Q3 2023 Riskified Ltd Earnings Call

November 15, 2023

Okay.

Good day, and thank you for standing by and welcome to the rest of the five third quarter 'twenty 'twenty financial results Conference call.

At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press star one on your telephone you will then hear an automated message advising your hand is race to withdraw your question. Please press star one again.

Please be advised that today's conference is being recorded I would now like to hand, the conference over to your Speaker Chet Adele head of Investor Relations. Please go ahead.

Good morning, and thank you for joining US today My name is Chuck Mendell risk if I head of Investor Relations. We are hosting today's call to discuss risk of <unk> financial results for the third quarter of 2023.

Participating on today's call are Ido golf, <unk> co founder and Chief Executive Officer, and argue don't you have that risk of fights Chief financial Officer.

We released our results for the third quarter of 2023 earlier today.

Our earnings materials, including a replay of today's webcast are available on our Investor Relations website at IR dot risk if I dot com.

Certain statements made on the call today will be forward looking statements related to our operating performance business and financial goals outlook as the gross profit margin.

Adjusted EBITDA profitability and expectations is the 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 995.

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.

That could cause actual results to differ materially from our expectations.

You should not put undue reliance on any forward looking statements.

Please refer to our annual report on form 20-F for the year ended December 31, 2022, and subsequent reports, we filed or furnished with the SEC for more information on the specific factors that could cause actual results to differ materially from our expectations.

Additionally, we will discuss certain non-GAAP financial measures and key performance indicators on the call reconciliation to the most directly comparable GAAP financial measures are available in our earnings release issued earlier today and also furnished with the SEC on form 6K, and the appendix of our Investor Relations presentation, all of which are.

<unk> on our Investor Relations website, I will now turn the call over to readout.

Thanks, Chad and Hello, everyone before we dive into a discussion on our financial results and outlook.

I'd like to first briefly touch on the evolving situation in Israel, then I will share some commentary from the third quarter and end my remarks discussing why I remain as confident that southern but positioning of the company.

As part of the discussion I'll provide some color on how we were able to efficiently adapt our workforce and enact our business continuity plan to ensure uninterrupted service to our merchants in the wake up the October 7th events.

And he will walk you through our third quarter financials, and what to expect in the fourth quarter.

First and foremost we condemn the horrific attacks in Israel, and we send our thoughts and support to all affected.

The loss of innocent lives, resulting from the Sun Forgivable terrorist Act and the award then answered is truly devastating.

To our customers partners and shareholders, who have reached out to support us during this difficult time on behalf of everyone at risk if I sincerely. Thank you.

I'm relieved to report that all of our employees are accounted for.

I am proud of everyone in the organization for stepping up their efforts and for their hard work and the time of need and I believe that speaks loudly to the strong culture at risk.

This level of focus and flexibility has meant that we've seen no material impact on our ability to maintain day to day operations across all critical functions.

Moving now to our third quarter results once again, our revenue growth during the third quarter was primarily driven by the success successful execution of our go to market strategy, which contributed to a 14% year over year revenue growth and 17% for the first nine months of the year.

We are growing more confident in our ability to add new merchants retain and upsell existing ones and expand our market share despite an uncertain and challenging macroeconomic backdrop.

Our competitive win rates remained high during the quarter and we are onboarding more new merchants versus this point last year, we have generated over 20% more leads compared to this point last year, which was contributing to a large and growing pipeline.

We are working diligently on maximizing revenue opportunities leveraging our machine learning capabilities to positively impact our business, while prioritizing investments in the areas with the highest return.

I am excited that we've grown top line revenue by 17%, while simultaneously decreasing total operating expenses by 6%.

Which drove an improvement in adjusted EBITDA performance by over 50% in the first nine months of 2020, we.

We believe that these results are testament to the overall strength of the business and our ability to execute and find leverage in the model.

Next allow me to spend some time talking about the isolated fraud event that we discussed on our last earnings call.

As a reminder, one of our largest merchants experienced a significant fraud event in July. This event was contained over the course of a handful of weeks and as expected the impact caused by this event contributed to a non-GAAP Q3 gross margin of 44%.

We do not anticipate any further impact to our gross margin going forward as a result of this event.

And while we are disappointed by this one time event, we did learn valuable lessons. For example, we have updated and solidified various golar processes improved some of our chargeback monitoring tools and added new detection capabilities.

I should also mention that our relationship with the impacted merchant remains very strong and this isolated example, underscores the overwhelming reason why we believe that chargeback guarantee is a superior model that delivers the most value to merchants.

We remain encouraged by our underlying gross margin performance I believe that our commitment to continuously invest in our machine learning capabilities through feature enhancements and model improvements continues to strengthen our market leading technology.

Now back to the Israeli conflict and how it relates to our business our core focus since the events of October seven is remained the safety of our employees and continually to services to our merchants to support the well being of our teams in Israel. We have provided flexible working arrangements for those who are not yet back to their normal office schedule assisted those employ.

And their families who have been called on reserve duty and expanded our existing mental health and wellness offerings.

To support our merchants, we've been working diligently as part of our business continuity plan to leverage our global network of employees to fill temporary capacity needs. Although we've experienced minor delays in a small number of long term initiatives. There has not been any material impact to our current productivity, we remain 100% engaged with all our customers through.

Increased communication efforts and have not seen loss of merchant volumes as a result of the October 7th events. This is a testament to the deep relationships that we have cultivated with many of our merchants high retention rates and our track record of being a reliable and trusted partner.

Before I turn it to <unk> I want to emphasize that I believe the DNA of our company positions us well as we work through the current situation.

While we are proud of being a company founded in Israel, We are truly a global company with business functions spread through eight locations around the world and with merchants in nearly 40 countries.

Our goal remains to maximize revenue and profit with our AI powered fraud and risk management platform to all of the world's largest enterprise e-commerce merchants and I am very confident in our ability to continue executing on that mission through all environments now.

Now I will turn the call over to Arne.

Thank you and the team and everyone for joining today's call.

We built up from how incredible this team and organization has been in the face of a difficult situation in Israel.

Our G&A for the third quarter was $29 7 billion, reflecting a 17% increase year over year.

We achieved third quarter revenue of $71 9 million up 14% year over year and air debates revenue of $213 5 million up 17%.

Our Gms and revenue growth. During this quarter was primarily driven by the continued expansion of our platform across new merchants and apps out similar to rate in the quarter.

Tickets and travel remains the largest overall category.

Year over year growth and to maintain.

The step down in growth from previous periods was primarily driven by the lapping of a large merchant in this category that was reported in third quarter of 2022.

Encouragingly for the first time in eight quarters.

All industries outside of tickets and travel in the aggregate contributed more than a single category or approximately 60% solid quarterly growth.

In particular this quarter, we saw solid performance in our home category, primarily driven by upsell activity.

Similar to the first half of the year third quarter growth in one of our largest category fashion and luxury goods remained relatively flat year over year.

We continue to see softness in particular within our luxury brands and sneaker sub segment in.

In addition, our electronics category declined further from their second quarter levels during the third quarter as demand for both in discretionary category slowed.

Finally, we also saw revenue growth across all geographies.

Our third quarter revenue in the United States, our largest region grew by 9% year over year, and we experienced 12% year over year growth in EMEA.

Our Americas and APAC regions. Each grew approximately 40%, primarily just a momentum in new and upsell activity.

We believe that our continued revenue growth from regions outside of the United States demonstrates market share gains and validate our decision to invest in between.

Moving onto gross margin.

Is it lessens our TSA margin was negatively impacted by the isolated product announced at our last earnings call.

The impact of the event was in line with expectations and our non-GAAP gross profit margin for the third quarter of 2023 reflective of this impact was 44%.

As a reminder, gross margin is best analyzed on an annual basis, our gross margin may fluctuate on a quarterly basis. However, given the unique nature of the third quarter margin allow me to provide clarity on the annual range as we approach year end.

As of today, we anticipate that our annual non-GAAP gross profit margin will be at the midpoint of our range of 15 to 51, 5%.

Or 57%.

Which translates to a fourth quarter gross margin of approximately 54%.

Moving to expenses.

Total non-GAAP operating expenses were $40 2 million for the third quarter of 2023% to 5% decrease year over year as a result of our continued focus on optimizing our expense base.

Our third quarter expenses represent the lowest absolute quarterly level since our IPO over two years ago.

Our non-GAAP operating expenses as a percentage of revenue improved year over year, 67% to 56%.

Reflecting leverage in our business model.

For modeling purposes, we anticipate modest step up of approximately $1 million in expenses in the fourth quarter.

Adjusted EBITDA for the third quarter was negative $8 4 million and negative $18 2 million for the first nine months of 2023.

Even with the one time impact of the aforementioned Martin Friday event.

We have been able to improve our adjusted EBITDA performance year over year for the fifth consecutive quarter and have improved our adjusted EBITDA performance by 50% year to date.

As previously mentioned, we continue to anticipate profitability on an adjusted EBITDA basis.

The fourth quarter of 2023, and and on annual basis in 2024.

Moving to the balance sheet, we maintain a very strong liquidity position and generated positive free cash flow during the quarter.

We ended the third quarter with approximately $482 million of cash deposits investments and accrued interest on the balance sheet and we carry zero debt.

This amount represents a sequential increase of approximately $2 million.

We remain confident in the business' ability to generate positive operating cash flow over the long term as was demonstrated during the third quarter and we continue to believe that our balance sheet and strong liquidity position.

Appreciate it assets.

Related to our capital allocation initiatives as we announced alongside our second quarter earnings. Our board has authorized a share repurchase program of up to $75 million subject to approval from the Israeli court, which is required by law.

The events of October seven Israeli Court are currently operating under a rolling emergency orders and circuit court processes are delayed.

We anticipate receiving a decision from the Israeli court in the next several weeks and we will announce the court's decisions promptly once it is a thing.

We expect to leverage this program to take advantage of opportunistic repurchasing opportunity and managed share dilution.

At valuation levels, well below that of companies with similar financial profile. We believe that we have a great opportunity to repurchase our stock at attractive prices.

We believe our strong balance sheet enables us to continue driving shareholder value by investing in the growth of the business, while maintaining significant capital to continue pursuing M&A opportunities.

Now moving to our guidance, which assumes no further worsening in consumer spending patterns.

<unk> changes to the macroeconomic environment.

As we approach and we have more visibility on the timing and ramp up of the onboarding of certain merchant and expect a more muted than originally anticipated to get some travel season, especially in the tickets and live event vertical for the remainder of the year.

As a result, we're refining our full year 2023 revenue range to be between $297 million to $300 million.

That being said as a result of our ongoing expense discipline from the first nine months of the year, we are improving our full year 2020, adjusted EBITDA guidance to be between negative $12 5 million and negative $14 5 million an improvement of 7% from the midpoint of our previously disclosed guidance.

Range.

Overall from an operational perspective, I believe that we're executing from a position of strength even in a challenging environment.

And despite the evolving geopolitical situation in Israel and the continued challenging macroeconomic landscape. We remain excited about prospects of our long term growth and our ability to deliver value for shareholders.

Operator, we are ready to take the first question. Please.

Thank you.

As a reminder to ask a question you will need to press star one on your telephone.

To remove yourself from the queue. Please press star one again, please wait for your name to be announced please standby, while we compile the Q&A roster.

One moment for your first question. Please.

And our first question comes from the line of Ramsey El <unk>.

I'll start with Barclays. Your line is now open.

Hi, This is Owen on for Ramsey I. Appreciate you taking our question. This morning I wanted to ask specifically about your sales pipeline and was wondering if you could provide any more color on the portion of new sales that is being driven by cross sell compared to net new logo growth and if youre seeing any difficulty in one first.

The other or any clarity there might be very helpful. I appreciate it.

Sure.

So we feel great about the pipeline I think we mentioned, it's about 20% larger than this point a year ago, and that's really across the board both in the newer products around policy in dispute.

Also from a geographical perspective.

So the pipeline increase I would say is relatively broad based.

Understood I appreciate that and I also wanted to follow up if I may on <unk>.

Your take rate and kind of longer term expectations there.

How you expect that to trend relative to the business is there any sort of point in which you might choose to favor new logo growth by passing along some expect expense savings to customers.

Any kind of update there might be interesting as well I appreciate it.

Sure. So I would say look take rate is always risk adjusted right. So depending on the risk of the segment or the merchant or the category dynamics.

And that informs our pricing and that means that theres really variance within take rate based on those profiles.

To be just a bit more specific if we work with a digital goods as merchant that sells high risk product internationally.

Fee would appropriately be higher than a merchant that sells domestically in the U S low risk products and that would influence the take rate.

Our pricing philosophy is to make sure that there is always.

Value to merchants when they start using risk if I'm right so our pricing.

Impacts our take rate would always provide them savings relative to their existing cost.

So that's how we think about pricing.

Understood. Thank you.

Thank you one moment for our next question. Please.

Our next question comes from Robert Napoli with William Blair. Your line is now open.

Thank you. Thank you for taking the question.

We're always thinking about you.

You all during this time glad to hear everybody's accounted for but.

I guess on the <unk>.

As we think about returning to profitability and maybe a longer term picture.

How do you think about the glide path to getting to your long term targets.

Of EBITDA margins.

Look I think the things that are within our control writer around opex discipline around executing on the sales side.

Like we've been focused on them for the past eight quarters, we will continue to focus on them as we march towards kind of those.

Longer term margin targets.

Yes.

For the last couple of quarters, I think that we've been able to improve our.

Opex line, and ultimately kind of positive adjusted EBITDA.

We're still expecting Q4 to be profitable next year can be a profitable it's very much of a focus and something we're executing them.

Thank you and the geography.

He is prospective gateway great to see the strong growth out of out of Asia.

Over the next where do you see the bigger opportunities are used just scratching the surface in those markets Eric is international going to become a much higher portion of the business over time and as is the international business to profitability.

Is there any are there any differences.

And the profitability of the business.

Alright, I think we're all very proud of the GMB gains in kind of the market share. We do have having said that we still feel we're scratching the surface of the overall.

e-commerce market and penetration.

So we still think there is significant growth definitely in some of these newer regions, where we're seeing kind of that higher growth rate. So like you mentioned, but also in the more traditional industries and regions. So when I think about growth outlook, it's continuing to focus on our existing categories and geographies. It's strengthening some of these international markets AP.

Back to Latam.

And moving more towards a platform sale.

<unk> and dispute resolved have a more pronounced impact.

So I think all of those will help us with the growth moving forward.

Thank you I appreciate it.

Thank you one moment for our next question.

Our next question comes from the line of Tim Chiodo with UBS. Your line is now open.

Hi, This is chang on for Tim. Thanks for taking the question. So my question is around the Platt partnership that you announced or payment can you provide us any update on how the partnership has contribute it to your business, so far and where do you see most of the use cases among verticals.

I think ACA is a growing and involve evolving payment method and we see more merchants want to offer it as an alternative credit cards, either to ability and a recurring payments plus the interchange fee or to take care of high amounts are different verification statuses. So.

So we do see that as a growing consumer payment option.

And what we've heard from our merchants is because the risk there is slightly different than traditional credit card fraud, but they still need help solving those problems. So really the partnership with Plaid is aimed at offering merchants.

<unk> solution that includes a waiter, except guaranteed payments via a C H.

And it has been meaningful and building some of that pipeline that we discussed earlier.

Got it that's really helpful.

A quick follow up on new products. In addition to charge back guarantee.

<unk> to see the pipeline growth.

The cross sell opportunity that you highlighted in the release so how does some momentum look like with policy protect contributing to new revenue bookings.

And do you see any difference in terms of product adoption between USA.

The international side. Thank you.

Sure.

Yeah, we feel great about the pipeline the way it's building we feel that the merchants are that are alive at solving a very meaningful and significant pain point for them.

Not sure that I can differentiate between global and local market.

But we definitely don't see inherently there shouldn't be a difference in the ROI that it's providing to either so we look forward to continuing to update you on the progress.

Thank you so much.

Thank you one moment for our next question. Please.

Our next question comes from the line of Terry Tillman with <unk> Securities. Your line is now open.

Yes. Thank you <unk> good morning, and also my thoughts are with everyone impacted by the conflict.

I had two questions maybe the first question.

In your prepared remarks, you talked about having increased confidence I think just in general in the business and monetizing new new logos.

I hope I didn't misrepresent that but.

And you all did to help the top 10, new customer deals in the quarter particular strength in the U S. What I'm curious about is what's driving the increased confidence the micro isn't any better. So it can't be that is it stuff on the sales side with leadership, you've got a new CMO is the market just.

From 12 months prior based on the RFP activity just starting to come around for these advanced Decisioning engines.

I'll stop with my rambling and maybe you could just put a little bit more meat on the bone in terms of the increased confidence and just running the business and then I had a follow up for Augie.

Sure happy to do so I think so let me kind of add up I have increased confidence on.

On the things within our ability to control alright, so when I think about some of the initiatives that we started probably two years ago about the increased investment in additional products in our platform.

Additional investments into our global Enterprise sales force sitting.

Sitting here today I think we are starting to bear the fruit of some of that right and some of that is reflective in some of these products being fully deployed and in the hands of merchants and generating value. Some of that is reflective in the the growth rates in APAC in the pipeline. That's building some of that is reflective in kind of the ml platform and the performance.

<unk>.

That it's been providing to us and our merchants.

Also you mentioned, Jeff are newish CMO from a few quarters ago also very confident and happy with our current leadership team. So I think all of those things are definitely helping me become more confident in the business.

Longer term like you said macro.

Have not seen a inflect meaningfully this quarter like you mentioned.

Yep Yep understood. Thank you for that and then AGA in terms of the fourth quarter outlook.

I know the accomplished tougher in <unk>, so that made sense on maybe kind of growth year over year, but in <unk>. It is an easier comp I think I'd love to just get a little bit more perspective on is there an incremental degree of conservativism, you did say tickets and travel.

That's the sole factor, but I did hear that well maybe there is some of the Rollouts will take a little longer just a little bit more in terms of maybe some of this is timing and then actually <unk>. There are some incremental benefits from some of the Rollouts just a little bit more on the roughly 7% growth at the midpoint comment. Thank you.

Yes, Barry. Thank you further question so.

In terms of the fourth quarter, and what's kind of changed some of.

And our perspective since we last reported Outdate some of the nuances and trend specific here about the ticketing sub vertical in tickets and travel most life.

Mostly in live events is something that we saw a little bit softer coming out at the end of <unk>.

At the end of the quarter and kind of like early in October.

And it's mostly the way I look at it it's mostly coming out of a really busy season, starting from the beginning of the year, but also through the summer.

And a little bit of a different seasonality in this industry than what we saw last year.

So that's kind of like one of the aspect there related to Q4 and the other aspect is more around new deals coming in.

We're looking at kind of like <unk>.

2023 growth.

Primarily driven by new business and it's a very very strong driver for us.

Looking into Q4, I think there was some push.

Slightly in a little bit of deal still coming in just.

A little bit in the back half of the quarter, maybe early next year, but all of them are really strong deals all of them are still kind of like.

In the forecast just a little bit later in the cycle.

And I would make that argument.

Alright.

With that again, I think like <unk> seen throughout this year, sometimes there can be fluctuations between quarters for us because of underlying e-commerce trends across our different categories and it is important to point out that we don't feel that the Q4 rate is reflective of what we would anticipate next year.

That's helpful. Thank you very much.

Thank you one moment for our next question. Please.

Next question comes from the line of Richard Smith with.

J P. Morgan your line is now open.

Thank you good morning.

Yes, most of my questions have been hit.

One clarification did you guys size, the actual impact of that fraud loss.

During the quarter and I have a quick follow up thanks.

Yes. Thank you for the question so.

Wind it up within the range of what do we expect that more precisely around $4 5 million.

And the gross margin that we.

That we expected.

Based on this fraud events is also 44, just aligned with our expectations.

Perfect. Thank you and then I'm not sure to what extent you guys can provide color on this but I'm just curious if there is.

Maybe you can kind of walk us through E com trends in general throughout the quarter. It may be to the first.

Marpol on behalf of <unk> anything you're seeing there.

Are worth calling out.

Yes of course, so as I already mentioned I think.

The biggest kind of changed from prior.

From prior expectations are around live events and to take Us <unk>.

Sub industry.

<unk> been a little bit softer, but overall, it's still a very strong growth driver for the year.

Still overall performing well.

Other trends I'll say, there is some strength in food and home category.

Later, one primarily driven by some of the Upsells that we were able to execute.

And electronics theme, a little bit soft I think it was soft last quarter.

But continued softness in this quarter.

Yes. These are property kind of like the biggest highlights.

Thank you.

Jessica tickets and travel weakened towards the end of the quarter and into this fourth quarter.

Just trying to clarify the comment I guess that would coincide with the b optic Zurich, if I'm thinking about that correctly.

It's hard to say I would just say it in more than one merchants.

Don't see exactly what's driving it but it's really like a.

Across Geos and.

And more than I would say like probably two or three of the merchants in this category.

You are right to highlight that it's more specific to live events than other types of ticketing.

Thank you.

Thank you one moment for our next question. Please.

Our next question comes from the line of Brent <unk> with Piper Sandler Your line is now open.

Hi, all this is Hannah on for Brian. This morning, Thanks for taking my question and glad to hear all your employees are accounted for just wanted to Echo my support for you and your colleagues and your families here.

In a previous answer you mentioned moving more to the platform sale I guess can you talk about your ability to land new merchants with more than just charge back guarantee upfront and how that's evolved.

Sure. Thank you for that commentary.

Look I would say that when we sell charge about guarantee where so we're solving for.

Charge backs related to fraudulent reason codes and key leaves a lot of pinpoint and inefficiencies for our merchants.

Such as charge backs related to non fraud reason codes.

<unk> forms of financial loss related to policy abuse and.

And right now we have the ability whether it's through a new sale or a cross sell or up sell to solve a wider set of problems right. So sometimes merchants are saying hey, that's.

That's great I don't just have a chargeback issue I have issue with some of these other problems and thats, helping us advanced conversations with a platform sale initially.

It is actually also helping us even when a merchant might say you know what I'm not ready to make a change on my fraud platform right now we can actually start with policy or dispute which has been showing great.

Traction and is a really easy and good initial sale.

We feel good about the opportunities in conversations with new merchants from that more platform approach.

Okay Super helpful. And then AG in terms of upsell strength, where you're seeing more strength on the volume side of the cross sell side and how do you expect that to trend over time.

I think.

It's upsell has been a strong category and a strong driver it's coming from a lot of different areas.

Financially the ability to expand.

So for higher approval rate are also so kind of expand and take more of the JV.

From existing customers.

Campaign.

Have been a factor.

Alright, thank you.

Thank you.

Currently showing no further questions at this time I'd like to hand, the conference back over to Mr. <unk> for closing remarks.

Thank you everyone for the support we look forward to updating you in the coming months on our next call.

This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.

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Good day, and thank you for standing by and welcome to <unk> third quarter 2023 financial results Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session you will need to prestige.

One on your telephone you will then hear an automated message advising your hands race to withdraw your question. Please press star. One again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your Speaker Chet <unk> head of Investor Relations. Please go ahead.

Good morning, and thank you for joining US today My name is Chad Mandel risk if <unk> head of Investor Relations. We are hosting today's call to discuss risk to <unk> financial results for the third quarter of 2023.

Participating on today's call are <unk> risk of hides co founder and Chief Executive Officer, and <unk> <unk> Chief Financial Officer.

We released our results for the third quarter of 2023 earlier today, our earnings materials, including a replay of today's webcast are available on our Investor Relations website at IR dot risk of <unk> Dot com.

Certain statements made on the call today will be forward looking statements related to our operating performance business and financial goals outlook as the gross profit margin adjusted EBITDA profitability and expectations as the positive cash flows which reflect management's best judgment based on currently available information and are not guarantees.

Future performance.

We intend all forward looking statements to be covered by the safe Harbor provisions contained in the private Securities Litigation Reform Act 995.

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.

That could cause actual results to differ materially from our expectations.

You should not put undue reliance on any forward looking statements.

Additionally, we will discuss certain non-GAAP financial measures and key performance indicators on the call reconciliation to the most directly comparable GAAP financial measures are available in our earnings release issued earlier today and also furnished with the SEC on form 6K and in the appendix of our Investor Relations presentation.

All of which are posted on our Investor Relations website, I will now turn the call over to readout.

Thanks, Chad and Hello, everyone before we dive into a discussion on our financial results and outlook.

I'd like to first briefly touch on the evolving situation in Israel, then I will share some commentary from the third quarter and in my remarks discussing why I remain as confident to southern but positioning of the company.

Then argued will walk you through our third quarter financials, and what to expect in the fourth quarter.

First and foremost we condemn the horrific attacks in Israel, and we send our thoughts and support to all affected.

The loss of Venison lives, resulting from this unforgivable terrorist Act and the award then answered is truly devastating.

So our customers partners and shareholders, who have reached out to support us during this difficult time on behalf of everyone at risk if I sincerely. Thank you.

I'm relieved to report that all of our employees are accounted for.

Im proud of everyone in the organization for stepping up their efforts and for their hard work and the time of need and I believe this speaks loudly to the strong culture at risk.

This level of focus and flexibility has meant that we've seen no material impact on our ability to maintain day to day operations across all critical functions.

Moving now to our third quarter results once again, our revenue growth during the third quarter was primarily driven by the success successful execution of our go to market strategy, which contributed to 14% year over year revenue growth and 17% for the first nine months of the year we.

We are growing more confident in our ability to add new merchants retain and upsell existing ones and expand our market share despite an uncertain and challenging macroeconomic backdrop.

Our competitive win rates remained high during the quarter and we have on boarded more new merchants versus this point last year, we have generated over 20% more leads compared to this point last year, which is contributing to a large and growing pipeline.

I am excited that we've grown top line revenue by 17%, while simultaneously decreasing total operating expenses by 6%.

Which drove an improvement in adjusted EBITDA performance by over 50% in the first nine months of 2023.

We believe that these results are testament to the overall strength of the business and our ability to execute and find leverage in the model.

Next allow me to spend some time talking about the isolated fraud event that we discussed on our last earnings call.

We do not anticipate any further impact to our gross margin going forward as a result of this event.

And while we are disappointed by this onetime event, we did learn valuable lessons. For example, we have updated and solidified various golar processes improved some of our chargeback monitoring tools and added new detection capabilities I.

Raul we remain encouraged by our underlying gross margin performance I believe that our commitment to continuously invest in our machine learning capabilities through feature enhancements and model improvements continues to strengthen our market leading technology.

Now back to the Israel conflict and how it relates to our business our core focus since the events of October seven is remained the safety of our employees and continually to services to our merchants to support the wellbeing of our teams in Israel. We have provided flexible working arrangements for those who are not yet back to their normal office schedule assisted those employee.

And their families who have been called on reserve duty and expanded our existing mental health and wellness offerings.

To support our merchants, we've been working diligently as part of our business continuity plan to leverage our global network of employees to fill temporary capacity needs. Although we've experienced minor delays in the small number of long term initiatives. There has not been any material impact to our current productivity, we remain 100% engaged with all our customers through.

Increased communication efforts and have not seen loss of merchant volumes as a result of the October 7th events. This is a testament to the deep relationships that we have cultivated with many of our merchants higher retention rates and our track record of being a reliable and trusted partner.

Before I turn it to Avi I want to emphasize that I believe the DNA of our company positions us well as we work through the current situation. While we are proud of being a company founded in Israel. We are truly a global company with business functions spread through eight locations around the world and with merchants in nearly 40 countries.

Now I will turn the call over time.

Thank you and the team and everyone for joining today's call.

We built up and how incredible the team and organization has been in the face of a difficult situation in Israel.

Our JV for the third quarter was $29 7 billion, reflecting a 17% increase year over year.

We achieved third quarter revenue of $71 9 million up 14% year over year and air debates revenue of $213 5 million up 17%.

Our Gms and revenue growth. During this quarter was primarily driven by the continued expansion of our platform across new merchants and apps out similar to rate Macquarie.

Tickets and travel remained the largest overall category with year over year growth in the mid teens.

The step down in growth from previous periods was primarily driven by the lapping of a large merchant in this category that was reported in third quarter of 2022.

Encouragingly for the first time in eight quarters.

All industries outside of tickets and travel in the aggregate contributed more than a single category are approximately 60% quarterly growth.

In particular this quarter, we saw solid performance in our home category, primarily driven by upsell activity.

Similar to the first half of the year third quarter growth in one of our largest category fashion and luxury goods remained relatively flat year over year.

We continue to see softness in particular within our luxury brands and sneaker sub segment.

In addition, our electronics category declined further from their second quarter levels during the third quarter as demand for both in discretionary category slow.

Finally, we also saw revenue growth across all geographies.

Our third quarter revenue in the United States, our largest region grew by 9% year over year, and we experienced 12% year over year growth in EMEA.

Our Americas and APAC regions. Each grew approximately 40%, primarily just a momentum in new and upsell activity.

We believe that our continued revenue growth from regions outside of the United States demonstrates market share gains and validate our decision to invest in this region.

Moving onto gross margin.

Is it a lesson our TSA margin was negatively impacted by the isolated product announced at our last earnings call.

Impact of event was in line with expectations and our non-GAAP gross profit margin for the third quarter of 2023 reflective of this impact was 44%.

As a reminder, gross margin is best analyzed on an annual basis as growth margin may fluctuate on a quarterly basis.

However, given the unique nature of the third quarter margin allow me to provide clarity on the annual range as we approach year end.

As of today, we anticipate that our annual non-GAAP gross profit margin will be at the midpoint of our range of 15 to 51, 5%.

Or 57%.

Which translates to a fourth quarter gross margin of approximately 54%.

Moving to expenses.

Total non-GAAP operating expenses were $40 2 million for the third quarter of 2023% to 5% decrease year over year as a result of our continued focus on optimizing our expense base.

Our third quarter expenses represent the lowest absolute quarterly level since our IPO over two years ago.

Our non-GAAP operating expenses as a percentage of revenue improved year over year from 67% to 56%.

<unk> leverage in the business model.

For modeling purposes, we anticipate modest step up of approximately $1 million in expenses in the fourth quarter.

Adjusted EBITDA for the third quarter was negative $8 4 million and negative $18 2 million for the first nine months of 2023.

Even with the onetime impact of the aforementioned Martin Friday event.

We have been able to improve our adjusted EBITDA performance year over year for the fifth consecutive quarter and have improved our adjusted EBITDA performance by 50% year to date.

As previously mentioned, we continue to anticipate profitability on an adjusted EBITDA basis in the fourth quarter of 2023 and and on annual basis in 2024.

Moving to the balance sheet, we maintain a very strong liquidity position and generated positive free cash flow during the quarter.

We ended the third quarter with approximately $482 million of cash deposits investments and accrued interest on the balance sheet and we carry zero debt.

This amount represents a sequential increase of approximately $2 million.

We remain confident in the business' ability to generate positive operating cash flow over the long term as was demonstrated during the third quarter.

And we continue to believe that our balance sheet and strong liquidity position.

They are appreciated assets.

Due to the events of October seven Israeli courts are currently operating under a rolling emergency orders.

Circuit court processes are delayed.

We anticipate receiving a decision from the Israeli court in the next several weeks and we will announce the court's decisions promptly once it is a thing.

We expect to leverage this program to take advantage of opportunistic repurchasing opportunity and managed share dilution at.

That valuation level, well below that of companies with similar financial profile. We believe that we have a great opportunity to repurchase our stock at attractive prices.

Now moving to our guidance, which assumes no further worsening in consumer spending patterns.

Changes to the macroeconomic environment.

As we approach and we have more visibility on the timing and ramp up of the onboarding of certain merchant and expect a more muted than originally anticipated ticketing travel season, especially in the tickets and live event vertical for the remainder of the year.

As a result, we're refining our full year 2023 revenue range to be between $297 million to $300 million.

That being said as a result of our ongoing expense discipline and the first nine months of the year, we are improving our full year 2020, adjusted EBITDA guidance to be between negative $12 5 million and negative $14 5 million an improvement of 7% from the midpoint of our previously disclosed guidance.

Range.

Overall from an operational perspective, I believe that we're executing from a position of strength even in a challenging environment.

Despite the evolving geopolitical situation in Israel and the continued challenging macroeconomic landscape. We remain excited about prospects for long term growth and our ability to deliver value for shareholders.

Operator, we are ready to take the first question. Please.

Thank you.

As a reminder to ask a question you will need to press star one on your telephone.

To remove yourself from the queue. Please press star one again, please wait for your name to be announced please standby, while we compile the Q&A roster.

One moment for your first question. Please.

And our first question comes from the line of Ramsey El <unk> with Barclays. Your line is now open.

Hi, This is Owen on for Ramsey I. Appreciate you taking our question. This morning I wanted to ask specifically about your sales pipeline and I was wondering if you could provide any more color on the portion of new sales that is being driven by cross sell compared to net new logo growth and if youre seeing any difficulty in one.

First the other or any clarity there might be very helpful. I appreciate it.

Sure.

So we feel great about the pipeline I think we mentioned, it's about 20% larger than this point a year ago, and that's really across the board both in the newer products around policy in dispute.

Also from a geographical perspective so.

So the pipeline increase I would say is relatively broad base.

Understood I appreciate that and I also wanted to follow up if I may on <unk>.

Your take rate and kind of longer term expectations there.

How you expect that to trend relative to the business is there any sort of point in which you might choose to favor new logo growth by passing along some expect expense savings to customers.

Any kind of update there might be interesting as well I appreciate it.

Sure as I would say look take rate is always risk adjusted right. So depending on the risk of the segment or the merchant or the category.

That informs our pricing and that means that theres really variance within take rate based on those profiles to.

To be just a bit more specific if we work with a digital goods merchant that sells high risk product internationally.

<unk> would appropriately be higher than a merchant.

Domestically in the U S low risk products and that would influence the take rate our pricing philosophy is to make sure that there is always <unk>.

Value to merchants when they start using <unk> right so our pricing.

It impacts our take rate would always provide them savings relative to their existing cost.

So that's how we think about pricing.

Understood. Thank you.

Thank you one moment for our next question. Please.

Our next question comes from Robert Napoli with William Blair. Your line is now open.

Thank you. Thank you for taking the question.

We're always thinking about you.

You all going this time glad to hear everybody's accounted for that.

I guess on the.

As we think about returning to profitability and maybe a longer term picture.

How do you think about the glide path to getting to your long term targets.

Of EBITDA margins.

Look I think.

Things that are within our control writer around opex discipline around executing on the sales side.

Like we've been focused on them for the past eight quarters will continue to focus on them as we march towards kind of those.

Longer term margin targets.

Yes.

For the last couple of quarters, I think that we've been able to improve our.

Opex line, and ultimately kind of positive adjusted EBITDA.

We're still expecting Q4 to be profitable next year to be a profitable it's very much of a focus and something we're executing on.

Thank you Thiago.

His perspective, I mean, great to see the strong growth out of out of Asia.

Over the next where do you see the bigger opportunities are just scratching the surface in those markets. Eric that was international we're going to become a much higher portion of the business over time and as is the international business to profitability.

Is there any are there any differences dois.

The profitability of the business.

Alright, I think we're all very proud of the GMB gains in kind of the market share. We do have having said that we still feel we're scratching the surface of the overall.

e-commerce market and penetration so.

<unk> Latam.

And moving more towards a platform sale or <unk>.

Policy and dispute resolve have a more pronounced impact.

So I think all of those will help us with the growth moving forward.

Thank you I appreciate it.

Thank you one moment for our next question.

Our next question comes from the line of Tim Chiodo with UBS. Your line is now open.

Hi, This is chang on for Ken. Thanks for taking my question. So my question is around the Platt partnership that you announced for <unk>.

Payments can you provide us any update on how the partnership has contribute it to your business, so far and where do you see most of the use cases among verticals.

I think ACA is a growing and involve evolving payment method and we see more merchants want to offer it as an alternative credit cards, either to ability and a recurring payment plus the interchange fee or to take care of high amounts are different verification statuses. So.

So we do see it as a growing consumer payment option.

<unk> solution that includes a waiter except guaranteed payments via ECH.

And it has been meaningful and building some of that pipeline that we discussed earlier.

Got it Thats really helpful.

A quick follow up on new products. In addition to chargeback guarantee.

<unk> to see the pipeline growth.

The cross sell opportunity that you highlighted in the release so how does some momentum look like with policy protect contributing to new revenue bookings.

And do you see any difference in terms of product adoption between USA.

The international side. Thank you.

Sure.

Yeah, we feel great about the pipeline the way it's building we feel that the merchants are about our lives. It's solving a very meaningful and significant pain point for them I'm not sure that I can differentiate between global and local market.

But we definitely don't see inherently there shouldn't be a difference in the ROI that it's providing to either so we look forward to continuing to us I want to update you on the progress.

And thank you so much.

Thank you one moment for our next question. Please.

Our next question comes from the line of Terry Tillman with <unk> Securities. Your line is now open.

Yes, Thank you <unk> good morning.

And also my thoughts are with everyone impacted by the conflict.

I had two questions maybe the first question.

In your prepared remarks, you talked about having increased confidence I think just in general in the business and in monetizing new new logos.

I hope I didn't misrepresent that but.

And you all did to help the top 10, new customer deals in the quarter particular strength in the U S. What I'm curious about is what's driving the increased confidence.

<unk> isn't any better so it can't be that is it stuff on the sales side with leadership, you've got a new CMO is the market just.

From 12 months prior based on the RFP activity, just starting to come around to these advanced Decisioning engines.

I'll stop with my rambling and maybe you could just put a little bit more meat on the bone in terms of the increased confidence and just running the business and then I had a follow up for Augie.

Sure happy to do so I think so let me kind of back up I have increased confidence.

Additional investment into our global Enterprise sales force sitting.

Sitting here today, I think we're starting to bear the fruit of some of that right and some of that is reflective in some of these products being fully deployed and in the hands of merchants and generating value. Some of that is reflected in the growth rates in APAC in the pipeline. That's building some of that is reflective in kind of the MLP platform and the performance.

<unk>.

That has been providing to us and our merchants.

Longer term like you said in macro.

Have not seen a inflect meaningfully this quarter like you mentioned.

Yep Yep understood. Thank you for that and then Augie in terms of the fourth quarter outlook.

I know the comp was tougher in <unk>, so that made sense on maybe kind of growth year over year, but in <unk>. It is an easier comp I think I'd love to just get a little bit more perspective on is there an incremental degree of conservativism, you did say tickets and travel.

Yes, Barry Thank you further questions. So.

In terms of the fourth quarter, and what's kind of changed some of.

And our perspective since we last reported Outdate some of the nuances and trend specifically about the ticketing sub vertical in tickets and travel more slides.

Mostly in live events is something that we saw a little bit softer coming out at the end of <unk>.

At the end of the quarter and kind of like early in October.

And it's mostly the way I look at it it's mostly coming out of a really busy season, starting from the beginning of the year, but also through the summer.

And a little bit of a different seasonality in this industry than what we saw last year.

So thats kind of like one of the aspect there related to Q4 and the other aspect is more around new deals coming in.

Looking at kind of like.

2023 growth.

Primarily driven by new business and it's a very very strong driver for us.

Looking into Q4, I think there was some push.

Slightly in a little bit of deal still coming in.

A little bit in the back half of the quarter, maybe early next year, but all of them are really strong deals.

Our scale kind of like.

In the forecast just a little bit later in the cycle.

And I would make that argument.

Alright.

That's helpful. Thank you very much.

Thank you one moment for our next question. Please.

Next question comes from the line of regional Smith with.

J P. Morgan your line is now open.

Thank you good morning.

Yes, most of my questions have been hit.

Point of clarification did you guys size, the actual impact of that fraud loss.

During the quarter and I have a quick follow up thanks.

Yes. Thank you for the question so.

<unk> ended up within the range of what do we expect that more precisely around $4 5 million.

And the gross margin that we.

That we expected.

Based on this fraud events is also 44, just aligned with our expectations.

Perfect. Thank you and then I'm not sure to what extent you guys can provide color on this but I'm just curious if there is.

Maybe you can kind of walk us through E com trends in general throughout the quarter. It may be to the first.

Month to month, and a half of a <unk> anything you're seeing there.

We're kind of calling out.

Yes of course, so as I already mentioned I think.

The biggest kind of changed from prior.

From prior expectations are around live events and to take Us <unk>.

But the industry is.

<unk> been a little bit softer, but overall, it's still a very strong growth driver for the year.

Still overall performing well.

Other trends I'll say, there is some strength in food and home category.

Later, one primarily driven by some of the Upsells that we were able to execute.

And electronics, because being a little bit soft I think it was soft last quarter.

But continue the softness in this quarter.

Yes. These are property kind of like the biggest highlights.

Okay.

Are you, suggesting it would take as a travel weakened towards the end of the quarter and into this fourth quarter.

Just trying to clarify the comment I guess that would coincide with the b optic Zurich, if I'm thinking about that.

Correctly.

It's hard to say I would just say it in more than one merchants.

Don't see exactly what's driving it but it's really like.

Across Geos and.

And more than I would say like probably two or three of the merchants in this category.

You're right to highlight that it's more specific to live events than other types of ticketing.

Thank you.

Thank you one moment for our next question. Please.

Our next question comes from the line of Brent <unk> with Piper Sandler Your line is now open.

Yeah.

Sure. Thank you for that commentary.

Look I would say that when we sell chargeback guarantee where so we're solving for.

Charge backs related to fraudulent reason codes and key leaves a lot of pinpoint and inefficiencies for our merchants.

Such as charge backs related to non fraud reason codes.

<unk> forms of financial loss related to policy abuse and.

And right now we have the ability whether it's through a new sale or a cross sell or up sell to solve a wider set of problems right. So sometimes merchants were saying hey, that's.

That's great I don't just have a chargeback issue I have issue with some of these other problems and that is helping us advanced conversations with a platform sale initially.

Traction and is a really easy and good initial sale.

So we feel good about the opportunities in conversations with new merchants from that more platform approach.

Okay Super helpful. And then in terms of upsell strength, where you're seeing more strength on the volume side of the cross sell side and how do you expect that to trend over time.

It's upsell has been a strong category and a strong driver it's coming from a lot of different areas.

Initially the ability to expand.

Two for higher approval rate are also to kind of expand and take more of the JV.

From existing customers.

Have been like.

Have been a factor.

Great. Thank you.

Thank you.

Currently showing no further questions at this time I'd like to hand, the conference back over to Mr. <unk> for closing remarks.

Yes. Thank you everyone for the support we look forward to updating you in the coming months on our next call.

This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.

Q3 2023 Riskified Ltd Earnings Call

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