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This is the first of two articles on Fiverr that you will receive over the coming weeks. The second article will be focused on the differences between Fiverr and its biggest competitor: Upwork.
A couple of weeks ago, I published a thread with some highlights of Micha Kaufman’s (Fiverr’s CEO) presentation at the BofA Global Tech Conference. This is the thread:
I liked almost everything that Micha discussed and it strengthen my conviction in the company even further.
The objective of this article is to outline all the things that I saw and liked, going a bit into detail in some of them. Although the conference happened more than one month ago I think that some of these topics should serve as a good reminder as we go into earnings season.
All of the quotes included in the article are from the conference (unless stated otherwise) so I will not include the source in all of them. You can find the full transcript of the conference here.
Without further ado, let’s get started!
What Fiverr does and how it makes money
Before getting started with the conference content itself I would like to give a brief introduction of what Fiverr does and how it makes money because I know that not all of the readers of this article are necessarily familiar with the company (I’ll be very brief, I promise).
Fiverr is a digital marketplace that allows the exchange of digital services trying to emulate how physical goods are bought and sold on e-Commerce platforms. The company generates revenue primarily from transaction fees and service fees. When a buyer orders a service, Fiverr collects the transaction value plus a service fee and then sends the seller (freelancers listed on Fiverr) the amount net of this service fee.
This is obviously a very quick summary of what the company does and how it makes money but it should do its job as a quick reminder for the article.
Let’s see what Micha Kaufman talked about during the conference.
How the pandemic helped Fiverr
The pandemic was obviously something that Micha Kaufman was asked about because Fiverr’s business clearly enjoyed significant pandemic tailwinds. This is evident if you take a look at the evolution of quarterly and yearly revenue:
Revenue jumped in Q2´20 and in 2020 overall and it’s one of the main reasons why Fiverr is seen by many investors (bears) as a pure COVID play. The rationale is that, as the vaccine is rolled out, the world will go back to in-person working and demand for digital services will subside and will go back to pre-pandemic levels. This might make some logical sense but just looking at the above chart you can see another significant jump in revenue for the most recent quarter (Q1´21) which might indicate that digital services might be stickier than what many people thought.
According to Kaufman, the pandemic did not only bring temporary tailwinds for the company, it brought permanent changes to the online freelancing industry and how people think about digital services:
I think most businesses and companies have moved into remote-only work with their organic teams. And they've noticed that this is actually a pretty viable way of working. And because of that, they've been also more open to figuring out how to integrate freelancers into that mix.
But there is something that is helping Fiverr take advantage of these obvious tailwinds: its highly efficient marketing.
The secret to Fiverr’s efficient marketing
Before digging into this section of the article, I would like to give some definitions that will help you understand it easier. Some of you may already know these definitions but I will leave them here just in case:
Organic traffic: people who visit Fiverr without doing so through a paid advertisement. These people go directly to Fiverr’s website or search directly for Fiverr on a search engine. This metric can be used as a proxy for brand awareness because strong brands enjoy high organic traffic
Performance marketing: paid marketing based on performance events such as clicks or conversion events
People end up on Fiverr.com mostly through one of the two means described above.
The pandemic brought increased awareness (both on Fiverr’s brand and the freelancing industry as a whole) and Fiverr has been doubling down on this situation. The company has been making significant investments to increase awareness even further, even getting to the point of placing an ad in the Superbowl. Here you have it in case you have not seen it:
This is an intelligent thing to do because if you put the right ads in front of the right people (people looking for alternative income sources) at exactly the right time (while most people still continue working from home) then marketing efficiency is going to increase significantly.
Think about it, you are working from home due to the pandemic, you want to start a side hustle and suddenly see an ad from Fiverr, you are most likely going to click it, right? Maybe you don’t end up signing up but at least you would give it a try. Now it’s the perfect time to double down on marketing spend because people are more likely to explore alternatives sources of income.
This increased awareness combined with higher marketing spend is attracting more traffic to the website, both on the organic and the paid side. The fact that organic traffic is also increasing allows the company to keep its performance marketing very efficient:
But we're taking that awareness wave and we've been doubling down on it, and that has created a very substantial growth on the organic side, which is great. And that also allowed us to keep our paid marketing, our invested marketing, very, very efficient.
So far the story seems to be playing out perfectly but is the story showing up in the numbers? Remember that companies can have great stories but eventually, these stories must be backed up by the numbers if you want the stock to move the way you want it to. This is indeed the case for Fiverr. If we use organic growth as a brand awareness proxy, Fiverr has a very strong brand. In the following graph you can see the company’s website traffic sources:
“Direct” traffic means that people are directly introducing the url (fiverr.com) in their browser. “Search” traffic means that people are introducing either an organic keyword or a paid keyword in a search engine and they end up on Fiverr's website. Let’s breakdown “search” traffic even further:
20% of the traffic for the website is generated through “search” and, from this 20%, almost 78% is organic (free keywords). If we combine this result, together with the direct traffic metric discussed above, we can see that more than 85% (69% + (20%*78%)) of the website’s traffic is being generated for free. Another thing to note is that more than 6% of the website’s traffic comes from social media which comes mainly from word of mouth:
More than 85% of traffic directly comes from free sources which has the effect of increasing the efficiency of paid marketing. Management calculates ROI to measure performance marketing efficiency, which is measured as:
The higher this ratio, the better, as it would mean that the company is generating revenue with fewer investments on performance (paid) marketing. This is how this metric has been evolving:
Management divides the graph by buyer cohorts and then analyzes ROI for different periods within these same cohorts. These cohorts are based on when buyers included in them joined Fiverr. Based on this brief explanation, there are several things to note:
1. Older cohorts should see this metric increase over time as they spend more revenue on the platform without the company needing to increase performance marketing expenditures. You can see this in the right section of the graph above or directly in the graph below as “old” cohorts experiencing increased ROI. This gives an indication of the quality of the product and the stickiness of the service
2. When a new cohort is included, the highest possible ROI for the first quarter is desirable
3. As the company improves its marketing strategy, the dots should be further apart because this would mean that ROI in any given cohort is improving faster in a shorter period of time. This is in fact what you can see if you look at the first graph
What management is most interested in is Time to Return On Investment (tROI). In the words of the company:
We measure the efficiency of our buyer acquisition strategy by Time to Return On Investment ("tROI"), which represents the number of months required for us to recover performance marketing investments during a particular period of time from the revenue generated by the new buyers acquired during that period.
Source: Company filings
The relationship between ROI and tROI is straightforward. As both of these metrics are quarterly measures, a ROI close to 1x means that the company is getting back the money it invested in that particular cohort in that same quarter (tROI = 3 months). This can only be interpreted in one way: the company’s performance marketing strategies are very, very efficient and buyers start spending their money as soon as they sign up.
This could also be interpreted in a different way as you could argue that Fiverr is spending less than it should on marketing. This is what Micha Kaufman said on this matter during the conference:
We gave ourselves space to spend up to a tROI of 12 months, which means that, yes, we have room to grow.
Looking at Sales and Marketing spend as a percentage of revenue I do think that Fiverr is spending enough on marketing and the “problem” is that its just extremely efficient:
Micha Kaufman said that Customer Acquisition Cost ('CAC') marginally increases as the company attracts more buyers and Fiverr will not spend money on buyers that don't provide a net positive return-on-investment:
And what we want to ensure is that the last customer that we acquire is also net positive on ROI. If they're not, we're not going to spend that dollar.
This is another reason why the company does not go on a marketing spending spree even if it is seeing that it's highly efficient with its strategy. More dollars spent on marketing could have the opposite desired effect, worsening ROI and tROI measures.
The question now becomes the following: why is the company so efficient in its performance marketing strategies? There are several reasons for this, some of which I have already talked about. One of the keys to the company’s marketing efficiency is automation:
...we also increase the efficiency of our marketing, and a lot of that has been done through the automation of our marketing.
Automation is achieved thanks to the wide range of categories that Fiverr has which enables the company to automatically shift marketing spend to lower CAC categories. This can be done because marketing cost for each category changes constantly:
When you look at the cost of acquisition across many different keywords, or categories, they differ across time. Sometimes they go up, sometimes they go down.
At the end of the day, through one category or another, the buyer is going to end up in the platform so this breadth of categories gives Fiverr a marketing advantage:
The beauty about running a truly horizontal market base with over 500 different categories, not to mention the number of sub categories, not to mention the nuanced services, is the fact that we can run campaigns on hundreds of thousands of different permutations of the services that are being offered on the market base. So something becomes expensive, we move away from it to something that is more cost effective. And since we automated the majority of this process, we can do that in real time, which allows us to always remain extremely efficient.
To summarize, the company is increasing its brand awareness which is increasing organic traffic to the website. Increased organic traffic makes performance marketing more efficient because some of the revenue generated by cohorts is organic revenue which doesn't require marketing expenditures to generate it. Performance marketing efficiency is increased even further due to automation.
Brand awareness always has the effect of making marketing more efficient but Fiverr is not messing around and is still spending significant amounts of money on it to increase this awareness even further. This is great in my opinion because the company has a huge opportunity ahead still, and now is the moment to invest.
Total addressable market
Fiverr’s total addressable market is not easily estimated at all. The company estimates its current TAM to be $115 billion:
I added the word “current” because Fiverr’s TAM is constantly increasing due to the company constantly adding categories and the digitization of the offline freelancing market. Although TAM is constantly expanding, this is not reflected in this metric because it is based on public data which is updated very slowly:
Public information is slow to update. So it's hard to give an assessment every few quarters, because the Census Bureau updates their information once every 5 years or so.
If you are familiar with Fiverr you probably know that TAM has not been updated for several quarters but as the company rolls out more categories and freelancers keep going online, this number is almost surely higher already.
I have already mentioned the expression “breadth of categories” several times and I would like to look at this more in detail.
Categories at Fiverr
All of the gigs on Fiverr are grouped under the following structure:
The 9 verticals of Fiverr are the following:
Graphics & Design
Digital Marketing
Writing and Translation
Video & Animation
Music & Audio
Programming & Tech
Business
Lifestyle
Data: added in 2021Q1
The company is well diversified across verticals, which is great. These verticals vary in size due to differences in TAM between them:
So when you look at the distribution of different verticals as a whole, they are a fair representation of their TAM. So some are going to be slightly larger than the other. It's going to be slightly larger on Fiverr as well. But no one category dominates the catalog.
Many investors think that Fiverr is heavily concentrated around Graphic Design but this is far from true, it’s just that Graphic Design has a slightly higher TAM than other categories. Going forward, the company is going to diversify even further because the number of categories is increasing fast. Additional categories are coming from two main sources:
Existing categories getting more granular. These new categories were already offered in Fiverr but they were bundled in some existing category and now they have been separated into an independent one.
Categories created from scratch.
According to management, category growth is evenly distributed across these two sources:
I would say that and I'm speaking mostly from my head, not hard data, but I would say that it's probably 50-50 in terms of the split categories that are getting more granular within the catalog versus categories that are created from scratch.
The company is introducing categories at a rate of 30 categories per quarter and reached the 500 categories milestone in 2020Q4. The breadth of Fiverr’s category is a great advantage for the company (besides the advantage for marketing discussed above) because many buyers end up in Fiverr looking for a specific category and end up expanding to other categories:
The majority of our customers are cross-category or multi-category customers. Only the minority buy in just one category. In short, we have some cases where you have a certain type of business that has a very particular type of interest within the market base. But the reality is that over time, you are going to drive even that business across many categories.
The secret of the company to introduce so many categories in any given quarter is organic supply:
The way supply comes to us 100% organically allows us to populate new categories very, very rapidly. Usually on the supply side within a matter of a few weeks, we have enough supply to start introducing that category. And usually, within a couple of months, that category is already working.
Rapid category growth is a huge advantage because it allows the company to expand its TAM by quickly adapting to new trends.
Fiverr depends on this organic supply (sellers) because if the company has many sellers then buyers will eventually come to a bigger and bigger talent pool. Truth is that these sellers don’t necessarily use Fiverr in a homogeneous way.
How sellers use Fiverr
Micha Kaufman was also asked about the objectives that sellers have on Fiverr (note that sellers can be individuals or agencies). This is obviously a complex question and giving a correct and specific answer to it is almost impossible because Fiverr is a global business that gives ample flexibility to sellers. Objectives vary widely across sellers:
But what's really interesting to understand, and this is pretty tricky when you run a large-sized market base, is understanding that different people come with different motivations to you. Some sellers have a 9 to 5 job, and this is their way to supplement their income. And for them, they would want to either work not more than 2 or 3 hours a day.
You also have to take into account that not all sellers need the same amount of money to make Fiverr their 9-5. Someone in a developing country might need much less than someone in the US to make Fiverr it’s full time job.
What’s really interesting about seller behavior is that Fiverr has an algorithm that understands the needs of the different sellers to allocate capacity accordingly:
So there are algorithms that are responsible for understanding capacity within the market.
What does this mean? On the seller side, the algorithm is in charge of distributing capacity so sellers are not overloaded so, for example, if a seller wants to work 2 or 3 hours per day, the algorithm does not send him 6 hours worth of daily work. This improves seller satisfaction as they see that Fiverr is also adapting to their needs. Seller satisfaction then spills over to buyers who are also satisfied as their requests are met by satisfied sellers in a timely manner.
Gig duration of Fiverr
Jobs on Fiverr are called “Gigs'' and the average time they take to complete is less than one week. However, this average should not be taken too seriously because it is calculated from a very wide range:
Yes, so the average number that doesn't represent anything that is on the two ends, the things are super quick, and the things that take more time. But if you look at the average, the average is definitely less than a week, it's a few days.
So this number, as much as it might sound interesting, does not give much information on the gigs that are listed on the platform. What is really important, and what Fiverr is focused on, is on allowing and encouraging longer term relationships between buyers and sellers regardless of gig duration. One of the reasons why they launched subscriptions is because it makes the process of renewing gigs smoother and it encourages longer-term relationships.
However, the fact that gigs have a short duration on average, joint with the quality of the platform allow the company to enjoy high take rates. Take rates are generally higher for short term job durations than they would for longer term.
Fiverr’s high take rates
Take rates measure how much of the value transacted in the platform is captured as revenue. Current take rate is approximately 27%, which is significantly higher than the 20% take rate with which the company launched. Higher take rates have been achieved due to Fiverr’s increased focus on scale (more categories) and added value (higher value add categories). This is a clear sign of pricing power, especially when combined with the fact that neither sellers nor buyers are leaving the platform:
Pricing power means that the service is sticky and it’s a quality service that is adding value to stakeholders.
For sellers:
Fiverr has been the first place in freelancing history where freelancers do not need to do anything to win a project. They just need to list themselves on the platform which is free. And so the time that we save them on chasing customers, trying to bid projects and end up not winning those projects, the time that we save them on chasing customers on actually collecting their payments, all that is being saved. And this creates a massive upside for sellers.
And for buyers:
It's not just the access to talent and the fact that we connect them and we do so in a very, very simple, smooth manner. But the fact that they don't need to deal with any tax forms, invoicing, different payment methods, different communication, that everything is baked into the platform.
As I mentioned before, management is working on making the platform even stickier by implementing features that encourage longer-term relationships between buyers and sellers, which is consistent with the company’s objective of making Fiverr a platform where these groups meet on a recurrent basis:
We give tools for sellers and buyers to incentivize them to work on a longer-term. We provide tools for retention, CRM for our sellers. That allows them to engage and find ways to interact with their customers on a longer-term.
Another recurrent topic when it comes to Fiverr is competition, especially competition from Upwork, but management is not focused on competition right now.
Competition is an opportunity, not a threat
Fiverr is differentiated from many other competitors in that it’s a horizontal business. In the digital freelancing space, there are many vertical businesses that have the advantage of providing very high quality on the vertical that they are specialized in but, on the flip side, they are very dependent on specific customers repeating their orders over and over again. Management does not consider these business competitors, they are actually seen as an opportunity to expand Fiverr’s verticals through acquisitions:
So the way we treat verticals is mostly as an opportunity for us as an inorganic growth. We've acquired three such businesses before. And we see that as a way to enter a new vertical or go upmarket in a certain vertical.
Other horizontal businesses such as Upwork (UPWK) compete in a more direct way with Fiverr (FVRR) but management is not currently focused on any particular competitor, they are focused on taking advantage of the shift of freelancing from offline to online. Remember that the opportunity for the online freelancing market is still huge:
Micha Kaufman thinks that the transition from offline to online will be similar to the shift of physical sales to e-Commerce:
I think the closest proxy is eCommerce. So when I look at the movement from physical commerce to eCommerce, it took eCommerce about 20 years to get to 10%, right?...And today, if I'm not mistaken, it's about 17%. That has been accelerating massively in the past 10 years. Took 20 years to get to 10%, now less than 10 years to get to another 7%. So I think that there will be an inflection point that will accelerate all of this.
It’s honestly great to see that management is focused on taking advantage of this opportunity rather than focusing on competitors because this is characteristic of a leader. The market will probably end up being huge with room for more than one winner so the efforts must be directed at running the business. In fact, although Upwork is a direct competitor, the two companies are very different in how they operate in the industry as I will outline in the article coming out shortly.
Moving upmarket
Buyers on Fiverr are very diverse and they range from individuals to large enterprises. It may sound surprising because you may not expect big customers to go to these types of platforms but the truth is that Fiverr has some big enterprise customers. These customers are not the specific target of the company and they came organically. The current focus is SMBs which make up 99% of the total market. Fiverr is not planning on changing the target right now although the door is left open for the future.
What the company is seeing in these early days is that big customers behave very differently than its most common customers:
The behavior of these customers is very different. Their spend, as an example, is 3x larger than an average Fiverr customer, right, which is great. And it's the very, very beginning of that cycle. The very beginning of that product.
More and more services of Fiverr are aimed at bigger customers but a lot of these (subscriptions, verified pro-sellers, longer-term projects) are also perfectly fit for SMBs.
I would like to finish this article with a warning so that you can adjust your expectations for future quarters!
Be careful with seasonality
2020 was not a normal year in any respect, many people turned to side hustles to earn an extra income and holiday periods were impacted by lockdowns and restrictions. For this reason, Fiverr’s revenue did not experience seasonality in 2020 and May was a strong month even though historically it had not been strong due to vacations and events all over the world.
Micha Kaufman said that this year the business is seeing a path back to normality in terms of seasonality as lockdowns are easing all over the world and people want to go on vacation:
For the first time maybe from the beginning of 2020, we're seeing a path to normality in terms of seasonality. May is a month that is known for having a lot of events around the world, a lot of holidays, the Christian world, the Muslim world. And in 2020, there were no holidays. People didn't go on vacations, they were stuck at home.
Why is this information important? To guide you in the interpretation of the results for Q2. If the company provides a lower than expected YoY revenue growth (which they probably won't) take into account that this is due to seasonality. Almost every business suffers seasonality in one way or another and knowing this will let you take advantage of post-earnings selloffs when investors who do not know this sell their shares due to “weaker-than-expected” growth.
This said, don’t expect revenue growth to be weak, this is not going to happen because the company is not going back to pre-pandemic levels and momentum is strong. This is consistent with the permanent changes that the pandemic brought to the online freelance market:
So we've said many times, we're not going into pre-pandemic levels at all. We were at the new baseline from which we're not going down.
The way to interpret this is that revenue YoY growth is going to be very strong but lower than it would’ve been during a year without seasonality.
Conclusion
Fiverr has demonstrated that it is much more than a COVID play. The pandemic changed how a big part of the population chose to work, facilitating access to additional sources of income. Fiverr is at the core of this trend which does not show signs of slowing down.
I am a very happy shareholder and I think that management execution has been flawless up to this date, making all the right moves with the objective of making Fiverr a synonym of Freelancing.
Stay well!
IQ
Disclosure: I’m long FVRR