Fiverr International Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 31, 2024

There are 13 speakers on the call.

Operator

Good morning, and thank you for standing by. Welcome to the fiber Second Quarter 2024 Earnings Conference Call. At this time, all participants are in listen only mode. After the speakers' presentation, there will be the question and answer session. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to our 1st speaker today, Qingqing Chan. Please go ahead.

Speaker 1

Thank you, operator, and good morning, everyone. Thank you for joining us on Fiverr's earnings conference call for the Q2 that ended June 30, 2024. Joining me on the call today are Micha Kaufman, Founder and CEO and Ofer Katz, President and CFO. Before we start, I'd 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 fiber 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.

Speaker 1

During this call, we'll be referring to some key performance metrics and non GAAP financial measures, including adjusted EBITDA, adjusted EBITDA margin and free cash flow. Further explanation and a reconciliation of each of the non GAAP financial measures to the most directly comparable GAAP measure is provided in the earnings release we issued today and our shareholder letter, each of which is available on our website at investor. Tivor.com. And now, I'll turn the call over to Miha.

Speaker 2

Thank you, Jinjin. Good morning, everyone, and thank you for joining us. Our Q2 results demonstrate continued strong execution and the resilience of our business. Both revenue and adjusted EBITDA came in above the midpoint of our guidance as we continue to expand customer wallet share and improve monetization. We are committed to driving profitable growth and delivering shareholder value in a fluid environment.

Speaker 2

I'm pleased to report that we have completed the 100,000,000 dollars buyback program announced in April. We remain highly confident about the long term opportunity of our business and believe our strong cash flow and strong balance sheet allow us to invest in our business while returning capital to our shareholders. I'm very excited to be here today. It has been an incredibly busy and fulfilling few months at Fiverr, culminating in the announcement of our summer product release last week. I want to thank our entire team for their hard work.

Speaker 2

The level of energy and dedication, especially in the last few weeks reminded me of Fiverr's early days when we were just a small startup. Fittingly, we are starting up a number of new ventures as we look to take our business to the next level. First is the expansion of fiber to enable freelance hiring capabilities. With the introduction of profession based catalog and the ability to initiate time based transactions and contracts, we are enabling businesses to hire long term freelancers who act as part of the team with ongoing tasks and goals. This is not an area we competed historically, but as we increasingly go up market and lean into complex service categories, it becomes essential to round up our offering.

Speaker 2

We believe it will significantly expand our direct addressable market, allowing us to open up top of funnel, specifically for traffic with long term hiring intentions. It will allow us to capture more our customers' overall freelance hiring budget. The expansion of Fiverr to a multi solution platform that enables long term hiring is also an important message to our community. In an environment where AI seems to have the potential of upend many professions, the line between human services and AI generated services is blurring. The professions based catalog puts talent at the center of the marketplace experience.

Speaker 2

To our buyer community, it underscores our value proposition in connecting them with the best human talent around the world for authentic creative work. To our talent community, the mission of Fiverr since day 1 has always been to bring them opportunities and empower their success and the commitment has not changed in the face of AI. It is our passion and responsibility to help talent navigate the changing landscape, discover their skills and translate them into a career. Earlier this month, we unveiled our first ever breakthrough achievement recognition to celebrate freelancers who have achieved significant earning milestones on fiber. It is extremely rewarding and inspiring to see people making 1,000,000 or even 5,000,000 throughout our platform by just doing what they love.

Speaker 2

Whether you're a musician or scriptwriter or Shopify expert and no matter where you come from, it is all possible on fiber. The second theme of our summer product release is deepening the integration of Neo, fiber's AI tool throughout the market based experience. As Gen AI applications quickly shift consumers' Internet behavior and expectations, we want to stay ahead of the curve to build a more personable experience on fiber. At the same time, tests and data in the past 6 months have shown that not everyone prefers the outright chatbot experience when it comes to shopping. So our strategy for Neo is to incorporate it as an assistant throughout the funnel to help customers when friction arises.

Speaker 2

For search, Neo provides the guidance you need to navigate fiber's massive catalog of services and talent, and it is trained to understand customers' past transactions and preference to provide the most relevant recommendations. When it comes to project briefing, having Neo is like having a strategist by your side. It transforms customers' ideas into a structured brief document that not only looks good, but also delivers better business results. Neo can also help customers write more detailed reviews faster by generating content based on transactions and providing language assistance. We are in the early innings of unleashing the full potential of AI in our marketplace And we believe it will be a multiyear tailwind for us to drive product innovation and growth.

Speaker 2

Lastly, I want to say a few words on the acquisition of AutoDS. For us, the deal is strategic for a number of reasons. Fiverr was founded on the belief that everyone should have the opportunity to find financial independence. The creator economy is the epitome of this community. And competitively, we have a strong foothold in this segment.

Speaker 2

We are passionate about continuing to support and empower this community. Like the Fiverr Millionaires that I've mentioned earlier, there is something emotional gratifying in witnessing and contributing to their amazing stories. Secondly, while drop shipping is not exactly a new business, with the rise of fast fashion e commerce sites like Temu and Shein and the continued strength of social media, we are seeing drop shipping related categories experiencing tremendous growth on fiber. That includes Shopify development, e commerce management, video ads and UGC videos to name a few. We believe the deal can create many synergetic opportunities for us to lean into growth.

Speaker 2

Lastly, in alignment with our expansion to a platform play, we are taking the opportunity to fold in new subscription based revenue stream with strong synergy and growth potential. This will add to our value added product portfolio, which includes Promoted Gigs and Seller Plus and further strengthen our business overall financial profile. To wrap up, we are expanding our business from a simple market base to a complete freelance talent platform for businesses of all sizes. We are also diversifying our business model to capture customers' freelance spending and provide them with multiple value added products and software solutions. We continue to operate at the highest level of discipline to drive consistent margin expansion and free cash flow generation.

Speaker 2

We are committed to profitable growth, robust free cash flow and a disciplined capital allocation strategy that aims to deliver long term shareholder value. With that, I'll turn the call over to Ofer, who will share some financial highlights.

Speaker 3

Thank you, Micha, and good morning, everyone. We delivered another strong quarter of results. Revenue for Q2 was $94,700,000 up 6% year over year, above the midpoint of our guidance. Adjusted EBITDA was $17,800,000 near the top end of our guidance and representing an adjusted EBITDA margin of 18.9%. Importantly, adjusted EBITDA margin increased by 180 basis points year over year, which underscore our commitment to driving steady, measurable operating leverage.

Speaker 3

We remain confident in our ability to achieve a 25% long term adjusted EBITDA margin in the next 3 years. We also continue to generate impressive cash flow. Operating cash flow was $21,000,000 up 11.9 percent year over year. Free cash flow was $20,700,000 representing a 12.5 percent year over year increase and free cash flow margin of 21.8%. This results in a strong balance sheet, which we intend to use to increase shareholders' value through a prudent capital allocation strategy.

Speaker 3

As Micha mentioned, we have completed the €100,000,000 share buyback, which was authorized in April, and we are committed to optimizing our capital allocation strategy to deliver shareholders' value. Over the next 3 years, we expect to continue growing free cash flow generation with a CAGR in the mid teens. There are multiple ways we can get them. But as I often say, we always model based on what we know. Based on our line of sight to date, we expect to achieve this through steady revenue growth, continued margin expansion, strong free cash flow generation accompanied by active share count management.

Speaker 3

Unpacking our Q2 results, we continue to see our strategy of going upmarket work really well with spend per buyer showing a robust growth of 10% year over year. We also see AI continuing to have a net positive impact on our business. It is important to know that we are starting to see stabilizing and improving trend in simple services. As we mentioned in prior quarters, we believe the low end transaction within the Simple Service categories were getting impacted the most, As the mix shift within those categories improved towards the higher end, we believe the overall durability of those categories shall improve over time as well. There are also certain metrics in Q2 that didn't perform as strongly as we had anticipated.

Speaker 3

Active buyer was 3,900,000 down 8% year over year and overall GMV decelerate in Q2. Both were impacted by a slowdown in traffic started in June as the scent we saw in the earlier part of the year proved to be more of a pull forward rather than sustainable turn of trend. These trends serve as a reminder for us that we are still in the middle of macro cycle where higher inflation and interest rates impact the immediate cash flow of small businesses, erode their confidence in spending as they try to preserve more cash and delay large projects for potential rainy days ahead. As we enter into the second half of this year, we are expanding our product portfolio both organically and inorganically to create additional growth catalysts as Micha covered extensively in his remarks. Our seller monetization program such as Promoted Gives and Seller Plus continued to show strong growth momentum and the addition of AutoDS will further strengthen our overall take rate.

Speaker 3

We believe these efforts will keep us on track to deliver the targets we set at the beginning of the year. For the full year 2024, we are raising the bottom end of our guidance and now expect revenue to be in the range of $383,000,000 to $387,000,000 representing Eurobeveril growth of 6% to 7%. We are seeing the volatility in June continue into July, and we anticipate Q3 revenue growth to be relatively muted. We expect Q4 revenue growth to improve as the continued product development and the addition of the AutoDS creates additional growth catalysts. In terms of underlying drivers, we now expect active buyer to decline slightly, more than we previously anticipated and spend per buyer to continue growing at our bus pace.

Speaker 3

We now expect the take rate to increase by approximately 250 basis points as we continue to expand our value added product portfolio. For adjusted EBITDA, we expect full year 2024 to be in the range of $69,000,000 to $73,000,000 representing an adjusted EBITDA margin of 18.4% at the midpoint. We are confident that we can continue making steady and consistent progress on our adjusted EBITDA margin to reach 25% by the end of 2027. With that, we'll now turn the call over to the operator for questions.

Operator

Thank And now we're going to take the first question and it comes from the line of Ron Josey from Citi. Your line is open. Please ask your question.

Speaker 4

All right. Thanks for taking the question, guys. So I wanted to ask about the product and then maybe a little bit more about just broader visibility. So on the product, look, I think it's really fascinating to expansion to a broader marketplace with a hiring platform. And so specifically, Micha, I wanted to hear a little bit more about the benefits of MEO as it relates to conversion rates and then insights on overall launch plans to have it fully integrated in it.

Speaker 4

And as we also think about the product, I'd love to hear more from a professions based catalog, just how you see demand and supply evolving on the marketplace over time as you bring everything together and become more of that hiring and marketplace platform? And then just a little more details on the macro volatility, the pull forward early in the year and then June, July comments. Was this just a change that happened in June, July? And as interest rates maybe come down, Any insights on maybe when we might see some stability here? Thank you.

Speaker 2

Good morning, Ron. Thanks for the questions. I'll try to take them by order. So the first one was I think about the product release and specifically about Neo. So essentially, I think as I've said in my opening comments, the possibility of actually using AI to make our product better, it's pretty much endless.

Speaker 2

And we're in the very early stages of doing that. And the experimentation that we've done with Neo as a personal assistant within the inbox, which is the which was the first version of doing it, taught us a lot about how our customers were actually using it and how it improved the conversion in briefing. It allows buyers to complete and it leads to higher conversion as a result. And so the idea here is that we're graduating Neo to get out of the inbox and essentially being integrated in all of our experience. Right now, it's being rolled out gradually because we want to test its accuracy and performance.

Speaker 2

But essentially, you can find it as a personal assistant throughout the experience. So it allows customers to search better, to be more accurate about their needs and as a result gets much higher quality match. But it also has awareness about where it exists. So if you're looking at a specific page, you can ask it questions about that page. So it helps people make decisions and get to what they're looking for better.

Speaker 2

The same goes with the integration in briefing. If customers have a brief pre made, then they can just upload it and we help make that brief even better. But if they don't, then the technology that is behind Neo actually helps them write a better, more accurate brief. And again, as a result of that, get matched with a much more specific cohort of potential talent that can do the job. So essentially, it's a big part of our summer release.

Speaker 2

We're very happy on how it's progressing. As a new technology, as we scale it up, it takes a little bit of time, but we're in the process of gradually opening this up for more customers? 2nd question was about the profession based catalog. So essentially, one of the things that happens in this idea of graduating from a market base to a platform is historically Fiverr was just a market base for predefined services. But those services are being offered by professionals.

Speaker 2

And we've noticed that a lot of the a lot of our customers when they search for something, they do not necessarily search for a specific service, but they do search for a specific talent. And as a result of that, we created a new catalog that is very much focused on talent, skills, professions rather than specific services. And again, it allows customers to be more naturally matched with our talent. If you connect this with new contracting forms like the possibility of paying based on hourly rates, then that completes or upgrades enhances the platform and the possibilities of customers to actually be engaged with talent. I think your last question was about what we're seeing with macro.

Speaker 2

I think as Ofer mentioned, we've seen some volatility during June. First, macro environment continues to be challenging in terms of SMBs and the sentiment of hiring. And I think that there's a few stats that are worth calling out here. So we have the small business index that continues to linger at the lowest levels in a decade. You have the job openings that are down 7% year over year and in the tech sector specifically they're down 17% year over year And you have professional staffing that is tracked through staffing hours that is also down 7% year over year, which is slightly worse than it was a year ago.

Speaker 2

So all in all, when you think about the hiring space, the hiring space is not seeing its brightest moment right now. In addition to that, what we've seen during June was some slowness in top of funnel traffic for us across the platform. So I think that's from a matrix perspective, it's more visible in terms of impact on active buyers and less on spend per buyer. And spend per buyer has been growing pretty aggressively double digit. And the efforts that we're doing in going up market continues to pay off.

Speaker 2

And from a category's perspective, we're seeing some more volatility among larger projects, which is something new. And I think that this tells more than anything else that what we're seeing is something that we can't call a steady trend. Right now, the market is a little bit volatile. Some of it is seasonality, some of it is AI in some categories, some of it is just macro. But in reality, we see among larger projects, we've seen some more volatility.

Speaker 2

At the same time, we're seeing some more stability on simple projects, which is slightly different than what we've seen in the 1st few months. So we're just calling out those facts. It's hard to call them a trend at this point.

Speaker 4

Thank you, Michael. Very helpful.

Speaker 2

Thank you.

Speaker 5

Thank you. Now we're going to

Operator

take our next question. And the question comes from the line of Bernie MacTiernan from Needham and Company. Your line is open. Please ask your question.

Speaker 6

Great. Thanks for taking the questions. Maybe just to start, I'd love to dive into auto DS a little bit more and just learn maybe what capabilities that the acquisitions bring that you didn't have before or for its customers and probably most importantly, how it's supposed to impact the financials in the second half of the year? And then I think based on the commentary of the take rate being up 2.50 basis points this year, it implies GMV down year over year in the second half of the year. So just wanted to make sure I was triangulating that right.

Speaker 6

And then I know it's early, but how to think about if we should be expecting in your view, reacceleration in 2025 or not? Or just given the comments of the 27 targets involving strong revenue growth, just maybe the puts and takes in getting there in terms of your thoughts in terms of the ability to continue to expand the take rate, how M and A could play in that, but also importantly GMV growth?

Speaker 2

Good morning, Bernie. Thanks for the questions. So AutoDS, essentially, I think as we said in the opening comments, drop shipping is a category that has been on fiber for many, many years and we've been witnessing a lot of growth in this category. I've been saying in previous quarters that fiber has identified a number of faster growing categories in which we intend to double down. And in some cases, it's doubled down organically and in some cases, there's an opportunity for inorganic growth as well.

Speaker 2

So we had a very sizable community of people that are either drop shipping or offer services related to drop shippers. And what we're doing with the addition of AutoDS is expanding this space also into the software solution. So that allows us to really double down and accelerate. AutoDS is practically in the software space related to drop shipping is the number one player in the world. It's a fast growing company.

Speaker 2

We love the team. It's extremely synergic with our business for a number of reasons. It allows us to double down on drop shipping, e commerce, social media, user generated content and video categories, which as I've said, some of the fastest growing categories on Fiverr. It's a community that we know very well and feel very strongly about. And I think competitively, it allows us to extend our offering and grow this further and also add to the value chain by providing more products for them.

Speaker 2

It's a community that is in many ways rooted in fiber's origin and we're very passionate to empower them. We talked about this idea of the fiber millionaire award. And this connects really to self made people, people that have built their businesses and are able to grow it. And lastly, I think it creates a diversified revenue stream, adding its subscription base, which is another step towards making our business, not just the market base, but also platform that provides freelancers with software solution on top of access to opportunities.

Speaker 3

I think the second part of the question is relates to take rate and impact on financials. And I would start by saying that we are happy and proud to end Q2, but consensus both for revenue and EBITDA. And with the confidence to reiterate the guidance for the year, both on revenue with a slight increase in the bottom range, reiterating the EBITDA. And I think this takes into consideration the fact and Michal, you referred to what Nif has said earlier about June July weakness, result in weak joining of new buyer, of active buyer compensated both by central buyer growing on double digits and take rate extension.

Speaker 4

And I

Speaker 3

think that looking on center buyer, center buyer is has our robust growth because we're investing in going upmarket for some time. It's a majority of investment with the add on of the summary list. Hourly rate features that we didn't have before, loyalty program. Those type of features allow us to double down on the community with a bigger wallet and increase the engagement relationship experience to a new level. And the second part that compensate on the active buyer is the take rate.

Speaker 3

And take rate has expanded over the last few years with new features that we have added alongside the marketplace. Going all the way back with Promoted Gigs and then Seller Plus. And I think the AutoDS falls into the same bucket, allowing our community to further utilize our offering to make money. And by having said that, we anticipate that the integration of the community will take some time and then the benefit of the AutoBS will fall into the take rate with much of the opportunity ahead of us. You asked about 20252027.

Speaker 3

I think that we put some time lines to the 25 percent EBITDA in 2027. This is based on the assumption that we continue to grow and continue to improve EBITDA. I think that's what we've been doing ever since. There is no step function or hockey stick. It just about continue to do what we are doing and make sure that the fundamentals continue to work.

Speaker 6

Great. Thank you, Mohammed.

Speaker 5

Thank you. Now we're going

Operator

to take our next question. And the question comes from the line of Jason Helfstein from Oppenheimer and Co. Your line is open. Please ask your question.

Speaker 7

Hi, this is Steve Hohmann on for Jason. So just one question on the consolidated take rate. So where do you see the ceiling on take rate over time kind of long term as you kind of look towards that 2027 target or the 2027 targets you put out today? Thanks.

Speaker 2

Hey, Jason. Thanks for the question. So essentially the if you think about the 2 parts of take rate, there's the transactional portion of it. And then there's the added value services and products that we offer to our community. The transactional portion of it hasn't really changed.

Speaker 2

And the growth that we're seeing is coming from the value added products. So we haven't capped this. For as long as we can continue generating products that our community loves using and thinks that they're worth spending, we'll continue doing that. And we have quite a few in the pipeline. And therefore, we haven't capped it.

Speaker 2

And the transactional portion has pretty much remained the same. So that's how we're thinking about this.

Speaker 7

Great. Thank

Speaker 5

you. Thank you. Now we're going

Operator

to take our next question. And the next question comes from the line of Doug Anmuth from JPMorgan. Your line is open. Please ask your question.

Speaker 2

Great. Thanks so much for taking the questions.

Speaker 8

I just wanted to talk more about the summer product release first, the hiring of long term freelancers. Micha, maybe you can just talk about what you've seen here in terms of demand from buyers just as you've built this product and kind of the drivers behind it? And then how we should think about monetization? Is it still project based or is there a different revenue structure there? And then, Ofer, just on the full year outlook, maybe you can just talk a little bit more about what drives the confidence in the 4Q revenue acceleration?

Speaker 8

Thanks.

Speaker 2

Good morning, Doug. Thanks for the question. So as to the summer product release, as we go up market and as we become more for our customers, they can envision doing more with us. In some cases, so when you think about the predefined catalog of services, in some cases, it's very hard for customers to define their need in the format of a well defined service with a beginning and an end. In some cases, when they need to hire talent, all they know is that they need a highly qualified graphic designer for 3 months because they have a variety of projects.

Speaker 2

Some of them they're not even aware of what their specifics are, but they know that they have a lot of pressure right now and they need talent for the next couple of months. When that is the case, the best way of doing that is not necessarily going through the gig or services catalog, but rather to find the right talent and engage in an ongoing arrangement, which is why we created this mechanism. Now it's not competing with the services because when you know exactly what you need and that is well defined and it has a beginning and an end, It's very easy for our community. They're very accustomed to providing the transparency and clarity of having a predefined scope of work where you know how long does it take and exactly how much it's going to cost. But these are the more variable tasks, the more variable ongoing projects.

Speaker 2

And so both the community from the supply side and the demand side have been asking for this. And we're happy to get to the maturity of extending our marketplace into this platform idea that really allows multiple ways of engaging with talent and multiple ways of contracting and paying to talent. So we just launched it. The community is highly, highly excited about this. Obviously, we're seeing a lot of transactions coming into the system already.

Speaker 2

But since it's been about a week, there's no numbers that we can talk about at this point.

Speaker 3

The second part, Doug, of the question was about the confidence in Q4 revenue. I think the confidence is based on what we are seeing, products that we have released and numbers of potential spend of bio growth and active bio. I think that the current guidance implies more muted growth for GMV this year. And from a prudent standpoint, we haven't taken into account any impact from product release. We do think that professional catalog and time based contracts open up a whole new world with super funnel traffic.

Speaker 3

Historically, we haven't compete in this area at all. So there's definitely a potential to drive additional GMV uplift in the second half. So all in all, when we build the model based on what we see, we think that the add on of the AutoDS later this year to our audience will have a positive impact on top of everything that we are doing internally. And the sum all is a nice exit rate for this

Speaker 2

year. Got it. Thank you both.

Speaker 5

Thank you. Now we're going

Operator

to take our next question. And it comes from the line of Andrew Boone from GMP Securities. Your line is open. Please ask your question.

Speaker 9

Good morning. Thanks so much for taking my questions. Micha, you've been fairly clear that AI has been a net positive. But can you talk about what you're seeing on the simple tasks and whether there's a path to underlying stabilization for those categories? And then secondly, as you transition from the marketplace into more of a platform with software solutions, how should we expect that to manifest going forward?

Speaker 9

It sounds like AutoDS is going to be operating independently. How do you think about the synergies? And then how do you build out more software solutions? And what's the obvious adjacencies that you're seeing there? Thanks so much.

Speaker 2

Good morning, Andrew. Thanks for the question. So starting with AI. So essentially AI continues to be net positive for us. We're seeing stabilizing and improving trends on simple services.

Speaker 2

We mentioned in the past that AI is impacting low ticket size job mostly. So we continue to see improving trends on simple overall mix of projects. So the overall mix of projects shifts towards higher end skill. Now several quarters in, we are actually seeing that in our we're seeing this in our data. So for example, writing and translation as a vertical, is the vertical with the biggest exposure to AI impact.

Speaker 2

In Q2, we're actually seeing traffic in that vertical improved 10 percentage points in terms of year over year growth rate compared to Q1. And on complex services, they're still growing much faster than simple and neutral categories, but the growth rate has moderated recently due to the volatility that we've been speaking about in June July. That said, with us now opening professions catalog and R and D contracts, this will open up new funnels and create growth opportunities, especially for complex services categories. And remember that we have over 700 categories. So our exposure to specific categories is relatively low and seasonal trends in categories spend are a regular thing in our line of business.

Speaker 2

When we think about the overall mix, complex is in the mid-30s of GMV and simple is about 20%. I would be careful about calling anything we've spoke about on June and in July a trend, because it's very hard to see stable things. Things seems to change over the year. And as I've said, there's many reasons why that is. And I would wait before we can actually quote at the trend.

Speaker 2

The second question was transition to platform. Okay. So essentially, when you think about the progression, the way we have developed over the past couple of years, we started from being a gig market base, where there is very well defined services with timing and price associated with them and people can just come in and order. Over the years, we've been offering a long list of or a multi solution building a multi solution platform where our customers can actually engage in a multitude of ways with the talent on the platform depending on their needs. And what we're trying to do is we're trying to fit the solution with the right need.

Speaker 2

So what we've been doing with Cyber Pro and Cyber Enterprise, what we've been doing with project management, success management, the addition of agencies into the platform, Fiber Pro, now the professions and the hourly based contracts, all of that completes a platform with multi solutions for our customers' needs. On top of that, we have software solutions for specific needs that could be either our sellers or our buyers depending on the solution and AutoDS is a part of this. So as I was saying in the beginning, dropshipping is a very lively, well growing category for us by adding not just the community of AutoDS, but their software solution because this is what they are. They are a platform that solves all the needs of dropshippers. We're able to enjoy those synergies, offering software to our dropshippers and our freelancers and offer freelancing solutions and creative solutions for dropshippers that have the software, but need help in managing their stores and growing their businesses.

Speaker 2

This together makes it highly synergic.

Speaker 9

Thank you.

Speaker 5

Thank you. Now we're going

Operator

to take our next question. And the question comes from the line of Matt Farrell from Piper Sandler. Your line is open. Please ask your question.

Speaker 10

Thanks, guys. Impressive free cash flow generation in the quarter and congrats on completing the buyback. For the $300,000,000 of free cash flow over the next three quarters, should we be thinking about all of that being deployed in some way just given where your balance sheet is today? And is the preference for continued buybacks or more M and A?

Speaker 3

Matt, should I assume you meant 3 years, dollars 300,000,000 or Yes.

Speaker 10

The $300,000,000 over the next 3 years, yes.

Speaker 3

All good. So I thought maybe you know something, I don't know. But I think we laid off the capital allocation priorities in the shareholders' return, pretty extensive. I will name it now, but again, it's pretty extensive details in the show, the letters. The way we see the capital allocation goes from investing product to drive growth.

Speaker 3

That's something that we've been doing for a while and we'll continue to do because we think the TAM is ahead of us. There's a lot of opportunity to capture. The second goes to optimize balance sheet and cash flow generation. I think a quick look into our balance sheet today. So we have a little bit over EUR 700,000,000 of cash and cash equivalent.

Speaker 3

And this is after we have completed the $110,000,000 buyback. So this $700,000,000 allows us a lot of flexibility and also making sure we have enough liquidity to pay off if needed the convert end of next year. And then if there is an opportunity for the value of the shareholders to do some more share buyback, If price is attractive, we may consider that. And lastly, it's M and A. We've been opportunistic in the past and plan to continue and seek for alternatives for us to grow inorganic by M and A.

Speaker 3

You need to take into consideration that on top of the $700,000,000 we are generating free cash flow every approximately $18,000,000 But as we look forward, we're pretty positive and confident from cash point standpoint.

Speaker 11

And I

Speaker 3

think we intend to strategize our cash usage with the goal of driving steady and consistent free cash flow per share in the next 3 years. As we mentioned in the prepared remarks, with the current line of sight, we believe we can drive CAGR of 14% in free cash flow for the next 3 years and a similar trajectory for free cash flow per share.

Speaker 10

Thanks. And maybe just one more. You mentioned not competing in the new long term freelancer category until the recent product announcement. First, is there a way to size how big this opportunity is relative to the part of the market that you've been going after historically? And second, do you have to change your go to market strategy at all to compete in this new area with what I would assume to be a different set of competition to some degree?

Speaker 10

Thanks.

Speaker 2

Yes. So I think when we look at this, as we go up market, this opens up the ability to have a significantly larger ticket size projects that are by definition more longer term or resemble more long term freelancer hiring. And as a result of that, that has a number of implications. 1, it allows to increase the top of funnel traffic because it allows us to get into more relevant keywords. As we invest in the profession catalog, it allows us to exist also on keywords that have to do with specific skills and not only on services.

Speaker 2

And lastly, also on conversion, it provides a way for buyers to search talent and initiate time based contracts without having full scope and as a result get into a more ongoing engagement. These are the types of engagements that fiber wasn't a part of. When you think about this competitively and what does it do to the market, we still think that the vast majority of opportunity is offline. It doesn't reside in specific marketplaces or platforms, but it is actually pretty scarce, widely spread either in directories or in offline ways of engagement. And we think that this is where the opportunity is in bringing that offline activity to the online.

Speaker 2

And this is why it is important for us to invest again to create this opportunity for top of funnel relevant keywords to create more opportunity for new business traffic coming into fiber?

Speaker 5

Thank you. Now we're going

Operator

to take our next question. And the question comes from the line of Mavin Fong from BTIG. Your line is open. Please ask your question.

Speaker 12

Hi, good morning. Thanks for taking my questions. Just a couple for me. Just so curious on the volatility fall in June and continuing into July. I know you said it was kind of across the top of funnel.

Speaker 12

But could you kind of speak to the larger businesses on your platform? I think in the past you've referenced like the TikToks and Deltas of the world. I mean, the larger organizations, are you also seeing this level of volatility, or is it isolated to SMB? And then secondly, I know you referenced in your shareholder letter that Promoted Gigs and Seller Plus continue to do well. I'm just wondering if you could just drill a little deeper on that.

Speaker 12

I think in the past you've given us some growth rates, but anything more you can share just on your view of that in the context of the choppiness we're seeing, freelancers leading into these type of services to grow their businesses even more, That'd be helpful. Thanks so much.

Speaker 2

Thanks, Marvin. I'll answer the question. So the when we look at our larger customers, that segment is growing faster than the rest. So yes, when we think about macro, macro does influence smaller businesses more. It should be said though, and we called out that, for example, one of the things that were surprising that volatility is that categories like programming and technology, which are always growing or a little bit more volatile during that period of time.

Speaker 2

And again, I think I called out a number of statistics on professional hiring that I think are troubling and are saying that there is an impact of macro. That said, it is mostly top of funnel, meaning, what you see is reduced levels of top of funnel traffic. Now this doesn't necessarily touches our existing customers. Actually, if you think about it and you look at cohort behavior, actually we're seeing cohorts behave better than before. And I called that in previous earnings and that hasn't changed, meaning that newer cohorts are spending more on their first purchase, 1st month, Q1, 1st year.

Speaker 2

And we're seeing those trends. So it's less of a volatility of existing customers and those larger customers that work with us in most cases only extend the scope of work that they do. And yes, it is impacting SMB more than that. I think the second part of your question was about promoted gigs and seller growth.

Speaker 12

Yes, just like your value added services and just stuff.

Speaker 2

Yes, they're doing well. And I think I said in the previous earnings when we gave a little bit more color in the form of actual number of growth, I said that there's a very nice road ahead for continued growth in both of these programs. And that continues to be the case, right? Sellers are very eager to get in. And obviously, these are in some cases, these are programs that are not open to all of them.

Speaker 2

The reason why they love using these products is it does create more income. It does create more value, more transparency, more analytics into their business. So we continue to create more ways for them to enjoy it, in promoted gigs, increasing real estate, in seller plus. In part of the summer of these, we talk about starting to build a kickstarter program that would provide more value to actually newer sellers, meaning it will help them start selling much faster and help them grow their business. So there's plenty of road ahead and we're not close to consuming the maximum potential of these programs.

Speaker 12

Thanks a lot, Mihai, and over. Appreciate it. Thank you.

Speaker 5

Thank you.

Operator

And the last question for today comes from the line of Rohit Kulkarni, ROTH Capital Partners. Your line is open. Please ask your question.

Speaker 11

Hey, thanks for taking my question. A couple of them, I guess, like looking ahead, it feels like GAAP profitability is not too far in the future for you guys. Maybe talk about once you turn GAAP profitable, how does that change your philosophy of running the business? I see you already have put out bullish kind of free cash flow generation potential, but just it feels that the model brings us to GAAP profitability by end of this year and every quarter going forward. So would love to get your take on that.

Speaker 11

And then in terms of this June, July trends, I know a lot has been asked and you've shared quite a few things. Perhaps, again, asking you guys a hard question, what gives you confidence that this volatility does not linger into August September? Any leading indicators that you would point us towards?

Speaker 3

I'll take the first part on the GAAP. So as we usually take and guide on long term EBITDA and free cash flow less than GAAP, but we have turned into GAAP profitability already. So that's a good news. And as we look into the future, we anticipate that the gap between the EBITDA and GAAP is going to decrease because of the share based compensation that we are carrying from 2021. So that within a 12 month ahead of us, what we anticipate is that the share based compensation is going to be reduced from 18% of revenue as of now to 13%, which is pretty much in the range of the industry And GAAP EBITDA will grow side by side with EBITDA.

Speaker 3

I think we set the EBITDA target, the long term target to 25%. We now gave it a time line of 2027. Free cash flow follow EBITDA. And I think that now that we are GAAP positive, I think we'd see improvement in GAAP income profitability over the next few quarters.

Speaker 2

And the next question about June July trends. No, it should be said, as I said that it's hard to call them a trend. There is some volatility and that volatility is something that the guidance take into account. It does take into account that it's continuing into July and potentially impact on the second half of the year. Hence, the updated color around active buyer.

Speaker 2

At the same time, spend per buyer take rate going up, which we think is going to cover it. And I mean, the volatility might be influenced also as you think about how the year will continue to progress on decisions about the interest rates and the outcome of the election in the U. S. So obviously, we're not profits and it's very hard to know. But since we've taken into the guidance the possibility of this volatility continuing, but the confidence that we have on the spend per buyer intake rate, we believe that we're going to cover it.

Operator

Thank you, Rohit. Now I would like to hand the conference over to your speaker, Micha Kaufman, for any closing remarks.

Speaker 2

Thank you, Nadia, for moderating the call today, and thank you, everyone, for joining us. We're looking forward to seeing you in person very soon during the quarter. Thanks so much and have a great day.

Operator

This concludes today's conference call. Thank you for your participation. You may now all disconnect. Have a nice

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Earnings Conference Call
Fiverr International Q2 2024
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