Feb 22, 2020 (Thomson StreetEvents) -- Edited Transcript of Fiverr International Ltd earnings conference call or presentation Wednesday, February 19, 2020 at 1:30:00pm GMT

Fiverr International Ltd. - VP of Strategic Finance

Fiverr International Ltd. - Co-Founder, CEO & Director

Fiverr International Ltd. - CFO

* Bradley D. Erickson

Oppenheimer & Co. Inc., Research Division - MD and Senior Internet Analyst

Good day, and welcome to the Fiverr Q4 Fiscal 2019 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Jinjin Qian. Please go ahead.

Jinjin Qian, Fiverr International Ltd. - VP of Strategic Finance [2]

Thank you, operator, and good morning, ladies and gentlemen. Thank you for joining us on Fiverr's earnings conference call for the fourth quarter ended December 31, 2019.

Please note that this call is being webcast on the Investor Relations section of the company's website. Full details of our results and additional management commentary are available in our shareholder letter, which can be found on the Investor Relations section of our website at investors.fiverr.com. Joining me today on the call are Micha Kaufman, Founder and CEO; and Ofer Katz, CFO.

Before we start, I would like to remind you that certain matters discussed today are forward-looking statements that are subject to risks and uncertainties relating to future events and/or the future financial performance of Fiverr. Actual results could differ materially from those anticipated in these forward-looking statements. Additional information that could cause actual results to differ from forward-looking statements can be found in Fiverr's periodic public filings with the U.S. Securities and Exchange Commission, including those factors discussed under the Risk Factors section in Fiverr's final prospectus under Rule 424(b) filed with the SEC.

The forward-looking statements in this conference call are based on the current expectations as of today, and Fiverr assumes no obligation to update or revise them whether as a result of new developments or otherwise.

And now I'll turn the call over to Micha.

Micha Kaufman, Fiverr International Ltd. - Co-Founder, CEO & Director [3]

Thank you, Jinjin. Good morning, everyone, and thanks for taking the time to join us on the call today.

2019 was a fantastic year for Fiverr. We delivered 3 consecutive quarters of consistent and strong financial results as a new public company. This exceeded the aggressive goals that we set at the time of the IPO.

For the full year, revenue grew 42% year-over-year, and our EBITDA margin improved by nearly 1,100 basis points. This is even more impressive when we consider the pace of our product launches throughout the year and the scaling of operations as a public company. Fiverr is a company that delivers on its promises, and we have a solid business model with high levels of consistent buyer behavior.

The freelance economy is growing rapidly around the world. Fiverr is enabling and harnessing this momentum. Our business model is seen as a simple and beautiful 2-sided marketplace. We are a technology company at core, and we had an amazing year of product innovation in 2019. From Fiverr Learn, which directly connects learning with work opportunities, to Fiverr Studios that enables virtual collaboration among our skilled freelancers, to the recent Fiverr Logo Maker that puts the power of AI into the hands of our design community, we made some bold strategic bets that reimagine how work can be done on our platform.

User response to these initiatives have been strong, and you should anticipate continued innovation from Fiverr in the years ahead.

Our continued investment in quality, matching and improving the buyer and seller experience has also paid off. This accelerated momentum in the second half of the year. We also executed well against both our category and international expansion strategies. During the year, we launched over 100 new categories and 7 new industry stores. This served as a strong engine for pushing top-of-funnel growth and provides our existing customers with many reasons to explore our new options and return to buy more.

During 2019, we expanded our team's footprint in the U.K. and in Germany. Our marketplace has always been global. However, having a team on the ground that executes localized product and marketing strategies, combined with our enhanced ability to transact in multiple currencies, puts us into a completely different level, and we are already enjoying these benefits. As we kick off 2020, we will continue to execute on our growth strategies, growing our buyer base, going upmarket, expanding categories, innovating our products and international expansion.

We are currently focused on several areas that we are very excited about, and I would like to highlight a few of them now. First is international expansion. Until now, our website was only in English, but that is changing. A few days ago, we launched our first 2 localized sites: de.fiverr.com for German language speakers and es.fiverr.com for Spanish language speakers. This is just the beginning. What we plan to do next is to convert all user-generated content, including gig listings as well as the seller experience.

We're also going to start optimizing localized marketing to become more efficient and effective in driving local adoption. Localization is a long-term investment for us. And we are super excited about the potential market opportunities beyond the U.S. user base. I'm happy that we were able to roll out these 2 new languages ahead of what we promised.

Next is going upmarket. Today, Fiverr has over 2.4 million active buyers, the majority of whom are entrepreneurs in very small companies, with 15 employees or less. There are over 30 million SMBs in the U.S. alone. So we are barely scratching the surface. As with many disruptive technologies, we see a natural path of adoption from the bottom up. Small businesses are typically more cost-conscious and are naturally early adopters who take advantage of new technologies first. As we go upmarket, we want to expand our addressable market and extend our reach to the next tier of users, which we define as organizations of up to 200 employees.

We have invested in tackling these new buyer segments with products such as Fiverr Studios, which help accommodate larger projects; team accounts that allow larger teams to collaborate on Fiverr; Fiverr's VID program, which provides dedicated support for our high-value buyers; industry stores that grows awareness among business users and targeted performance marketing campaigns to acquire these business users. All of these products and marketing investments are geared towards growing market share among larger businesses without the need of a sales force. And you should expect to see more of this theme throughout 2020.

The next initiative I would like to highlight is Fiverr's technology infrastructure. Fiverr's mission is to change how the world works together. And our marketplace is evolving from a simple transaction platform to an ecosystem of products that bring businesses and freelancers together. You've already seen us releasing products like Learn, And Co and ClearVoice to our marketplace to help our buyers and sellers become more successful.

In 2020, we will invest in strengthening our core infrastructure so we can unlock our data assets, innovate even faster and create more synergy among our products. You will see continuing investment in proprietary quality search and catalog technology. You will also see us investing in personalization and recommendation engines.

And finally, we have made strong internal progress on promoted listings. This will be the first time we give our sellers a tool to proactively promote themselves on our platform. It is something our sellers have requested for a long time, and we believe they will be excited about the product as well. We are taking sufficient time to make sure we get this right from the user experience perspective, and I'm happy to announce that we will be rolling out the beta for promoted listings in April. The rollout of the beta of this product will be an important step in the evolution of the Fiverr marketplace. To sum up, these investments will allow for continued growth, enable more rapid international expansion and the development of new technologies in automation, advertising and collaboration.

I am very excited about 2020. We expect another strong year of growth and progress towards profitability. I look forward to our next call and to sharing our progress with you. We look forward to seeing many of our investors on the road and at the JMP Securities conference in San Francisco next week.

With that, I'm going to turn it over to Ofer, who will share with you a few highlights and our financial outlook for 2020. Ofer?

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Ofer Katz, Fiverr International Ltd. - CFO [4]

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Thank you, Micha, and good morning, everyone. We are very happy with the financial results we delivered in 2019 and the growth we are experiencing across all underlying metrics.

As Micha mentioned, full year 2019 revenue grew 42% year-over-year to $107.1 million. This was driven by 17% growth in active buyers, 17% growth in spend per buyer and a 100 basis point improvement in take rate.

The growth in active buyer and spend per buyer is consistent with the balanced approach we have spoken about before. More importantly, we saw acceleration trends in those 2 metrics in the back half of the year. The investments we've made in quality, matching and personalization are paying off. We also continued to see strong organic and paid trends at the top of the funnel. Going forward, we expect we would continue to grow active buyer and spend per buyer in balanced fashion.

Our take rate for Q4 was 26.7%, up 100 basis points year-over-year. To break it down a little more, the 26.7% take rate primarily consist of approximately 25% we charge on the marketplace transaction. The remaining contributions come from Fiverr Learn, And Co, ClearVoice and incremental revenue from currency fees on the marketplace, which we expect can continue to make modest contribution to the overall take rate throughout 2020.

Moving to expenses. In 2019, we made a significant progress on our path for profitability. Our gross margin continues to be strong and consistent at 80% level. Adjusted EBITDA for the year was negative $18 million, an improvement from the loss of negative $21 million in 2018. Adjusted EBITDA margin gained 1,100 basis points from the prior year, primarily driven by a 330 basis point improvement in R&D and 780 basis point improvement in sales and marketing.

On a full year basis, we saw a modest increase in G&A as a percentage of revenue due to IPO and public company related costs, but these costs have stabilized and showed improving leverage in Q4, a trend we expect to continue into 2020. Overall, we expect continued leverage gain across all operating expenses in 2020 narrowing EBITDA loss on both dollar and margin basis.

We are providing strong guidance for the year. We expect 2020 revenue in the range of $139 million to $141 million, representing year-over-year growth of 30% to 32%. We expect adjusted EBITDA to continue to improve to negative $15 million to negative $13 million, representing a negative 11% to negative 9% of adjusted EBITDA margin. This is an improvement of 680 basis points over 2019 at midpoint, and we intend to continue making progress towards profitability.

We expect 2020 quarterly revenues will be distributed with a similar cadence to 2019 revenue.

In Q1 of 2020, we expect revenue of $32 million to $33 million, representing 35% to 39% year-over-year growth. Q1 adjusted EBITDA guidance is negative $5.5 million to negative $4.5 million. We expect adjusted EBITDA margin to increase throughout the year, consistent with prior year pattern.

As part of our 2020 revenue guidance, we are taking the following key factors into consideration: first, consistent revenue contribution from our existing cohorts; second, organic revenue growth from new buyers through a growing network effect; third, incremental revenue from new buyers from paid marketing channels. This is based on planned marketing budget and payback efficiency consistent with historical level; and lastly, continued take rate expansion from products such as Fiverr Learn, And Co and ClearVoice.

We've been able to build a diversified business, and as part of that, we added new components to our platform with several product offerings. Some of them were introduced at the end of 2018 or beginning of 2019, which will be lapping a full year by the end of Q1 2020. We expect the impact on the overall revenue growth will be normalized starting from Q2 2020. The potential revenue impact from new products such as promoted listings, the additional gains from our continued investment in marketing efficiency, incremental revenue from global expansion efforts and potential conversion improvement from new products in our pipeline are not included in our guidance as the timing and magnitude of these contributions are uncertain.

We ended 2019 with excellent results, and the strong business momentum give us confidence in driving continued growth in 2020 and beyond. With that, I will now turn the call over to the operator to open it up for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Doug Anmuth with JPMorgan.

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Douglas Till Anmuth, JP Morgan Chase & Co, Research Division - MD [2]

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First, I was just hoping you could talk about your marketing and customer acquisition a little bit. You talked about tROI the last 2 quarters at less than 4 months. So maybe you could just expand on some of the key drivers there, in particular some of the growth in the affiliated program as well.

And then secondly, can you just talk more about how you're balancing growth and profit going forward? We've been thinking about EBITDA positive some time in 2022. Is this something you can pull forward? If you could just talk about your kind of outlook and philosophy there.

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Micha Kaufman, Fiverr International Ltd. - Co-Founder, CEO & Director [3]

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Doug, thanks for the question. So when we think about the marketing and customer acquisition, what we've really pushed during the year that has been very effective for us is the right balance of how we invest across different channels and how we use marketing automation to optimize every campaign that we're running. And that has yielded a great result, that some of that reflects in tROI that was kept very low and some in the quality of the buyers that we were acquiring. What we've done along the lines of opening new channels is pretty much doubled our affiliation program, and that has been a very successful driver for us.

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Ofer Katz, Fiverr International Ltd. - CFO [4]

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In terms of the second part of the question about growing profit going forward, I think that you've probably noticed we made a significant progress in 2019 in terms of improving EBITDA margin. It has been improved by 1,100 basis points all the way from 28% in 2018 to 17% by the end of 2019. But having said that, growth continued to be our top priority. Bear in mind that despite of the impressing financial result of last year, we are still a very young company, and we think that the TAM -- the big TAM is ahead of us.

So we've been very consistent about our commitment, but also our proven ability to increase the efficiency as we scale. We run a marketplace model with a very high gross margin and highly scalable so that we plan to continue to be committed to push for profitability in a very consistent and a steady pace as we have done in the last few quarters all the way to breakeven and beyond.

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Douglas Till Anmuth, JP Morgan Chase & Co, Research Division - MD [5]

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Okay. If I could just follow up quickly, Ofer. I think, at the end of your remarks, just talking about the outlook, you mentioned a couple of things that were not included in the guidance. Can you just repeat that? I think you said promoted listings and maybe a couple of others. I just want to make sure we got that.

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Ofer Katz, Fiverr International Ltd. - CFO [6]

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So the way we build the guidance is based on the things we know. And we have enormous community -- repeat community that keep being active in the marketplace generating a fixed stream of revenue over a very long period. Then we also know, based on historical data, how efficient is our marketing spend. And we keep -- we plan to keep the investment looking forward and bringing more cohorts on top of the existing. But we do plan to release a few product [that will help] us. Those that we have already spoken about includes promoted listings that we plan to release for beta on April, within a few weeks. Because we are uncertain of magnitude and our plan to softly release in a very -- certain categories at the beginning, we didn't include this type of product into our guidance.

Same goes to international expansion. We've just released a few days ago 2 language. It's the first time that Fiverr enabled buyers to engage and buy in different language other than English. We have, on the road map, a few additional improvement of this experience, a few more language. But yet, the guidance doesn't include impact of this type of product release.

Having said that, bear in mind that the product -- the road map of -- the product road map includes few more product, but it's too early to discuss. So all in all, I think, just to summarize, just to recap, the guidance is based on what we know and future products are not included in this aggressive plan for next year.

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Operator [7]

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Our next question comes from Ron Josey with JMP Securities.

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Ronald Victor Josey, JMP Securities LLC, Research Division - MD and Senior Research Analyst [8]

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Micha, I wanted to follow up on your commentary, and Ofer as well, just around promoted listings, what you're just talking about. With the rollout -- the beta expected in April, can you just talk about what you've seen in early testing that gives you the confidence it's ready to go in April? And then maybe any insights on the actual data, how you plan to continue to test the product to make sure it's doing what you think it would be helpful to understand just the rollout for promoted listings. And also just on the tROI question that Doug was asking, clearly, we're seeing improvement in brand awareness and the industry as a whole continues to move online. Any insights on just Fiverr's brand awareness just given the marketing spend this past year would be helpful as you perhaps reach outside of some of the major cities out there.

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Micha Kaufman, Fiverr International Ltd. - Co-Founder, CEO & Director [9]

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Ron, thanks for the question. So as to promoted listings, we've been talking about that in the previous few quarters. And I think that we shared with you that we've studied this matter and have been learning how other marketplaces have been successfully rolling out the system. And I think that based on these learnings, we have been able to develop the system internally. It is worth noting that this is going to be the first time in which Fiverr actually gives its sellers the ability to promote themselves and participate in increasing their success. And so we get a lot of excitement from the community and high interest in doing that.

And the rollout plan, essentially, is to start with a number of categories: first, test the system, but test it with real services and real sellers to see the impact and to start optimizing. I think we -- I've mentioned before that optimizing a system of promoted listings is a journey and it will take a few good quarters to get it right. And this is one of the reasons why we're not factoring any wishful thinking around that into our guidance.

As to -- I think the second question was about brand awareness. So this is an area where we've invested in 2019, including the fact that the IPO itself was a pretty big brand awareness event. And we've done brand awareness campaigns in Germany and in the U.K. And what we see is we see an increase in brand awareness that translates into organic traffic in a way that has been very successful for us. And if -- a couple of years ago, when we started doing brand awareness, we were really starting from awareness. Now a lot of our branding campaign are going down to consideration and to conversion. And that has been translating also into the efficiency of our paid marketing.

Brand marketing and paid marketing go side by side and have a strong influence on each other. And I think that what we've seen is we've seen that paid off really well and also resulting in a lot of organic activity that has to do with the virality of the service. All of that, as I've said, translated into mostly organic traffic, which is the way you typically measure brand awareness.

So getting all of that success and seeing how that was contributing to the acceleration from the first half of last year to the second half, we're seeing that momentum carried over to the first quarter of this year, which is influencing our guidance for Q1 as well.

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Operator [10]

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Our next question comes from Jason Helfstein with Oppenheimer.

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Jason Stuart Helfstein, Oppenheimer & Co. Inc., Research Division - MD and Senior Internet Analyst [11]

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I have 2. So clearly, you're seeing good marketing leverage and you've talked about that. You talked in the letter just about the expansion of the German and Spanish local websites. Will that weigh -- you talked about that being a long-term investment. Will that weigh on marketing efficiency during 2020? And just how do you think about those opportunities relative to the current marketing flywheel? And then second, what do you think is the most important factors for growth in 2020 as you think about the new products that you launched last year because there were a good amount of things that you'd put out in the marketplace?

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Edited Transcript of FVRR.N earnings conference call or presentation 19-Feb-20 1:30pm GMT - Yahoo Finance