Riskified Ltd. Q3 FY2023 Earnings Call

Good day and thank you for standing by. Welcome to Riskified's Third Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers 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 Chett Mandel, Head of Investor Relations. Please go ahead.

Good morning, and thank you for joining us today. My name is Chett Mandel, Riskified's Head of Investor Relations. We are hosting today's call to discuss Riskified's financial results for the third quarter of 2023. Participating on today's call are Eido Gal, Riskified's Co-Founder and Chief Executive Officer; and Agi Dotcheva, Riskified's Chief Financial Officer. We released our results for the third quarter of 2023 earlier today. Our earnings materials, including a replay of today's webcast, are available on our Investor Relations website at ir.riskified.com. Certain statements made on the call today will be forward-looking statements related to our operating performance, business and financial goals, outlook as to gross profit margin, adjusted EBITDA profitability and expectations as to positive cash flows, which reflect management's best judgment based on currently available information and are not guarantees of future performance. We intend all forward-looking statements to be covered by the Safe Harbor provisions contained in the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our expectations as of the date of this call, and except as required by 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 Annual Report on Form 20-F for the year ended December 31st, 2022, and subsequent reports we filed or furnished with the SEC for more information on the specific factors that could cause actual results to differ materially from our expectations. Additionally, we will discuss certain non-GAAP financial measures and key performance indicators on the call. Reconciliations to the most directly comparable GAAP financial measures are available in our earnings release issued earlier today and also furnished with the SEC on Form 6-K 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. Before we dive into a discussion on our financial results and outlook, I would like to first briefly touch on the evolving situation in Israel. Then I will share some commentary from the third quarter, and end my remarks discussing why I remain as confident as ever in the positioning of the company. As part of the discussion, I will provide some color on how we were able to efficiently adapt our workforce and enact our business continuity plan to ensure uninterrupted service to our merchants in the wake of the October 7th events. First and foremost, we condemn the horrific attacks in Israel and we send our thoughts and support to all affected. The loss of innocent lives resulting from this unforgivable terrorist act and the war that ensued is truly devastating. To our customers, partners, and shareholders who have reached out to support us during this difficult time, on behalf of everyone at Riskified we sincerely thank you. I am relieved to report that all of our employees are accounted for. I am proud of everyone in the organization for stepping up their efforts and for their hard work in a time of need, and I believe this speaks loudly to the strong culture at Riskified. This level of focus and flexibility has meant that we've seen no material impact on our ability to maintain day-to-day operations across all critical functions. Moving now to our third quarter results. Once again, our revenue growth during the third quarter was primarily driven by the successful execution of our go-to-market strategy, which contributed to 14% year-over-year revenue growth and 17% for the first nine months of the year. We are growing more confident in our ability to add new merchants, retain and upsell existing ones, and expand our market share despite an uncertain and challenging macroeconomic backdrop. Our competitive win rates remained high during the quarter and we have onboarded more new merchants compared to this point last year. We have generated over 20% more leads compared to this point last year, which is contributing to our large and growing pipeline. We are working diligently on maximizing revenue opportunities, leveraging our machine learning capabilities to positively impact our business while prioritizing investments in the areas with the highest return. I'm excited that we've grown top line revenue by 17%, while simultaneously decreasing total operating expenses by 6%, which drove an improvement in adjusted EBITDA performance by over 50% in the first nine months of 2023. We believe that these results are a testament to the overall strength of the business and our ability to execute and find leverage in the model. Next, allow me to spend some time talking about the isolated fraud event that we discussed on our last earnings call. As a reminder, one of our largest merchants experienced a significant fraud event in July. This event was contained over the course of a handful of weeks, and as expected, the impact caused by this event contributed to our non-GAAP Q3 gross margin of 44%. We do not anticipate any further impact to our gross margin going forward as a result of this event. And while we are disappointed by this one-time event, we did learn valuable lessons. For example, we have updated and solidified various go-live processes, improved some of our chargeback monitoring tools, and added new detection capabilities. I should also mention that our relationship with the impacted merchant remains very strong and this isolated example underscores the overwhelming reason why we believe that chargeback guarantee is a superior model that delivers the most value to merchants. Overall, we remain encouraged by our underlying gross margin performance. I believe that our commitment to continuously invest in our machine learning capabilities through feature enhancements and model improvements continues to strengthen our market-leading technology. Now, back to the Israel conflict and how it relates to our business. Our core focus since the events of October 7th has remained the safety of our employees and continuity of services to our merchants. To support the well-being of our teams in Israel, we have provided flexible working arrangements for those who are not yet back to their normal office schedule, assisted those employees and their families who have been called on reserve duty, and expanded our existing mental health and wellness offerings. To support our merchants, we've been working diligently as part of our business continuity plan to leverage our global network of employees to fill temporary capacity needs. Although we've experienced minor delays in a small number of long-term initiatives, there has not been any material impact to our current productivity. We remain 100% engaged with all our customers through increased communication efforts and have not seen loss of merchant volumes as a result of the October 7th event. This is a testament to the deep relationships that we've cultivated with many of our merchants, high retention rates, and our track record of being a reliable and trusted partner. Before I turn it to Agi, I want to emphasize that I believe the DNA of our company positions us well as we work through the current situation. While we are proud of being a company founded in Israel, we are truly a global company with business functions spread through eight locations around the world and with merchants in nearly 40 countries. Our goal remains to maximize revenue and profit with our AI-powered fraud and risk management platform to all of the world's largest enterprise eCommerce merchants and I am very confident in our ability to continue executing on that mission through all environments. Now I will turn the call over to Agi.

Thank you, Eido, team, and everyone, for joining today's call. I echo Eido's thoughts on how incredible the team and organization has been in the face of a difficult situation in Israel. Our GMV for the third quarter was $29.7 billion, reflecting a 17% increase year-over-year. We achieved third quarter revenue of $71.9 million, up 14% year-over-year, and year-to-date revenue of $213.5 million, up 17%. Our GMV and revenue growth during this quarter was primarily driven by the continued expansion of our platform across new merchants and upsells, similar to recent quarters. Tickets and Travel remained the largest overall category, with year-over-year growth in the mid-teens. The step-down in growth from previous periods was primarily driven by the lapping of a large merchant in this category that was onboarded in the third quarter of 2022. Encouragingly, for the first time in eight quarters, all industries outside of Tickets and Travel in the aggregate contributed more than that single category, or approximately 60% to our quarterly growth. In particular, this quarter we saw solid performance in our home category, primarily driven by upsell activity. Similar to the first half of the year, third quarter growth in one of our largest categories, fashion and luxury goods, remained relatively flat year-over-year. We continue to see softness in particular within our luxury brands and sneakers sub-segment. In addition, our electronics category declined further from their second quarter levels during the third quarter as demand for growth in discretionary categories slowed. Finally, we also saw revenue growth across all geographies. Our third quarter revenue in the United States, our largest region, grew by 9% year-over-year, and we experienced 12% year-over-year growth in EMEA. Our Americas and APAC regions each grew approximately 40%, primarily due to momentum in new and upsell activity. We believe that our continuous revenue growth from regions outside of the United States demonstrates market share gains and validates our decision to invest in this region. Moving onto gross margin. As Eido mentioned, our Q3 margin was negatively impacted by the isolated fraud event announced at our last earnings call. The impact of the event was in line with expectations, and our Non-GAAP gross profit margin for the third quarter of 2023 reflective of this impact was 44%. As a reminder, gross margin is best analyzed on an annual basis as gross margin may fluctuate on a quarterly basis. However, giving the unique nature of the third quarter margin, allow me to provide clarity on the annual range as we approach year-end. As of today, we anticipate that our annual non-GAAP gross profit margin will be at the mid-point of our range of 50% to 51.5%, or 50.7%, which translates to a fourth quarter gross margin of approximately 54%. Moving to expenses. Total Non-GAAP operating expenses were $40.2 million for the third quarter of 2023, a 5% decrease year-over-year as a result of our continuous focus on optimizing our expense base. Our third quarter expenses represent the lowest absolute quarterly level since our IPO over two years ago. Our Non-GAAP operating expenses, as a percentage of revenue improved year-over-year from 67% to 56%, reflecting leverage in the business model. For modeling purposes, we anticipate a modest step up of approximately $1 million in expenses in the fourth quarter. Adjusted EBITDA for the third quarter was negative $8.4 million and negative $18.2 million for the first nine months of 2023. Even with the one-time impact of the aforementioned merchant fraud event, we have been able to improve our adjusted EBITDA performance year-over-year for the fifth consecutive quarter and have improved our adjusted EBITDA performance by 50% year-to-date. As previously mentioned, we continue to anticipate profitability on an adjusted EBITDA basis in the fourth quarter of 2023 and an annual basis in 2024. Moving to the balance sheet, we maintained a very strong liquidity position and generated positive free cash flow during the quarter. We ended the third quarter with approximately $482 million of cash deposits, investments, and accrued interest on the balance sheet, and we carry zero debt. This amount represents a sequential increase of approximately $2 million. We remain confident in the business' ability to generate positive operating cash flows over the long term, as was demonstrated during the third quarter, and we continue to believe that our balance sheet and strong liquidity position are underappreciated assets. Related to our capital allocation initiatives, as we announced alongside our second quarter earnings, our Board has authorized a share repurchase program of up to $75 million, subject to approval from the Israeli court, which is required by law. Due to the event of October 7th, Israeli courts are currently operating under rolling emergency orders and certain court processes are delayed. We anticipate receiving a decision from the Israeli Court in the next several weeks and we will announce the court's decision promptly once it is obtained. We expect to leverage this program to take advantage of opportunistic repurchasing opportunities and manage share dilution. At valuation levels well below those of companies with similar financial profiles, we believe that we have a great opportunity to repurchase our stock at attractive prices. We believe our strong balance sheet enables us to continue driving shareholder value by investing in the growth of the business while maintaining significant capital to continue pursuing M&A opportunities. Now moving to our guidance, which assumes no further worsening in consumer spending patterns or material changes to the macroeconomic environment. As we approach year-end, we have more visibility on the timing and ramp-up of the onboarding of certain merchants and expect a more muted than originally anticipated Tickets and Travel season, especially in the tickets and live event vertical, for the remainder of the year. As a result, we're refining our full year 2023 revenue range to be between $297 million to $300 million. That being said, as a result of our ongoing expense discipline in the first nine months of the year, we are improving our full year 2023 adjusted EBITDA guidance to be between negative $12.5 million and negative $14.5 million, an improvement of 7% from the midpoints of our previously disclosed guidance range. Overall, from an operational perspective, I believe that we're executing from a position of strength, even in a challenging environment. And despite the evolving geopolitical situation in Israel and the continued challenging macroeconomic landscape, we remain excited about prospects for long-term growth and our ability to deliver value to shareholders.

Thank you. Our first question comes from Ramsey El-Assal with Barclays. Your line is now open.

This is Owen on for Ramsey. I appreciate you taking our question this morning. I wanted to ask specifically about your sales pipeline and was wondering if you could provide any more color on the portion of new sales that's being driven by cross sales compared to net new logo growth? And if you're seeing any difficulty in one versus the other? Any clarity there might be very helpful. I appreciate it.

We feel great about the pipeline. It’s about 20% larger than it was at this time last year, and this growth is seen across the board, including in newer products related to policy and dispute, as well as geographically. Overall, the increase in the pipeline is quite broad-based.

Understood. I appreciate that. And also wanted to follow-up, if I may on your take rate and, kind of, longer-term expectations there and how you expect that to trend relative to the business? Is there any sort of point in which you might choose to favor new logo growth by passing along some expense savings to customers? Any kind of update there might be interesting as well. I appreciate it.

Sure. So I would say, look, take rate is always risk adjusted, right? So depending on the risk of the segment or the merchant or the category, that informs our pricing, and that means that there's really variance within take rate based on those profiles. To be just a bit more specific, if we work with a digital goods merchant that sells high-risk product internationally, the fee would appropriately be higher than a merchant that sells domestically in the US low-risk products. And that would influence the take rate. Our pricing philosophy is to make sure that there's always value to merchants when they start using Riskified, right? So our pricing, which impacts our take rate, would always provide them savings relative to their existing cost. So, that's how we think about pricing.

Thank you. One moment for our next question please. Our next question comes from Robert Napoli with William Blair. Your line is now open.

Thank you for the question. I'm glad to hear everyone is okay during this time. As we consider moving towards profitability and the longer-term outlook, how do you envision the path to achieving your long-term EBITDA margin targets?

Look, I think the things that are within our control right around OpEx discipline, around executing on the sales side, like we've been focused on them for the past eight quarters, we'll continue to focus on them as we march towards those longer-term margin targets.

Yeah. I mean, for the last couple of quarters, I think that we've been able to improve our OpEx line and ultimately pass this to adjusted EBITDA. We're still expecting Q4 to be profitable and next year to be profitable. It's very much of a focus and something we're executing on.

Thank you. From a geographic perspective, it's encouraging to see the strong growth coming from Asia. Looking ahead, where do you identify the biggest opportunities? Are you just beginning to tap into those markets? Will international business represent a larger share of the overall business in the future? Also, regarding the profitability of the international business, are there any geographic differences?

I think we're all very proud of the GMV gains and, you know, kind of the market share we do have. Having said that, we still feel we're scratching the surface of the overall eCommerce market and penetration. So, we still think there's significant growth, definitely in some of these newer regions where we're seeing kind of that higher growth rates like you mentioned, but also in the more traditional industries and regions. So when I think about growth outlook, it's continuing to focus on our existing categories and geographies. It's strengthening some of these international markets, APAC, LATAM, and moving more towards a platform sale where, you know, policy and dispute resolve have a more pronounced impact. So I think all of those will help us with the growth moving forward.

Thank you. One moment for our next question. Our next question comes from the line of Tim Chiodo with UBS. Your line is now open.

Hi. This is Ching on for Tim. Thanks for taking the question. So my question is around the Plaid partnership that you announced for ACH payments. Can you provide us any update on how the partnership has contributed to your business so far, and where do you see most of the use cases among your verticals?

I think ACH is a growing and evolving payment method, and we see more merchants wanting to offer it as an alternative to credit cards, either to build recurring payments plus the interchange fee or to take care of high amounts or different verification statuses. So we do see it as a growing consumer payment option. And what we've heard from our merchants is because the risk there is slightly different than traditional credit card fraud, but they still need help solving those problems. So really, the partnership with Plaid is aimed at offering merchants an end-to-end solution that includes a way to accept guaranteed payments via ACH. And it has been meaningful in building some of that pipeline that we discussed earlier.

Got it. It's really helpful. And a quick follow-up on the new products in addition to chargeback guarantee. So it was encouraging to see the pipeline growth and the cross-sell opportunity that you highlighted in the release. So how does the momentum look like with Policy Protect contributing to your new revenue bookings? And do you see any difference in terms of product adoption between US and the international side? Thank you.

We feel very positive about the pipeline and its growth. The merchants that are currently using it are finding it addresses a significant challenge they face. While I can't specifically compare the global and local markets, we don't believe there should be any difference in the return on investment it offers to either. We are excited to continue selling and will keep you updated on our progress.

Thank you. One moment, for our next question, please. Our next question comes from the line of Terry Tillman with Truist Securities. Your line is now open.

Thank you, Eido, Agi, and Chett, good morning. My thoughts are with everyone affected by the conflict. I have two questions. Eido, in your prepared comments, you mentioned a boost in confidence regarding the business and the ability to monetize new logos. I hope I understood that correctly. You also highlighted the top 10 new customer deals for the quarter, with notable strength in the US. I'm curious about what is behind this increased confidence. The macroeconomic environment hasn’t improved, so it can't be that. Is it related to sales leadership? You've recently appointed a new CMO. Are we seeing a shift in the market compared to 12 months ago based on RFP activity, leading to more interest in these advanced machine learning decisioning engines? I'd appreciate it if you could elaborate on the increased confidence in acquiring new business. I have a follow-up question for Agi as well.

We are happy to do so. I think so let me tighten that up. I have increased confidence in the things within our ability to control. So when I think about some of the initiatives we started probably two years ago about the increased investment in additional products on our platform, additional investment into our global enterprise, salesforce, sitting here today, I think we're starting to bear the fruit of some of that, right. And some of that is reflective in some of these products being fully deployed and in the hands of merchants and generating value. Some of that is reflective in the growth rates in APAC and the pipeline that's building, some of that is reflective in kind of the ML platform and the performance that it's been providing to us and our merchants. Also you mentioned Jeff, our new CMO from a few quarters ago. Also very confident and happy with our current leadership team. So I think all those things are definitely helping me become more confident in the business longer term. Like you said macro, I have not seen inflect meaningfully this quarter like you mentioned.

Yeah, understood. Thank you for that, Eido. And then Agi, in terms of the fourth quarter outlook, I know the comp was tougher in 3Q, so that made sense on maybe kind of growth year-over-year, but in 4Q, it is an easier comp. I think I'd love to just get a little bit more perspective on, is there an incremental degree of conservatism? You did say Tickets and Travel, maybe that's the sole factor. But I did hear that, well, maybe some of the rollouts will take a little longer, just a little bit more in terms of maybe some of this is timing and then actually 1Q, there's some incremental benefits from some of the rollouts, just a little bit more on the roughly 7% growth of the midpoint comment. Thank you.

Thank you for the question, Terry. Regarding the fourth quarter and how our perspective has shifted since our last report, I've noticed some nuances and trends in the Ticketing sub-vertical within Tickets and Travel, particularly in live events. We observed a slight decline toward the end of the quarter and into early October. This is primarily a result of coming off a particularly busy season that began at the start of the year and continued through the summer, along with different seasonal patterns compared to last year. That’s one aspect concerning Q4. The other aspect relates to new business deals; our growth in 2023 is mainly fueled by these new contracts, which have proven to be a significant driver for us. As we approach Q4, there has been a slight delay in some of these deals, with a few expected to close in the latter half of the quarter or early next year. However, all of these deals are strongly positioned and remain in our forecast, albeit pushed a bit later in the cycle.

I would like to add that there is some push and a few deals still coming in, just a little bit in the back half of the quarter, maybe early next year.

Sorry, go ahead.

Yeah. I would just add to that again. I think like you've seen throughout this year, sometimes there can be fluctuations between quarters for us because of underlying eCommerce trends across our different categories. And it is important to point out that we don't feel that the Q4 rate is reflective of what we would anticipate next year.

Thank you. One moment, for our next question, please. Next question comes from the line of Reginald Smith with JPMorgan. Your line is now open.

Thank you. Good morning. I guess most of my questions have been hit, just point of clarification, did you guys size the actual impact of that fraud loss during the quarter? And I have a quick follow-up. Thank you.

Yeah, thank you for the question. So it landed up within the range of whether we expected more precisely around $4.5 million. And the gross margin that we expected based on this fraud event is also 44, just aligned with our expectations.

Perfect, thank you. I'm curious if you could share some insights on e-commerce trends during the quarter, particularly in the first month and a half of the fourth quarter. Is there anything notable you could point out?

Yeah, of course. So, as I already mentioned, I think the biggest kind of change from prior expectations are around live events in the Ticket sub-industry. It's been a little bit softer, but overall it's still a very strong growth driver for the year and still overall performing well. The other trends, I would say there's some strengths in the food and home category. The later one, primarily driven by some of the upsells that we were able to execute. And electronics has been a little bit soft. I think it was soft last quarter, but continues this softness in this quarter. Yeah, these are probably kind of like the biggest highlights.

Thank you. Are you suggesting that Tickets and Travel weaken towards the end of the quarter and into this fourth quarter, just trying to clarify the comment? I guess that would coincide with the Beyonce concert, if I'm thinking about that correctly.

It's hard to say. We do see it in more than one merchant. I don't see exactly what driven, but it's really like across geos and in more than, I would say, like probably two or three of the merchants in this category.

You're right to highlight that it's more specific to live events than other types of ticketing.

Thank you. One moment, for our next question, please. Our next question comes from the line of Brent Bracelin with Piper Sandler. Your line is now open.

Hi, all. This is Hannah on for Brent this morning, thanks for taking my questions and glad to hear all your employees are accounted for. Just wanted to echo my support for you, your colleagues, and your families here. Eido, in a previous answer, you mentioned moving more to the platform sale. I guess, can you talk about your ability to land new merchants with more than just chargeback guarantee upfront and how that's evolved?

Sure. Thank you for that commentary. Look, I would say that when we sell chargeback guarantee, we're solving for chargebacks related to fraudulent reason codes, right. And that leaves a lot of pain points and inefficiencies for our merchants, such as chargebacks related to non-fraud reason codes, different forms of financial loss related to policy abuse. And right now we have the ability, whether it's through a new sale or a cross-sell or upsell, to solve a wider set of problems, right. So sometimes merchants are saying, hey, that's great, I don't just have a chargeback issue. I have issues with some of these other problems, and that's helping us advance conversations with the platform sale initially. It's actually also helping us even when a merchant might say, you know what, I'm not ready to make a change on my fraud platform right now. We can actually start with policy or dispute, which has been showing great traction and it's a really easy and good initial sale. So we feel good about the opportunities in conversations with new merchants from that more platform approach.

I think upsell has been a strong category and a strong driver coming from a lot of different areas. Definitely, the ability to expand both for higher approval rates or also to kind of expand and stake more of GMV and from existing customers have been a factor.

Thank you. I'm currently showing no further questions at this time, I'd like to hand the conference back over to Mr. Eido Gal for closing remarks.

Yeah, thank you everyone for the support. We look forward to updating you in the coming months on our next call.

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.