Earnings Call Transcript - FVRR Q3 2021

Operator, Operator

Hello everyone and thank you for joining the Fiverr Q3 fiscal 2021 Earnings conference call. My name is Doris and I will be moderating your call today, though I'll hand you over to your host Jinjin Qian. I would like to remind you if you'd like to ask a question during the Q&A session at the end of the call. If you have joined us online, please use the request to speak flag icon. Please unmute your microphone before asking a question. I now have the pleasure of handing you over to Jinjin Qian. Please go ahead.

Jinjin Qian, Host

Thank you, operator. And good morning, everyone. Thank you for joining us at Fiverr's Earnings Conference Call for the Third Quarter ended September 30th, 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 current expectations and assumptions as of today. Fiverr assumes no obligation to update or revise them. A discussion on 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 the 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

Good morning, everyone, and thank you for joining us on the call today. We are very excited to talk to you about recent developments at Fiverr. Q3 turned out to be a very strong quarter with revenue growing 42% year-over-year, above the high end of our guidance. All KPIs, including active buyers and buyer intake rates, performed really well too. Our business, including the traffic to our platform, improved from the hyper-seasonality that we experienced in the early part of Q3. This is by no means to say that the uncertainty, and impact of COVID is over. However, the strength and resilience of our business once more powered us through these volatile times. We believe the secular trends over work and the need for digital transformation are here to stay well beyond the pandemic. Businesses need to stay competitive in their talent strategy to be adaptive in their ever-changing digital landscape, to creatively address the skilled labor shortage and to be nimble and efficient in execution. Fiverr, with our vast catalog, resilient community, investing in cloud services, and product experience, continues to empower freelancers and businesses across the world in achieving these goals. I'm very proud of the entire Fiverr team for delivering strong results quarter after quarter, so we can invest aggressively in long-term initiatives. Today, I want to spend some time talking to you about how we envision the future of work and how we're putting a few important pieces in place as we plan the next 10 years of Fiverr. After that, Ofer will provide more color on the quarter. When we consider the total addressable market, it's important to note that the majority of freelancing still happens offline. We believe offline channels will continue to be a big part of how businesses connect with freelancers, just like how after more than 20 years, e-commerce is still less than 20% of total retail sales. We want to make sure that Fiverr is enabling all freelancing engagement for businesses, both online and offline. This is why we recently acquired Stoke Talent, a freelance management software company. Through Stoke, we gained access to the offline freelancing market that is still orders of magnitude larger than the online freelancing. With Stoke's offering, we can enable businesses to better monitor existing financial relationships. Most companies today do not use dedicated purpose-built freelance management systems. Oftentimes, freelancers are managed through Excel spreadsheets scattered among different teams and individuals throughout the organization. When asked how many freelancers does your organization engage with today, most companies don't know the answer. This can lead to tremendous inefficiencies in managing budget, meeting compliance, setting up payments, sending tax documents, and the list goes on. All of this becomes easy once you sign up on Stoke. With Stoke, Fiverr aims to become a 360-degree partner for businesses to move their entire freelancing budgets to our ecosystem. Talent is everywhere, and finding talent is hard. We believe the future of work requires businesses to implement a multi-channel freelancing strategy, moving to help businesses effectively implement such a strategy and efficiently manage it without having to worry about being tied to one platform or one source of talent pool. Now, let's talk about the freelancer side. We believe the future of work for freelancers is about building a personal brand and an audience, and the line between building a freelancing career and a small business is blurring. This has been Fiverr's vision from day one and is how we differentiate ourselves from any other freelancer platform. On our e-commerce platform, freelancers are entrepreneurs. They are store owners and they take full control in defining which services to provide, at which price, and how and when they work. With this in mind, we want to build Fiverr into an ecosystem that not only brings freelancers revenue opportunities but also software and tools to help them manage their business and continue to grow professionally. We recently completed the first phase of integration of And.co and rebranded it as the all-new Fiverr workspace, which enables freelancers to seamlessly integrate their Fiverr orders with all other client engagements, so they can manage contracts, invoices, and earnings in a consolidated fashion. We also completed the acquisition of CreativeLive to round up our offering in the learning and development space. We incubated Fiverr Learn internally a few years ago and the product has received tremendously positive feedback from our community. Not only do they love the high-quality content, but it is also a way to connect with top talent in relevant fields and to increase visibility on our marketplace. The acquisition of CreativeLive will allow us to significantly expand our professional education content library and further grow this part of our business. Leveraging its production capabilities and content distribution technology, we also see meaningful opportunities to expand our value adds to the corporate certification partnerships but I'll save that for later. Before I hand it to Ofer, Fiverr has built a very intuitive, easy-to-use platform with a very efficient go-to-market strategy. But sometimes, people forget how complicated our problem space actually is. We are not doing e-commerce for merchandise, but we are dealing with people, services, and relationships. They are much more complicated than merchandise. The underlying technology we've built over the years and the insights we've gained on buyer intent and seller expertise is what makes delivering the simple experience possible. We'll continue to innovate and invest in technology to make the future of work easier and better. With that, I'll turn the call over to Ofer.

Ofer Katz, CFO

Thank you, Micha. And good morning, everyone. We are excited to deliver another quarter of excellent results as a medium of businesses continued to come to Fiverr to consume and purchase digital services. Revenue for Q3 was $74.3 million, up 42% year-over-year, driven by a 33% growth and a 20% growth in the marketplace. This is especially impressive considering the 88% growth we had in Q3 last year, translating to a 166% revenue growth on a two-year basis. The decline can be attributed to EBITDA impact from the 50 basis point increase in service fees, the continued expansion of seller tools, including Promoted Gigs and Seller Plus, as well as additional contributions from ClearVoice, Fiverr Learn, and Fiverr Workspace. We continue to move upmarket with high-value buyers, now representing 62% of core marketplace revenue, up from 57% in Q3 last year. The growth contribution from high-value buyers is driven by two factors. First, the number of high-value buyers grew significantly faster than the overall buyer growth. Second, the average spend per buyer for high-value buyers is many times more than the average marketplace spend per buyer. Repeat buyers—those who joined Fiverr over a year ago—contributed to 58% of revenue in the core marketplace, up from 55% in 2020. Our older cohorts continue to spend at elevated levels compared to pre-pandemic periods. We continue to see recent cohorts from 2020 and 2021 perform better than a typical cohort in previous years. Adjusted EBITDA for the quarter was $7.3 million, representing an adjusted EBITDA margin of 9.8%, an improvement of 180 basis points over Q3 last year. We have continued to improve our operating leverage and our ability to generate consistent positive adjusted EBITDA while growing our top line at a significant pace, which demonstrates the strength of our business model. We made two important acquisitions in Q4, CreativeLive and Stoke Talent. Those transactions will not have a material impact on our P&L in Q4, but they are highly strategic for us as we march towards our long-term vision of the future of work. With CreativeLive, we expect to expand our e-learning offering to our community. We're also planning to lean more into professional training to strengthen our value proposition with upmarket buyers. Stoke Talent is a young, fast-growing company that provides best-in-class freelance management software for medium to large businesses. We believe Stoke's platform-agnostic approach will enable us to capture freelancer spend outside of Fiverr, the vast majority of which is still offline. It also supports Fiverr's upmarket initiative as we look to strengthen our integration with clients' workflow. Dozens of customers are already on Stoke's platform, with an average annual freelancer spend of over $100,000 per customer. Post-acquisition, we expect to significantly accelerate the pace of customer acquisition on the Stoke platform, as well as continue to optimize the onboarding process to increase freelancer spend from existing customers. Now onto guidance. For Q4, we expect revenue to be between $74.5 million to $77.5 million and adjusted EBITDA to be between $5.5 million to $7 million. We are encouraged by the recent trends on our marketplace, as the hyper-seasonality is in the past two months. As Micha mentioned, it is too early to say that the COVID impact is completely behind us. It will take a few additional quarters for us to unwind the COVID impact, and macro conditions remain highly volatile. For the full year 2021, we now expect revenue to be between $292.4 million to $295.4 million. At the midpoint, this represents revenue growth of 55% year-over-year and 174% on a two-year basis. Adjusted EBITDA is expected to be between $19.5 million to $21 million, which at midpoint represents a 210 basis point year-over-year improvement and a positive swing of 23.7 percentage points compared to two years ago. The fact that we have been consistently growing our business at a significant pace and dramatically increasing our market share highlights the strength of our business model and our ability to execute, and we expect to continue doing that for many years ahead. With that, we'll now turn the call over to the operator for questions.

Operator, Operator

So if you would like to ask a question, please press star 441 on your telephone keypad. Please note you'll wait a couple of seconds for all attendees to register their questions. Our first question comes from Nick, Jonathan CTP. Please go ahead, Nick.

Nick Jonas, Analyst

Great. Thanks for taking my questions. I have two questions regarding the acquisitions. First, can you touch on what the impact of the Q4 guidance is from the acquisitions this quarter, just so we can try to tease out what's organic and what's additive from CreativeLive and Stoke Talent? And then the second question, maybe taking a step back, how should we think about Stoke Talent in terms of your strategy to go more upmarket? Does this go further than the larger SMB that you were focused on? Can Stoke Talent start to attract enterprise clients, maybe Fortune 500-type clients? Thanks.

Micha Kaufman, CEO

Hey Nick, on the first part of the question regarding the fourth-quarter guidance, you shouldn't assume any impact from Stoke Talent or CreativeLive; the two companies are considerably small and the overall revenue and expenses are not material to where we are today. As for your second part of the question about Stoke Talent, as we said in the opening remarks, Stoke is mostly serving customers who are spending over $100,000 a year on their freelancing engagement, which if you compare that to the average spend per buyer on Fiverr, indicates that there's a market gap. This is definitely serving as a way for us to engage with much larger types of customers. Those types of customers oftentimes bring their existing freelancers into those platforms, but overtime, as they need access to additional freelancers, we can serve through our marketplace specifically. This works very well with Fiverr Business as well. So we definitely think that this is extremely strategic. It's a young company just starting but the pace of growth is very nice, and we're very excited about it.

Nick Jonas, Analyst

Great. Thanks for taking the questions.

Operator, Operator

Our next question comes from Doug Anmuth from JPMorgan. Please go ahead, Doug.

Doug Anmuth, Analyst

Great. Thanks for taking my questions. Hope you guys are doing well. Maybe first just on take rate; 140 basis points of increase year-over-year, Ofer. I know you mentioned that about a third of that sounds like it's coming from the increase in service fees. But can you help us understand the other 100 basis points across Promoted Gigs, Seller Plus, and ClearVoice? Some of the other things you mentioned there. And then also how you think about where the take rate can go over time. And then just I know hyper-seasonality, you kind of talked about getting through perhaps the worst of it. I'm curious to get your early thoughts around whether seasonality you think kind of returns to a more normalized position there. Thanks.

Micha Kaufman, CEO

So on the part of the question regarding the take rate, I think the answer is consistent with the response we gave previously. The change we made on the services account for part of the increase, and the rest is due to the other services we are promoting, which have a higher take rate. One good example is the Promoted Gigs. Another example is Seller Plus, which we initiated two or three quarters ago. These types of add-on services, whether on the supply side or the demand side, increase the take rate. As these services become more popular and adopted by the audience, we anticipate the take rate will increase for the time being. This has been consistent with what we've seen since the company went public; the take rate has been growing moderately quarter-over-quarter, and we anticipate this trend for the next few quarters. Regarding hyper-seasonality, as we've been discussing since the previous quarter, hyper-seasonality began in the second half of May. I think the worst period was July, and it stabilized in August with a moderate improvement in September and October. Our point is that it is still early to say whether the COVID impact is behind us and hyper-seasonality is over. The upcoming holiday season could be a little different this year. Many people didn't get to visit their families last year, and from reports on travel, it seems this year will see a slight increase. That said, we're cautiously optimistic about how we see upcoming seasons and business fundamentals are very strong.

Doug Anmuth, Analyst

Okay, that's helpful. Maybe just one more to follow up. You mentioned CreativeLive. Obviously, that expands the e-learning capabilities here. I'm curious about other key investments you think you need to make in that direction as you lean into professional training more.

Micha Kaufman, CEO

CreativeLive is really a way for us to take the program we started with Fiverr Learn and move it forward without us having to produce thousands of high-quality classes. It really adds strong assets in product and capability contribution. We want to provide opportunities for individuals to advance their careers and translate their learning and training into work achievement. The integration of CreativeLive into our strategy is extremely important as we think about entering new verticals and creating training programs that would allow professionals to get into those sectors; this is critical to our solution and part of a 360-degree ecosystem that addresses many different aspects of our business.

Doug Anmuth, Analyst

Great. Thank you.

Operator, Operator

Our next question comes from Jason Helfstein from Oppenheimer. Please go ahead, Jason.

Jason Helfstein, Analyst

Thanks for taking my question. First, how do you think about the impact of the acquisition? I mean, clearly, there's product behind that, either product acquisitions, but how fast do you think you can integrate them and then we possibly see the impact on the business? Is that maybe more of a 2023 impact or could we actually see some in 2022? And given there's a lot of discussion about labor leaving tech jobs because of burnout, are you seeing more of these workers joining your marketplace and how are you thinking about that over the next six to 12 months? Thanks.

Micha Kaufman, CEO

Jason, good morning. Regarding the impact of the acquisition, I think you're right. The impact should be expected in 2023; it will take a few quarters for integration to complete. So expect to see a very meaningful impact in the coming quarters. As for what we're observing with employees leaving their jobs, it's a phenomenon we're seeing known as the great resignation. However, people are not just resigning without pursuing new opportunities—they are rotating jobs. Yes, some people are burned out, but many are just rethinking their careers, which provides an opportunity for them to reshape their work-life balance. We have seen a steady increase in freelancing overall; more people are engaging in freelancing, but this trend isn't largely driven by burnout. It’s more about rotation. Additionally, with salary inflation, those resigning create demand for new talent, allowing that talent to command higher salaries. It's a cycle that feeds itself. However, we're not sensing a massive change, as many of those employees are simply moving to other tech companies.

Operator, Operator

Our next question comes from Bernie. Please go ahead, Bernie.

Bernie, Analyst

Hey, thanks for taking my question. There's still a lot of growth potential within your sales force as they sell into businesses doing over $100,000 in revenue. Could that help your SMB business? Is that kind of an add-on effect there? Is that the right way to think about it?

Micha Kaufman, CEO

Yes. Stoke does have a handful of markets and partners you can collaborate with; they take marketing in-bound. I think Stoke is a very early-stage company that is growing really fast. That said, it's still early to see how we develop in the next few quarters. That's the plan for our SMB business and as Niko mentioned earlier, it can take some time to combine the synergies between Stoke and Fiverr—this is the direction we're heading. We are also focused on creating a holistic solution for businesses. They come to us using Fiverr Business for their purposes and may have other freelancers they have previous relationships with. The Stoke platform should serve these customers effectively. It's a great channel for adding large customers into the Stoke environment. A lot of Stoke's growth has been organic but yes, combining with sales efforts, both inbound and outbound, is key. Generally speaking, as Ofer said, it's a young company with pleased growth, and we are happy to provide more details on that business in upcoming quarters.

Operator, Operator

Our next question comes from Strat Eriksson from RBC Capital Markets. Please go ahead, Strat.

Strat Eriksson, Analyst

Just a couple from me. First for Stoke, can you just talk about the mechanics there that you envision when you think about bringing an enterprise onboard? How do you see the transition for their offline freelancing activity to the online world? What does that look like? How hard is it? Is there a basic assumption when you sign up for Stoke that they want to move everything online or is that not how it works?

Micha Kaufman, CEO

Thanks for the question. As we have always said, the majority of freelancing activity—about 95% of it—is offline. It's mostly based on word of mouth and referrals. When businesses look for talented freelancers, they typically use their networks. Over time, businesses form groups or cohorts of freelancers that have worked with them previously and become a resource. What Stoke provides is a way to standardize those relationships. While managing compliance levels and overseeing budget and communication, Stoke allows organizations to streamline these complex relationships. The reality is that organizations often need access to more freelancers. They can use their existing networks to find some, but now with Stoke and Fiverr integrating, they can tap into one of the largest talent pools in the world. The overarching goal is to provide multiple ways for organizations to engage with freelancers. Fiverr aims to facilitate all of these approaches, providing a simple, intuitive, easy-to-use solution. Integrating Stoke is a vital strategy in bridging offline to online activities, focusing on larger clients with their own groups of freelancers.

Strat Eriksson, Analyst

Got it. One follow-up: you mentioned several times this morning that we may still have a few quarters to see if we can fully emerge from COVID, creating some uncertainty and caution. Could you help us reconcile why that would be? It seems like that would be beneficial for Fiverr, especially now that we may not have to worry about hyper-seasonality.

Micha Kaufman, CEO

In addition to hyper-seasonality, we are also contending with the notable growth of active buyers from the previous few quarters. Since we calculate active buyers based on full-quartal activity, we anticipate some headwinds there for the next few quarters. That's the main area where we foresee those headwinds impacting our overall growth as we look to the future.

Operator, Operator

Our next question comes from Rohit Kulkarni from MKM Partners. Please go ahead, Rohit.

Rohit Kulkarni, Analyst

Thanks. A couple of questions. One on marketing: Are there any early signs of success from the brand marketing campaign that you could share? As part of your buyer and traffic acquisition, are you seeing any challenges given the way you allocate your marketing dollars?

Micha Kaufman, CEO

We launched a new brand initiative, combining TV and digital outreach in multiple countries including the U.S., U.K., Australia, and Germany. Based on the early results since our campaigns were just launched, we are encouraged by the positive signals we've seen. Our ongoing strategy is to use a blend of brand marketing and performance marketing, which is pivotal to our growth. In terms of trends in buyer acquisition, our performance metrics are promising, with the ROI on our customer acquisition taking around a quarter to manifest. Lifetime value for our customers is continuously increasing. Importantly, the customers we attract are spending more over time, especially with high-value buyers contributing 62% of our revenues, which is a substantial increase compared to last year.

Rohit Kulkarni, Analyst

For hyper-seasonality and the travel sector: Given your insights about travelers returning this year compared to 2019, are you considering any shifts in behavior for Q4, particularly for the late December period?

Micha Kaufman, CEO

Yes, we've baked some assumptions into our guidance. I think the upcoming holiday season might behave differently this year than previous years. Many individuals missed family gatherings last year, and we expect a somewhat higher volume of travel this year compared to 2019. This could lead to a longer holiday season; various trends are indicating increased leave-taking. However, this remains speculative, and we aim to exercise caution. Our analysis indicates that seasonality appears more moderate this year, rather than hyper-seasonal as we've experienced in the past.

Rohit Kulkarni, Analyst

That definitely provides more color, thank you.

Operator, Operator

This concludes the conference call. Thank you for joining. You may now disconnect your lines.

Micha Kaufman, CEO

Thank you, everyone, for spending your morning with us. Have a great day and we'll talk to you soon. Thank you.