Riskified Ltd. (NYSE:RSKD) Q3 2023 Earnings Call Transcript
Riskified Ltd. (NYSE:RSKD) Q3 2023 Earnings Call Transcript November 15, 2023
Riskified Ltd. beats earnings expectations. Reported EPS is $-0.02, expectations were $-0.05.
Operator: 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. [Operator Instruction] 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.
Chett Mandel: 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.
Eido Gal: 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. Then Agi 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 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 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 to 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 for 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.
Aglika Dotcheva: 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 category, 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 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 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 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 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. Operator, we are ready to take the first question please.
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