Fiverr International Ltd. (NYSE:FVRR) RBC Capital Markets Technology, Internet, Media and Telecommunications Conference 2022 November 15, 2022 11:10 AM ET
Company Participants
Micha Kaufman – CEO
Ofer Katz – CFO
Conference Call Participants
Brad Erickson – RBC Capital Markets
Brad Erickson
We’ll get started. Question from Israel. Welcome. The management team from Fiverr International. So CEO, Micha Kaufman; and CFO, Ofer Katz thanks, guys, for being here so.
The last week so it’s nice. These guys teased me because I’m in my basement all the time. Yes twice if I’m in trouble. So but it’s been a long, long two or three years so anyways.
Question-and-Answer Session
Q – Brad Erickson
So I have a list of questions as always. If you guys want to chime in at all, feel free to let me know. Just raise your hand and we’ll get right to it so. Have to start out with the hard hitting post earnings questions. I think you guys are – you spoke to seeing some of that sort of pipeline I don’t want to call it softness, but a little bit of a slowdown here from the SMBs.
So guidance was — you couldn’t take your guidance up as you kind of would historically have liked to EBITDA a little bit better off. Maybe speak to as we start out next year, you’ve kind of talked to maybe some of that consistent slowing. What’s instructing that view would you say as you think about starting out the year maybe at a little bit lower growth rate?
Micha Kaufman
So a lot of it is – it’s really the outsized cohorts that, we’ve gained during COVID, which are now normalizing and that’s impacting what we see on the growth side.
Brad Erickson
Yes.
Micha Kaufman
Yes and both that lapping effect in the macro that you called out probably earlier than most companies back in March. We’ve seen and we’ve seen recently we’ve seen, you know, SaaS companies, security companies, started to complain. So I think that from that perspective, we’re getting into cycles, probably, like, the earlier than other segments. We’re getting out of it probably in fact earlier than other have been [ph] trying as well. We’ve seen, I mean, COVID, in the sense COVID was – a formal cycle very different than what we’re seeing now.
Brad Erickson
Sure yes.
Micha Kaufman
But we saw that cycle happening very quickly for us. I remember losing about 17% of the business overnight for about two weeks and then exploding and getting into massive, massive growth. I think we’re going to experience that as well when this cycle stabilizes – the timing on it is just – it’s huge I don’t know so that’s mostly what we’re seeing. And as of June, we said that we’ve seen market stop segments so – both Europe, which was weaker than the U.S. at the beginning of the year, the stabilized U.S. stabilized.
Brad Erickson
Yes.
Micha Kaufman
And this is going into October – then also – getting into Q4. But I mean, at the same time, you you’re seeing large stack and you’re seeing large retail. I mean, I mean, the hard time predicting I mean [indiscernible] those are – the companies cannot predict. And we’re kind of in a situation where macro is just it’s just so many factors that are working. So it’s very hard to predict and we haven’t talked about next year and I think we’re getting the benefit of doing that on February when we have more data.
Brad Erickson
Yes, sure, yes got it. Yes a lot of companies 90,000 employees quarter-over-quarter, so a little hard to predict. And maybe for Ofer, just on that cohort stabilization you talked to, but you said you’re still sort of seeing some lingering effects. How long is that going to last, right. Because I get it you added, I mean, before you were adding 50,000, 60,000, 100,000 net new active buyers a quarter and then I think you did close to 400 in one of the quarter’s last year. It was insane, the inflection. So it sounds like those are sort of trickling off. I would have thought those were done by now or getting close to done. Is that is that a fair characterization or we see a little bit into next year?
Ofer Katz
Well, it depends on the cohort. I think that the cohort from 2021 it’s stabilizing at the beginning of next year it’s also be a test. The early cohort of 2020 is stabilizing as we speak and once department fills. So it depends. It’s like at the end of the second year for the global stabilize and then generate really flat. It’s not growing revenue stream over a very long period, if you look into the cohort of pre COVID, then still within this period of macro-economy and recession being out there. They still perform on net positive retention. It’s higher than 100%. So stabilize after the second year. Then it has a long period of steady and growing retention. But since 2021, the first half of 2021 was pretty massive in terms of cohort and this is stabilizing at the beginning of time.
Brad Erickson
Got it. And is it — when you name of softness too, it sounded like it was from a net new perspective from existing, it sounds better. What are you seeing between frequency versus size of basket, we’ll call AOB, if you will?
Micha Kaufman
I think it’s depend. There’s thick variety of buyer it’s very different. I would say that business buyer, frequency is higher and it’s better – higher because of the ASP. But I don’t think the mix has changed. As you said, there is a softness around the overall ecosystem/
Brad Erickson
Yes.
Micha Kaufman
Impact, both you and all the cohorts, I think the business, the business account that have left success that it’s so far. But that’s kind of what we are saying.
Brad Erickson
Okay and then in terms of like end markets where you’re seeing this I guess I think of it as two drivers one, you definitely have some like categories that skew towards new business formation. But then you also have like a ton of around digital content creation, digital marketing, those sorts of things. What are you seeing on the existing side lately? Is that a material contributor or are there other categories you might call out that where you’re seeing sort of puts and takes or differences in performance lately?
Micha Kaufman
I think in these earnings, we’ve called out digital transformation – and it’s picking up momentum again. But it’s pretty hard to determine if this is time-to-time and has to do with macro or has to do more with Q4. Yeah. With Q4 is a lot of certainly, retail business, are trying to maximize, the holiday season. And therefore, investing a little bit more on digital transformation you’re adding ecommerce capacity around shipping these kind of things. I haven’t seen any major trends in these categories.
Brad Erickson
Yes interesting – I was curious like on advertising in particular, fair amount of share I think versus social. Does that cause any sort of net benefit in your mind or are you guys kind of the arms dealer or you think of yourself as like guns for the war in that any sort of share shift competitively?
Micha Kaufman
I think now – there’s decrease in advertising in general. That we’re calling out and we’re going in the report of both Meton and Google and other companies So we’re seeing but within those categories, we again, we haven’t seen any major trends of decrease and so that could be the fact that, you know, on our platform, we actually serve very different segments in the market. And but smaller micro businesses, medium and large sized businesses.
And I think they kind of box at each other – in a way, if there is a little bit of a decrease in certain areas. There would be an increase in other segments of the market. And this could be explaining why we haven’t seen any major trends around this.
Brad Erickson
Okay interesting. And then on the – just on the ad auctions, I mean, I think performance marketing is a material source of your traffic and new active buyers and new business. Are you seeing those auctions soften it all. And I guess, like, companies in your position, I feel like, a lot of companies, small businesses who advertise in social channels or search or whatever, go through a downturn right?
And they’re don’t have a public company balance sheet like you would. How do you guys treat, like, A) what have you seen from the pricing and B), how do you treat that would you look to maybe step in and arb a little bit of that traffic or are you sort of appropriately cautious?
Micha Kaufman
I think we’ve always been very opportunistic about the way that we went since we found of marketing unlike we have small business but I think many others and bigger business. We developed our own technology to manage hundreds and thousands of complaints in the obviously [ph] in multiple channels in multiple. So this kind of machine is able to track any opportunity measured by lifetime value to cut and that was down. And at the same time, closed campaign, which are not performing
I think if you look at the CLI over the last few quarters, it’s pretty stable with more upside and at the end of the last quarter, I think we know that during the month of September and I think change to October, because there’s some uplift in the number of the file, we were able to acquire on part of that is the is the fact that there wasn’t opportunity out there. So, again, I think the way we manage that was always using the same narratives. Pleasuring on a retail time basis corporative acquisition and assumed lifetime value. That has been a pretty powerful machine that.
Brad Erickson
Got it, okay. But at but at you haven’t seen any I mean, maybe as ad – ad auction?
Micha Kaufman
There is also significant control.
Brad Erickson
Got it.
Micha Kaufman
That we can.
Brad Erickson
Yes, yes maybe shifting gears. One of the questions we get on you guys a lot is just weather and industry, frankly, is how countercyclical it might be right? And clearly, there’s a lot of layoffs going on right now potentially and I think you said it on last week’s call that you are feeling accelerated demand of freelancers coming to the platform may have to kick off a few more than normal being bad actors?
But as you see that come, the question I think I actually asked it on the conference call some of these, you know, sometimes you you’re not I have to think you’re not able to fulfill all the demand. I think you’re probably doing better than maybe some other categories because of how diverse your freelancer base is. But what does the improved freelancer base bring to you from conversion standpoint? And I don’t know, I mean, do you think your business is counter cyclical?
Micha Kaufman
I think what we explained during the call is that usually what you see in a cycle is that you see supply coming first and then demand follows. Since we’re running a two set of market base for many, many years now, I can definitely say and we’ve double checked that many, many times that supply brings demand. That’s always the case. If you have high quality supply brings high quality demand as well. And this coincides well with our motion up market.
Meaning, that the demand for better, higher quality supply that can tackle more complex projects is there and the more that kind of supply comes in, the greater the demand is. So from that perspective, this for us is the right sequence. It always starts from supply. And we’re getting that supply right now even get more of that, which is great. Demand is going to follow right. So from that perspective, I think that we’re probably in the best place and the best time.
Again, timing is an issue because it’s very hard to predict the exact type of the cycle. I don’t know if and we did want to make sure that we’re careful about calling what we’re seeing now a trend. We said that from June, we’ve seen some stabilization with each quality trend. Things could go worse and they could go better. It seems that right now the market is hanging on every good news that there’s any bleep in the market? We’ve seen this sub market today.
Brad Erickson
You’ve seen 10 continuous days of good business trends. We want to know better or not yes that will better. All right, yes we don’t need to talk about that anymore. Just on the take rate, a source of a lot of questions over last year. You guys the core taker, I think, is somewhere in the mid-20s, a little bit above that. But the effective take rate, the reported take rate is obviously closing in on, I think, it’s at 30% essentially?
Micha Kaufman
Transactional take rate fees but yes 25.5% and the rest is added volume service and product.
Brad Erickson
Yes, So can you kind of, A) walk us through maybe rank order and size, I know promoted listings, I imagine it’s the biggest, but walk us through sort of what the other inputs are to that and then I have some follow-ups?
Micha Kaufman
I think it’s those who the status on top of the transaction they have to promote it. They have to color glass [ph] color glass is set of tools that will provide on the site to enable ClearVoice, to monetize better the opportunities. So we just now we launched [indiscernible] and we just introduced second our service with a different pricing that’s part of the reason for the speed stay fit.
Throughout the quarter we also have some monetization on the buyer side the subscription type of transaction within ClearVoice, the company that we acquired, we are using it.
So those type of services that goes on the buyer side and the software usage and they’ll our suppliers to use systems to help them manage the calendar content marketing publication while they use freelancing to produce the content itself. So this type of services on the buyer side, on the seller side, accumulate to the, add on take rate.
Brad Erickson
Yes got it. And then just from a, model standpoint I mean, I think you’ve been adding all of these things add up to maybe 20 bps a quarter or 30 bps a quarter type of thing. Is that kind of a right way to think about it going forward or how should we think about that?
Micha Kaufman
The way we phrase that before is the big cushion with the way that the model again takes place. We do anticipate a modest growth yes because we launched small services. The services are well adapted. But I think it should be should be a pretty modest of the growth.
Brad Erickson
Got it.
Micha Kaufman
And there are some quarters when you see kind of pick up because or meaningful change because we launched we launched service. There are some quarters where it’s only an extension of existing.
Brad Erickson
Yes, got it. Is it fair – so on the promoted gig though, I’m assuming that’s still rising as a percent of the mix? Is there any guard rails you can give us on how to think about ad load or like, are you letting are you letting freelancers bid sort of unlimited amounts to get business you know, they’re not bidding so how to think about just – how to go over time?
Micha Kaufman
And so I think that when we spoke about the potential, potential to extend out across more categories across more areas of the real estate that we have in the marketplace. We’re not compromising on the quality of sellers that can actually be to promote themselves because this is very important. The quality of those ads are going to remain very high which is going to, continue supporting the great conversion and the great ROI that our sellers are getting on it.
And the great service that our buyers get from those promoted placements. So on that, but as we demonstrated that we can continue expanding that. And it is continuing to grow. Obviously, they can’t be I mean, there’s a bidding machine like any other, you know, promoted listing engine. And it’s very important for us that whatever they bid ROI because this would ensure that their retention within the program is going to be behind. This is the case for now. So we’re definitely not going to change that, but there’s still room to continue getting into more categories more segments of sellers and more areas as well.
Brad Erickson
Got it. And maybe just one on that, I know you got to ask this a lot, but just category expansion. I mean, you’ve got what 500 plus, maybe you got 600. So I mean, A) what are – there sort of areas of low hanging fruit out there and B) there’s other freelancer marketplaces smaller and they can focus on engineering or financial services or whatever. Might you guys look to sort of expand in those categories M&A, maybe just talk about how you think about that?
Micha Kaufman
Definitely so category expansion is one of our growth factors. We’ve talked about this for many, many years definitely since we took the company public and actually we took the company public 2019 and we had about 300 categories we now have about 600. So we’re definitely continuing to grow there. And the reason is because, essentially, we want to grade this everything store for digital service.
Right so and there’s plenty of room to continue developing categories and we are doing that on a monthly basis. So definitely room to grow We’ve been as Ofer said on the marketing side, on the M&A side, we’ve been very opportunistic as well. We’ve acquired six companies so far two of which, two or three of which have been vertical market basis. Sometimes we see an opportunity to get into a vertical or category to be to be aggressive doing that through M&A.
And if this would be we’re going to look into it in the future in the same – with the same eyes. I think right now, maybe the market will create more opportunities for M&As. We’re definitely keeping close eye on that. But the machine that we’ve created internally allows us to introduce I mean, I think that during the past few quarters, we’ve been introducing you know, about 30 new categories every quarter which is a pretty high cadence.
So we’re able to fill those with the right high quality supply in a matter of couple of weeks. And then start generating the – so that the machine works well. M&A is just indicators where we see incredible opportunity to do something that would take us higher.
Brad Erickson
Yes got it. I want to talk fiber business, but before I have one more, take rate question. Sorry I have to ask. You guys did raise it last year, but I think it was more of just like related to covering some payment costs than anything. It wasn’t necessarily a real price increase? How much room do you think there is down the road for just organic take rate expansion throughout all the extra stuff we just talked about?
Micha Kaufman
On the transactional side?
Brad Erickson
Correct yes from the 25.5% you mentioned?
Micha Kaufman
I think at the end of the day, take rate is a – to us is a reflection of the value creation that we provide. So the more value we provide theoretically, the higher the take rate could be. But just as a as a refresher with those who haven’t tracked the story, the take rate use to be 20%, and it’s now 25.5%. So there is there is room when you add value, when the role that you play in the matchmaking, the deal making, the fulfillment and the satisfaction of both parties is higher there is a potential.
And then, again, when we talk about guidance, we try to say that there’s we mostly focus on added value services and products which I’ve been contributing an increasing quarter and into that take rate. On the transactional side, there’s aspects of the service that could be in subscription form that could be contributing to take rate and so forth, but we haven’t announced or introduced anything.
Brad Erickson
Got it, okay, okay. Real quick, pause for questions. Anyone no takers we’ve been quiet audience this morning. Fiber business this is something obviously you guys like to talk about. This one’s been tough right? It hasn’t necessarily manifested in the P&L that we’ve been able – that’s been as visible to investors. Obviously, it’s a super important category, large potential. I think your public competitor is also has an enterprise strategy of sorts?
And while the business overall there is pretty large, they actually product, but the revenue portion within that enterprise product is actually quite small, so below 10% in their case. What has to happen for fiber business to sort of inflect for people to see? And the things that I think about anyways are either one) is it a different distribution channel, selling channel do you need more salespeople?
Something like that or B) is it just a function of again growing that digital flywheel paid marketing, brand marketing like what are the gating factors to seeing a bigger inflection provider business, because I don’t think there’s any debate on the product and the value it could add. It just seems like a marketing problem or a selling updating factor, if you will?
Micha Kaufman
Yes that’s a good point. I’ll start by saying that we’re internally contemplating on when to start reporting it separately, because there’s I mean, last time we’ve done it, it was a couple of quarters ago. What we did, it surpassed, so 5% of the business. I should say that it is it is growing extremely well. It is outgrowing the pace of the marketplace itself. So that segment of our business is growing extremely well. So we are very happy with it. It’s a very young product field.
And it should also be noted that it is not targeting enterprise at all. As a company, when we think about our go-to-market strategy and motion, we used to concentrate pretty heavily on the micro and small businesses. And by the way, should be noted as well. Like, if you take our entire business, which is on a on a trailing 12 months, but 4.2 million active buyers businesses, half of which are in the U.S. that’s about 2.1 million out of 31.7 million businesses.
We haven’t even started on a small business so it’s completely untapped. And by the way, Europe is in total 20 countries 1.5 times larger than the U.S. So it’s another 40 something million businesses. So there is a huge opportunity to get into the small business. What we’re doing in fiber business is actually getting into the midsized business. We’re not targeting the enterprise. We don’t plan to put a massive sales force.
And by the way, we don’t need it. And the reason is that when you look at the – when you look at fiber funnel, when you look at the – by the way, most of it is organic. Well, we’ve talked a lot about marketing, but marketing is just a portion of our new business. The majority is organic. So when we look at this funnel, within that funnel, we’ve identified enough businesses not to get us to a point where we actually need a sales force.
It’s more about being able to identify those businesses, move them to the right product, which is fiber business, and maximizing their usage of the platform and capacity. We’ll be becoming better and better in doing that. So we’re definitely going to exhaust that before we start you know, paying customers that weren’t getting mostly for free. And so, it’s really optimizing that machine into so much there’s such a long way to go there and this is the mid-market. So we’re not right business at all. And this is not the in the, during the near future, we’re not going to touch on.
Brad Erickson
Yes, yes no that’s helpful. I understand the strategy there. Last question LinkedIn have you heard them?
Micha Kaufman
It’s a Microsoft company.
Brad Erickson
Yes, to some, it represents existential risk to others I don’t know. It could be a partner at some level how should – I mean, what do you see? What do you think? How do you guys contemplate the future with them maybe inching towards the space a little bit?
Micha Kaufman
Yes I mean, we’ve been tracking, we’ve been tracking what LinkedIn is doing like everyone else. I think that their core business is very specific and it’s very different than ours. And because of that, if anything, we see this as an opportunity to get more awareness for freelancing in general. I don’t think that from a transactional like, a transaction making the aspect. It’s a risk — because they’re not focusing on that.
I think it’s just, you know, creating awareness to find that if someone has a lending profile, they may be also getting freelance work. By the way, it’s not that’s new they just made it simpler. And I think that we’re focusing, which is really the deal making, the actual matching helping customers get to the right talent that they actually need.
And actually in many cases, just helping them, helping them actually describe or translate their needing to what product they actually need to get or what type of talent need to get is a very different type of product. So we keep tracking it. I think that’s all in all, listen, to be 50% of the workforce by 2030 or at least 50% are going be engaging Instagram that’s a massive market. And by the way, it’s probably going to be large enough to entertain more than one huge company.
And that and that’s fine and I understand that the interest of many companies to get in that stage. I think that we have a great head start. We’ve been doing – we’ve been building to certain markets for the past 13 years, which puts us in a great position to continue leading this market. So we’ll keep that.
Brad Erickson
So I know we’re out of time quick cloud channel check just because I’m asking every company today. What do you use and have you detected anything abnormal recently where they’re coming to you saying, hey, sign a longer deal, we’ll lower your price, looking to optimize maybe spend a little bit less on cloud. Have you guys had any conversations in the last month or two or three where there suggests they’re being a little bit more aggressive on having those outbound conversations?
Micha Kaufman
First question, AWS.
Brad Erickson
No one said any changes lately so, but I don’t know everybody’s business is doing different things so I was just curious?
Micha Kaufman
Why would you anticipate a change?
Unidentified Analyst
Always looking to, help customers save money, particularly when their businesses may be softening?
Micha Kaufman
I don’t think that this is the case. If anything I mean, cloud computing continues to expand and they’re expanding other territories, which is not just the drivers of the world, but lowering to the market of smaller businesses. And I think that this is where they’ll probably have more leverage to actually get into those markets. I think that when for a company you’d like the size of Fiverr.
Brad Erickson
Yes, I had to ask. There’s interest there so yes.
Micha Kaufman
Cool.
Brad Erickson
Thanks, guys, for being here. Appreciate it we are out of time.
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