Riskified Ltd. Q3 FY2022 Earnings Call

Good day and thank you for standing by. Welcome to the Riskified Third Quarter 2022 Earnings Call. At this time, all participants are in listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Chett Mandel, Head of Investor Relations. Please go ahead.

Good morning and thank you for joining us today. My name is Chett Mandel, Riskified Head of Investor Relations. We are hosting today's call to discuss Riskified's results for the third quarter of 2022. Participating on today’s call are Eido Gal, Riskified’s Co-Founder and CEO; and Agi Dotcheva, Riskified’s Chief Financial Officer. We released our results for the third quarter earlier today. Our earning materials, including the replay of today's webcast, are available on our investor website at ir.Riskified.com. Certain statements made on the call today will be forward-looking statements related to our operating performance, financial goals, and business outlook, which reflect management's best judgment based on currently available information and are not guarantees of future performance. Please note that these forward-looking statements reflect our opinions as of the date of this call, and, except as required by applicable law, we undertake no obligation to revise this information as a result of new developments that may occur after the time of this call. These forward-looking statements involve risks, uncertainties, and other factors, some of which are beyond our control, that could cause actual results to differ materially from our expectations. You should not put undue reliance on any forward-looking statements. Please refer to our periodic and other SEC filings for more information on the specific factors that could cause actual results to differ materially from our expectations. Additionally, non-GAAP financial measures will be discussed on the call. Reconciliations to the most direct comparable GAAP financial measures are available in our earnings release issued and furnished with the SEC on form 6-K today in our prior filings with the SEC and in the appendix of our Investor Relations presentation, all of which are posted on our Investor Relations website. I will now turn the call over to Eido.

Thanks, Chett, and hello everyone. Building off the momentum from a strong first half of the year, we saw an acceleration in our growth during the third quarter. Revenues were $63 million, representing 20% year-over-year growth, which is more than double our second quarter year-over-year growth. On a constant currency basis, our revenues were $65 million, representing 24% year-over-year growth. We achieved our strongest quarter of the year through increased upsell activity, new logo wins, and a very busy quarter for tickets and travel vertical. This positive momentum more than offset declines in organic growth from some of our existing merchants, which we primarily attributed to the tougher macroeconomic environment. Overall, I am pleased that our total growth outpaced the broader e-commerce market. Our achievements in the first nine months of 2022 go well beyond our financial performance. We have strengthened our leadership team, and I am more confident than ever in our current go-to-market position. We have focused on thoughtfully expanding our global footprint, further penetrating emerging categories, broadening our partnership channels, and developing new products. We believe that this strategy will enhance our ability to solve a growing number of high-value use cases for our merchants. This will help enable Riskified to capture an increased share of the broader e-commerce landscape, which would allow us to grow sustainably over the long term. This differentiated positioning, combined with the powerful value proposition that we believe we offer to our merchants, is leading to strong traction for our sales. Proof of this success is evidenced in the quality of our new logo wins and strength in recent upsells. A great example of a recent new logo win, as we've highlighted in our earnings release, was the onboarding of one of the world's largest secondary ticket marketplaces for live sports, concerts, theater, and events. This merchant processes billions of dollars worth of transactions annually. We secured this big win by demonstrating superior performance in a competitive process and we're proud to have entered into a contract to review nearly all this merchant's e-commerce volume. We believe tickets and travel is an industry in which we are rapidly extending our competitive position. I want to highlight that the breadth of our new logos goes beyond tickets and travel. For example, some of our top new logos signed during the quarter are in fashion, retail, and in our money transfer category. As we continue to expand our portfolio of merchants, we are becoming more diversified than ever before. We also continue to execute on our successful land-and-expand strategy. We believe this strategy drives GMV and long-term gross profit gains as customer engagement grows and matures. We saw strong upsells across various merchant sizes, with particular momentum from our merchants with more than $3 billion in online sales volumes. We also had success from both merchants in our more mature cohort and from new enrollments. We are continuously deepening our relationships and increasing the value that we offer our merchants as they submit additional order volume through our platform. In addition to the momentum in our sales efforts, during the third quarter, our gross profit growth of 35% exceeded our revenue growth, reflecting the benefits of ongoing investment in our technology and the strength and leverage in our business model. As we discussed in depth on the last earnings call, a key initiative for the second half of 2022 and beyond has been to prioritize profitable growth through thoughtfully reducing our expenses and recognizing additional operating leverage. We believe that we are accelerating our path to profitability, all while keeping our long-term growth outlook intact. This goal remains a top priority for the company, and I'm very pleased with the progress that we have made in executing on this important initiative. During the quarter, we lowered our expense base and combined with an acceleration in our revenue growth, we saw a 33% improvement in our adjusted EBITDA results sequentially, which Agi will expand on shortly. As we approach year-end, I am proud that our diversified and global company has continued to grow and strengthen despite the challenging economic environment that we are operating in. Our dialogue with our merchants is high. Our pipeline is healthy, and we believe that our go-to market positioning is the best that it has ever been. By leveraging our superior data and strong technology, we believe that this will allow us to continue to do what we do best, helping to enable the best outcomes and operational improvements for our merchants, which we expect will, in turn, help drive value for our shareholders. Before I turn this over to Agi, who will cover the financial results in more detail, I want to thank all Riskified employees for their relentless dedication in accomplishing this fantastic quarter. I look forward to ending the year strong as we aim to execute on the goals of the company together.

Thank you, Eido, team and everyone for joining today's call. Our GMV for the third quarter was $25 billion, reflecting a 21% increase year-over-year. We achieved third-quarter revenue of $63 million, up 20% year-over-year, and 24% on a constant currency basis. The growth in GMV and revenue during the quarter was primarily driven by the continued expansion of our platform across new merchants and upsells and revenue growth across all geographies. During the third quarter, we saw ongoing growth across our money transfer category, and we continue to benefit from sustained growth in fashion and luxury goods. As expected, tickets and travel continue to rebound and be the most meaningful area of growth during the quarter. We believe that there are additional GMV opportunities for us in this category from new merchants and upsells based on our current pipeline of activity. As Eido mentioned, our organic growth remains below historical trends, which we primarily attribute to a continuation of the impact of the pandemic combined with a more challenging macroeconomic environment compared to this time last year, which is driving softer e-commerce activity. We remain optimistic that over time, the broader e-commerce landscape will improve from current levels, which we believe should positively impact our organic growth. From a geographic standpoint, we saw growth across all our regions, which solidifies the ROI that we're seeing from our global investments. The United States continues to grow, and we once again saw strength in EMEA. Consistent with last quarter, the strength in EMEA was achieved with the addition of Kenyan merchants, as well as continued success in tickets and travel. Our non-GAAP gross profit margin for the third quarter of 2022 was 52%, consistent with the second quarter of 2022 and up from 47% in the third quarter of the prior year. As we mentioned in the past, gross profit margin is best analyzed on an annual basis, as individual quarters can fluctuate mainly due to adjustments and improvements in our decision-making model, changes in the industry mix of our revenues, seasonality factors, the ramping of new merchants, the variety and risk profile of transactions approved, along with other business priorities. The year-over-year increase in the third quarter of 2022 was driven primarily by overall positive outcomes related to some of the factors listed above. We have operated the company profitably in prior periods, and we're focusing on the levers to pull and the processes to prioritize in order to return there. During the second quarter of 2022, we initiated a plan to efficiently and thoughtfully reduce our operating expenses. We continue to successfully execute on this plan and further reduce our expense base in the third quarter. Total non-GAAP operating expenses were $42 million, a decline of 5% from the second quarter. We saw sequential improvements across all areas of our expense base, and our non-GAAP operating expenses as a percentage of revenue declined to 67% in the third quarter of 2022 from 74% in the second quarter. We expect expenses as a percentage of revenue to further decline in the fourth quarter reflecting leverage in the business model. For modeling purposes, we anticipate a modest step up in expenses in the fourth quarter, similar to the cadence we saw in the prior year. This is mainly a function of the timing of sales commissions earned and some seasonality. We will continue to diligently manage our hiring plans and expense base into 2023 to help drive future adjusted EBITDA improvement. The adjusted EBITDA loss for the third quarter was negative $9 million, or more than 30% improvement both quarterly and year-over-year. In addition, we continue to maintain a healthy cash flow model with free cash flow of negative $4 million for the third quarter. This represents a 75% improvement year-over-year. For the first nine months of the year, our free cash outflows have been approximately $27 million, and we feel great about our ability to manage our cash outflow, which meaningfully slowed during the quarter. Moving to the balance sheet, we maintain a very strong liquidity position, which we anticipate will be more than sufficient to support the investments we're contemplating as we aim to move towards profitability. We entered the third quarter with approximately $484 million of cash and deposits on the balance sheet, and we carry zero debt. And now turning to our updated guidance outlook for the full year of 2022. The updated revenue guidance assumes currency rates against the year-over-year remain stable to current levels and that there is not a further deterioration of macroeconomic conditions. In addition, we will continue to monitor the performance of our merchants, visitor adoption, and the broader e-commerce landscape. For the full year 2022, we are revising upward our guidance ranges. In the face of a separate growth landscape, we have now raised our guidance on two separate occasions. It is trading on the resilience of the business and strength in our new merchant wins. We now anticipate revenues will be between $257 million to $261 million, up from our previous guidance of $255 million to $258 million. As I previously communicated, we continue to expect our fourth-quarter revenue to reflect some softness due to the broader e-commerce and retail uncertainty that may persist during the holiday shopping season. As a result, we anticipate our year-over-year growth in the fourth quarter to be lower than the third quarter, which is reflected in our updated full-year guidance. The most meaningful upward improvements in our guidance are a direct result of the OpEx savings that we're realizing. These savings have resulted in us improving our full-year adjusted EBITDA guidance by 18% from our August guidance. We currently expect between negative $44 million and negative $47 million, an improvement from negative $54 million to negative $57 million. Our new range represents a 33% improvement from the midpoint of our initial guidance given in February of this year. We have had initial success in controlling our expense base across the company while sharpening our plans to find additional areas to optimize our cost structure. Overall, we're very pleased with our results and remain excited about our continuous prospects for long-term growth. We look forward to continuing to report our progress to you in the coming quarters.

Thank you. Our first question comes from Timothy Chiodo with Credit Suisse. Your line is now open.

Great, thank you. Good morning. I appreciate you taking the question. So definitely impressive in terms of the cost savings and you mentioned the improvement in profitability; I'm sure that's much appreciated by many investors. In terms of the CapEx savings, and actually in the context of longer term, your outlook for EBITDA margins longer term or roughly 20%. I realize we're far away from that today. But in terms of the timing of getting there, when should investors be thinking about plugging that 20% into their model? How many years away roughly would you say that might be, and then I have a quick follow-up on the travel vertical, if you don't mind?

Sure. Hey, Tim. When we think about the path to profitability and the next steps to reach those 20% margins, I would say obviously, I am very happy with the work the team has done this quarter and the previous quarter lowering our expense base. For next quarter, we anticipate expenses as a percent of revenue to decline further. When we think about how much progress we'll be showing in 2023, we need to take a step back and talk about revenue for a second. This quarter saw great go-to-market performance with 20% revenue growth, still in the face of some headwinds, including a 4% FX impact and mid-single-digit regulatory PSD2 impact, and organic e-commerce growth was actually slightly negative. So thinking about how these factors will play out in 2023, as we've previously shared, we anticipate that PSD2 will be non-material. We believe that the FX impact will dissipate in the back half of next year, and the area that I want to analyze more closely is how we think the organic will behave next year. Slightly over 30% of our business is not just tickets, travel, and events; the remainder is pretty diversified across geographies and industries. We just need to spend time building a bottoms-up model to understand how organic growth will behave next year before really comprehending the path to profitability. But without getting into guidance, if organic growth returns, we've definitely seen periods of profitability in the back half of next year, and you can extrapolate further into that kind of longer-term 20% target.

Okay, and then just make sure I heard that right: periods of profitability potentially in the back half of next year, meaning on an EBITDA basis, potentially turning slightly positive as early as the back of next year?

Correct.

Okay, thank you for that context. I'm sure that's appreciated. And my brief follow-up is on the travel and tickets vertical. I believe in the past, you've mentioned the growth in that vertical year-over-year. I know you mentioned many new logo additions, and it's clearly an area of strength for the company, but were you able to provide a pinpoint estimate or sorry, the actual number on what the growth was this past quarter?

Yes. Thank you for the question. So I'll take this one. Ticket and travel grew significantly in Q3, and it was both driven by existing merchants, for now, it's at or above pre-pandemic levels, and we're very happy with that growth, but also through the addition of new merchants and upselling the existing ones. Overall, it was probably the highest growth that we've seen across all industries. Most importantly, I believe that we still have upside in this category as there's whitespace opportunity, just from the new merchants that we're adding, but also in looking into the pipeline of new logos.

Thank you. Our next question comes from the line of Owen Callahan with Barclays. Your line is now open.

Hi, guys, it's Alan on for Ramsey. I appreciate you taking our question and wanted to expand a little bit on that merchant mix and pipeline generation. I wanted to get an understanding of how important these new logos are when factoring in the slowing of current merchant volumes. Additionally, I wanted to get a sense of the mix of these new merchants. Are they coming from new geographies or new verticals? Any color there would be super helpful. Thanks.

Hey, Alan, thanks for the question. Let's unpack the revenue growth again to understand the dynamics between new clients, upsells to existing clients, and the organic base. That 20% growth, which still had the 4% FX impact and that mid single-digit regulatory impact, really came from new and existing clients because the organic base was just slightly negative. We're very pleased with our go-to-market performance. The team has been performing extremely well, and there's a great demand environment because of the guaranteed cost savings that the product is offering while kind of still generating higher incremental sales for our merchants. Overall, it's very diversified. It's coming from a combination of across geographies, across industries, and a great mix of net new and upsell to existing.

Thank you. Our next question comes from the line of Terry Tillman with Truist. Your line is now open.

Yes. Thanks for taking my questions and solid performance here. And Agi, hi there. The first question is just on enhancing go-to-market motions and just optimizing go-to-market. You had an important leadership addition earlier in the year or at least a couple of quarters ago. Where do you see more of the low-hanging fruit or ongoing greater impact? Is it a new logo success or just doing more cross-selling and upselling with existing customers? Does one area seem much more pronounced or, again, low-hanging fruits are probably oversimplifying it, but just trying to get a sense of where you see some of the enhanced go-to-market benefits, whether it's new or existing, and then I had a follow-up.

Hey, Terry, thanks for the question. Definitely, Robbie and the entire go-to-market organization have had a great quarter, and they have really been doing some great process improvements, and we've been seeing the results. But it's not just them. It starts with the product. We've consistently seen in these types of enterprise motions that we're able to show through pilots that we are the most accurate solution on the market. Because of that, we've been able to win these types of competitive cycles, and in fact, that multibillion-dollar ticketing merchant that we mentioned in our release is a competitive cycle that we won this way. That's helping us accelerate growth. Layer that in with the fact that we now have a more global go-to-market team, as well as being able to sell additional new use cases for our merchants like policy protect, like dispute resolution. So they're all working in tandem, showing consistent strength across time, both on the new logos and upsells. Again, going back to this multibillion-dollar ticketing merchant, that was a new win a few months ago that we were able to upsell in a very short timeframe. So it's success on both fronts.

That's great to hear. And I guess, Agi, there have been a couple of questions about the accelerated path to profitability, and both of you have provided some interesting and positive color. I guess the reality is, we can't just look at the expense base and somehow run rate that or reduce it a little bit, because there are some seasonal expenses. Can you remind us what kind of uptick there is in seasonality on the expense side for Q4 and just anything directionally around the three OpEx items in '23? Should they continue to trend lower as a percentage of revenue? Just any more you can help us on how to think about the run rate of expenses? Thank you.

Yes, of course, Terry, and thank you for the question. For modeling purposes, we do anticipate a modest step up in expenses in the fourth quarter, and that's very similar to the cadence from last year. These are just regular seasonal increases. For example, it’s really a function of more incremental travel or some of the commission-related payments that are usually made before the holidays. So that's the ballpark. I think that overall, these positions in Q4 are the way to think about it, keeping our expenses positioned along with the run rate for next year. When you consider that we have been operating on a much lower base from where we started back in February, and considering the improvements we've made over the last two quarters, we seek continuous execution on that front.

Thank you. Our next question comes from the line of Robert Napoli with William Blair. Your line is now open.

Thank you, and good morning. Good numbers, Eido and Agi. Good to hear about your outlook for next year and working towards that profitability. What is your view on online sales growth for the industry? I think you said that you felt it was slightly negative in the third quarter. Any view on trends in the fourth quarter and just what do you think online sales growth needs to achieve profitability in 2023 and your thoughts on the long-term?

So, let me give you some kind of answer around Q4 and seasonality. We do expect a slightly different mix in terms of the industry compared to Q3. In Q3, it was traditionally high in tickets and travel. In Q4, tickets and travel continue to have a strong performance, but traditionally, the general retailers are expected to take a more substantial weight in the overall portfolio. So far, it might surprise anyone, but reading through industry analysts' reports, the online sales this holiday season are projected to see small growth compared to previous years while still growing. Overall, the spending environment for general retail e-commerce is kind of what we're projecting.

Okay. And then, where do you expect to see the operating leverage? You had good gross margins this quarter, and I know looking at it on an annual basis. But is that the right way to think about gross margins and then where do you get the operating leverage? Where do you expect to see most of it on the G&A line? Any commentary on where you expect to see net operating leverage?

Yes. We think the current level is the right zone for our annual gross margin, plus or minus based on various factors. But we feel that we're on track to meet or slightly exceed our annual target. As we assess and refine our models, we're identifying opportunities to maximize efficiency and achieve the best outcomes for our merchants and our business. In response to your follow-up about operating leverage, I'm pleased that we continue to reduce our expenses as a percentage of revenue, and we expect that trend to continue into Q4 as well.

Thank you. Our next question comes from the line of Tien-Tsin Huang with JPMorgan. Your line is now open.

Thank you. Great results here. I wanted to ask, just to make sure I understood your fourth-quarter thinking relative to what you saw in the third quarter. Any change in view from 90 days ago with respect to revenue and gross margin? Just want to make sure I understood them?

To give you more clarity, we're raising our annual guidance based on our overall performance. We do expect Q4 to be a little bit softer, and that's reflected in our guidance and the range that we have right now. So the range represents the best estimates of the annual results, but it's no secret that the environment is highly variable, and that's reflected in the guide. On the gross margin front, we do expect to meet or slightly beat the annual goal. That's how we're thinking about both Q4 and 2022 in general.

Okay, that's perfect and very reasonable. Just on my follow-up regarding the chargeback to billings performance and the gross margin in general. Is it a function of better outcomes driven by your tech as you've had another quarter to season that? Or are there any changes in risk decisioning on your part or from your clients’ part?

We're definitely very happy with the modeling performance. We continue to see cohort improvements. We've been able to especially see pronounced improvements within some of our tickets and travel merchants driving better performance this quarter. Overall, we are pleased with that.

Great. Good to hear. Thank you.

Thank you. Our next question comes from the line of Brent Bracelin with Piper Sandler. Your line is now open.

Thank you. Good morning. I wanted to circle back and talk a little bit about some of the new merchant activity pipeline activity. You've called out adding a new ticketing and travel customer. Are you seeing a mix shift where customers and new merchants you're dealing with are looking to outsource a larger degree of their network traffic, and that's an increasing part of the pipeline? Just love to better understand the trend.

Historically, the trend has usually been starting on a segment of the merchants' volume and then expanding over time. What we've seen now is that we have more merchants submitting substantial amounts of volume from day one, along with an acceleration in the time between initial submissions and larger engagements. To your point, the multibillion-dollar ticketing merchant we highlighted, where we currently handle most of their volume, represents a quicker onboarding than we have historically experienced. We attribute this to some proof points in the industry and the overall demand environment driving merchants toward our guaranteed solutions.

Helpful color. As we think about heading into a recession in the U.S. next year, are there meaningful cost savings by outsourcing fraud risk to your platform? Is the ROI narrative resonating with customers? Just trying to think through how this will play to your advantage or whether it’ll make closing new deals more challenging and lengthen sales cycles.

That's a great point. We feel great about the demand environment right now because merchants are looking to optimize their cost base. We're one of the few tools that guarantees cost savings while driving incremental revenue at the same time. This has become a more significant focus for merchants globally, and we believe we are well-positioned to capitalize on that opportunity. I think that's driving some of the strength we see this quarter and our overall pipeline.

Great, thank you. Lastly, for Agi, cash burn has narrowed here to a little under $4 million in the quarter. Is that the right kind of cadence we should think about on a quarterly burn rate into next year? Do you think that can narrow further in the next year on a quarterly basis? Any sort of directional color on cash burning next year would be helpful. Thanks.

I'm very happy with the cash burn and the free cash flow that we saw this quarter. There's obviously some variety between quarter-to-quarter driven by timing in payments and expenses, but on an annual basis, we expect free cash flow to trend positively. For next year, our positions regarding our expense base will support this. As mentioned, Q4 gives a good approximation for the runway next year. There might be some spread with seasonality, similar to what we saw in Q3 to Q4, but overall, we anticipate showing continued leverage into next year.

Thank you. Our next question comes from the line of Josh Beck with KeyBanc. Your line is now open.

Thank you for taking the question, team. You've discussed the tickets and travel vertical. I'm curious about some of the other more meaningful verticals; fashion, luxury electronics. Was there anything that really stood out with respect to trends, quarter-to-date, and how are you thinking about the prospects there as we enter 2023?

We continue to see good growth in areas where we're strong. In terms of fashion—whether it's luxury or general retail—we continue to see robust growth there, driven by new additions and upsells. Some of the emerging categories also show growth and a healthy pipeline. We've highlighted our remittance business, which we're optimistic about for the future, and we are already seeing good results right now. The global diversification of our efforts continues to be a great success story as we ramp up the sales team. I think overall, we're drawing attention to ticketing and travel because those areas performed stronger. However, I remain cautiously optimistic as we make our plans for 2023.

Okay, that's helpful. This is somewhat of a tricky question. You talked about the e-commerce environment this quarter, and I recall that was a global number indicating negativity. Many U.S. forecasts indicate low single-digit growth for Q4. Moving forward, do you expect a return to mid-teens e-commerce growth and incremental growth in e-commerce penetration every year? Although it’s difficult to ascertain at this juncture, could you outline how you're thinking about future growth prospects for the e-commerce market overall and any mile markers or data points you'll be assessing to refine that forecast?

I think the answer is yes. I believe e-commerce will continue to grow in the years ahead, and I remain very optimistic about that. The key question is when will it return? How many quarters will it take to fully bounce back? The more challenging question is predicting how it will return—will it return at 10%, 15%? Those are nuanced queries. However, I am very optimistic that we'll see better organic growth than we did in this quarter in subsequent quarters in this industry.

Very helpful. Thank you.

Thank you. I'm currently showing no further questions at this time. I would like to turn the call back over to Eido Gal for closing remarks.

Thank you very much, everyone. We really enjoyed this conference and look forward to updating you in the quarters ahead.

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