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spk03: Good day, and thank you for standing by. Welcome to Riskify's third quarter 2023 financial results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Chet Mandel, Head of Investor Relations. Please go ahead.
spk00: Good morning, and thank you for joining us today. My name is Chet 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 Ido Gal, Riskified's co-founder and chief executive officer, and Agi Doceva, Riskify'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.riskify.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 accept 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 statement. Please refer to our annual report on Form 20F for the year ended December 31, 2022, and subsequent reports we file or furnish with the SEC for more information on these 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. Reconciliation 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 6K. and 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 Idao.
spk05: Thanks, Chet, 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 this discussion, I'll 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. Then, Aghi will walk you through our third quarter financials and what to expect in the fourth quarter. 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 versus this point last year. We have generated over 20% more leads compared to this point last year, which is contributing to a large and growing pipeline. We are working diligently on maximizing revenue opportunities, leveraging our machine learning capabilities to positively impact our business, while prioritizing investment 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 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 a 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 guarantees 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 to services to our merchants. To support the wellbeing 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 events. This is a testament to the deep relationships that we have 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 Aghi, I want to emphasize that I believe the DNA of our company positions as 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 e-commerce 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 Agni.
spk04: Thank you, Ido, team, and everyone for joining today's call. I echo Ido's thoughts on how incredible the team and organization has been in the face of a difficult situation in Israel. Our GNV 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 app sales, similar to recent quarters. Tickets and travel remain 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 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, remains relatively flat year over year. We continue to see softness in particular within our luxury brands and sneaker subsegments. In addition, our electronics category declined further from their second quarter levels during the third quarter as demand for goods in this discretionary category 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 AMIA. Our Americas and AFAC regions each grew approximately 40%, primarily due to momentum in new and upsell activity. We believe that our continued revenue growth from regions outside of the United States demonstrates market share gains and validates our decision to invest in this region. Moving on to growth margin. As Ido 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 cross-profit margin for the third quarter of 2023, reflective of this impact, was 44%. As a reminder, growth margin is best analyzed on an annual basis growth margin might fluctuate on a quarterly basis. However, given 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 growth profit margin will be at the midpoint 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 events, 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 on 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 carried 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 positions 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 events of October 7, 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 that 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 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 midpoint 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. Operator, we are ready to take the first question, please.
spk03: Thank you. As a reminder, To ask a question, you'll need to press star 1-1 on your telephone. To remove yourself from the queue, please press star 1-1 again. Please wait for your name to be announced. Please stand by while we compile the Q&A roster. One moment for our first question, please. And our first question comes from the line of Ramsey Elassad with Barclays. Your line is now open.
spk07: Hi, 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-sale compared to net new logo growth. And if you're seeing any difficulty in one verse, the other, any clarity there might be very helpful. I appreciate it.
spk05: Hey, Owen. Sure. So we feel great about the pipeline. I think we mentioned it's about 20% larger than this point a year ago, and that's really across the board, both in the newer products around policy and dispute, also from a geographical perspective. So the pipeline increase, I would say, is relatively broad-based.
spk07: Understood. I appreciate that. And I 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.
spk05: Charis, 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 U.S. 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. 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.
spk07: Understood. Thank you.
spk03: Thank you. One moment for our next question, please. Our next question comes from Robert Napoli with William Blair. Your line is now open.
spk09: Thank you. Thank you for taking the question. We're always thinking about you all during this time. Glad to hear everybody's accounted for. I guess on the... As we think about how you're turning to profitability and maybe a longer-term picture, Ido, Aggie, on how do you think about a glide path to getting to your long-term targets of EBITDA margins?
spk05: 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 kind of those longer-term margin targets.
spk04: Yeah, I mean, for the last couple of quarters, I think that we've been able to improve our OPEX line and ultimately kind of pass this to adjusted EBITDA. We're still expecting Q4 to be profitable and next year to be profitable. It's very much the focus and something we're executing on.
spk09: Thank you. And from a geo perspective, I mean, great to see the strong growth out of Asia. Just over the next, where do you see the bigger opportunities? Are you just scratching the surface in those markets? Or is international going to become a much higher portion of the business over time? And is the international business, the profitability, are there any differences geo-wise in the you know, the profitability of the business.
spk05: 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 e-commerce 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 region. 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 those will help us with the growth moving forward.
spk09: Thank you. Appreciate it.
spk03: Thank you. One moment for our next question. Our next question comes from the line of Tim Scioto with UBS. Your line is now open.
spk01: Hi, this is Jing. I'm for Tim. Thanks for taking the question. So my question is around the PLAT 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?
spk05: I think ACH is a growing and evolving payment method, and we see more merchants want 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, you know, the risk there is slightly different than traditional credit card fraud, but they still need help solving those problems. So really, the partnership with Plate is aimed at offering merchants, you know, 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.
spk01: 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-fail 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 U.S. and the international side? Thank you.
spk05: Sure. Yeah, we feel great about the pipeline, the way it's building. We feel that the merchants that are alive, it's all being a very meaningful and significant pain point for them. I'm not sure that I can... differentiate between the global and kind of local market, but we definitely don't see a inherently there shouldn't be a difference in the ROI that it's providing to either. So, you know, we look forward to continuing to sell and update you on the progress.
spk03: Anastit, thank you so much. 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.
spk06: Yeah, thank you, Ido, Auggie, and Chet. Good morning. And also, my thoughts are with everyone impacted by the conflict. I had two questions. Maybe the first question, Ido, I think in your prepared remarks, you talked about having increased confidence, I think just in general in the business and in monetizing new logos. I hope I didn't misrepresent that. And you all did tell the top 10 new customer deals in the quarter, particular strength in the U.S. What I'm curious about is what's driving the increased confidence? The macro isn't any better, so it can't be that. Is it stuff on the sales side with leadership? You've got a new CMO. Is the market just from 12 months prior, based on the RFP activity, just starting to come around to these advanced ML decisioning engines? I'll stop with my rambling and maybe you could just put a little bit more meat on the bone in terms of the increased confidence and just winning the business. And then I had to follow up for Auggie.
spk05: Sure, happy to do so. I think, so let me tighten that up. I have increased confidence on the things within our ability to control, right? So when I think about some of the initiatives we started probably two years ago about the increased investment and additional products in our platform, additional investments into global enterprise Salesforce, you know, sitting here today, I think we're starting to bear the fruit of some of that, right? And some of that is reflective and, you know, some of these products being fully deployed and in the hands of merchants and generating value. Some of that is reflective in the, you know, the growth rates and 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 know, you mentioned Jeff, our new HCMO 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, you know, I have not seen it inflect meaningfully this quarter like you mentioned.
spk06: Yep, yep, understood. Thank you for that, Ido. And then, Augie, in terms of the fourth quarter outlook, I know the comp was tougher in 3Q, so that made sense on maybe, you know, 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. You know, maybe that's the sole factor, but I did hear that, well, maybe there's 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 want to, there's some incremental benefits from, you know, some of the rollouts. Just a little bit more on the roughly 7% growth of the midpoint comment. Thank you.
spk04: Yeah, Terry, thank you for the question. So in terms of the fourth quarter and what's kind of changed some of, you know, our perspective since we last reported outdates, Some of the nuances and trends specifically about the ticketing subvertical and tickets and travel mostly in live events is something that we saw a little bit softer coming out at the end of the quarter and kind of like early in October. And it's mostly the way I look at it, it's mostly coming out of a really busy season, starting from the beginning of the year, but also through the summer. and a little bit of a different seasonality in this industry than what we saw last year. So that's kind of like one of the aspects there related to Q4. And the other aspect is more around new deals coming in. Looking at kind of like 2023 growth, it's primarily driven by new business, and it's a very, very strong driver for us. Looking in the Q4, I think there was some push slightly in a little bit of deals still coming in just a little bit in the back half of the quarter, maybe early next year. But all of them are really strong deals. All of them are still kind of like in the forecast, just a little bit later in the cycle.
spk05: Yeah. And I would maybe argue, you know, Sorry, go ahead. 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 e-commerce 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.
spk06: That's helpful. Thank you very much.
spk03: Thank you. One moment for our next question, please. Next question comes from the line of Reginald Smith with JP Morgan. Your line is now open.
spk08: Thank you. Good morning. I guess most of my questions have been hit. Just a point of clarification, did you guys size the actual impact of that fraud loss during the quarter? And I have a quick follow-up. Thanks.
spk04: Yes, thank you for the question. So it landed up. within the range of what 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.
spk08: Perfect. Thank you. And then, and I'm not sure to what extent you guys can provide color on this, but I'm just curious if there's, maybe you can kind of walk us through e-comm trends in general throughout the quarter, maybe through the first month, month and a half of 4Q? Anything you're seeing there worth kind of calling out?
spk04: Yeah, of course. So, as I already mentioned, I think the biggest kind of change from prior expectations are around live events in the tickets 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'll 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.
spk08: So are you suggesting that tickets and travel weaken toward 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.
spk04: It's hard to say. We just see it in more than one merchant. I don't see exactly what's driven it, but it's really like across geos and in more than, I would say, like probably two, three of the merchants in this category.
spk05: You're right to highlight that it's more specific to live events than other types of ticketing. Thank you.
spk03: Thank you. One moment for our next question, please. Our next question comes from the line of Brent Braceland with Piper Sandler. Your line is now open.
spk02: Hi, all. This is Hannah on for Brent this morning. Thanks for taking my questions. I'm glad to hear all your employees are accounted for. Just wanted to echo my support for you, your colleagues, and your families here. Ido, 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?
spk05: 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 up-sell, to solve a wider set of problems, right? So sometimes merchants are saying, hey, you know, that's great. I don't just have a chargeback issue. I have issue 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 is a really easy and good initial sale. So we feel good about the opportunities and conversations with new merchants from that more platform approach.
spk02: Okay, super helpful. And then, Aggie, in terms of upsell strength, are you seeing more strength on the volume side or the cross-sell side, and how do you expect that to trend over time?
spk04: I think Upsell has been a strong category and a strong driver. It's coming from a lot of different areas. Definitely the ability to expand both for higher approval rate or also to kind of expand and take more of the GMV from existing customers have been a factor.
spk02: Great. Thank you.
spk03: Thank you. I'm currently showing no further questions at this time. I'd like to hand the conference back over to Mr. Itogal for closing remarks.
spk05: Thank you everyone for the support. We look forward to updating you in the coming months on our next call.
spk03: This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.
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