Q2 2023 Riskified Ltd Earnings Call
We anticipate approaching profitability on an adjusted EBITDA basis in the fourth quarter of this year and on a full year basis. In 2024, we have determined that now would be the right time to allocate some of our capital towards share repurchases.
We have a strong balance sheet, a large and stable cash and deposits position of approximately $480 million and zero debt.
At this time, we believe that both the company and our shareholders would benefit from a FERC <unk> share repurchases as a result to date, we've announced our board's authorization for share repurchase program of up to $75 million.
Subject to approval from the Israeli court, which was necessary by law. This court approval process is expected to take several months.
We believe that our company is undervalued with our cash balance currently comprising approximately 65% of our market capitalization.
This represents an attractive opportunity to repurchase shares and ultimately increase the percentage owned by our current holders. In addition, we intend to continue managing the business with discipline to further reduce dilution in share based compensation from current levels.
Additionally, even with this authorization, we believe that we have ample capital to pursue opportunities to continue to execute on our business objectives and strategically invest in the future of the company while pursuing profitable growth. We are laser focused on delivering for shareholders in the near and long term.
Now I will turn the call over to Doug.
Thank you, Jim and everyone for joining today's call.
<unk> for the second quarter was $31 billion, reflecting 22% increase year over year, we achieved strong second quarter revenue of $72 8 million up 21% year over year, which represents an acceleration from our first quarter growth of 17%.
Yes.
Our growth in GSV and revenue during this quarter was primarily driven by the continued expansion of our platform across new margins and upsell.
Also experienced revenue growth across all geographies.
They get some travel remains our largest category and grow approximately 50% year over year.
Going forward as we now have fully lapped college related comparable period, we expect a more normalized level of growth in this vertical for the remainder of the year.
Currently during the second quarter and for the first time in several quarters. The overall business outside of tickets in troubled kids region contributing to our growth.
And while too early to tell the ultimate trajectory.
Side about the positive impact we have seen this quarter.
Similar to the first quarter, one of our largest category fashion and luxury goods, let's close to flat year over year in the second quarter as compared to the growth that we saw in this category in 2022.
For the second quarter in a row, we have seen softness in some of our corporate margins within this category in particular within our luxury brands and sneakers sub segment.
Finally from a geographic standpoint, the U S. Our largest region grew by 18%, which was the highest level seen in several quarters.
EMEA grew 20% and the Americas, and APAC grew 35, and 44% respectively during the quarter.
Our continued revenue growth from regions outside of the United States further demonstrate the positive returns from our previous investments and market share gains.
Moving on to gross profit margin, our non-GAAP gross profit margin for the second quarter of 2023 was 52% consistent with the second quarter of 2022.
Several weeks ago, we became aware that one of our largest margin was experiencing a significant fraud event.
Based on the information currently available to US we anticipate an incremental impact of approximately negative three eight to $4 8 million on our third quarter gross profit.
We have been working closely with this marching to remediate the issue.
Just on the information currently available to US we believe that impact on our gross margin is contained.
Outside of the impact that this margin fraud events, we're encouraged by our gross margin performance and have improved our fourth quarter gross margin outlook accordingly.
However, as a result of this marks a fraud event, we now anticipate that our annual gross profit margin will be in the range of 50% to 51, 5%.
As a reminder, gross margin is best analyzed on an annual basis.
Gross margin may fluctuate on a quarterly basis.
Moving to expenses.
non-GAAP operating expenses were $42 2 million for the second quarter of 2023 six.
A 6% decrease year over year and relatively flat with the first quarter of 2023.
Our absolute dollar expenses have remained essentially flat over the past four quarters.
Our non-GAAP operating expenses as a percentage of revenue declined year over year from 75% to 58%, reflecting leverage in our business model.
We plan to continue operating the business with discipline, we are modeling approximately $84 million in second half expenses.
With our fourth quarter expenses to be lower than the third quarter.
Adjusted EBITDA for the second quarter was negative $4 6 million or 67% year over year improvement.
We have meaningfully improved our adjusted EBITDA performance on a year over year basis for the fourth consecutive quarter. She is making the decision to accelerate our timeline to reach profitability.
As previously mentioned, we currently anticipate being profitable on adjusted EBITDA basis in the fourth quarter of 2023.
On an annual basis in 2034.
Yes.
Moving to the balance sheet.
We ended the second quarter was approximately $480 million of cash deposits and accrued interest on the balance sheet and we carry zero debt.
This amount represents a slight sequential decrease in cash deposits and accordingly.
Yes.
We remain confident in the patient's ability to generate positive cash flow.
For the long term and we continue to believe that our balance sheet as John liquidity position are underappreciated assets.
In terms of our outlook, we're updating our 2023 guidance that was previously shared on our Q1 call.
Assuming no further material changes to the macro environment, we now anticipate revenue between $298 million and $303 million for the full year 2023, or $300 5 million at the midpoint.
We continue to believe that our full year adjusted EBITDA between negative 17 million and negative $12 million.
We continue to approach our guidance responsibly.
We will continue to monitor the performance and health of our margin consumer spending the broader e-commerce landscape and the impact on our results.
Overall, we're pleased with our strong first half results the continued challenging macroeconomic landscape.
We remain excited about how we're positioning our business for the continued prospects for long term growth and our ability to deliver value to our shareholders.
Operator, we're ready to take the first question. Please.
Sure.
Yes.
Thank you.
As a reminder to ask a question. Please press star one on your phone.
To be announced to withdraw your question. Please press star one again standby as we compile the Q&A roster.
Okay.
One moment please for our first question.
Okay.
Our first question will come from.
Brent <unk> of Piper Sandler Your line is open.
Good morning, Great to see continued strength in ticket and travel I guess I want to double click into that the base business. It sounds like based <unk> chickering travel returned to growth.
Other factors.
They drove a return there or are you just seeing.
A broader diversified base is at the top three merchants coming back any quarter any sort of additional color on that.
The recovery, you're seeing in the basics ticket travel.
And of course with Brian . Thank you for the question, so where we are.
We're encouraged by what are we seeing travel and the overall kind of continued strength in consumer spending and moving towards the span on experiencing and experiences.
Specifically about travel what we're seeing is that international travel is growing very nicely.
Better than domestic.
And mostly it's really deep.
Number of transactions that have been increasing very positively.
So much like the price level.
And.
That's kind of like the new answers a lot of travel outbound travel outside of the U S towards.
<unk> Europe and APAC.
Totally makes sense and then what about the base business, if I, if I exclude tickets and travel what's driving the base business ex travel to return to growth.
Oh, sorry, I didn't understand.
Side of travel we've seen some of the continuation of the trends from Q1.
We've seen some softness in.
Hi, Ann's question and the subs.
Segment of sneakers.
But we've seen some positive.
<unk> seen some positive trends around.
And.
And specifically around chrome as well so all we know.
The hires noticed high but also the lower much better.
So I would say overall normalization and for the first time this quarter I'm very encouraged by seeing that.
We've been growing is in aggregate all of the industries outside of travel as well.
Helpful. And then maybe could you just spend a little time talking about the.
The merchant summit I know, it's a small summit, but I imagine some of your largest merchants, where there walk us through what the pain points are out there what's the feedback on on the product whats the feedback on policy protect would love to get any sort of like.
Real World insights given that was a relatively recent event and you talk to your largest merchants. Thanks.
Sure happy to provide more context there.
Look I think we are in a unique position that we work with some of the largest enterprises and we've been fortunate.
Because of our relationship we have a good relationship with some of the C level executives and they joined US for three days for the summit. When we were able both to present, let's call. It our immediate kind of 18 month roadmap to them to collect feedback and have them involved and say Hey, you know this would work for my business This would not.
Worked for my business, but also really understand their pain points and strategic goals for the next 18 to 36 month roadmap and.
And I think really across the board the issue a policy how do we make sure that we're selling to our best customers and give them the best experience, while making sure that we're not spending too much money on shipping logistics reverse logistics coupon codes on our low LTV or.
Quote unquote bad customers was a consistent theme.
And it's definitely something that strategically touches a lot of points in the organization. So having the senior leaders involved in crafting the solution and understanding their pain points, we think is incredibly beneficial.
Helpful color I'll cede the floor. Thank you.
Thank you.
One moment please for our next question.
Our next question will come from will Nance of Goldman Sachs. Your line is open.
Hey, guys. Good morning, I. Appreciate you taking the question wanted to follow up on the merchant proud of event that you called out Wonder if you could provide a little bit more color.
Yes.
Different sort of event than you guys typically typically see in the business how long does it take you guys to catch it that sort of thing.
I guess I was looking forward you mentioned some innovation on the model Scott.
One is that something you can kind of.
Learn from and factor into future models rollout to the broader customer base.
Sure. It's an important question. So let me give kind of a wide answer here. So.
So really what happened is I would say a confluence of three main things number. One this was one of our largest merchants.
Number two we had recently signed an agreement to target a higher approval rate for our higher fee.
And number three as we started ramping up approval rate there was a large fraud attacks targeting this margin now when we increase approval rates there is.
Anticipated risk within the account Unfortunately, the mistake that we made is that we not correctly categorize some of the new risk coming from the fraud attacks.
And that meant that we underrepresent, what the overall risk level of the account. So we actually did identify the fraud attack relatively quickly, but because we misunderstood the broad level and the account the mitigation strategy wasn't.
Quick enough or severe enough to really stop the attack and you can see the financial impact like RG sure.
Obviously, you were very frustrated and disappointed with the outcome. This is the single largest monetary event than the 10 years since <unk> has existed.
In the five years back.
Published audited financials. This is the first time that we've had to.
Move down the annual gross margin guide.
And I would say that some of the immediate steps, we're taking to make sure that something like this or something like this doesn't happen again is number one just more on the operational side, which is a bit simpler making sure. We're not managing accounts that have multiple events happening at the same time life change in approval rates and a fraud event number two is more around the modeling.
It's hard to make sure that we're able to better differentiate the risk from different factors in the account like related to equivalent rates related to the fraud attack and number three is just making sure we have a high reliance on quicker signals about the changing risk levels of the accounts that we can make changes even sooner.
Then we are.
I do want to highlight.
It is a contained event, we don't think that Theres any <unk>.
Additional impact to Q3 margins.
There is no forward looking impact right. So it's not going to impact Q4 'twenty four.
And again this is frustrating because outside of this we do think that the business is performing.
Very well then your revenue the platform side, the opex piece and flowing that through with full leverage.
And it is frustrating because obviously without this we would have been able to improve the adjusted guide did not keep it says like we did for now.
But look overall, we are encouraged with the modeling performance in the system. Overall, we have been able to increase our Q4 gross margin guide and we think Thats a better indication of the overall trajectory of the business.
Got it appreciate all the color thank.
Thank you <unk>.
Maybe just to follow up on the on the capital return at outset. It sounds like we've got a little time before that gets approved by local authorities, but just wondering if you could kind of talk through how youre thinking about.
The level of share repurchases into 2024 and <unk>.
Youre thinking about alternatives to share repurchases, such as M&A and how that might factor into that the amount that ultimately gets done.
Yeah.
Yeah, sure so I'll start and maybe it'll add up a little bit.
So we've already got an approval by the board.
We are in the process of submitting.
So these really are.
Relation and authority our request for approval is just something.
Something that we need to go through I would expect probably it will take like.
Two months or so and by the end of the year, we should be able to start the program.
And kind of execute throughout 2024.
I would say from our perspective look we have 400 Navy we're approaching profitability.
So we definitely feel that even with the 75 million share repurchase is not impacting in any way shape or form our ability to strategically look for M&A opportunities. Obviously internally, we feel that we're making a lot of smart investments profitable investments into the growth of the company.
So this is impacting.
Impacting that as well.
Understood very helpful. Thanks for taking my questions.
Thank you.
And one moment please for our next question.
Our next question will come from the line of Randy <unk> of Barclays. Your line is open.
Hi, This is Owen on for Ramsey. Thanks for taking our question. This morning wanted to ask a bit about your kind of Q2 take rate I saw came in slightly compared to last quarter in the previous year just wanted to get some color on that was wondering if you are maybe kind of pass along a little bit more value to customers as you achieve scale.
Al or maybe there is some cyclicality in the corner just.
Anything to consider there would be helpful.
Yes. Thank you for the question so what we do.
Considering that they create more of an outcome of the <unk>.
Model than really kind of like on a later call inputs.
There's a number of factors that can influence them in any way.
Given quarter. This is the amount of new revenue on upsell.
That's far adding and the difference weights of different industries, the different mix in performance of different merchant.
So all I know.
Expect no considerable changes.
It's a little bit.
Ins and outs.
But I don't expect huge fluctuations.
Based on that.
Understood I appreciate that and then I was wondering if I could follow up with some of the geographical expansion that youre kind of seeing you called out APAC Europe and Canada. In this quarter was just I'm wondering which one of.
Those kind of regions is sort of the largest opportunity from a geographical perspective that youre currently seeing.
I would say FX.
It's definitely a large opportunity for us which sounds like a consistence.
<unk>.
In the last couple of quarters.
But overall I'd say that we have a lot of room for penetration in all geographies.
A profile that is some of the growth. It's with currently seen also in the U S, which is our largest category industry as well, yes, maybe just to expand on that I mean, when we think just about the growth opportunities. It's a combination of some of the new products that we outlined which are very early stage. So that has a lot of opportunity glow.
But also just thinking about core chargeback guarantee even in kind of the U S and Europe .
We still think it's relatively low penetration, but obviously outside of that in APAC and Latam.
Growth is both faster and the penetration lower so we think there is a lot of opportunity there.
Understood appreciate the color.
Thank you.
One moment. Please our next question.
The next question will come from Tim Chiodo of Credit Suisse. Your line is open.
Hey, this is Pat on for Tim Thanks for taking the question.
We announced chargeback guaranty integration less commerce tools, which has some impressive large retail clients and now you have partnerships with other E. Commerce platforms can you maybe expand more on this distribution channel in terms of maybe how the economics differ from a direct go to market strategy and generally what the mix of new client wins looks like between.
The partnered indirect model.
Sure happy to expand on that you are right also in our partnership strategy, we continue to target the <unk>.
Larger merchants.
And we do that either through integrated partnerships or more refer like partnerships. The economics for us I would say that overall they tend to be similar to or just shifting some of the economics away from internal sales and marketing towards the more a partner.
As a broad generalization.
With the commerce, having just announced that it is still early days of that specific partnership, but we are encouraged by the overall size of demand and how it helps us expand our reach.
Great and then just a quick.
Quick follow up on <unk>.
Travel to take that gets recovered nicely over the past year and a tailwind to <unk> growth recently, but wanted to dig in more into growth expectations ex travel and low risk approach supports more discretionary verticals that you guys discussed the return to growth for some of these in this past quarter, but there definitely has been macro impacted but generally.
More normalized basis, how do you see risk of fives merchant mix ex travel growing compared to industry E comm growth rates in the future.
Yeah.
Yeah. So overall the trend is that.
For this year that the lower star just better.
Compared to last year, well see some normalization.
Say that overall it still.
It's still.
As an aggregate, they're all contributing to our growth, but primarily what is really happening is that's our continued addition of new business is able to kind of Nicky.
Negate some of the negatives from the same cohort growth.
<unk>.
Over time, I expect they still continue to normalize, but we're not there yet.
Okay.
Thank you.
Yeah.
Thank you.
One moment. Please next question.
Our next question will come from Robert Napoli with William Blair. Your line is open.
Thank you and good morning.
So I guess, maybe a little bit more color on the international business versus the U S business I guess international was about 37%.
Of the business last in 2022.
So can you tell us how is that international business different than the U. S is there we think theres more Friday internationally did that $3 8 million come from the international business. How does the economics of the international business looked versus the U S.
Hey, Bryan Thanks, I'll take that one so I think you are right. We are seeing faster growth in some newer regions, which would be kind of APAC, but Tom.
Our most our more established geographies would be both the U S and Europe .
Specifically talking about the fraud event.
Just because of different privacy reasons, I wouldn't want to get into the specifics of the merchant.
But it's actually considered a safe category and it's more U S domestic.
International It back there.
And the economics of the international business versus the U S.
I don't think I have anything meaningful to call out there and we think that broadly on in aggregate, which would be seeing similar things.
Okay, and then the pipeline it sounds like you added a lot of business you said the pipeline has grown.
Can you.
Give some color on.
Like the IRR added in the quarter, the number of new customers or just any color on that pipeline.
What you added in the quarter and how that pipeline has grown.
Yes.
I would say look I think argue sure that most of the growth that we're experiencing is coming from our new and upsell business.
And that they've been performing better than anticipated.
Relative kind of our internal projections and just ending in a better place the number of logos that we've added in the first half is higher than last year. So we think overall the trajectory, it's Greg both and the additions that revenue the number of logos and the pipeline generated.
Thank you.
Sure.
Thank you.
And again, we'll miss around next question.
Our next question will come from the line of Terry Tillman of Truth Securities. Your line is open.
Yes, Thanks, Adrienne Chad.
Kind of building on the prior question in terms of I think eight of the top 10, new merchants added outside of the U S. Do you expect that kind of mix or dynamism to continue over the next couple of quarters and if you had to kind of dig into maybe some of the traction with these new logos coming internationally is it to go to market enhancements over the last year key new sales talent, maybe the Deloitte relationship.
More you can kind of double click into maybe rising above the other drivers and then I had a follow up for Augie.
I think it's hard to tell.
Uh huh.
To crystallize it into one thing I think it's a confluence of factors I think the go to market teams.
And Ravi who joined US last year to lead them have been executing well with the new appointment of our new CMO, Jeff as well as openings has also been helpful in driving great outcomes and behaviors within the teams and the team members themselves. Obviously, you deserve most of the credit.
But it doesn't happen in isolation I think a lot of the product enhancements that we've been making whether it's kind of the more platform sale that solves a wider range of problems or the continued improvements to the core chargeback guarantee model, which just means that the.
The outperformance of using risk appetite, it's greater than the internal team.
Maybe the current environment, where merchants are just more focused on cost savings. So again I think all of that is overall, helping us with the demand environment driving more growth there.
And it's hard to pinpoint how much each of these factors I outlined.
Responsible for that.
Understood and I guess I'll give you just a follow up I think you had remarked 50 to 51, 5% gross margin for the full year.
Do you foresee us into 'twenty, four and beyond getting back to that kind of a consistent pattern, where gross margins to expand a little bit so whether it's the autonomous train models or platform enhancements, just the technology, bringing to bear on improving margins next year that the gross margin side. Thank you.
Yes, just just as al mentioned earlier.
We are increasing our gross margin for Q4 and this is obviously.
A reflection of some of the improvements that we're doing internally and on overall basis continues to improve.
Our cohorts going into next year, I think we're well positioned and I do expect to continue to.
To build on that.
Thanks.
Thank you.
And with no further questions in the queue I would now like to turn the conference back to <unk> for closing remarks.
Thank you everyone for joining us we look forward to continuing to update you in future quarters.
This concludes today's conference call. Thank you all for participating you may now disconnect and have a pleasant day.
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