Online freelance marketplace Fiverr (NYSE: FVRR) reported results in line with analysts' expectations in Q2 FY2023, with revenue up 5.15% year on year to $89.4 million. The company also expects next quarter's revenue to be around $91 million, roughly in line with analysts' estimates. Fiverr made a GAAP profit of $227 thousand, improving from its loss of $41.9 million in the same quarter last year.
Fiverr (FVRR) Q2 FY2023 Highlights:
- Revenue: $89.4 million vs analyst estimates of $89.3 million (small beat)
- EPS (non-GAAP): $0.49 vs analyst estimates of $0.37 (31% beat)
- Revenue Guidance for Q3 2023 is $91 million at the midpoint, roughly in line with what analysts were expecting
- The company reconfirmed revenue guidance for the full year of $361.5 million at the midpoint
- Free Cash Flow of $18.4 million, up 39.4% from the previous quarter
- Gross Margin (GAAP): 82.5%, up from 79.4% in the same quarter last year
- Active Buyers: 4.2 million, in line with the same period year ago
Based in Tel Aviv, Fiverr (NYSE: FVRR) operates a fixed price global freelance marketplace for digital services.
Fiverr operates a global digital services marketplace in over 450 categories including graphic design, digital marketing, translation and programming. The company operates in over 160 countries, with roughly 2/3rds of its business taking place in English-speaking countries.
The value proposition for buyers of “gigs” is multi-part: access to an expansive catalog of digital services and a diverse pool of freelancers, price certainty for clearly defined services, and the knowledge that Fiverr will regulate any disputes between buyers and sellers of services.
For gig sellers, Fiverr provides an audience and digital storefront to list their services. By reducing the need to source a pipeline of new projects, freelancers can focus on execution. The fixed price element removes the need for negotiating with buyers. Fiverr also provides the business support infrastructure for freelancers, such as standardized contracts, invoicing and payment, financial reporting, marketing and real-time performance feedback along with a customer support function.
The iPhone changed the world, ushering in the era of the “always-on” internet and “on-demand” services - anything someone could want is just a few taps away. Likewise, the gig economy sprang up in a similar fashion, with a proliferation of tech-enabled freelance labor marketplaces, which work hand and hand with many on demand services. Individuals can now work on demand too. What began with tech enabled platforms that aggregated riders and drivers has expanded over the past decade to include food delivery, groceries, and now even a plumber or graphic designer are all just a few taps away.
Fiverr (NYSE:FVRR), competitors include Meta Platforms (NASDAQ:FB), Upwork (NASDAQ:UPWK), Microsoft’s LinkedIn (NASDAQ:MSFT) and privately held Freelancer.
Sales Growth
Fiverr's revenue growth over the last three years has been impressive, averaging 40.3% annually. This quarter, Fiverr reported mediocre 5.15% year-on-year revenue growth, roughly in line with what analysts were expecting.
Guidance for the next quarter indicates Fiverr is expecting revenue to grow 10.2% year on year to $91 million, in line with the 11.1% year-on-year increase it recorded in the same quarter last year. Ahead of the earnings results, analysts covering the company were projecting sales to grow 12.4% over the next 12 months.
Usage Growth
As a gig economy marketplace, Fiverr generates revenue growth by expanding the number of services on its platform (e.g. rides, deliveries, freelance jobs) and raising the commission fee from each service provided.
Over the last two years, Fiverr's active buyers, a key performance metric for the company, grew 9.81% annually to 4.2 million. This is decent growth for a consumer internet company.
Revenue Per Buyer
Average revenue per buyer (ARPB) is a critical metric to track for consumer internet businesses like Fiverr because it measures how much the company earns in transaction fees from each buyer. This number also informs us about Fiverr's take rate, which represents its pricing leverage over the ecosystem, or "cut" from each transaction. 
Fiverr's ARPB growth has been decent over the last two years, averaging 7.47%. The company's ability to increase prices while growing its active buyers demonstrates the value of its platform. This quarter, ARPB grew 5.15% year on year to $21.28 per buyer.
Pricing Power
A company's gross profit margin has a major impact on its ability to extert pricing power, develop new products, and invest in marketing. These factors may ultimately determine the winner in a competitive market, making it a critical metric to track for the long-term investor. Fiverr's gross profit margin, which tells us how much money the company gets to keep after covering the base cost of its products and services, came in at 82.5% this quarter, up 3.1 percentage points year on year.
For gig economy businesses like Fiverr, these aforementioned costs typically include server hosting, customer support, and payment processing fees. Another cost of revenue could also be insurance to protect against liabilities arising from providing transportation, housing, or freelance work services. After paying for these expenses, Fiverr had $0.83 for every $1 in revenue to invest in marketing, talent, and the development of new products and services.
Gross margins have been relatively stable over the last year, averaging 81.7%. Fiverr's margins are some of the highest in the consumer internet sector, enabling it to fund large investments in product and marketing during periods of rapid growth to stay one step ahead of the competition.
User Acquisition Efficiency
Unlike enterprise software that's typically sold by dedicated sales teams, consumer internet businesses like Fiverr grow from a combination of product virality, paid advertisement, and incentives.
It's expensive for Fiverr to acquire new users as the company has spent 58.4% of its gross profit on sales and marketing expenses over the last year. This relative inefficiency indicates that Fiverr's product offering can be easily replicated and that it must continue investing to maintain its growth trajectory.
Profitability & Free Cash Flow
Investors frequently analyze operating income to understand a business's core profitability. Similar to operating income, adjusted EBITDA is the most common profitability metric for consumer internet companies because it removes various one-time or non-cash expenses, offering a more normalized view of a company's profit potential.
Fiverr's EBITDA was $15.3 million this quarter, translating into a 17.1% margin. The company has also shown above-average profitability for a consumer internet business over the last four quarters, with average EBITDA margins of 12.3%.
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Fiverr's free cash flow came in at $18.4 million in Q2, up 194% year on year.
Fiverr has generated $46.4 million in free cash flow over the last 12 months, an impressive 13.4% of revenue. This high FCF margin stems from its asset-lite business model and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a cash cushion.
Key Takeaways from Fiverr's Q2 Results
With a market capitalization of $1.08 billion, Fiverr is among smaller companies, but its $353.7 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.
While revenue growth was slow and active buyers were flat year on year, it was good to see Fiverr's unit economics move in the right direction. Overall, the results were ok, showing progress towards profitability. The stock is up 1.65% after reporting and currently trades at $29 per share.
Is Now The Time?
When considering an investment in Fiverr, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter. There are several reasons why we think Fiverr is a great business. For a start, its revenue growth has been impressive, and that growth rate is even expected to increase in the short term. And while its sales and marketing efficiency is sub-average, the good news is its impressive gross margins are a wonderful starting point for the overall profitability of the business and its strong free cash flow generation allows it to invest in growth initiatives while maintaining an ample cash cushion.
At the moment Fiverr trades at 19.2x next 12 months EV/EBITDA. Looking at the consumer internet landscape today, Fiverr's qualities stand out, and we like the stock at this price.
Wall Street analysts covering the company had a one year price target of $41.8 per share right before these results, implying that they saw upside in buying Fiverr even in the short term.
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