Fiverr International Ltd. (NYSE:FVRR) Goldman Sachs Communacopia + Technology Conference September 9, 2024 2:30 PM ET
Company Participants
Jinjin Qian – EVP, Strategic Finance
Conference Call Participants
Eric Sheridan – Goldman Sachs
Eric Sheridan
Okay. So in the interest of time, we’re going to get started with our next one. It’s my pleasure to welcome Fiverr to the conference. We have Jinjin Qian, EVP, Strategic Finance. Jinjin, thank you so much for being part of the conference.
Jinjin Qian
Thank you for having me.
Question-and-Answer Session
Q – Eric Sheridan
Okay. All right. So I think to set the table for those in the room who may not be familiar with the story, maybe talk a little bit about the journey the company has been on both pre-IPO and through its life cycle as a public company, just in terms of level setting, what the company is focused on, what you’ve been building and where the current state of the company sits right now?
Jinjin Qian
Sure. Yeah. For those who are not familiar with us, so we have been around for over a decade now. Our current founder, CEO, started the company 14 years ago with the mission of making freelancing services as accessible as you purchase something on Amazon. And we started with only eight categories. Until today, we cover pretty much everything you can imagine in the digital services with over 700 categories. And yeah, we went public in 2019, and since then we’ve been consistently growing. The company is three times as large. Revenue-wise, turned profitable and right now, kind of a few kind of strategic focus of the company is, one, going up markets, continue to drive bigger spend, be more relevant for larger customers. Second is the investment around AI, both platform-wise as well as category-wise. And then lastly is to expanding the platform into kind of more diversified revenue stream, more value-added products, which continue to be a growth driver for us.
Eric Sheridan
Maybe just following up with that with one other big picture question. You’re still very early innings in what could be a very large market opportunity when you look at that. When you talk to customers and the team tries to think about what frictions remain, when you think about product and client education, what do you guys see as the key unlocks that can capitalize on that potential, penetration rate opportunity? And maybe it goes back to some of what you said. But just in terms of what do you need to build and how the market needs to evolve to actually experience that penetration rate opportunity?
Jinjin Qian
Yeah. I think we’re in the very early innings of this market. I think freelancing remains a very old school business. I think over 90% of the freelancing is still done in offline fashion, through word-of-mouth, through your individual network. I think what we’ve experienced in the last few years with COVID, definitely accelerated the awareness and adoption of this market, but there’s still a long way to go. I think there’s a lot of — I think SMBs are the first to adopt this because they are more cost conscious and they’re more nimble. I think larger organizations, I think there’s multiple decision makers within the company. There’s a lot more processes and they’re a little slower to adopt this. But we see this as very similar kind of a going upmarket trajectory where larger companies are more and more open to taking the flexible workforce as a very integral part of their workforce strategy.
Eric Sheridan
Okay. We’ll come back to some of those topics in the big picture, but just maybe to level set, one of the enduring conversations we’ve been having on earnings calls over the last 12 months has been the current demand environment you find yourself in. So level set on what were the key messages coming out of Q2 earnings on the current demand environment that the company finds itself in and what you might be watching for what might improve that demand environment going forward?
Jinjin Qian
Sure. Yeah. So overall, it is a challenging macro, and we talk about overall SMB sentiment being relatively weak. The overall hiring environment, especially professional staffing is down double-digit year-over-year. So it is challenging. That said, I think there are a few things. I think one, we are doing a number of things to generate growth catalysts even under this macro, including our expansion into the professions and longer-term engagements, including what I talk about like expanding into product — value-added product revenues. At the same time, like hopefully, with interest rate changing that will lead to some of the pickup in the SMB sentiment. If that happens, definitely, that will help our business. I think historically, if you look at the macro data, I think temp staffing usually leads full-time staffing, leads the overall GDP cycle. So if the GDP cycle starts to turn, like I think we will be the first one to kind of see the uplift on upswing.
Eric Sheridan
Okay. Maybe one follow-up on this just in terms of cohort trends. In terms of, again, key messaging coming out of Q2, things that you’re going to be watching for how those might change around elements of buyer frequency, retention, spend per buyer and sort of level set us there on what current trends you’re seeing and what you might be monitoring probably those might change in the forward periods?
Jinjin Qian
Yeah. I think there are a few things. I think on the spend per buyer versus active buyer, I think we’ve made the conscious choice in the last few quarters and years to really focus on higher-value buyers. These the segment of buyers with better engagement, better retention longer term. And in the current macro where overall demand is not very strong. I think leaning into the product is really focused on that segment gives us the ability to be more efficient and really growing the spend, and you’ve seen that in the growth of spend per buyer. Very in the — very robust and consistent manner even under this macro. So that strategy is working really well for us. And I think the second is we believe our leaning into the complex and longer term going forward, will further allow us to grow the spend. So looking out for the rest of this year and going forward, I think you’ll continue to expect growth in spend. I think we have a long runway for that, and continue to see also take rate expansion to continue.
Eric Sheridan
Okay. Generative AI has been a sort of controversial topic around this space because initially, there was a view that Generative AI might be quite disruptive. And then you as a company have given a lot of examples where people needing more AI skills can actually be a driver for the business platform. Talk a little bit about the journey the company has been on, around Generative AI and how the founder is sort of putting the company sort of aimed from a strategic standpoint to capitalize on AI as a theme?
Jinjin Qian
Yes. It’s a really exciting time for us. I think one is as a horizontal marketplace that connects talent to help filling skill gaps, I think GenAI and the huge technology wave really creates that opportunity for us to lean into the technology, helping SMBs to get connected with AI expert, which is a scarcity today. And for small companies to be able to build customized GPT ads to leverage GenAI technology to strengthen their marketing capabilities without hiring full-time and can instantaneously just come to Fiverr and use those services. So we’ve seen AI services grow tremendously over the past 12-plus months. Second is leveraging AI throughout the platform. We’ve launched Neo for a while now, and Neo is becoming almost like a Copilot throughout the funnel, whether it’s top of the funnel search, being on the side to help buyers better — get matched with longer-term search queries, where sometimes it’s hard to express all your needs in a search bar. The Neo can pop up where you can actually have a more natural language dialogue, and Neo can parse out that information and get matched with the underlying metadata and provide you recommendations. So that turns out to be a lot more intuitive, especially for complex projects and buyers who are new to the platform. And we’re seeing wherever Neo touches, the conversion rates really make a difference. We’re also having Neo impacting how brief it’s written and gets sent over to sellers, how reviews are getting written in a more longer form and more quality reviews, which we will now help conversion from the top of the funnel. So, Neo continues to be a key investment for us.
Eric Sheridan
One of the questions I get from investors, I’m not sure there’s a great answer to this, but just how to think about Neo scaling and becoming a greater portion of the business in the next 6, 12, 18, 24 months. How should we think about what holds that back or how many different aspects of the platform Neo can be aimed at over the longer term?
Jinjin Qian
Yeah. I think the signals we’ve seen so far is existing users who know the platform well tend to take longer to adopt. They stick to what they know and they’re very comfortable. But new buyers really find Neo kind of being a game changer, help them navigate to the relevant products, especially now we have many different offerings of Fiverr from the longer term to the short term to the brief and match, things like that. And we believe, down the road, we see Neo allow us to unlock the tremendous amount of data like on Fiverr platform. I think Fiverr is really unique in the sense that the entire transaction lives on Fiverr, right, like not only preorder, like after the order, the communications, the dialogue, the briefing documents, the draft, the edits, the comments and to the final delivery, all lives on Fiverr. So we have this whole wealth of data on Fiverr, frankly, it didn’t get all its full potential in the past. Now with Neo, it’s almost like a crawler going into this whole information and then Neo can really digest and help us understand who can do what for whom, and that will unlock a lot of the opportunity for us, especially as we go into complex projects where hiring becomes multidimensional, more with tangible and intangible input, I think Neo really is great there.
Eric Sheridan
Okay. Great. You guys are always putting out a pretty heavy cadence of product and strategy. You did a winter 2023 release into the summer 2024 release. Can you just maybe level set for the audience about some of the key products and initiatives that were launched around those releases? And how you think they fit into the broader strategic goals of where the company wants the platform to go longer term?
Jinjin Qian
We’ve already talked about Neo, which is obviously a big part, starting from beginning of the year and throughout this year. This is an investment. I think another exciting thing for us is we launched this professions catalog just a month ago. I think historically, Fiverr is — you can do a well-scoped project on Fiverr, but longer-term engagement on Fiverr is difficult because if you don’t have a well-defined project at what time, deliver what, historically, you can’t really purchase that on Fiverr. With the professions catalog, now one — you can engage with a freelancer for like a few months or even like 6, 12 months engagement where you can pay from an ongoing basis, monthly by monthly. Second, it allows us to open top of the funnel traffic for higher related keywords that historically, we don’t really compete on. So we are starting to really build up these professions catalog pages and work on the SEOs. And hopefully, we’ll see some of that throughput next year.
Eric Sheridan
Okay. one area if you look back over the last couple of earnings reports has been you continue to produce upside in terms of take rate. Maybe talk a little bit about, obviously, there’s things like Promoted Gigs, Seller plus value-added services. What are the drivers of some of the take rate dynamics that you’d like to highlight? And broadly, how do you think about take rate continuing to evolve in the years ahead?
Jinjin Qian
Yeah. We included a chart in the recent shareholder letter to breakdown kind of the take rate component. There is about 26% of the transaction-related commission rates, and that has been pretty consistent and stable. And really, the driver behind the consolidated take rate is from those value-added products you mentioned. I think advertising the Promoted Gigs is one thing. We continue to expand the presence of the product, not only just on the search and browsing pages, but also in the search bar, as you auto compete or complete, there is a few gigs down there. As buyers and seller communicate next to the inbox, there’s a few gig slots for you to inspire you for the next purchase. So products like this allow us to continue to expand the advertising product. There’s also a Seller Plus, which is a seller subscription product allows you to get access to advanced analytics, dedicated success manager, which is very popular among our sellers. We also initiated a kick-start program, which is kind of a part of the Seller Plus, but really cater towards new sellers. Because right now, like we see great adoption of Seller Plus among experienced sellers who do a lot of volume on Fiverr. But for new sellers, we’re trying to bring more benefits specifically to help them jump start their business on Fiverr. Lastly, I think most recent earnings, we talked about the acquisition of AutoDS, which is a drop shipping platform, great platform. We see a lot of synergies like drop shipping related categories are some of the fastest-growing categories on Fiverr because of e-commerce sites like SHEIN and Temu and the growth of TikTok like drop shipping is becoming super popular. We have over 160,000 drop shippers who come to Fiverr and purchase services. So with this acquisition, we see lots of cross-sell opportunities. We can sell the software solutions to these drop shippers that are already on Fiverr. We can also sell Fiverr services to the AutoDS subscribers on the other hand. So these are all different ways for us to really grow the take rate and bring more values to our community.
Eric Sheridan
Maybe just one following up there and then maybe I have another one that follows up on take rate. But in terms of AutoDS, how is that emblematic of the strategy around M&A overall? When you’ve done M&A, when you’ve chosen inorganic growth versus building it yourself, maybe talk a little bit about what the company’s decision path is there? And framing up sort of a strategic viewpoint around M&A in general?
Jinjin Qian
Yeah, definitely. So I think our overall M&A is — there’s a few areas like we’re focused on. One is continuing to doubling on the categories, category expansion and doubling on the categories is growing faster. I would say AutoDS is part of that and great synergy. Second is in terms of tech tuck-ins, like obviously, AI is a big topic. But in general, like businesses that are — allow us to strengthen the underlying marketplace dynamics would be another area. International expansion, that’s another area. I think overall, especially in this market, we are very disciplined on M&A. I would say it has to be accretive overall to the business with great growth potential would be like a focus, I think. And just to say M&A is just part of our overall capital allocation, right, with M&A alongside our organic investments on the product and services alongside the buybacks and other things would be overall capital allocation probably.
Eric Sheridan
Maybe just coming back to take rate, if the environment were to improve from a macro standpoint and volume were to pick up and you would see both buyer growth and buyer cohort velocity on frequency, how do you think about price elasticity and take rate in an environment where volume might be better? Could there be a coiled spring in the business that could have a multitier effect on the potential for revenue growth? Or are there areas where maybe you would go a little slower on value-added services or price because you were in an environment that might be quite stimulative of volume? How you think about the interplay of a better volume environment versus a better take rate environment and price elasticity?
Jinjin Qian
I think it’s less of a kind of a supply demand elasticity in the sense that I think the take rates upside that you’ve seen is really driven by product expansion, rather than really squeezing economics from the buyer sellers. That said, I think if overall macro comes back, there are definitely going to be more leaning into driving that demand, capturing that demand. So in terms of a product strategy roadmap like allocation, that perspective, I would say there will be more kind of going into capturing that demand. But I don’t think — I think the take rate like we command today is really because the product that we built that really helps the buyer sellers, like they don’t really have to purchase, right, like the Promoted Gigs or the Seller Plus. It is — they find it useful. So I think in a time when the overall macro is relatively soft, I think we accelerated some of the roadmaps on Promoted Gigs and Seller Plus and allow us to really grow that piece of the business.
Eric Sheridan
Maybe sticking with that theme, given what you know now about the demand environment, what are sort of the key messages from the company in terms of thinking about margin progression through the remainder of this year and into next year?
Jinjin Qian
Yeah. We laid out our kind of three-year target. We always said our long-term EBITDA margin is going to be 25%, but this is the quarter we kind of put a 2027 target on it. I think we feel very comfortable with the target. It will be more of a kind of linear kind of path towards that goal. I think — for us, it’s — growth is always a priority. That said, under this macro like we’re kind of very pragmatic about driving margin expansion and believe when the macro actually turns, then we will be at a very strong kind of position where we can go back to strong growth while we have a very solid bottom line profile. I think in addition to the 25% margin target, we also laid out a three-year kind of free cash flow target. We see a very tangible path of driving free cash flow and free cash flow per share for the next three years. Even with some macro uncertainties, fluctuations, we believe there’s multiple ways of getting to that number with multiple levers for us to pull. So we believe the numbers we laid out is kind of not based on which we think is very tangible.
Eric Sheridan
So just sticking with that, if the macro environment were to improve, and you’ve laid out the sort of more linear margin trajectory going out to 2027, should we think about incremental outperformance in the business being reinvested in support of that growth? Is that the right way to think about the interplay between those factors? Because you’ve been very adamant as a company that when growth comes back, we want to invest behind growth or growth first. I just want to understand how that would dovetail with what you’ve talked about now in terms of a multiyear margin trajectory?
Jinjin Qian
Yeah. I think if — I think — I mean our investments always very data-driven discipline, right? Like if macro is stronger, like there’s definitely going to be using that to invest into growth more. But at the same time, there is more ROI to be driven from. So from a margin perspective, I don’t think margin will get depressed if macro is stronger rather like we will see continued margin expansion with revenue upside. The other side, if macro turns out to be more volatile, there’s definitely lever to be pulled to deliver that margin expansion as well while continue to managing the macro environment.
Eric Sheridan
Maybe just one follow-up there. So if the demand environment improves and there’s growth to be invested in, is the primary lever on the marketing side of the equation? It’s product platform that’s all being put in place irrespective of the macro environment. So it’s really just about leaning in on the marketing side against what you see on the advanced side? Is that the more causal relationship?
Jinjin Qian
Yes, yes. On large scale.
Eric Sheridan
Okay. You obviously are generating a lot of free cash flow. You’ve done a buyback now. How are you thinking about capital allocation priorities going forward? How do you think about the free cash flow you’ll generate? And what management’s broad message is on what’s the priorities of use of that free cash flow?
Jinjin Qian
Yeah. I think we laid out there are kind of four priorities. Number one is investing in the product to drive growth and innovation. Number two is optimize balance sheet. We have a convert coming out due next year. So there’s different options to that. Obviously, the default is kind of using the cash we have enough to cover it, but we are also evaluating other options there. Third is buyback. We announced our first ever buyback in April of $100 million, and we just completed it. So buyback will continue to be part of the capital allocation mix that, that we think about and lastly is M&A. I think overall strategy is, we feel like we have a very strong — we have over $700 million in cash, and we can kind of invest in growth while drive shareholder value. And I think part of the reason laying out the free cash flow target and free cash flow per share target is to have a framework that I think use of the balance sheet is going to be one way for us to deliver that consistent growth in free cash flow per share for the next few years.
Eric Sheridan
Got it. Okay. We only have a few minutes left. But in terms of all we’ve talked about so far today, maybe put a finer point on what are the key priorities on both the investing side and the operating side for the management team as they think about exiting 2024 and going into 2025? And how do you think about some of the biggest potential levers for growth over the medium term?
Jinjin Qian
Yeah. I think from a managing the business side of things, I think it’s a lot less volatile than the market itself. I think our strategy has been very consistent. If you look at our past since IPO, I think we’ve laid out the mission whether it’s going up market, whether it’s investing in the technology. It’s been very consistent. I would say it’s — we’re going to continue executing against that. I think a few priorities we mentioned, one, continue to grow going upmarket, which includes leaning to complex services, leaning to longer engagement, leaning to the Pro side of things. We didn’t really talk too much about Pro. But that going upmarket continue to be the case. Second priority will be AI. We spent some time there. And then lastly is to drive revenue diversification, drive the — expand the product portfolio within the value-added products. I would say that will be kind of some of the product priorities going to next year. And then at the same time, we’ll be very — stay very disciplined and drive bottom line upside.
Eric Sheridan
Maybe I will ask one follow-up, even though that was kind of the last one I wanted to hit. But, Pro, you talked about it there. In terms of building scale on the Pro side of the business, what do you guys see as pretty critical I mean either the investment side or the execution side to achieve success on going upmarket?
Jinjin Qian
Yeah, I think we have kind of been doing this for about two years now, and I think we are seeing very good signals, and we kind of try different models. But what we find most effective and efficient is what I call farming, the high potential users from the very wide top of the funnel that we enjoy. And the Pro team is really good at customer segmentation and identify customers with potential than providing high touch in combination of product, whether it’s team, whether it’s a better catalog, whether it’s brief and match like better matching algos to really drive more usage. I think on Pro, on average account their spend three times to five times more compared to broader marketplace. So we find that very successful. So with the recent summer release, we also started launching out a more comprehensive loyalty program for the Pro, giving some of the 5%, some of the incentives for Pro. Think about 5% is almost encouraging buyer fees for the next transaction, right, for the customer. So we really believe there’s a lot of potential there. Like, we surveyed our customer, right, for small business they spend at least $1,500, for a medium business they spend at least $15,000 a year on freelancing services compared to our current spend of a couple of hundred dollars, there’s huge potential there, and we’re just scratching the surface. So I think we really believe that, that is going to be a strong growth driver. I mean you see it in the spend per buyer metric over the past few years already. But that will continue driving the growth.
Eric Sheridan
Okay. All right. I think we’re going to leave it there with a few minutes left. Jinjin, thank you so much for being part of the conference. Please join me in thanking Fiverr for being part of the conference this year.
Jinjin Qian
Thanks guys. Thank you, Eric.
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