Riskified Ltd. (NYSE:RSKD) Q4 2023 Earnings Call Transcript
Riskified Ltd. (NYSE:RSKD) Q4 2023 Earnings Call Transcript March 5, 2024
Riskified Ltd. beats earnings expectations. Reported EPS is $0.07, expectations were $0.03. Riskified Ltd. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and thank you for standing by. Welcome to the Riskified's Fourth Quarter 2023 Earnings Conference Call. [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, Riskified's 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 full year and fourth 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 full year and fourth quarter of 2023 earlier today. Our earnings materials, including a replay of today's webcast, will be 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 revenues, gross profit margin, adjusted EBITDA profitability, adjusted EBITDA margins 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 statement. Please refer to our Annual Report on Form 20-F for the year ended December 31, 2023 and subsequent reports we file or furnish 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 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. I'm proud to report that Riskified ended the year strong, despite facing macroeconomic and geopolitical headwinds. We entered 2023 looking to increase our new logo base, further penetrate our existing accounts, expand our geographic footprint and strengthen our platform sales motion, while improving our technology and achieving profitability on an adjusted EBITDA basis in the fourth quarter. I am pleased that we were able to accomplish our 2023 goals, but acknowledge our work is not yet done. In particular, I'm excited about achieving a gross margin of 58% in the fourth quarter. We believe that the cumulative multiyear impact of focusing on the continuous advancement of our technology stack contributed to an outstanding fourth quarter.
This represents our highest gross margin in 10 quarters, all while maintaining very high levels of performance for our merchants. Allow me to provide some further insight into our technology strategy. In 2023, we focused on a three-pronged approach to drive improved performance, while we expanded deeper into new geographies, industries and payment methods. We strengthened our machine learning factory by leaning further into autonomously training models. This allows us to train, test and deploy models more quickly, which in turn expands the capacity of our data scientists to develop and enhance additional features to drive powerful performance. And finally, we built out an automated performance management platform designed to optimize approval and chargeback rates per merchant in an automated and constant way.
We believe that this automation will allow us to continue to scale the business with high leverage. I am optimistic that some of the leverage seen in Q4 will flow through to 2024 and beyond, but I encourage you to continue analyzing our gross margin on an annual basis, given individual quarters can vary due to many factors, including the ramping of new merchants and the risk profile of transactions approved. I want to thank the team for their attention and responding so quickly from third quarter fraud event to achieve such fantastic results in Q4. We have further diversified our portfolio across merchants, industries and geographies to become a more broad-based and resilient company that is able to continue to grow across all macro environments.
We continue to have success penetrating the e-commerce landscape through new merchant wins and through upsells within our existing merchant white space, which contributed the total annual GMV growth of 17% and total annual revenue growth of 14% in 2023. Agi will walk you through the drivers of our top line growth shortly, but overall, I am encouraged by our performance in 2023. In particular, five out of our six verticals contributed positively to our performance during the year. All of our regions achieved at least double-digit growth year-over-year, and we have more enterprise merchants that count on our platform than ever before. In fact, we had over 50 accounts that contributed $1 million or more to our top line in 2023. Our go-to-market team met their annual revenue target and delivered a strong end of the year, with 1/3 of the new merchant activity in 2023 coming in the fourth quarter, providing positive momentum heading into 2024.
Also, in our first full year of having our refine platform sales strategy, new bookings derived from our Policy Protect, Dispute Resolve and Account Secure products were up approximately 3x. Our fourth quarter was the strongest quarter ever for our Policy Protect product, as over 50% of the Policy Protect deals that we won during the year went live during the quarter. And while the revenue from these products still represents only a small percentage of our overall revenue base, we believe that our ability to sell an end-to-end platform has proven to be a very successful differentiator and stickiness tool. We executed and focused on improving our technology stack throughout the year. For example, based on direct feedback from our merchants, we increased the number of use cases we help solve beyond just blocking fraudulent refunds and serial returners to also solve coronal abuse, item limits and reseller policies for our Policy Protect product.
On Dispute Result, we prioritize developing a holistic and automated solution for the fraud and non-fraud chargeback representment process. This product allows us to become a one-stop shop that automates the entire dispute flow to help reduce higher win rates for our merchants. Both products are proving to have a true market need based on recent activity and existing pipeline and serve as key tools in our land-and-expand strategy. The new product traction we've seen and the enhancements we've made, combined with our market-leading core chargeback guarantee offering, led to a very strong fourth quarter overall win rate of almost 80%. The proven performance, accuracy and predictability that our core chargeback guarantee product generates is why merchants are initially drawn to Riskified.
Now, our expanded end-to-end platform dedicated to solving multiple high-value e-commerce use cases gives them even more reason to stay. This is evident in our low churn numbers. Our annual dollar retention in 2023 was 98%, which was inclusive of a few unusual churn events as a result of merchant bankruptcies. We are proud of the deep-rooted partnerships that we have built with many of the world's largest e-commerce merchants. Moving lower in the income statement and enter of the areas that are more within our operational control. In mid-2022, we made the decision to accelerate our timeline to profitability and have executed on that accelerated timeframe. Our 2023 annual adjusted EBITDA of negative $8.5 million exceeded our guidance by 37%, and we achieved positive free cash flow for the year of $5.9 million.
Furthermore, our 2023 annual adjusted EBITDA margin expanded by 1,100 basis points from the prior year. I am pleased that we have achieved positive adjusted EBITDA in the fourth quarter and that we are guiding to positive adjusted EBITDA on an annual basis in 2024 and beyond. We have made a lot of progress in getting to this point, and I believe it is important to communicate how to think about the financial milestones we plan on achieving over the next few years. As a management team, we are building towards adjusted EBITDA margins between 15% and 20% by 2026. In addition, we also plan on achieving positive adjusted EBITDA, inclusive of our share-based compensation expenses by 2026. Allow me to provide some further context. Over the past two years, we have faced a challenging macro environment and volatile consumer spending, which has led to a net dollar retention in the low hundreds, down significantly from higher rates of 115 to over 120 that we've seen historically even pre-COVID.
Overall, this has produced lower growth rates than our historical norm and is not where we aspire to be longer term. We remain focused on accelerating our revenue growth, and we believe that there are multiple ways to achieve that. As a leader in e-commerce fraud and risk intelligence, we believe that we can capitalize on the large opportunities in front of us. As always, our goal remains to land and expand our platform with the world's largest e-commerce merchants and the speed and frequency at which we are able to execute on this strategy is the top area of focus. In addition, potential improvements to our same cohort base would also result in a more positive impact on our net dollar retention rate, which would also allow us to grow revenue faster.
However, even at similar revenue growth rates as compared to the last few years, we are confident in our ability to manage the business and how to optimize the operational levers available to us in our gross margin and OpEx line items to continue driving adjusted EBITDA improvements in order to achieve these targets. Overall, I am confident in our ability to efficiently run the business to constantly bring our top line growth down to the bottom line. Before I turn it over to Agi to provide further color on our results and on our 2024 annual guide, it's important to highlight our commitment to managing share-based compensation expense and dilution to meaningfully lower levels than they are currently at. First, in 2023, share-based compensation expense as a percentage of revenue decreased by approximately 500 basis points from 2022.
And in 2023, we granted approximately 30% fewer equity awards as compared to 2022. We expect to see share-based compensation as a percentage of revenue continued to decline in 2024. Many of the larger awards that we granted in 2021 through '23 have a four to five-year vesting period. And as these awards complete our vesting requirements by the end of 2016, we expect to see a meaningful drop-off in our share-based compensation expenses. Second, and perhaps even more important to discuss is our focus on controlling our equity awards to meaningfully lower levels. In 2023, equity awards granted represented approximately 6% of our weighted average diluted shares, down from approximately 9% in '22. We anticipate that this number will be approximately 4% to 5% in '24, as we continue to manage the business in a disciplined manner.
Assuming valuation level similar to today and absent any unanticipated executive or senior hiring and any additional buyback authorization, we expect to target similar levels going forward. Third, since the implementation of our $75 million share repurchase program in November, we have repurchased approximately 7.6 million shares at a total cost of $34 million as of February 29. We remain committed to repurchasing our shares at what we believe are attractive valuation levels. Looking forward, we are excited and energized by the opportunity in front of us in '24. There is plenty of white space for us to penetrate, and we believe that our product and platform leadership position will allow us to do that, combined with the global network scale that we have built and the financial and operational discipline of our business model, I have great confidence that we are well positioned to execute on these initiatives for the benefit of our shareholders.
Now, over to Agi.
Aglika Dotcheva: Thank you, Eido, team, and everyone, for joining today's call. We achieved fourth quarter revenue of $84.1 million and full year revenue of $297.6 million, up 6% year-over-year and 14%, respectively. Our fourth quarter GMV of $35.2 billion was the highest quarter of volume reviewed in our history. This was driven by continued new and upsell growth and solid Black Friday to Cyber Monday holiday activity, which grew approximately 6% compared to last year's season. For the full year, we grew our GMV 17% to $123.1 billion. During the fourth quarter, we had strong performance in our home category, primarily driven by upsell activity and in our full category, primarily driven by new merchants. These two categories historically have not had large seasonal increases in the fourth quarter, unlike more traditional retailers, which tend to experience a higher holiday shopping season compared to other parts of the year.
In addition, our fashion and luxury category remained relatively flat, similar to the first nine months of the year. Our ticket and travel category was also flat this quarter, as we had a tougher comparable period in Q4 of 2022, driven by fewer large live events in the fourth quarter of this year. The combination of these factors contributed to the stepdown in our Q4 growth rate, but we remain bullish on these key categories, and we expect to see tickets in travel return to growth in 2024. For the full year, approximately $30 million of the increase in revenue was attributable to increases in GMV and billings associated with new merchants, primarily within our tickets and travel category, which grew by more than 30% year-over-year. In addition, we saw 45% year-over-year growth in our food category and 19% growth in our home category.
The remaining increase in revenue was primarily due to upsell net of organic declines and attrition, which contributed to our net dollar retention rate of 105%. Our ticket and travel category contributed just under $100 million in billings, which represented approximately 30% of our overall portfolio. In our travel portfolio of merchants, year-over-year activity was driven by a higher number of transactions for both life and accommodations against relatively stable consumer pricing. Our fashion and luxury goods category, which represents approximately 30% of our portfolio, was relatively flat year-over-year. Throughout the year, we continue to see softness within our luxury brand sneakers' subsegment, which was positively offset by better growth in other subsegments such as fast fashion and by addition of new merchants and upsells within the category.
Finally, we also saw growth in billings across all geographies year-over-year. The United States, which is our largest region, grew by 10% and EMEA grew by 15%. Our Americas and APAC region grew approximately 30% and 40%, respectively, primarily due to momentum in new and upsell activity. We believe that our continued growth in regions outside of the United States demonstrates continued market share gains and validate our decision to invest in this region. Overall, our contribution by region was more evenly distributed than in previous years, as we continue to build a global and diversified company. As Eido mentioned, while our gross margin continues to be best analyzed on an annual basis, allow me to provide more detail on how we achieved 58% non-GAAP gross margin in the fourth quarter.
The ongoing improvements to our model and enhancements to our monitoring tools and systems led to better performance. Consistent with prior years, our fourth quarter plans to have a safer population of transactions than the rest of the year, and we did not have any unexpected broad events. Also, as always, the timing of new revenue and merchant mix can impact the gross margin in a given quarter. Overall, the success of this quarter contributed to an annual non-GAAP gross profit margin of 52%. As Eido mentioned, we're expecting some of the margin expansion that we achieved in Q4 to carry into 2024. As it relates to 2024, for the full year, we're targeting a non-GAAP gross profit margin between 52% to 53%, which is 1% higher on each end than the initial range of 2023.
Directionally, our first quarter margin is expected to be within this range. Q2 and Q3 are expected to be below the range and Q4 is expected to be higher than the range. Moving to expenses. Total non-GAAP operating expenses were $39.4 million for the fourth quarter and $163.5 million for the full year of 2023, both representing a year-over-year decline of 6%. We're becoming more efficient and we have a deeper understanding of the working needs of each area of the business. We ended the year with decreased costs across most areas of spend with savings generated through the negotiation of contracts in our AWS and other optimization efforts of our data sources, lower human resources expenses resulting from decreased headcount and recruiting needs, more focused spending in our sales and marketing line item and savings from the leasing space.
For the year, our non-GAAP operating expenses as a percentage of revenue declined from 66% to 55%, reflecting leverage in the business model. We anticipate continuing to see further leverage in 2024 compared to 2023 and anticipate operating at approximately $40 million per quarter run rate. In addition, we have now substantially completed the global expansion of our go-to-market footprint, and we expect to start seeing improved leverage, as we further realize the returns on this previous investments. In the fourth quarter, we achieved our strongest adjusted EBITDA results ever, with $9.7 million in positive adjusted EBITDA, to highlight exactly how much progress we have made in achieving profitability, our adjusted EBITDA margin of 12% in the fourth quarter compared with minus 10% in Q4 of 2021, which was the first full quarter of operations following our IPO.
For the year, we reported negative $8.5 million in adjusted EBITDA, an improvement of nearly 80% year-over-year. Our annual results represent 1,100 basis points expansion in our operating margin from the prior year. I'm extremely pleased by our ability to execute on our profitability goals on an accelerated timeline and have set ourselves up for profitability on an adjusted EBITDA basis in 2024. We will continue to seek ways to strengthen our adjusted EBITDA results in 2024. In addition, we continue to maintain a healthy cash flow model and achieved record positive free cash flow of $7.1 million in the fourth quarter. We generated positive free cash flow of $5.9 million during 2023, and we believe we are in a great position to continue generating strong free cash flow and expect approximately $30 million of positive free cash flow in 2024, assuming a constant capital allocation strategy.
Moving to the balance sheet. We ended the year with approximately $475 million of cash, deposits and investments on the balance sheet, and we carry zero debt. This amount represents a decline of approximately $3 million from last year, primarily due to our repurchase activity in the fourth quarter of 2023, offset by the strong free cash flow activity mentioned previously. This leads me to the topic of capital allocation. On November 20, 2023, we received Israeli court approval to begin executing our previously announced share repurchase program. Since receiving this approval, we have been aggressive in utilizing this program to take advantage of what we believe are attractive repurchasing opportunities. In the fourth quarter, we repurchased approximately 3 million shares for a total price of approximately $13.1 million.
As of February 29, year-to-date, we have repurchased an additional 4.5 million shares for a total price of $20.8 million. We anticipate that our repurchasing activity will more than offset the dilutive impact of equity issuances associated with option exercises and vesting of RSUs in 2024. At valuation levels well below that of companies with similar financial profile, we believe that we have a great opportunity to continue repurchasing our stock at attractive prices. We continue to believe that our strong partnership and liquidity position are strong underappreciated assets. We will continue to be thoughtful on how we utilize our capital to drive shareholder value, including executing on additional repurchases and opportunistic both on M&A.
As we previously announced on February 13, as part of our effort to drive faster and more meaningful progress towards our margin targets, we made a decision to reduce our global workforce by approximately 6%. We expect to recognize net operating expense savings related to this reduction of approximately $6 million on an annualized basis, subject to reinvestment, which is factored in our 2024 outlook. As a result of the reduction in force initiatives, we anticipate recording an incremental expense of approximately $2 million, primarily in the first quarter of 2024. This expense primarily relates to severance amines, employee benefits and other costs related to the reduction in force. Charges incurred in connection with the reduction in force are excluded from adjusted EBITDA guidance.
The actual amounts mentioned could differ slightly from what is currently expected upon the completion of this reduction. We ended 2023 with 742 employees, a decline of 5% from the prior year and following the completion of the transaction, we will have approximately 700 employees. Now, turning to our outlook. As we look forward to 2024, we currently anticipate revenue of between $323 million and $335 million or $329 million to the midpoint. Consistent with the past two years, we anticipate that our growth will be driven primarily by new activity, and at the midpoint of our guidance, we're forecasting a relatively similar net dollar retention rate as of 2023. The behavior of the macro environment, either positively or negatively can impact our net dollar retention rate and may ultimately determine where we fall within our revenue range.
In addition, we feel confident about the new business activity levels, which is supported by a more robust pipeline than at this point last year. Like we saw this year, the timing of when new merchants go live during the year can be difficult to predict and may have an impact on our calendar year revenues. For modeling purposes, we currently expect all of our quarters in 2024 to reflect a similar percentage of the total revenue as they did in 2023. Now, let me discuss our adjusted EBITDA outlook. We currently expect adjusted EBITDA to be between $10 million and $17 million or approximately $13.5 million to the midpoint. The midpoint of our adjusted EBITDA guide represents additional margin expansion of approximately 700 basis points from the prior year, demonstrating leverage in the business model and the commitment to managing the business in a disciplined manner.
Overall, I'm encouraged by our market positioning and executing on the elements within our operational control. Heading into 2024, we have set ourselves up to be a more productive and leaner company in a challenging environment. And Eido and I remain excited by the continuous profits for long-term growth and our ability to deliver value to our shareholders. Operator, we are ready to take the first question, please.
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