Fiverr International Ltd
NYSE:FVRR
Earnings Call Analysis
Q3-2023 Analysis
Fiverr International Ltd
The third quarter showcased robust performance, with both revenue and adjusted EBITDA reaching the upper end of the company's forecast, indicating firm guidance fulfillment and improving profitability.
A notable increase in the take rate to over 31%, backed by the successful growth of value-added services, coupled with disciplined expense management, reflected positively in the attractive adjusted EBITDA margin.
Revenue surged to $92.5 million, marking a 12.1% year-over-year growth, while the annual active buyer metric reached 4.2 million with a 4% year-over-year improvement, suggesting a wide-scale adoption and higher customer spend.
Reaffirming its revenue guidance for the year within the range of $358 million to $365 million, the company expresses confidence for future growth despite increased market uncertainty, forecasting a year-over-year growth of 6% to 8%. The adjusted EBITDA margin is now predicted to hit 16.3% mid-point, showcasing optimism in the business strategy and execution amid varying market conditions.
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Good day, and thank you for standing by. Welcome to the Fiverr Q3 Fiscal 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Brian Lang, Investor Relations Manager. Please go ahead.
Thank you, operator, and good morning, everyone. Thank you for joining us on Fiverr's earnings conference call for the third quarter that ended September 30, 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 in 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.
Thank you, Brian. Good morning, everyone, and thank you for joining us. Q3 was another strong quarter as we continue to accelerate our revenue growth and drive EBITDA margin expansion. Both revenue and adjusted EBITDA came at the top end of our guidance range. A number of factors drove the strong performance. The cohorts in our core market base continues to stabilize from the COVID growth spikes and our push up market has allowed us to grow spend per buyer at a strong pace. Finally, healthy growth in our value-added services contributed to our take rate of over 31%. All of this was extremely well executed with continued expense discipline, which is reflected in the strong delivery of our adjusted EBITDA margin. These results underscore the power of our business model and the progress we are making to solidify our position as the global leader of freelancing mark spaces. This, together with the strength and resilience of the Fiverr team allows us to focus, adapt and thrive to external changes. As you all know, Israel went through a horrific attack a month ago. Our first priority has been to help our employees, their families in the Fiverr community and support those that deadly atop impacted. As some of our employees are being called up, we are ensuring their families will get what they need, while they are on the front lines. As a company, we are quickly adopting so that we continue to operate and execute at the highest level of focus and consistency, thanks to our hybrid operation that's already in place. Since we laid out our strategy focus this year to strengthen our core market base and accelerate our pace to push up market. We have been working on knocking down barriers that prevent buyers from shopping more often and fulfilling more complex projects. We know that Fiverr's unique transaction model and global access to talent provide great convenience and access to our customers that are unmatched anywhere else. But there are also pinpoints such as the difficulty of finding the best talent among so many choices, the uneasiness when a project is only partially scoped or the headache when a project requires coordination between multiple freelancers. This is why we created products such as Fiverr Neo, Fiverr Enterprise and the project planning service in Fiverr Pro to address those issues. The vision for Fiverr Neo is quite wild. We imagine Neo will serve as a personalized recruiting expert that can help our customers more accurately scope their projects and gets matched with [ Freon ] talent, just like a human recruiter only with more data and more brain power. What we have done so far is leveraging the existing LLM engines to allow customers to express their project needs in natural language, which Neo will synthesize and define the scope before matching the client with a short list of choices pulled from the entire Fiverr freelance database. It's a substantial step forward from the existing experience and streamlines the time the customer needs to make an informed decision. To improve the experience further, we continue incorporating cutting-edge technology into our production to advance the algorithm and provide a much faster processing speed. We already see thousands of customers utilizing the service and early results show a positive impact on match quality and delivery. On the Fiverr business solutions side, we are targeting higher-end customers, expanding our wallet share and expanding our product suite to accommodate more use cases that are sometimes difficult to execute through a typical market-based order. When a customer comes through the funnel without a well-defined product scope, sometimes they need a domain expert to help carry out a specific function of the business, say, a social media market expert. Sometimes they have a vaguely scope project with an evolving road map, say, building a complex mobile app. In both cases, they are looking for Freelance to engage for an extended period of time. This is where Fiverr enterprise comes in. Through Fiverr enterprise, clients can manage an ongoing engagement with a pool of freelance talent continuously update tasks and project milestones and ongoing budget management and payment tools. This allows us to address the freelancing need of larger businesses that otherwise might be stuck with the complexity of creating detailed scope for open-ended goals at the beginning of the project. Finally, in Fiverr Pro, we are seeing great traction for the newly introduced project partner service. Since its launch last year, we've seen many business customers utilizing the service to fulfill significantly larger projects. We've further expanded the offering to include separate project planning and project management services to cater to a wider range of businesses. The project planning offering is a popular option among customers who need help with scoping and staffing, and we have found that most customers use the project planning capabilities, end up utilizing the full project management capabilities as well. As you can see, there have been a lot of exciting developments at Fiverr this year. Leveraging the flywheel of our marketplace build over the years, we are taking our business to the next level with new products and services that cater to a wider range of customers and their needs. There is tremendous potential for us to expand our customer base and grow their wallet share with us and that we should be able to build on these opportunities in the years ahead. With that, I'll turn the call now to Ofer who will walk you through our financial highlights.
Thank you, Micha, and good morning, everyone. We delivered another quarter of strong results driven by the resilience of our cohort, our recent upmarket efforts as well as growth in our value-added seller services. Revenue was $92.5 million, representing a year-over-year growth of 12.1%. Adjusted EBITDA was $16.5 million or 17.9% in adjusted EBITA margin. Both were at the top end of our guidance range. For the second quarter in a row, we have also achieved GAAP profitability, thanks to our ongoing efforts in improving our operational efficiencies. All of this demonstrated the impact of the strategy we set at the beginning of the year, the strong execution of our team as well as the strength of our business model. Our annual active buyer were at $4.2 million as spend per buyer improved to $271, up 4% year-over-year and a $6 increase from Q2. Our Fiverr business solution continues to make meaningful progress as we use more partners to certified and onboard customers to our premium marketplace, Fiverr. This effort helped to drive the accelerated pace of our spend per buyer increase as our buyer base continues to evolve towards higher quality, higher budget [ demographies ]. We continue to maintain strong efficiency and unit economics in our performance marketing. This quarter, our TROI for performance marketing remains very stable at slightly over 3 months. On a longer-term basis, our lifetime value to CAC over 3 years remains healthy at over 3x and for 5 years, exits 4x. We expect to continue to invest as efficiently as possible as we push forward on our upmarket efforts and focus our investment and higher value buyers. Our Q3 take rate improved to 31.3%, representing a year-over-year expansion of 130 basis points as we increased seller monetization of Promoted Gigs and sellers. We continue to expand and optimize our ad placement for Promoted Gigs, while sellers benefited from the introduction of our 2-tier pricing model that we launched a year ago. We are excited to report that Seller Plus subscribers have now reached 25,000 more than doubled from the end of last. Our improving take rate signifies the value that we are able to provide for our freelancers, and we continue to develop additional tools to help them grow their businesses. Now turning to guidance. In the immediate weeks after the onset of the wall, we experienced some volatility in our marketplace, primarily from buyers and sellers in countries in the region. This volatility has already created a headwind to revenue this quarter. While some of this volatility has subsided, the risk of it increasing again remains, and we have incorporated the risk into our outlook for the remainder of that. As such, for the full year of 2023, we are maintaining our revenue guidance in the range of $358 million to $365 million, representing a year-over-year growth of 6% to 8%. We are raising the adjusted EBITDA range to be $58 million to $60 million, representing an adjusted EBITDA margin of 16.3% at the midpoint. This implies fourth quarter revenue guidance of $88.1 million to $95.1 million, representing a year-over-year growth of 6% to 14%, reflecting the increased uncertainty for the remainder of the year. We expect adjusted EBITDA guidance of $14.9 million to $16.9 million, representing an adjusted EBITDA margin of 17% at the midpoint for the fourth quarter. That said, just as how we have navigated our business through a series of macro conditions in the past few years, we are confident in our ability to continue executing with the strongest disciplined focus and a long-term thesis of our business and strong market-leading position remain intact. With that, we'll now turn the call over to the operator for questions.
[Operator Instructions] Our first question comes from the line of Ron Josey from Citi. Great.
And I'd be remiss if the first thing out of my mouth wasn't to say we're thinking about you all and the team over there given all of the events. And so would love to hear more just how things are going from an operations perspective. Ofer, you talked about the revenue headwind that subsided since the start. Any insights on there would be really helpful. And again, we cannot think about you all. And then from a Fiverr neo perspective, despite all this, Neo rollouts just continue to gain speed. And so Micha, if you can just talk to us a little bit more about what you're seeing there about some of the early wins and the road map would be great.
So first of all, I think what we called out is what we've seen since the events of October 7 is that we have seen some volatility in the region, as an example, sellers in Israel have seen weakness in their business for the first 2 weeks since October 7. And at this point, mostly data subsided. So we see that element as being pretty stabilized right now, but with some factor of uncertainty depending on how things will evolve in this region. In terms of Fiverr neo, we're very pleased with the rollout. Obviously, very, very young product, but we're seeing over 100,000 users that are trying the product. And what we're seeing from their experience is that we're able to provide more accurate matches, which is basically what we wanted to do and have a higher engagement and satisfaction levels, which we're very happy with and the beginning of a repeat usage of the product. So there's a lot of learning as we build this product. And what we're doing is really a hybrid of technologies. Some of them are being developed by us. Some are off the shelf, most of the leading companies that are developing LLM, which have partnered with us. And we're putting this to the maximum. I think a lot of these systems are not yet optimized for large scale and high performance but we find our own ways of developing a lot of this technology to provide a very smooth experience to our customers. And again, the feedback that we're getting from them is extremely positive.
Our next question comes from the line of Douglas Anmuth from JPMorgan.
And of course, I just want to echo Ron's thoughts while thinking about all of you at Fiverr. Two questions. Just can you talk more about Fiverr Pro and just how customers are using the platform differently? And if there's a way to perhaps quantify some of the increased spending that you're seeing there compared to in the marketplace? And then secondly, you continue to make really good progress on take rate. Any way that you can help us understand is how you think about the headroom and opportunity around Promoted Gigs and Seller Plus, especially as you continue to expand kind of availability there.
Essentially, the way we've built Fiverr Pro is really to tackle a number of different needs. One is the need for embedded talent. So people that have more experience and have a better portfolio of existing work and the notable clients that comes with it. So our clients that are using this product are, by definition, quality centric. So that is one of the reason why they're using it. However, on top of that, we're offering a number of added value features that comes with being a pro customer that they love as well. And we've -- I think we've spoken about this before, but we keep extending these features. So the ability to work to the team on the platform, the ability to do budget management, to have a more sophisticated types of projects getting done if you do require someone to actually manage the project for you, there's an option to have a project manager to run those projects. So by definition, those customers that are using this product are of larger needs. They need more experienced freelancers or agencies, and therefore, they're also spending more and retaining better. As for the second question on take rate. So basically, it's the one question I think we continue to get since we took the company public. And essentially, what we said is we do see headroom for growth. In every product that we've launched and Ofer mentioned that in the opening statement, is growing. Promoted Listings is one of them. Seller Plus is another. And this has been really adding to the take rate we've had 4 years ago and how it has been steadily growing since then, which is exactly what we said is going to happen. So the message remains essentially, we believe that there is more opportunity to continue investing and expanding these offerings. And we see that the more we do it, the better gains we get from these products.
Our next question comes from the line of Jason Helfstein from Oppenheimer.
And again, sending support and thinking of everyone over there. Can you help us understand, I mean, you've got like, I guess, kind of 3 factors, right? One is just the COVID roll off. The second is just some of the just general weakness we're seeing in the economy with SMBs. And then the third is all the progress you're making kind of moving up market. I mean, is there a way -- I mean, at some point, we'd love if you broke out the kind of non-SMB business. But just maybe help us understand kind of where we are in that? And do you think you've seen the bottom on the SMB side?
I think you're correct to list those different factors. At this point, we haven't seen any major change that we can call out. Meaning, COVID effect is pretty much lapped which also had us enter a new era of remote work, which is now being challenged as people are being called to -- back to the office. What we're seeing with the general economy, the weakness around SMBs as a result of macro has been pretty steady, meaning it is not becoming worse, but it is not becoming better. And this is why many quarters ago, we said that as a strategy, we are investing in going up market and acquiring or entertaining customers who the macro environment impacts less. And if you follow the numbers and you follow the growth of these cohorts, you will see that we're making great steps in increasing their portion. The cores that we acquire today are very different than the cohorts we've acquired a year ago. Now to the point where they spend about 20% more in their first purchase when they join us which is massive. And then their lifetime behavior is much, much different. Some of it is thanks to what we're doing with Fiverr Pro, which has a multiple spend per buyer than our average. But it's also how we find and engage with these customers. So this has allowed us to really make a step forward, and we're seeing that in the spend per buyer as well. But we haven't seen any material change in those trends so far. And we're just reiterating the fact that we believe that when the market will start recovering, we will have tremendous opportunities for growth. It is yet to come.
Our next question comes from the line of Eric Sheridan from Goldman Sachs.
Maybe one following on Jason. When you think about the demand environment and turning it back to incremental margins and investments to stimulate growth, you made a lot of progress this year on margins on a very consistent basis. How do you think about the balance of investing in growth as you see signals of a stable to rising environment versus elements of continuing to produce very solid incrementals in the business on the margin side going forward, maybe thinking about it in terms of key investments that need to be made and what signals you're looking for to possibly turn on some of the demand investments on the cost side.
So essentially, again, I want to reiterate our approach as a business. We are a growth company, and we doubled down on growth when growth is a good option. And essentially, the way we manage the businesses, we're pushing for the rule of 40. It's that simple, right? So we're optimizing growth and profitability profile and putting a sustainable path to maximizing long-term shareholder value. Right now, it seems that it's more on the cohorts of midsized businesses and up and less on the micro businesses and the very small businesses, which is why we've been doubling down there. And bear in mind as well that even though we can theoretically invest more in smaller businesses right now because of the dynamics of macro, the efficiency of our marketing spend would get hurt, which I don't think is going to serve anyone, not us and not the shareholders for the long term, which is why we're resisting the temptation of actually doing that. Right now, the sentiment is such where to keep the extremely efficient machine that we have. And again, you can see that in the very short ROI. And you can see that in the growing LTV to cap ratios over time that this strategy actually works.
And I think that just to augment what Micha said, I think that we have proven to improve margin in a sunny day and a rainy day. And I think the plan is to continue this path. There was a long-term EBITDA margin ahead of us, and we are getting there.
Our next question comes from the line of Matt Farrell from Piper Sandler.
The first one, the Q4 guidance range is much wider than you normally provide for a given quarter, and you kind of hinted that the uncertainty you're seeing. Could you walk us through the assumptions or just how to think about you getting to the high end of the range and what would happen to get to the low end of the range? And my second question is, I know you're not going to provide any quantitative commentary on next year, but would love to hear some of the strategic priorities for 2024 across various parts of the business.
I think on the first part on the guidance, we noted the volatility that we've been seeing in the first few weeks of this quarter. And we guide based on the assumption that the risk of volatility will retain into the -- in the next few weeks. So based on that, it might be that it might be that volatility will create headwind the other way. And based on the uncertainty, we kind of increase the range to make sure that investors get the full picture of what we are seeing and the operating plan has been adjusted accordingly. In terms of the 2024 has even wider uncertainty because we still a way to go. And we obviously -- we speak about numbers early next year. And I'll let Micha to go through the strategic profile of 2024.
So on priorities for 2024, I would say that a lot of what we've been doing throughout the years have been paying off well. And there's a few specific things when it comes to next year. So continuing on my previous comments, given the macro environment going upmarket is a strategic move and target for us. And at least until macro changes, this is a center of focus. The other one that I can call out is AI integration, both internally as a team and how it makes us move faster, more efficient, but also in our product to make the lives of our customers better and get what they're trying to do faster. On the same note, pretty much catalog expansion is extremely important as we're seeing so many new areas of professionalism appear as the landscape changes. And so continuing to expand the catalog and ensure that we add the necessary categories and skills to the catalog is important. International expansion is another one. I think 2023 has been very successful in that front. And we've been -- I think the playbook or the playbooks that we've been developing have been paying off, and we're seeing regions where we're doubling down, growing much faster than the average growth of the market base. Team excellence is an ongoing investment. And lastly, I would just generally call consistently looking for growth opportunities, both organically and inorganically.
Our next question comes from the line of Kunal Madhukar from UBS.
Two, if I could. One on the take rate, given your focus towards going up market and the increasing adoption of Neo, how do you think that impacts the take rate in so far as it relates to Promoted Gigs or Seller Plus? And then in terms of volatility on the revenue side, can you help us understand, you are a global company. And so is demand across the globe kind of volatile or is it in specific areas? And similarly, on the seller side, is the supply affected across the globe? Or is it just in specific areas?
So if I understand the question about take rates. As I said earlier, it is sustainable as we've been proving quarter after quarter with no exceptions. And there is still upside. You called out Promoted Gigs and Seller Plus, both are growing programs, and they keep growing quarter after quarter. So I don't think I'm not sure what's the connection to Neo, but essentially, we don't see them shrinking or being impacted by the new technologies. And obviously, there's ways of integrating Promoted Gigs and solutions like that within our new product as well.In terms of the second question about volatility on revenue, we're a global company, and that is correct. And obviously, some regions as a result of or activities, and we've seen the same with Ukraine before, and we're seeing it now in the Middle East, become volatile. And sometimes it's very short periods of time. And sometimes it's slightly longer. This is why we called it out. And we said that most of this has been subsided. However, since wars by definition, are dynamic events. It is really hard to forecast how this would evolve, and this is why we're putting a bit of cautious into anything.
Our next question comes from the line of Andrew Boone from JMP Securities.
On take rates, I understood that that's a trailing 12-month metric, and it stepped up almost 1 point in the last 2 quarters. And so is there anything that you guys can disclose in terms of the take rate as it's at in 3Q '23? Meaning, do we have a significant step up and we're plateauing from here, but we'll see it in the figures as that trailing 12 months catches up to 3Q? Or how do we think about just the increase over the last couple of quarters? And then how do we play that going forward?
I think we mentioned that in the prepared remarks, the take rate is driven by Promoted Gigs and Seller Plus. Those are the 2 different programs that we are expanding for -- over a few quarters now. Micha mentioned earlier that Seller Plus have more than 25,000 subscribers, which is more than double the number of subscribers we had end of roster. So I think on both of this program, the thing a very good retention. On the Seller Plus, we now run 2 different deals, 2 different offerings, different pricing. And I think that the plan on those programs of Seller Plus and Promoted Gigs is to further expand because there is a room. We just open the promoted gigs into mobile. So there is more assets for us to monetize again and there's more value to assist seller in the marketplace to better monetize their skills and time, which is why the adoption rate and the retention is steady and growing, and we plan to expand it over the next few quarters.
And then I wanted to ask about brand marketing specifically. You guys just launch a new U.S. campaign, how do we think about brand marketing as a component of sales and marketing and how that has trended just given the more difficult macro environment.
So we, for many reasons, mostly competitive. We're not providing an accurate breakdown between brand and performance marketing. However, as evidence in what we're doing around the world, not just in the U.S., this is an area where we're definitely continuing to invest. It's a long-term investment and one that goes hand-in-hand with performance. So to us, it's really the funnel that supports performance -- supports the brand and the brand supports the performance. And this is why depending on new categories that we enter, new areas of interest for us. Trends in the market, that defines how we break down between brand and performance. I hope this gives a little bit of color.
Our next question comes from the line of Marvin Fong from BTIG.
Question, I guess, just to pile on here on take rate, big jump this quarter and like Andrew observed, it is the trailing 12 months. But should we -- how much of this do you think is perhaps in tougher economic times, freelancers are sort of doubling down on investing in their business. Do we see any single of that? So for instance, was bidding prices up for Promoted Gigs, things of that nature? Or any thoughts there on perhaps kind of the kind of cyclicality of the value-added services would be interesting.
So I'll give it a very, very simple answer. Promoted Gigs is an ROI positive program since we launched it. It makes money for sellers. It doesn't matter if it's good times or bad times. The impact they have is positive. And as long as it's positive, they will continue using it more in over time. And because of that, it's -- in many ways, it is disconnected from the economical times. I hope this addresses the answer.
And then maybe my follow-up, a lot less talk on AI this call. And I guess I'll just lob a question in here. Could you speak to thing about the growth of the business? And I guess, just interested -- I know you won't give us anything specific, but taken as a whole, are these kind of categories related to AI that you've launched in, let's call it, the last year? Has that become a pretty measurable part of GMV? Any characterization of that would be great.
So I did address this also in how we think about next year and the fact that AI both impact the efficiency of how we work allows us to do pretty incredible things in our product. It also has an impact -- positive impact on the categories that we can introduce. So again, we're not getting into specific category breakdown. But what we're seeing on the buyer side, I think we've introduced these categories, these categories continue growing. I think that a lot of the height that surrounded AI in the beginning of the year subsided and right now, it's really looking for the killer applications that could be developed with AI, and we're developing some of them and our customers are as well. So these are definitely areas where we continue seeing growth, but not just that, but we continue investing in the catalog side to ensure that the new types of skills that pop up are going to be addressed on the Fiverr market base.
Yes, just to be clear, when I said less talk about AI, I guess I've had questions from the sell side as I mean you guys are doing [indiscernible] just didn't want to short shift on AI. So thanks for that. That's all I had.
Our final question comes from the line of Rohit Kulkarni from ROTH MKM.
And again, kudos to you and your team for the level of resilience that you've demonstrated through these times. Two questions. One, just a big picture and probably kind of skinning the take rate cap in a different direction. Part of the pun here. But I guess, a big picture, as in there are Internet marketplaces with advertising and subscriptions, they're clearly well developed. We have seen subscription penetration up to 40%, 50% of active users. We have seen advertising penetration up to 10% of global volume of that marketplace. I guess would love to hear kind of your thoughts around where you are right now internally looking at those metrics at Fiverr? And what are the puts and takes of Fiverr's marketplace to evolve into having much more significant penetration in advertising and subscription because perhaps that kind of goes back to the multiple questions on take rate on this call. So that's one question. And then tactically speaking, how important is it for you to grow buyers on the platform right now over the next 3, 6 months or so? And then what is it tactically that you're doing differently versus probably over the last 9 months?
So as to the first question, I would say the following: First, these are still products that are being evolved and they continue growing. It is important to also know that if that is being compared to other market bases where the component of promoted is much higher than if you would follow the makeup of their revenues, you would notice that their transactional component is far, far lower than ours. Meaning that when you make the majority of your take rate from the transactional component, then the expectation that you would be able to match this on promoted is unreasonable. And in the marketplaces where the component of promoted is much higher than the take rate is tiny in comparison to ours. So this has some explanation for the ratio between those 2 -- having said that, there's obviously more room to grow the offerings as they've been growing so far. In terms of the importance of growing buyers on our platform, as I've said, we are a growth company, and we are focused on delivering growth. Now there's the balance of quantity and quality. And this has a lot to do with the opportunities that the market and the economy is providing to us. And as we said, the focus is less on quantity and more on quality. It doesn't mean that we don't want far more, and we're optimizing everything the product in our marketing to do that. But it means that in this economy, in this environment, we're very much focused on the quality of our customers. Again, if you look at an indicator like spend per buyer, you see that spend per buyer is increasing pretty dramatically and we believe will continue to. And when the environment would shift, as I've said, I think we're going to see tremendous opportunity for growth across all segments of the market.
I would now like to turn the conference back over to management for closing remarks.
Thank you, JP, for moderating today's call and to everyone who joined the call today. I'm wishing all of us much better and more peaceful times. Have a great day.
This concludes today's conference call. Thank you for participating. You may now disconnect.