Bernie McTernan from Needham & Company. Please go ahead.

Bernie McTernan, Analyst

Great. Thank you for taking the question. Micha, I believe you said that spend per first-time buyer was up 15% year-over-year. Just wondering how that's trended to other periods and how much of an acceleration that represents?

Micha Kaufman, CEO

Good morning, Bernie. Just to clarify, what I said is that the first-time buyers we acquire spend on their first purchase 15% more than older first-time buyers used to spend. So hopefully that clarifies it.

Bernie McTernan, Analyst

I guess the question being, has that generally been trending higher over the past few quarters.

Micha Kaufman, CEO

The answer to that is yes. But we're doing a nice step function as we accelerate our investment in the Fiverr Business Solutions.

Operator, Operator

Thank you. We will now take our last question from the line of Rohit Kulkarni from ROTH MKM. Please go ahead.

Rohit Kulkarni, Analyst

Hey, thanks for taking my questions. Nice quarter, guys. A couple more product and perhaps one sales question. On this, Fiverr Certified, I see kind of impressive logos there like Amazon Ads and Stripe and TikTok. But let's talk about how did these relationships come about? How closely do you work with these companies in terms of vetting certified experts on specific projects for these companies? So just that's just one overall kind of mechanics logistics question on Fiverr Certified. And then, on this, kind of, I would say, newly repackaged Fiverr Business Solutions, which now includes three things inside it. Are you trying to do a different approach with the go-to-market? I know traditionally you have been predominantly on digital with no sales, but perhaps, with this kind of newly repackaged and impressive product portfolio, does that need a different approach in go-to-market to attract higher-end buyers?

Micha Kaufman, CEO

Good morning, Rohit, and thanks for the questions. So the first one was on Fiverr Certified. So essentially, as you said, super impressive logos, incredible companies. The relationship there is very close. Fiverr provides a mission-critical solution for these brands, mostly to engage with SMBs, where their level of support is more difficult and more scarce. We call it Fiverr Certified because those who provide the services are certified and meet the standards of each of these brands. They're essentially the best of the best. They all meet the qualification, which is why this product is so cool. It allows us to pair customers with experts for each of these platforms. In terms of Fiverr Business Solutions, we said this a few times before; I'll say it again for the sake of consistency. The pipeline that we have of customers coming to fiverr.com is incredible. We created this suite of solutions because we have all of these customers coming to us, and we want to make their lives easier in self-identifying with the right products and the solutions that they seek. No change in strategy in terms of sales force, but really making our customers' lives much better. That’ll allow us to identify them better, segment them better, and so forth, which obviously improves the performance of our products.

Rohit Kulkarni, Analyst

Okay. Thank you very much.

Operator, Operator

Thank you. I would now like to turn the conference back to management for closing remarks.

Micha Kaufman, CEO

Thank you, Sandra. Thanks for running the call today. Thank you everyone for participating. We look forward to seeing you in the conferences and speaking with you soon, and have a great day. Thank you.

Operator, Operator

That does conclude our conference for today. Thank you for participating. You may now disconnect.