Q2 2021 Riskified Ltd Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the <unk> second quarter 2021 earnings call. At this time all participant lines are in a listen only mode. After this.
Speakers presentation there'll be a question and answer session to ask a question. During the session you will need to press Star then one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star then zero.
I would now like to hand, the conference over to your Speaker today, Chris <unk> Investor Relations. Please go ahead.
Yeah.
Thank you and good morning, and thank you for joining us today.
Risk abide is hosting this call to discuss its second quarter earnings results for the period ended June 32021.
Participating on today's call are <unk>, co founder and CEO and <unk> Chief Financial Officer.
Earlier this morning risk if I had issued a press release announcing its financial results for the second quarter of 2021, a copy of this press release has been furnished with the Securities Exchange Commission on form 6K, while this call will reflect items discussed within those documents for more complete information about our business and financial performance. We also encourage you to read our final initial public.
Bring prospectus dated July 28, 2021 as filed with the Securities and Exchange Commission on July 32021.
Before we begin I wanted to remind you that matters discussed on today's call will include forward looking statements related to our operating performance financial goals and business outlook, which are based on management's current beliefs and assumptions. Please note that these forward looking statements reflect our opinion doesn't the date of this call and we undertake no obligation to revise this information as a result of new developments that may.
Okay forward looking statements are subject to various risks uncertainties and other factors that could cause the actual results to differ materially from those expected and described today. In addition, we are subject to a number of risks that may significantly impact our business and financial results for a more detailed description of our risk factors. Once again. Please review our final IPO perspective, where you will see a discuss.
The factors that could cause the company's actual results to differ materially from these statements.
A replay of this conference call will be available on our website under the Investor Relations section.
I would also like to remind you that during the call. We will discuss some non-GAAP measures when talking about its performance you can find the reconciliation of those non-GAAP measures to the nearest comparable GAAP measures in the earnings press release issued and furnished on form 6K today and on our prior filings with the SEC all of which is posted on our website at IR.
<unk> dot risk if I'd dot com.
Now I'll turn the call over to adult doll.
If I had to co founder and CEO.
Thank you Chris and thank you all for joining us for our first earnings call as a public company.
We're happy with the positive market reception to our IPO and very excited for the journey ahead.
We are also pleased with our results for the second quarter, which included revenue growth of 47% year over year, and a 55% year over year increase in gross merchandise volume to $26.0 billion we.
We believe these results validate the degree to which the ROI, we deliver strongly resonates with many of the worlds largest online merchants.
In addition to these financial results there are several achievements from the quarter that I would like to share with you today.
First we started reviewing orders for several new large merchants, who completed the platform onboarding process during the quarter. These additions to our merchant network represent a broad range of ecommerce verticals that are well positioned for continued organic growth in the future.
Notably several of these merchants also operate an online payment categories that risk. If I'd has not previously served including crypto currency brokerage as just one example.
Second while we do not plan to report on individual customer contracts on a regular basis. There was a significant in quarter renewal that deserves an exception owing to the size of the merchant and the depth of our relationship.
Over the summer, we renewed an important partnership with wafer one of the world's largest destination for the home, although we will not be disclosing the terms of the renewal we are humbled and excited to continue working with wafer to solve complex problems related to online shopping checkout and payments.
Third the risk if I'd platform continue to prove its performance capabilities in response to the exacting customize these are large global merchants during the quarter, our algorithms learn from more than $150 million, new ecommerce transactions conducted on our platform simultaneously we cut.
<unk> our platform implementations for several large merchants to address their unique pain points through the use of more than one risk of five product.
We believe this ability to customize our platform a tremendous scale is yet another reason why many of the world's largest E Commerce companies Trust us to review and guarantee the entirety of their online order volumes.
Argued will go into further detail on our strong financial performance shortly but since this is our first earnings call as a public company I'd like to provide a brief overview of our business. The tailwind is driving our growth in a few strategic initiatives as background.
Our CTO and co founder of <unk> started risk a fight in early 2013 to solve online payment fraud at the time, we didn't fully appreciate how big e-commerce would become or how many industries. It would impact, but we understood one of the key problems at the very heart of e-commerce selling anything on.
Online involves unique risks that all connect back to fraud. The internet has always been overrun with people concealing their identities for financial gain and most modern payment products placed the cost of fraud squarely on the seller. These two realities create a very challenging situation for online merchants.
Seller liability poses a fundamental question with each and every order and online merchant receipts, which customers should they accept which customers should they decline. It's an incredibly complex question to answer and left to solve this problem on their own we believe too many merchants experience large amounts of missed sales unnecessary.
Expenses and in fever your results overall.
From the very beginning we believe that we could build a ubiquitous machine learning solution that would outperform anything in individual merchant could build on their own. The end result was the risk if I'm, a new paradigm and fraud management.
Today, our platform aggregates data from more than 1 billion historical full lifecycle e-commerce transactions, creating network effects that we believe drive superior performance and compelling ROI for our merchants.
As our algorithms continuously get smarter it enables our merchants to realize ROI that goes beyond just preventing from.
As a result are highly satisfied customers include many of the world's largest online merchants, including way fair wish Macy's and stock X.
We believe so strongly in the superior accuracy off our platform that we guarantee performance levels that are precisely customized to each merchant business more specifically, we provide guaranteed minimum approval rates for our merchants online order volumes, while also contractually agreeing to bear the cost of any fraudulent sale approved.
By risk are fine.
This allows our merchants to maximize the conversion of incoming orders into successful sales without worrying about who's a good customer and who's a fraudster.
In return, we charge our merchants a percentage based fee on the value of every transaction that we have and.
And we do this all seamlessly in the background of each online session. So legitimate consumers can experience the fast frictionless shopping experience.
In the end, we believe that this approach results in higher merchant revenues reduced expenses and superior consumer experiences relative to what any merchant is capable of producing on their own.
Based on an internal analysis of our 10 largest merchants providing sufficient data be average merchant working with risk if I experienced an amazing 8% increase in revenue after integrating with our platform.
Those same merchants experienced a 39% average decrease in fraud related operating costs and chargeback expenses net of our fees during that same period.
All of this drives a powerful flywheel effect, our risk management platform get stronger from each transaction, we process and each merchant we add to our network.
Each transaction, we review enhances our datasets and our ability to identify similar.
Characteristics between transactions on our network.
As we grow this sophisticated transaction matching enables us to deliver a strong return on our investment for our merchant and drives robust product innovation that enhances the consumer shopping experience. We then leverage this improved ROI for our merchants and our enhanced product suite to attract more merchants, which drive.
Some more transactions through our platform and fuels further organic growth.
As our business has grown over time, our merchant network and the portfolio of potential chargeback contain have become increasingly diversified across a broad range of consumers industries and geographies today, we serve large scale merchants and representative categories, such as sporting goods furniture and Homewares.
Travel apparel accessories, consumer electronics and jewelry to name just a few our merchants range from direct to consumer brands online only retailers omnichannel retailers online marketplaces, and other E Commerce service providers that bear the liability for payment truck.
And each year, we review transactions on their behalf that represent consumers located in more than a 180 countries, providing truly global coverage for merchants looking to grow into new overseas markets.
As we improved our ability to manage payment risk we discovered other similar risks facing our merchants for example, we realized account takeovers, where a popular fraud factor bank declines were a huge source of missed sales opportunities and policy abuse was a common occurrence with a sizable financial Inc.
As a result, we launched several new products, which are now important part of our overall platform. Our plan is to continue to enhance our platform by developing new product features and functionalities to further strengthen our market, leading technology and serve the most complex and evolving need.
Every merchant.
We hope to share more details on these products in the future.
Now I'd like to touch quickly on the structural tailwind benefiting our business.
We believe that our business benefits from several macro trends that are driving continued demand for our products first our opportunities increase as more sales are transacted online. According to E. Marketer Global E. Commerce sales grew 28% year on year to approximately $4 three trillion in <unk>.
'twenty and are expected to grow to approximately $6 four trillion by 2024.
Furthermore, the prevailing omnichannel sales strategies like buy online pickup in store is expanding the range of large scale merchants. We can serve while also complicating their fraud decision process.
Fraud is continuously on the right merchants face an increasingly sophisticated range of fraudulent threats every year, including stolen payment credentials compromised consumer accounts and illegitimate refund claims fraudsters can easily impersonate legitimate consumers, resulting an enormous.
Financial losses, and damage brand reputations and consumers can falsely claim that their orders never arrived or that the product. They purchased was damaged on delivery.
As a result, Juniper research estimates that merchant losses due to online E. Commerce fraud will exceed 25 billion in 2024 up from $17 billion in 2020.
Lastly, the policies implemented by payment networks and banks are introducing meaningful friction points that have the potential to block large volumes of E. Commerce shopping online merchants depend on these partners to conduct their business yet these partners and their policies can be extremely punitive from Merck.
Since.
As just one example, Edgar Dunn and company estimates that 720 billion will be lost due to payment declines by 2022 and approximately 72% of these payment failures will happen to good consumers.
Simply put the e-commerce landscape is rife with bad actors and multiple counterparties that even the most sophisticated merchant with the most dedicated internal fraud prevention team may struggle to manage effectively in the long run.
<unk> as consumers expect fast and simple shopping experiences merchants are forced to decide with limited information, which consumers to accept and which to deny and they need to make those decisions in the blink of an eye.
I should also mention that there was one notable headwind that is impacting our business at least towards the time being.
The online payments industry in Europe is currently adapting to new payment regulation called <unk>.
As a result of PSD to an existing card network rules online merchants will no longer be liable for fraud for some portion of their European E Commerce volume.
The market is still adjusting to this new regulatory framework, but we believe the associated <unk> those online merchants submit to us will decline and as a result impact our near term revenue potential to an extent the.
The magnitude of the liability shift is difficult to quantify with certainty and several important dynamics have yet to play out.
Which means that the impact on our European E Commerce volumes remain uncertain.
The important takeaway here is that all of this will result in a onetime reset to a portion of our growth and not a reduction to our overall market potential.
All that said when I step back and I look at the global market ahead of us I see a tremendous opportunity for long term growth enterprise class merchants continued to generate the lion share of direct to consumer <unk> online and they increasingly look to third party vendors such as risk if I'd to manage noncore.
And so if their business at.
At the same time our platform also serves many other parties impacted by online fraud, including some of the world's largest online marketplaces. We believe the value we create far exceeds the cost of an in house solution, enabling us to drive meaningful ROI.
Compelling economics, both for our merchants and for risk if I allow us to say confidently that we will continue investing aggressively to capture market share in this exciting new industry. That's why we've recently opened offices in China as well as the U K and Australia, and there will be others to come in the near future.
Before I turn it over Taghi I want to thank all of our team members for their hard work and dedication over the last eight years and.
In addition to growing our business. We have also managed to make a meaningful impact on our communities both in Israel and in the U S.
And the last three years alone we have worked with 50 to nonprofits on 136 projects committing over 4000 volunteer hours along the way.
We also donated shares in the company that were valued at $13.0 million at the time of our IPO and close to $13 million as of September <unk>, which will be allocated to nonprofits across Israel.
We hope to continue our dedication to service as we grow our corporate social responsibility initiatives in the future.
I'm very proud of what we've achieved to date and I look forward to what's to come with that I would now like to turn it over to Augie to discuss our second quarter financial results and outlook.
Thank you and everyone for joining today's call.
This is <unk> first earnings call I would like to begin with an overview of our financial model. So that everyone understands the fundamentals behind our business.
Then I'll discuss our second quarter financial results in detail and finally I'll provide our guidance.
Fundamentally our business model aligns our interest with our merchant E J.
<unk> when they win.
We generate revenue by granting margins access our ecommerce risk management platform and reviewing our clothing and guaranteeing ecommerce transaction for legitimacy, we charge our emerging percentage of every dollar of gene pool. So are you tempted itself drove as many orders as we think you can hold the margins they have.
Beneath that is merchant centric approach, coupled with weaker decisioning profit maximizes, our financial results and lower margin.
If approved the transaction that'd be guaranteed results in a manageable charge back well will reimburse the margins.
The amount of the loan sale.
These situations we record a charge my guarantee expense in cost of revenue and typically provide the payments of the marching in the form of a credit on future invoices.
We charge our merging our percentage of every dollar of Jean David We until we define our take rate as a percentage of billings divided by G&A. As a result, our take rate is driven by two main factors number one risk adjusted fee.
The fee, we charge, our merchant, which is established contract infection risk.
Adjusted <unk>, which is expressed as a percentage of the GMT, we absorb our risk adjusted price is a function of the type of marching the risk level of the end market. The percentage of JV. We review from the merchants and the guaranteed approval rate we agreed to provide a number to you alright. Thank you.
Percentage of GMP that we IPO.
So for example, when our emerging assets or we get transactions from end markets that carry higher rate, we might charge a higher fee.
When we upsell and radio additional volume from an existing merchant it will usually be coupled with them already suggested SEC.
Let me out of changes in the overall take rate can be attributed to see emerge in our industry makes me now portfolio of margins each has a different risk profile.
On March eight great.
Therefore, unlike traditional payment companies our take rate changes are enough to merit and treat them like volume discounts by Ryder by overall business trend.
Yeah.
Our take rate was approximately 26 basis points in <unk> 2021 which represented a decrease of three basis points from 29 in Q2 of 2020, largely due to an increase of <unk> <unk> from a few merchant upsells in our portfolio for a longer week adjusted right.
As a result of the strong value add we provide to our merchants we have experienced strong marching revenue retention the compelling ROI. We deliver he's also resulted in margins increasing the use of our platform overtime and.
An important indicator of our ability to grow our relationships with our merchants and to increase their use of our e-commerce to risk management platform.
Net dollar retention rate, which has been well over 100% over the past few years.
Now I'll turn to our second quarter results, we ended the quarter with DMD grow 55% year over year to $26.0 billion and revenue growth.
47% year over year to $72.0 million.
The strong year over year growth in revenue is primarily driven by the expansion of our platform from new and existing merchants who continues to experience.
Overall e-commerce volume isn't downloaded earlier.
Fortunately our cost of revenue, which primarily consists of chargeback expenses increased by 27% year over year to $26.0 million due to the previously described.
The changes in revenue and cost of revenue that I noted earlier drove a 65% year over year increase in gross profit to 33 point swing in.
Before discussing gross profit margin I want to remind everyone that this is a metric that is best analyzed on an annual basis as individual quarters can experience variety.
The 90, the industry mix shift of our revenue and changes in the risk profile as transactions with tools.
Gross profit margin for the second quarter was 60%, reflecting seven percentage points year over year equivalent from 53% in the second quarter of 2020. This.
This improvement is primarily driven by a lower risk profile of the transaction is approved in the period and ongoing improvements in our models and algorithms.
Although we are very pleased with this margin performance in Q2, we don't expect to maintain the same level of gross profit margin in the back half is this is primarily the result of a merchant needs.
More specifically and its testimony we experienced higher charge back when we first enter in your industry. These levels trend lower overtime as our platform learns from more industry specific performance data. In addition, we expect a pickup in higher risk profile travel industry related volume.
Summer and holiday related seasonality.
The remainder of the P&L I will refer to non-GAAP metrics you can find the reconciliation of non-GAAP to GAAP numbers in the accompanying press release issued this morning.
Total non-GAAP operating expenses in Q2 of 2021 with $40.0 million or 57% of revenue driven by planned investments in research and development sales and marketing and general and administrative call isn't it continue to extend our platform and build new products as well as go to market.
Activity towards geographic expansion and market coverage, we do expect non-GAAP operating expenses as a percentage of revenue developed in Q3, and Q4 to reflect ongoing investments as well as the incremental costs of operating as a public company.
Adjusted EBITDA in the second quarter was positive one 6 million representing a margin of three 8%.
Mentioned above we expect to accelerate investments in the near term and therefore produced negative adjusted EBITDA for the remainder of the year and for the full fiscal year.
Our balance sheet remains strong with $156.0 million of cash and cash equivalents restricted cash and short term deposits. We did not carry any debt on our balance sheet.
Following the end of the second quarter and the second 1021, we completed our initial public offering.
They've songs raising net proceeds of approximately $386 seven medium.
The capital we have rate gives us a chance foundation to continue to invest in our technology and future growth opportunity and to enable our merchants to create trusted relationships with our consumers.
And now turning to guidance, let me remind you that these detail would your European Union countries have begun to adopt will be a headwind on revenue relative to earlier quarters for the remaining of the fiscal year.
Since the PSC to regulation authority in the beginning of 2021 with gradual adoption by country by the end of the year, we expect that Q4 will carry the most significant impact.
For the full year of 2021, we anticipate revenue between $228.0 million and $229.0 million and negative adjusted EBITDA between $29.0 million and 25 point swing in our general practice will be to provide annual ranges for guidance.
Which we believe is consistent with our long term approach, we take to managing our maintenance. However, even the unique timing of this first public earnings release occurring so late in the quarter were comfortable to provide our revenue outlook for Q3 of between $67 million and 51 points of meeting.
For modeling our for earnings per share, we expect to have approximately 809 million and thundered 61 million weighted average shares outstanding for third and fourth quarter respectively.
We're very pleased with our strong results through the first two quarters of the year and we expect to continue to benefit from strong underlying growth in global ecommerce fueled by the expansion of Omnichannel purchase options and higher e-commerce penetration rate.
Leverage our proprietary technology aggregated data advantages and skilled merchant network to drive even higher return on investment for merchants and create frictionless shopping experience for consumers in particular, we're excited to continue our growth and aggressive global expansion into several major geography.
In the coming years, we look forward to reporting on our progress in achieving this vision along the way.
I'll turn it over to the operator for your questions.
Thank you as a reminder to ask a question you will need to press Star then one on your telephone to withdraw your question. Please press the pound key.
These standby, while we compile the Q&A roster.
Our first question comes from the line of Josh Beck with Keybanc. Your line is now open.
Congratulations on the first public quarter.
The IPO team really really good to see.
I just wanted to start high level, just with the product roadmap you had talked certainly about.
Some areas that you'd like to get into maybe just give us a little bit.
I know you can't be too specific, but just maybe a little bit more of a flavor for where you'd like to see the product.
Expanded on overtime.
Sure thing Hey, Josh.
So you know our product roadmap right now consists of accounts secure which helps verify accounts at creation and logging policy protect which kind of saves merchant's from abuse in their different policies like returns and.
In Deco, which helps optimize payment declines and also PSD too to help with that regulation.
Really you know our focus is to help generate ROI throughout the purchase funnel, we view that as either helping merchants increased sales decrease their operating cost or create a better friction less really seamless environment for their end customers alright. So that's really what we have in mind.
And taking a step back I'm really kind of happy with the traction and the value that these products are creating together with the synergistic qualities that they have working with each other.
They're all kind of live with a multitude of enterprise clients and it's really helping create this type of platform approach for us.
Excellent.
Really good to hear about the way fair renewals. So thank you for the context there.
Curious I know you can't get too specific about some of these larger new merchants that you've on boarded but maybe just would've been some of the early learnings as you started to obviously.
Work more closely with them and actually onboard them.
To the system.
I think we've been pleasantly surprised how applicable the solution is not just for credit card E. Commerce transactions, but also you know alternative forms of payment whether it's a C. H, whether it's digital tokens are wallets. So that's been kind of our assumption, but it's been real.
Forest throughout this quarter and I think that you know we've always had the thesis that even the world's largest merchants would be happy to partner with a risk if I on noncore elements of their business and we feel that the wafer is a great example, but also what kind of other things.
Things that we can discuss right now.
Okay excellent I just squeeze one more financial question just related to the guidance. Obviously, you have really strong momentum.
As you mentioned within the quarter and it's certainly a good visibility into Q3, maybe just with respect to Q4.
What are some of the key assumptions, obviously, you mentioned PSC two is likely to be more of a.
SEC during that quarter, just what are some of the big moving parts that we should be.
Thinking about it as we go into the fourth quarter of the year.
Yeah, So I'll take this one.
So when we think about Q4, we already know that some of the most of the European countries have already started to adopt these appeal and is definitely something that we're watching and we expect that most of the effects and impacts on our emerging will happen in Q4.
Having said that this is something that we've already kind of included in the risks in our in our financials based.
Based on the expectations based on what do we see.
And in addition of that we're just very excited about the continued.
Ranked in growth coming from our existing customers and.
I'll, just say that we're seeing generally that the COVID-19 has a positive impact like a tailwind to the ecommerce growth.
And that's also something that when we think about kind of the fluctuations between travel and and just to continue to add growth in E. Commerce, we're very well positioned with a portfolio.
That kind of.
Barry bonds being the impact of e-commerce, but it also kind of made it sometimes you can buy some of the softness in travel.
Very helpful. Thank you team.
Thank you. Our next question comes from the line of Timothy Chatto with Credit Suisse. Your line is now open.
Great. Thank you and good morning, everyone I wanted to dig in a little bit to the longer term growth outlook. So I think this would be something that would be extremely helpful to investors. When we think about that let's call it 25% to 30% medium to longer term growth outlook getting past the near term impacts from PSD, two and whatnot.
How does the management team to think about this algorithm in terms of the components. When we think about one portion is the underlying end market growth. So E. Commerce growth very strong then you have this other driver of wallet share gains with your existing customers and then of course, you have new customer wins. So if you were to kind of put some rough numbers around those.
To add up to roughly 30% or so how should we think about those clearly the E. Commerce underlying is sort of in the mid teens, maybe higher but those other two components sort of bridge us to the 25 to 30.
<unk>.
Yeah, Hey, Tim So definitely when we think as a management team on kind of the really long term persistent growth opportunities that we have it's like you mentioned that the underlying growth of the e-commerce market that we're part of.
Together with expanding the wallet share with our existing clients.
And we have a very kind of considerable expansion opportunity there together with kind of gaining new clients, it's still kind of a massive opportunity.
I'll say that we also think about kind of expanding into additional categories.
D C H M digital tokens earlier.
Also thinking about geographical expansion. We're also thinking about some new products that are kind of very nascent in their revenue opportunity.
Those are all kind of different factors into that very long term persistent growth outlook. When we think about you know the exact percentage point and so I don't think it's something that we're sharing at this point, but I would say overall the way that customers, especially the larger ones, which are more significant for us they tend to start with a smaller.
Section and expand usage over time and stay kind of become more comfortable with the planning for them as we prove our ROI and expand with them. So because of that dynamic we tend to see more of the revenue growth from existing clients and expansion within the existing cohort.
But the net new business is what's helpful in kind of the future growth opportunities.
Okay, great. Thanks, a lot that's really helpful context, My quick follow up is.
And actually maybe it's not so quick of a follow up but it's a it's a question around PSD two offsets. So clearly there is some portion of volume that will cease being sent over in this quarter in Q4 et cetera with PSD two that's more of the intra European volume of course, the cross border piece is still very much in scope for.
You guys can you talk about the applicability of the new products in other words, if the core charge back guarantee product is impacted by PSD two in Europe.
What extent could the other new products still be sold into those same customers that you clearly already have good relationships with.
Right. So the PST to directive, which creates the payment security in the EU right. It forces customers into strong customer authentication a byproduct of that is is that we see more customer drop off second thing we see.
Is a shift in liability from the merchant to the card ish right and like you mentioned because of that liability shift there might be a one time reset to a portion of the European volume.
And the second question is does our PST to optimize product alright that helps offset some of that revenue impact over time, but.
But the remainder of the platform the accounts secure the tobacco product the policy protect our scale that's relevant to self correct.
Yes, exactly that's what I was getting at.
Couple of different products that could be still be sold into those same customers just kind of what I was getting at.
Okay.
Thank you everyone for taking the questions.
Thank you.
Our next question comes from the line of Ramsey El <unk> with Barclays. Your line is now open.
Hi, guys and thank you for taking my question. This morning.
I wanted to ask about kind of following up on the assumptions underpinning your your expectations in 2021, and whether they've changed between.
A couple of months ago, and the pre IPO period, and today I'm actually asking specifically about delta variation impact whether the wafer renewal is contemplated in guidance and whether you've had to adjust your expectations around travel recovery. Those three sort of items have you has your view changed has it caused your.
Projections to change effectively.
Thank you Randy.
This one so we're constantly monitoring macro trends such as call. It involvement on travel and just the general growth in E Commerce and when we think about the different factors that are impacting it.
Don't see any huge impact based on where we thought we'd be maybe there's just some shifts in cat.
Category is that specifically for example, if I think about travel we do see them like domestic travel our domestic accommodation growing much faster than kind of recovering weren't as international travel is not recovering as fast. So there is kind of specific variation.
Some of our assumptions, but overall.
We're kind of a very strong about our position of where we were.
Just a month ago.
So not a lot of change in the view, Okay. And then secondly, I wanted to ask about gross margin came in a little better than our model and if you could just comment on the performance of charge backs in the quarter and also maybe more broadly.
Should we expect not having a lot of historical context at this point, how volatile can that performance fee quarter to quarter.
Yeah sure. So what do we think about gross margin as a percent of the tens of crossroads in China, We do manage based more on an annual basis and it was the kind of explains out there can be variability in different quarters because of seasonality because of different industry merchant mix.
And different ramp up of new clients.
But on an annual basis, we're very kind of claw.
Close of where we thought we're going to be and I think this is kind of like the best way to look at the way we're managing this environment.
Okay, Alright, thank you very much appreciate it.
Thank you.
Our next question comes from the line of Tien Tsin Huang with Jpmorgan. Your line is now open.
Thank you so much and congrats again on the IPO in the first quarter here it looks really clean I wanted to follow up on Ramsey's question just.
With EBITDA coming in better gross margin coming in a little bit better and the outlook was better than what we had forecasted for EBITDA how much of that.
This gross margin performance versus perhaps the slower investment ramp I know that there was a lot of plans to invest in people et cetera. So just just curious if there's been any change on the cost side.
Sure thing James Thank you for the question. So I think that's a lot of it is coming from gross margin outperformance and regarding our investments we are on track and we're continuing to kind of scale.
Speed up until ramp up I'll say that the majority of these investments I expect it to kind of happen over Q3, and Q4 and this is reflected in some of our guidance.
Okay great.
High quality, then great terrific. There I don't know maybe for you although I D.
Just on the we get a lot of questions on buy now pay later, there's been a lot of activity. There are a couple of acquisitions.
And I've had some people ask about risk applied and how baidu pay later might play a role in Europe and your flow.
Do you participate and if so how.
Yeah. That's a that's a great question, so taking a step back like I mentioned, we don't just focus on credit card transactions, we already work with.
Age, where it's Paypal volume with digital wallets and from that perspective, the technology and work with buying out. There later, just as well when we think about the buy now pay later vendors themselves.
Their service is to provide an end to end payment processing that also includes the.
The risk component in the chargeback liability.
And they said they face the same problems that our enterprise e-commerce merchants space right, namely that they make mistakes they accept bad transactions when they have a loss as a result of that they turned away good customers because they do not want to receive those often they have to invest very large amount of resources to upkeep.
These teams and tools and processes and systems. So we definitely kind of feel that our platform just dedicated to solving. This one unique problem is very applicable and is directly within our strike zone to help them I will say that one just kind of a nuance to help understand I'm just talking about fraud related loss.
Not any type of underwriting related to credit, which I think is more of their specialty.
They are better than us that that portion.
Perfect.
Thanks for going through that guys. Thanks.
Thank you.
Our next question comes from the line of Terry Tillman with Truth Securities. Your line is now open.
Hey, Don Augie, congratulations on the IPO as well for me in the quarterly results.
I had a couple of questions. One thing I wanted to kind of take a look at is you have a growing merchant base on the platform and they're at various kind of cycles in terms of where they are whether they're early onboarding, they're starting to move into broader swath of their D. N V. Two.
Fully kind of ramped what I'm curious about is its kind of like a visibility a question I'm asking how much of your merchant bases like really fully ramped you've got the most attached you can get on GMB reviews as opposed to it's ramping or it's really early stages. That's the first question.
Yeah, So I would say definitely at the earlier cohorts right and I'm talking about 16 to 17 cohorts you can see that the wallet share has been steadily increasing and I think we shared some of their highest cohort expansion numbers or the net dollar expansion numbers that are great reflection effect. When we think about the most recent cohort this year the previous two years.
There's definitely a lot of expansion opportunity there left with.
We've added some of the world's largest e-commerce merchants that are underpenetrated today. So we definitely think theres kind of a massive opportunity.
Don't have you know for various kinds of also technical and sometimes regulation as we can share the exact white space.
On our internal models, it's very significant.
Okay, and maybe just a follow up question is you know Omnichannel I mean people have been talking about it for quite some time, but I think the brick and mortar companies or brands are still trying to work through that and that's the journey what I'm curious about is what's the cadence of it.
Terms of some of these large brands that are really trying to embark on omnichannel opus or curbside and just really get their house in order. There do you all tend to follow those initiatives do you tend to be in parallel and does it open up more opportunities or GMB. Thank you.
It does when I think about some of the categories like grocery is that you know from a traditional retail have done much more omni channel in the past 18 months, that's definitely opens up more opportunities for us. The reason being these kind of more complex undertakings like buy online curbside pickup.
Fraud tends to gravitate to those areas because they are newer.
And there's less data and it's easier to perform fraud there.
Which means that it's also a kind of a better opportunity for us to service. These merchants when they once they start getting into these world. So we don't really feel that various omni channel flows are a good driver for the business.
Congrats good luck in the second half thanks.
Thank you.
Our last question comes from the line of Brent bracelet with Piper Sandler Your line is now open.
Hey, good morning, and thank you for taking my questions here I guess I wanted to focus a little more on Q3 activity given the range for Q2 numbers here were known published an updated an S. One ahead of the IPO.
Could you provide a little more color on how the platform is addressing the digital wallet and online payment use cases, I mean, how much interest activity are you seeing now from that use case in Q3.
Broader adoption provide a lift to revenue just trying to understand the mechanics on how it works and how it may impact the model.
Alright, so I will say and I am putting Q3 aside for a second would be on boarded some new categories around kind of payment platforms and digital wallets and.
In the second quarter.
They are still under penetrated there is still a lot of wallet share in white space opportunity there.
Well you know it tends to take a longer term for us to ramp to fully realize the opportunity within these accounts.
So I wouldn't imagine that it would be a significant portion in Q3 at least.
Okay.
Over time could that be an incremental lift drive a higher attach rate to G. M. D could it be a material lift or it's just too new at this point to really tell.
I think on the very long term it could definitely be part of that persistent long term growth that's expanding the Tam, it's making sure that where applicable.
More geographies verticals categories.
Which is kind of not that long term vision that we have.
So it definitely.
Perfect and then on the international expansion I think you specifically referenced Australia China.
How is the how does the merchants' receptivity to to risk if I'd been there walk through any sort of color you can provide on appetite to partner in outsourcing and those two new regions.
Oh, we're very happy with the expansion both in Australia, and we also have planned in Shanghai and in Japan, Our London offices have been very successful so far.
We're ramping up in Mexico and Brazil.
And really I think the common thread is that the problem of fraud as global Okay, and the platform is able to provide a great service and all of these different geographies.
So again to date, even before we had the local representatives in those countries, we were able to support our global partners when they were selling globally.
But now you know that definitely helps us both with the go to market, but also in a way to service the clients.
So very happy with the reception so far.
Great and then last one here for you Aggie PS.
PSD two volume kind of head to head wind risk was well known kind of going into the second half of this year I'd be curious, how you're seeing those headwinds play out so far.
Any sort of change you know relative to what youre thinking going into the second half any thoughts there on kind of what's happening in real time would be helpful. Thanks.
Yeah sure.
I mean, we we kind of.
Expected the countries, they're going to gradually adopt it starts ramping up and we do see most of the countries kind of going in and plan. So in that respect everything is not unexpected.
<unk> of where we are right now country in both countries and merchants are dumping thing that they feel in terms of protection I think regulation is difficult to predict.
And I'd.
I I believe in the long term.
Bill will provide a growth opportunity for us once we're kind of class a cycle and we created this reset and we'll be able to really help all these clients that we have today to kind of subtract <unk> <unk> to really help them with SEC.
Moving there.
Alright, and friction points as well.
Helpful color. Thank you so much for the call and taking my questions.
Thank you.
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