FVRR - Fiverr International Ltd. (FVRR) 51st Annual J.P. Morgan Global Technology Media and Communications Conference (Transcript)

2023-05-22 19:00:20 ET

Fiverr International Ltd. (FVRR)

51st Annual J.P. Morgan Global Technology, Media and Communications Conference

May 22, 2023, 03:50 PM ET

Company Participants

Doug Anmuth - JPMorgan

Conference Call Participants

Micha Kaufman - CEO

Ofer Katz - CFO

Presentation

Doug Anmuth

All right. We're going to go ahead and get started. I'm Doug Anmuth, JPMorgan's Internet analyst. We're pleased to have with us Fiverr Co-Founder and CEO, Micha Kaufman; and CFO, Ofer Katz.

So Fiverr's mission is to revolutionize how the world works together. The Fiverr platform connects small businesses and the Fortune 500 with skilled freelancers, offering digital services and more than I think we're close to 700 queries now, such as programming, 3D design, digital marketing, content creation, video animation, architecture, lots of others. In the past 12 months, more than four million customers bought a wide range of services from freelancers working in more than 160 countries.

So Micha is a serial entrepreneur. He's founded and led several tech ventures, and he's been Fiverr's CEO since the beginning about 13 years ago. Ofer has served as Fiverr's full-time CFO since 2017, consulting CFO of the company since 2011, and he was previously acting CFO at Wix. So thank you both for joining us.

Micha Kaufman

Thanks for having us.

Question-and-Answer Session

Q - Doug Anmuth

All right. Let's see, Micha. Let's start where most tech conversations are starting right now with AI. So companies and investors are sorting through the opportunities here, the areas of disruption. How do you think about the impact of generative AI on Fiverr?

Micha Kaufman

So first off, we've been involved in AI for many, many years. Actually, as a company, we launched several AI products within Fiverr in the spaces of voice and graphic design, and we're super excited about the recent developments. And first of all, we're excited because AI is a step function in technology just allows us to build a better product and that's a huge plus.

The second part of it is that it seems that everybody is winning because of AI. If you look at professionals, so we're two set of market based. We have supply and demand or sellers and buyers, freelancers and businesses. And everyone can enjoy it. Our freelancers can use technology to work less hard and focus more time on their creativity, which also means that they can deliver faster output for their customers. Their customers receive higher quality and faster products. So it's a great plus.

And if anything, I think that this is just -- it's just changing the nature of skills and professions. I said that many times. I don't think that AI is going to replace human beings but I think that human beings that are going to master AI are going to replace professionals who don't.

So if anything, it's a shiny new tool. It's incredibly powerful but everybody has access to it, which means that this is going to be the -- since everybody can use AI, that's going to be the new baseline. If you know create something above the baseline, you're going to need to either become a professional or hire professional to do it.

Doug Anmuth

Okay. Great. You've talked recently about some of the tailwinds that AI is creating in the business. You've rolled out a lot of services and kind of categories tied to AI. How fast is -- what are you seeing so far? I know it's only been a few months but what are you seeing so far? And how do you think that will trend going forward?

Micha Kaufman

Yes. So it's -- since it's been around for just a couple of months, it's very hard to call anything a trend but Fiverr as a horizontal solution, it was a market base with multiple verticals and categories. As you said, close to about 700 different categories. We've launched in a matter of three weeks, we've launched between 20 and 30 new categories that are dedicated to AI-related services. And these categories are booming.

Searches for AI-related services as Sky Go rocketed for over 1,000%. And obviously, the demand for these services is booming. And it's great because Fiverr wants to be the place where you can always find those next professionals. The professionals, the types of skills that were invented five minutes ago. You want to be able to find them all on Fiverr. So we've been seeing very high demand.

Just as an example, areas of data science, developers -- software developers who specialize in integrating AI in apps, prompt engineers. Anything that has to do with AI is going up right now. So that's a good first sign for us.

Doug Anmuth

When you have a category like this that's growing so rapidly, how do you vet freelancers and ensure that buyers are receiving high-quality work?

Micha Kaufman

So essentially, obviously, there's the rating and reputation system that is baked into our product. So once activity starts, when conversations start with -- when orders start it's very easy to measure because we have so many signals within every transaction that allows us to understand the quality of that transaction. And beforehand, there's many ways of doing such. We have an automated vetting mechanism.

And in some cases, we also have team specialists are actually in domain experts that are actually looking into applicants or sellers that are coming into categories to ensure that their profile is intact and some of it is by way of connecting their professional networks into Fiverr, so we can actually get access to information from there.

So we have a multi-tier process of vetting and ensuring that we get top tier. And in the case where we offer talent that is the top percentile of talent like what we offer within Fiverr business and Fiverr enterprise, we have a whole vetting process that includes interviews and so forth.

Doug Anmuth

Got it. Okay. All right. And then just to wrap on this topic. Just when you think back through Fiverr's history, have there been any similar points where maybe people have questioned kind of opportunity versus threat or technology shifts where a vertical has grown so quickly?

Micha Kaufman

Yes, I think -- the good thing about being in horizontal is that you're not dependent on any specific category. We don't have any overconcentration in any category. So -- so categories by nature are a moving object, right? If last year, everything was about NFT and crypto, now nobody is talking about that. So we've been able to take a great advantage at the time and now it's something else, right?

So I think that this is one of the strengths of being this everything store that can respond super quickly to any change in the market. And the market is changing very rapidly. But the fact that the skill market is changing is not a new thing. If you think about this historically, how many jobs survived between my grandfather's generation to my father's? My father to my generation? My generation to my kids? Very few, right?

So now it's another step that is changing this. And there's going to be so many new skills. And if some skills are going to be obsolete, that's fine. It always happens. I understand why there's a lot of interest right now, and maybe some of it is a little bit of a panic. But -- but it's just another phase in technology. It's a step function, but step functions happened before with big data and with IoT and with smartphone and some of -- each one of them has been an opportunity for disruption.

And this is going to be another wave as a company that knows how to ride those waves. We feel very confident of being able to take advantage and enjoy.

Doug Anmuth

Okay. Great. All right. Let's shift gears, talk about macro a little bit. I know another fun topic.

Micha Kaufman

I guess everybody's that's used to it.

Doug Anmuth

That's true. I remember a conversation at this conference a year ago, right, when it was kind of really early in kind of seeing some of those impacts. But in any case, Fiverr has actually stood out, right, in the work economy space. I think having kind of a more stable environment, let's say, over the last several months versus some platforms kind of seeing further softness. What do you think is driving some of that relative outperformance?

Micha Kaufman

I think that this -- we're experiencing a cycle right now. So within that cycle, I think the different segments in the market enters the cycle at some latency and some will get out of it faster than others. And since Fiverr historically has been very concentrated in the small business side, we're super, super sensitive to macro.

So being such, we felt macro ahead of everybody else because it's -- small businesses are very similar to consumers. So you feel it very, very quickly. What I think you're seeing now is more companies that are from the SaaS space or enterprise space. Bigger ships takes longer to turn. They feel macro slightly slower. They have committees to decide that they want to cut back on expenses blah, blah. Smaller businesses don't have that. They just see the wrong headline in the newspaper and they're done. They're just -- they're playing defense instead of offense.

And so we've seen the cycle slightly earlier, I think, than other businesses, maybe similar to consumer businesses. But I think that on the flip side, we're going to be one of the first companies to actually see the rebound from this cycle, which we've seen before in other cycles. So -- so that's probably the reason why there's a little bit of an offset between different segments of the market.

Doug Anmuth

And do you feel like you're seeing any of those -- are there parts that are improving -- do you believe, like from a geographic perspective or anything?

Micha Kaufman

Unfortunately, not really. It's more of a steady state since probably Q4 meaning that it's not becoming worse, and it's maybe a little bit less all around the place. So a little bit less hectic going up or down. It's more normalized, more stabilized. It's still -- we're not sensing a recovery, and that goes pretty much global.

And by the way, different regions of the world have their own issues, right? EU is -- has its own issues versus the states or other parts. But largely, what we're seeing from a business standpoint is that businesses right now are more in maintenance mode than in growth mode. So they're not doubling down, which means that they're not sensing that the market is about to recover yet. We'll be happy to call trends that tells otherwise, but this is the case right now.

Doug Anmuth

Got it. Okay. So maybe -- within the -- your guidance of 5% to 8% revenue growth this year, with some acceleration in the back half. So the assumption there on macro is steady state? I'm here basically.

Ofer Katz

We didn't factor any -- we didn't factor any change in macro. It's the kind of nature of what we see with this flat active buyout in throughout the year and a growth in spend per buyer, which is based on investments we are doing and the end of some lapping in terms of spend behavior over the last few quarters.

Doug Anmuth

Got it. Okay. All right. Okay. So that's a good kind of shift into talking about active buyers and spend per buyer. I guess last year, you saw moderating growth in active buyers. You kind of just said flattish this year. You had some churn last year associated with the COVID cohorts. Where are you in terms of that cohort stabilizing and having new buyer growth kind of coming into the business?

Ofer Katz

Yes. So in terms of cohort behavior, cohort are stable. And this goes to old cohort and new cohort and give us a lot of confidence in as we look forward. In terms of loyalty of our buyer base and ability to acquire a new cohort that behave pretty much similar to the old one.

In terms of the top of funnel due to the softness in the appetite of SMB to invest in their growth. What we have accommodated our investment to match the level of intent and the performance marketing environment, which is why the active buyer has flattened, as we don't anticipate, at least in terms of modeling any change of this environment, we think that active buyer and as we look forward, will be flatten.

Doug Anmuth

Okay. Is there any -- I guess, when you look across kind of cohorts from smaller businesses to larger enterprises, and I know, of course, the business is overall much more skewed to smaller businesses, but any bifurcation in trends or behavior that you're seeing?

Ofer Katz

Not specific worth noting. I think that -- we are focused on high-value buyer and a bigger organization. But I think that the softness is across the board, slightly more -- slightly more aggressive on the SMB on the big organization. The retention is better. This is why we are focused on those type of organization. But all in all, I wouldn't know -- I wouldn't note any specific or gap between the two type of organizations.

Doug Anmuth

Okay. And you've talked about spend per buyer growth kind of gradually improving in the back half of this year. I guess how much of that is comp dynamic, right, just the easing versus more organic improvement?

Ofer Katz

I think -- as I mentioned earlier, during the last few quarters, we've seen SMB reducing the spend. This has been partly compensated by the investment we are doing in going upmarket in terms of product release and focus on high-value buyer.

Now that this period is lapping, we anticipate bio [ph] to go back to what we call normal growth, which is approximately $5 per quarter. Again, this is driven now that the baseline is flat. This is driven both by the investment we are doing in product and quality, but also in terms of focus on high-value buyer and the acquisition channel.

Doug Anmuth

Okay. Let's talk about fiber business a little bit. So I know it's early, but also a major initiative, right? As you've talked about, I guess, overall, how would you gauge your progress so far on Fiverr business?

Micha Kaufman

We're very happy with it. it’s going extremely well. It is outgrowing in its pace, the growth of the market base, which is a great sign. And -- it's a product where we're investing a lot in understanding the life cycle of a customer and being able to identify and segment the right customers, identifying them as they land on Fiverr and making sure that we can move them into the right solutions as fast as possible.

And what we've demonstrated is that by moving them into Fiverr business, we're able to extract multiple times their investment in multiple times their lifetime value as a customer. So we continue developing this product. We've been -- some features, we've announced, some we just released and are working extremely well because it's not just the ability to match larger customers with the right talent. It's being able to tackle more complex projects, it's introduction of solutions like project partner, which is allowing our customers to actually outsource entire projects into our platform.

It's aspects of the product that has to do with the way they -- these large companies pay or get invoiced. It has to do with team collaboration, and so there's -- from that perspective, that really allows us to get into a much different segment of the market, which offer mentioned as a better retention as a much, much higher lifetime value that we can engage with in many more categories and we're learning to do is not just identifying them and moving them into the product, but making sure that their success is being maximized.

So if we start engaging with the customer through a small team, extending from that team to department, from that department to multiple departments and eventually becoming their tool of choice for managing their entire freelancing talent base is what we're offering. So it's a suite of solutions. And I think that what we're doing now is essential to be able to cater for all these needs.

We see from the progress of adoption and new customers that are joining that type of engagement is -- we're super happy with it. Still early days for that, and it's a very different mentality for us. It's not like moving from a B2C to a B2B kind of thing but the team is doing a great job, and it's progressing. We're very happy with the progress.

Doug Anmuth

What's the -- you talked about kind of identifying to be able to like pull out kind of existing customers, right, existing buyers, right? We're actually really enterprise business, right, buyers and moving them. But what's the -- what other changes are there in terms of like go-to-market strategy or sales to go into the bigger businesses?

Ofer Katz

So the vast majority of the funnel is driven by the existing go-to-market strategy. We don't plan to change it anytime soon. And I think as Micha said, the challenge is to segmentize this funnel into the appropriate product and as early as we can starting with the lending experience and it goes all the way to identifying existing customer and route them through or offer them to move to a more advanced offering.

So I think that this is where we are focused. It goes to product. It goes to customer success and been able to communicate with this audience while transforming to the new service. I think this is where the majority of the investment is there.

Doug Anmuth

Got it. Okay. Maybe talk about take rate a little bit. Take rate in 1Q, you're over 30% for the third straight quarter. I think it's up about 400 basis points over the past four years. Maybe if you can talk about some of the drivers here and how you think this can go going forward?

Ofer Katz

So I think take rate as being a question since we went public. And happily, as we go upmarket, we also increased take rate. So take rate is based on two different components. One is transactional, which stands for approximately 25.5%. And all categories, all transactions. And then we have additional layer of value-added services both on the buyer and the seller side. Part of that is Promoted Gigs. Other part is Seller Plus. We do have some subscription on the buyer side.

So all in all, this stem for the additional layer. And as times goes and we introduce new services and been able to monetize against take rate is going up. So we feel the take rate is sustainable. And as we further adopt more products and as Promoted Gigs, Seller Plus and other services that have been introduced a while ago are being well deployed, we see some potential for upside.

Doug Anmuth

Okay. Anything you can add there just in terms of how you think about penetration of Promoted Gigs or growth in that business?

Micha Kaufman

Has been growing very nice. We're even a little bit ahead of what we thought it would be at this point, which is good. It still have room to grow into, both in terms of the number of customers that are actually taking advantage of it, but also the space in which we can promote those services. So definitely, space to grow into. When we release it, we said it's not going to be overnight.

It's a full product with a complete bidding system and an ROI system. And it -- we said that it's going to take time to prove itself. But the size of -- the size of courts that are using it and are sticking with it or loving it and continuing to use it -- it's surprising even for us and there's room to grow. So this is definitely one of these tools that we're very happy and have a great contribution.

Seller Plus is another one, which is doing extremely well. And it also allows us to identify sellers that are highly engaged and wanting to actually make a living out of the platform and providing them with the tools to do so. So these are just two examples of great tools that can continue to evolve and continue to grow and have even a higher penetration, so continue to contribute to potentially higher take rate over time.

Doug Anmuth

Okay. Great. I think we have a mic in the back. If there are any questions, feel free to raise your hand. We'll get a mic around. In the meantime, well, that's circulating. Let's hit on margins and profitability. You have a long-term EBITDA margin target of 25%, and despite the slower top line that we're seeing, given macro, you're continuing to improve that margin trajectory and essentially doubling EBITDA margin this year into the mid-teens. Can you just walk us through the major margin levers this year and how you've built that discipline into the company?

Micha Kaufman

You want on this?

Ofer Katz

So we've been asked earlier about -- now whether we would act differently if we would have been a private company. So we've been a private company for some time. And I think the level of discipline we have within the organization, across the team across countries is as much as I can imagine. And it gives us a lot of confidence as to the effectiveness of everything we do and the measurement of every investment we're making.

And EBITDA for us is not a nice thing to have. Now we have committed to become profitable and we are lucky to become profitable ahead of time. And we are doubling EBITDA this year first, because the business is scaling to a level of point where we make ascend on each transaction. So that everything that we do is measurable against its ROI. We're not buying growth just to grow faster. We are growing with our healthy unit economy.

And I think that as we look forward, we do know how to double down and increase this EBITDA margin as we scale further. So whether it's a high-growth period, as we experienced in the past or whether it's a more challenging period, I think within those two different business scenario, we have the ability -- the proven ability to improve EBITDA. And I think that's the plan for the next few quarters.

Doug Anmuth

Okay. Great. Just a quick question on the artificial intelligence freelancers. Can you give us some sense as to how that's beginning to unfold in terms of your ability to get good workers on your platform? And what is the interest of the customers in those workers? And over what time frame do you think it would take for it to become a meaningful growth driver to the company?

Micha Kaufman

Sure. As we mentioned before, we -- as soon as ChatGPT came out in mid-December, by mid-January, we already had about 20 new categories in our catalog that are devoted to AI services. And obviously, we've seen peak interest in searches within our marketplace, and we've seen a very nice increase in demand for those services. So we definitely see -- it's a little bit of a hype right now, right? Everybody is talking about this, but nobody really knows where this is going to land. And what the regulatory environment is going to be like.

And while everybody is super excited about this. It's -- there's still an understanding that a lot of it is just misunderstood or not understood enough. There's a lot of inaccuracy in AI. There is -- it's not exactly production ready but it's definitely exciting because it sparks the imagination in terms of what can be done with it.

And I think that one of the things that are very unique to Fiverr is the fact that the type of talent that we have on the platform are the extreme version of early adopters. They've been playing with AI for two years. They didn't wait for December for ChatGPT to be out here. They've been playing with tech that only geeks had access to. They've been toying with this and they've been in the forefront of everything.

So while this new technology comes out and it's available, to really be able to extract the most out of it, you need to know the tech. You need to learn it, you need to master it. It's much like, everybody in this room can get the license to adopt a Photoshop, but that doesn't make us graphic designers, right? It's the same about AI. Sure, you can ask it to do something, but this is not going to result with breathtaking results to get those amazing results that all of us are seeing out there, these are experts.

These are people that have -- sometimes you see commercials that have done with technologies like Stable Diffusion, it's incredible. But this is not one person saying, "Make me an add for" no, these are tens of people that are experts in getting the most out of this take.

Since it's not us, we need access to these people. You can find those people on Fiverr. That's our job, right? So that combination that -- that cooperation between human beings and machine, this is the power. So these people are coming to us because they're a part of our community. They are the early adopters. And that's the purpose. The purpose is that Fiverr is going to be the place where you can find that talent always, always even if that talent was invented three weeks ago.

Doug Anmuth

All right. We're going to wrap up quick word association. All right. whatever comes your mind.

Micha Kaufman

Whatever you ask, I'm going to say AI, so.

Doug Anmuth

Fiverr brand.

Micha Kaufman

Powerful.

Doug Anmuth

Macro.

Micha Kaufman

Stable.

Doug Anmuth

Europe. Take rate.

Micha Kaufman

High.

Doug Anmuth

AI.

Micha Kaufman

Optimism.

Doug Anmuth

Cohorts.

Micha Kaufman

Strong.

Doug Anmuth

SMBs.

Micha Kaufman

Resilient.

Doug Anmuth

Enterprise.

Micha Kaufman

Not now.

Doug Anmuth

Margins.

Micha Kaufman

Improving.

Doug Anmuth

And last one, freelancing opportunity.

Micha Kaufman

Incredible.

Doug Anmuth

All right. Cool. Leave it there. Thank you.

Micha Kaufman

Thank you, everyone.

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Fiverr International Ltd. (FVRR) 51st Annual J.P. Morgan Global Technology, Media and Communications Conference (Transcript)