Good afternoon. I'm Reggie Smith. I cover fintech stocks here at JP Morgan. I am happy to interview the CEO and Co-Founder of Riskified, Eido Gal. He's in town today. We're going to do a Q&A. I've got a couple of questions lined up. I'm gonna open it up to you guys towards the end of the session, for your own questions. Welcome.
Thank you. Thank you for having me.
For sure, for sure. Riskified, company that we did the IPO a few years ago, still a fairly new company, not well-known. I want to let you start by just kinda giving your spiel on what Riskified does, how they make money, what problems they're solving. We can kinda go from there.
Sure. When we started the company, probably about 10 years ago, the thesis was that we can leverage machine learning to better identify e-commerce fraud, and we focused specifically on enterprise e-commerce merchants. Really the market we operate in is, Reggie, if I were to steal your credit card while we're speaking, order a bunch of iPhones online, ship them to me. Exactly. Check it out. I would hack it somewhere online. Then you would see it on your statement. You would ask around at home, "Did anyone use my card?" Everyone would say, "No." You would call your bank, JP Morgan, I assume. You would say, you know, "Someone stole my card. This is unauthorized card usage." You're protected as a consumer, right? The bank would refund you the money. The money gets taken out of the merchant's account.
Merchants, once they accept card not present transactions, they are liable in the event of fraud, right? That really starts our world. When we started Riskified, we said it doesn't make sense that we have hundreds and thousands of enterprise e-commerce merchants. Each one is trying to look at incoming transactions and identify if they're fraudulent or not, right? They're building these large, complex teams that are using a lot of third-party tools and data enrichment and systems, and they're basically screening every incoming transaction. They have a lot of costly mistakes. They accept the bad transactions that the business needs to pay us a chargeback. That's like over 30 basis points from their overall revenue rate. They turn away a lot of good customers because they fear they might be fraudulent, okay? It's not a great experience.
Sometimes you need to send transactions to manual review, and you can't offer same-day shipping. We said, "Hey, how do we take this problem and we solve it end-to-end for merchants instead of being a small tool that they use?" Then we came up with what was then very unique to financial guarantees. Number one, we told merchants, "Look, we'll take over the order screening process and tell you if to accept the transaction or not. If we make a mistake, we'll pay you back. We'll provide you a Chargeback Guarantee, and we'll also provide you an approval rate guarantee." That's really our way of telling merchants, "Look, you don't need to focus on this. Riskified can do this end-to-end. You're gonna be guaranteed the cost, okay?
We're gonna guarantee you a higher acceptance rate." That was really the original thesis and how we started the company.
Got it. Now, I remember during the IPO, you guys talked about, I guess, your AI, and AI is very topical these days. Can you talk a little bit about your AI and how you screen for fraud without giving away your secret sauce? 'Cause it was a really cool concept and approach, I remember from then. Maybe you could share that with the audience.
Sure. Sure. Let me unpack it in a few minutes. The type of machine learning we have done from day one, we call it supervised machine learning, where we work a lot with domain experts to create feature engineering, okay? To give a few concrete examples to make it a bit more realistic, when we work with an OTA on the flight volume, a feature is something that looks that holds analytical value. We would look at the flight route between London and New York, and we would look at the nationality of the passport making that purchase. For all the different permutations here, we would assign a risk score, and the risk score would be based on the historical occurrences that we've seen. We're basically creating a lot of features that have risk value, okay?
Our models later on are trained on those transactions. They know the good transactions from the ones that have resulted in a chargeback, and that's somewhat unique to us. Because we provide the Chargeback Guarantee, merchants need to give us the chargebacks in order to be reimbursed. In the machine learning scenario, we have sort of source-of-truth tagging.
Sure.
that our modeling can train on. Over time, that's created a great environment for us, where we have, you know, thousands of features or hundreds of features in each model, and we have a lot of different models. We have different models based on geography. We have different models based on the vertical. Flights might be different than general retail, and they use different features. The models we use in APAC might be different from the ones in Americas. Our, specifically, the model in Brazil holds slightly different data features. That's the type of environment we run.
Yeah. That's that's good. Competitively, right? I think about there's an in-house solution that a merchant can use, but then there are also some risk scoring solutions. Just, you know, kinda talk about, you know, how your solution stacks up, why it's better, where it may be weaker. Anything you can share there in terms of why Riskified, why I should use Riskified rather than do it internally or use a scoring system.
You should use us because we're gonna guarantee you a lower cost than your current cost structure, and we're gonna provide you higher acceptance rate at the same time. All right? That's consistent across all of our merchants, right? Merchants using Riskified, their bill ends up being lower than their current cost structure for higher acceptance rate. Now, what you're saying is true. Usually, when we come to a merchant day one, they have a team, whether it's, you know, five to 50 people that are building engines to identify transactions. This internal team is the one using those scoring tools, those third-party vendors. These are tools that help the team build, you know, in the case of legacy solutions, to build very hard-coded rules. In the case of the modern scoring solutions, maybe a bit more machine learning in nature.
They score a transaction, decide what to accept, and they have case management, so they can manually review the transactions. Sometimes merchants, if you're selling to that team, the team would want to continue to managing that part of the business, right? That would be one advantage that they have. The Riskified pitch would be, "Look, this isn't mission-critical for you. To succeed as an online retailer, you need to be doing a million things well. Why do you feel that you need to be the best at identifying if an e-commerce transaction is fraudulent or not, right? We can clearly do that better than anyone else because of our network effect, because of our ML platform. You know, we have 500 people in Tel Aviv. Our biggest teams are the Data Science, Analytics, and Domain teams.
We can obviously outperform, you know, even at the largest enterprises teams that are trying to solve this.
That was very compelling.
Thank you.
Why would somebody say no? You know, like what's talk about your go-to-market strategy and how. Like that resonates with me at least. Like what's the pushback you get? Or, you know, walk me through how you sign a client.
We find that when we talk to the finance folks and some head of payments and risk, that definitely resonates with them as well. I think it's important to remember that when we started the company 10 years ago, no one was doing this, and we had zero volume. We would ask someone, you know, "Would you ever consider outsourcing this or letting someone else manage this process?" They would say, "No, I've never seen this done before." All right? Now fast-forward to today and just, you know, some of the referenceable clients we have, whether it's the Wayfair or some of the OTAs, some of the largest fashion brands that we work with, I think it's becoming much more common.
Yep.
Okay? People are getting much more comfortable with the value that we provide and the proof points. Realistically, like what are some of the possible challenges that we have? It can sometimes be perceived that we're selling into the risk organization, even though potentially we would be replacing them later on.
Mm-hmm.
Right? That's more around politics and positioning. How do we make sure that we showcase to the fraud manager that a modern fraud manager leverages Riskified to drive better financials for the organization, and it's less about, you know, building a large domain with a lot of people.
Got it. Perfect. Let's talk about kind of the addressable market opportunity, where you guys play, enterprise level, merchants. How big is that market today? How penetrated is it today? And how do you think about, you know, kinda longer term growth outside of what we're seeing macro-wise today? Obviously it's a tough macro environment, those things, if you could kinda talk us through.
Well, I view eCommerce as a whole, and I put travel and services in there as well as probably like above $5 trillion-ish. I think most people would agree with that. I think that what we consider enterprise, which is above $75 million in annual GMV, is 70%+ of that market. There might be certain segments within that that are a bit less relevant to Riskified, but as a generalization, okay, I think that's the market opportunity that we're going after. When you compare it to our current size, our current size is tiny relative to that.
Sure.
All right? I think that there's a lot of opportunity to grow and to capture more GMV. The way we think about the business, we do think about how do we expand our GMV.
Yeah.
The second thing is we believe that we have a very deep and strategic relationship with enterprise e-commerce clients. You know, when we talk about some of our annual dollar, you know, retention rates, they've been at 99%, 98%, so literally almost no client decides to leave us. We're consistently asking, "Hey, we have this great network effect of data and machine learning platform and, you know, we're helping merchants predict will this result in a fraud chargeback or not? What other predictions can we help them with?" All right? That's what's been driving our product platform strategy-
Yeah
... that we've expanded into, and I'm sure we'll touch on some of that in a bit. It's also informing how we think about, you know, potential M&A opportunities as well.
Yeah. We'll hit on all of that in a second. Thinking, I guess about verticals, so I know last quarter, the last several quarters, your ticketing and your travel has been super strong. What's driving the growth there? Are there other verticals that maybe you have not gotten into yet that lend themselves to what you're doing that are maybe high fraud or high chargeback? Like what are some of the other verticals-
Yeah
... that are really attractive to Riskified?
We are really happy with the traction in tickets and travel, right? It went from being slightly below 20%, you know, kind of pre-COVID, to almost a third of the business today. That's a combination of obviously the massive growth that the industry has had, just the tailwinds from the post-COVID recoveries, but also a lot of new client wins. We do see that in these industries, the more successful we are, the easier it is to add that incremental merchant, right? You're already working with, you know, over 50% of the peer set.
Sure.
At some point it becomes a disadvantage not to use Riskified, and that helps us accelerate the growth there. At the same time, we're really happy with some of the diversification that we have, right? We mentioned that the previous quarter, eight out of the top 10 merchants that we added were from categories outside of tickets and travel, right? Our newer regions, APAC, EMEA, they're seeing over 40% growth, right? We're seeing a lot of diversification and growth in some of these categories. When I think about, you know, what's most interesting to me, I feel that food, which includes both groceries and food delivery, when I think about some of the traction within the remittance category, those are all very, very exciting.
Even though they're traditionally might be lower fraud or chargeback risk, they actually have a lot of optimization, especially around our Policy Protect and around refunds and returns and appeasements. I'm really excited about that.
Yeah. There's so many things you just covered I wanna dig into. I guess new products. You launched a chargeback kind of management service. Can you talk about that?
Dispute Resolve.
Dispute Resolve. I would imagine that conflicts with your or it's separate and apart from your Guarantee product. How did that come to be, and what's the opportunity there with that and any other products that you're excited about?
Dispute Resolve just started from merchants asking for us to help them with, you know, not just their fraud chargebacks. They have chargebacks for other reason codes. A customer said, "I never received my package," and, you know, felt it was a false claim, so how can we help them? There's a process where the merchant goes in front of the bank and submits some information, says, "Well, you know what? Maybe this customer said someone stole his card or he never received the package, but here's evidence that he did receive the package or that he should not win this case." It's a form of arbitration. We both help automate this process, and they tend to do it manually, but we also leverage some of our machine learning capabilities to do it in a smarter way, right?
You know, depending on the reason code of the chargeback, you need to present specific evidence points, and that can change based on the issuer that you're in front of. All these different things, we're able to increase the win rates.
Sure.
That helps drive more profitability for the merchant. Longer term, it also helps drive better margins for us, right?
Sure.
Especially on the fraud side, as we are better at disputing and winning those disputes, it helps improves our bottom line as well. That's great. The second product that I'm probably most excited about is the policy product. Actually, just this morning there was a big Wall Street Journal article about the cost of returns and the inefficiencies there. Our policy product also came from merchant feedback, where they said, "Hey, you know, I have a lot of loss going on in these areas. Customers, they're not filing a chargeback, but they're filing a refund claim or request, and they're saying, 'Hey, you know what?'
I never received my package,' or, 'I received the wrong color or the wrong size.'" It turns out, not surprisingly, that even easier than stealing someone's credit card and defrauding him based on that, I can just call the retailer and say, "I never received my package," and they would refund me. All right? A real instance that we recently had is that for a $10+ billion e-com merchant, they were manually screening all these refund requests, and they were probably rejecting around 2% of them. Using basically the same technology and data platform that we already have, we started screening those transactions.
Yeah.
We were able to block over 10% of those claims.
Wow.
Right. Find that they were linked to abusive entities and customers. The amazing thing is that the insult rate, the way they measure it, the amount of people calling in, say, "Hey, why did you block this?" The amount of people later on filing a chargeback did not increase at all. Right? That flows straight to their bottom line. We think the value there is very significant.
That's a fairly new product, not well penetrated within your portfolio today. How do you think the adoption of that will kinda play out?
Sure.
How quickly can it become a significant product?
This is the first year we're actively in market with this product. We set a target internally at the beginning of the year that 10% of the new revenue for this year, the new revenue sales, will come from this product. On an absolute basis, it might still be on the smaller side, but when you think about how it's scaling, it's scaling from 0% to 10%.
Yeah.
Within a year, we feel, well, we feel very good about being on track for this year.
Yeah. I know your retention is really high. Two things I kinda wanted to talk about. One, upselling. I would imagine that, because retention is so high that it's probably easy to upsell things like you're talking about. Beyond just upselling additional volume, but like these additional services, customers seem to be receptive to that.
We're doing two things with policy. Number one, we are introducing in newer pitches. It's not just that we're solving the problem of fraud chargebacks, we're solving chargebacks and abuse. All forms of chargebacks and all these different forms of abuse, that's helping us both create differentiation within the sales cycle. It's leading to larger initial deal sizes. We are seeing kinda great traction, especially on the new, the upsell, the cross-sell motion. To your point, we also have a great base of existing clients where we can cross-sell some of these capabilities, the integration is pretty much all there.
Yeah. No, that's good. wanted to talk about, I guess, the balance sheet and M&A, how you're thinking about that. Are there any pockets of technologies or capabilities that you would like to add or are curious about?
Yeah. Look, we think that the balance sheet is a strategic asset. It's about $485 million. As of last quarter, we were actually kinda free cash flow, slightly free cash flow positive, so feel great about that. When we think about the best way to utilize the cash, it's, hey, how can we find products that we can cross-sell into our existing base? Okay. We view our strategic e-commerce merchants as a strategic asset. They stay with us. They trust us. They have a great relationship with us. What other decisioning endpoints can we provide them? That's what we have in mind.
You know, we just need to find the right technology at the right price, something we haven't been able to do up until now. We are actively looking. I hope that we'll be able to find something. We do have a high bar there.
Prices have come down.
I think there's still some disconnect-
Yeah.
between private and public, expectations. You know, something that people do ask us a lot about, so it's worth mentioning, our opinion on just the buybacks and given the stock price and everything. The answer we've shared is that while we are discussing it internally, we've always felt that it's something that's maybe better suited for profitable companies. Now that, you know, we have at least a clear line of visibility into profitability and how long it's gonna take and how much cash we need there. We're just trying to understand the dynamics around a more limited flow and knowing that some investors are looking to open larger positions, how that would impact. Those are some of the things that we discuss internally around, you know, how to best use the cash.
You touched on another important point, I guess the path to profitability, and I guess how that can scale beyond this year. Maybe update us on the timeline for profitability.
Yeah
... and then, and how quickly it can scale, and how you're managing expenses, going forward.
For us, I think it was about 18 months ago, maybe even more, when we were speaking, probably during the IPO process, we said, "Hey, we're gonna invest into expanding our global go-to-market teams because we feel that there's, you know, great demand in international regions, and we wanna have field sales in Latin America and APAC and set it up in Japan." We went ahead and did that. We also said, "We need to invest in some of these product platform capabilities and increase the teams to invest in policy and dispute resolve." We went ahead and did that. Once we finished those strategic investments and have them in place, we said, "Okay, now we're gonna pause, and we're gonna kinda accelerate the march towards profitability and beyond." Really happy with the progress we've made there.
You can see that OpEx has remained relatively flat over the past two to three quarters. When you think about a year-over-year basis, it's probably kinda gone down by a few million. And we think that there's a lot of leverage in the business model, so we can continue to scale revenues definitely this year, probably also beyond. We haven't made final decisions on 2024 yet. So keeping OpEx, you know, essentially flat or relatively flat while scaling revenues.
That's good. In speaking of scaling revenues, we kinda talked about it earlier, but there's like latent potential within your existing customer base. I know in the past you've kinda framed out what that is. Could you provide us?
Yeah
... some details on that?
I mean, we've historically framed that what we've seen is that e-commerce was growing and, you know, call it low to mid double-digit growth, right? Because we're a percentage of a merchant's GMV, we enjoyed that growth as well in that our new and upsell business was growing at a 10% to 15% growth, right? Let's say, call it historically. Ever since we've shared that historical projection, the e-commerce landscape has not grown at that level.
Sure.
It's grown, you know, sometimes tickets and travel has grown a bit less, a bit more. Post-COVID beneficiaries have had a more challenging time. What we are seeing in today's environment is that our new upsell, cross-sell business is actually performing better than historically it has, and that's probably a combination of, you know, more products, more conversations, more global go-to-market, the current environment where our guaranteed cost savings is resonating more.
Yeah.
On the other hand, the macro environment or the same store sales for some of our merchants, or the merchants that we might have some larger exposure to, are still slightly down.
Sure
... on a year-over-year basis, right? We have some merchants in the home improvement, home furnishing category. We don't think there's anything structurally wrong with those clients, but they still have some digesting some of the COVID growth. Once it reverts to the normalization, we definitely anticipate that would be a tailwind to the business.
Is there like a rule of thumb in terms of how much volume you think you should get from a merchant at, or maybe an optimal amount for the merchant that they get the best price and the best performance and stuff like that? Maybe varies by vertical. Is there a number or a way to think about that?
We always do risk-adjusted pricing, right? One of the things that allows us to work with extremely high-risk merchants that sell, you know, digital gift cards and luxury fashion on the high-end. We work with the largest pet food e-commerce merchant that sells, you know, 99% domestic U.S. Because our pricing is risk-adjusted, there's value for everyone, right? It's true that some merchants, especially the larger ones, they would prefer to start us off on a segment. They're not gonna give us, you know, $50 billion in volume on day one. They want us to prove our value on a specific geography, on a specific use case, and once we've proven to them that the technology works, and it does, and we build the relationship, we're able to progressively capture more volume at different take rates.
Got it. I'll open it up to questions in the audience. If not, I can keep going.
I was wondering if I may. I was just curious, on the world shifting towards marketplaces and to enterprises, even PayFacs. I mean, with so much in the way of payment facilitation, the software companies looking to do more payments, you know, not just in retail, but, you know, you pick it. I'm just curious, how does that impact flow for you?
How does that impact?
Your business, your flow of work and potentially the scope of work that you can do.
I think it can influence the partner strategy, right? We really view ourselves as the infrastructure of looking at a transaction, understanding if it's fraudulent or not, right? We think we're the best at doing that. Now, sometimes we work direct with merchants. That tends to work for the enterprise space, where they have a complex environment. They work with four different payment gateways. They don't have an off-the-shelf e-commerce solution. It's very, like, customized, so we integrate directly. Now, if there are areas to collaborate, whether it's with a PayFac, with a payment gateway, with an e-commerce platform, where the relationship is they have the one-to-many relationship with clients, usually it's a bit more SMB and mid-market oriented, but we're still the ones partnering that value chain.
I think that's very interesting, and that's an area that, you know, when we think internally, how are we gonna approach the mid-market, that's kind of the thesis.
It's kind of a related question, but would you ever consider going into the payment space yourself so that Riskified is the wedge and then adding on payments licenses and providing that functionality as you think about, you know, doing more for customers?
When we try to unpack. It's interesting, we do have those discussions, you know, what's unique and what's the value prop of Riskified. We tend to feel that just doing payment processing or the plumbing, it's not simple. There's a lot of complexity there. It is very separate than the type of like machine learning, feature engineering type of decisioning that we do. We always end up at the place where it's probably a bit more natural for us to ask what type of data backed decisions do enterprise e-commerce merchants need to make, okay? We're probably more suited to do that than the payment side.
I guess I have a similar question, maybe the other way of the value stream. Today, obviously, a lot of your services are focused on the transaction level. How much demand are you seeing from merchants, specifically for platforms where maybe there's a sign-on required before the transaction to prevent that fraud before they even get to the transaction level, and how are you thinking about that strategy?
Definitely. We've rolled it into our core Chargeback Guarantee product because it's such a inherent part of a lot of the flows to verify an account creation, right? You wanna verify that it's not a fake account, a malicious account, a bot attack. You also wanna make sure when someone is logging into an account that it's the real user. It's not someone, you know, performing an account takeover, or there's a term called credential stuffing, where they just use like a million different permutations of user and password to gain access to that. You wanna be able to identify and block that. Overall, we do think of it as part of the wider like e-commerce protection stack. The question is, do you block that event at account creation or login?
Do you just store that info and, you know, when there's a payment attempt, that's when you act and block the transaction. We definitely see that.
Okay. I'll continue. I always ask CEOs this question. Five years from now, like, where is Riskified? Where is the market? What's your five-year view on the space?
Not guidance.
Not guidance, not guidance.
Just a view.
Just industry, like adoption, whatever it is. What do you think?
Look, I think that more and more categories are moving to what we consider online, right? Even when we talk about the growth in groceries, it's not just because people are ordering to their home, right? The actual flow is just different. It's an omni-channel flow. I think the omni-channel flow will increase in categories that maybe people don't have a full realization of how much that would move what we call now online. I think that would expand dramatically. I think there's still a lot of share gains for e-commerce that now that I feel that we're starting to approach this normalized environment where all the different, like post-COVID noise, acceleration in travel, deceleration in this kind of normalizes, will revert to close to historical norms, if not at historical norms.
For Riskified within that, I feel that we're going to continue to become more accurate, okay? I just feel that's like a base function, right? As we get more clients, as we improve the engineering about our ML platforms, I think that's gonna lead to an increasing delta between the value an internal team can create for a client versus Riskified. I think our market share gains will outpace the market because of that. I think that our ability to sell additional use cases, whether it's policy or dispute management or some of the newer things that we'll have in line as we're talking about five years out, will also increase both the stickiness and the revenue per account. That's kind of the overall thesis. Increase market share as GMV, and increase the amount of services that we sell into enterprise e-commerce.
I think that's gonna remain constant.
Do you see a change or evolution in the go-to-market strategy? I know we talked about partnerships earlier. Like what does that look like five years out? Like I would imagine, and correct me if I'm wrong, like the bottleneck is really just the sales process and like getting people on board. Like how do you optimize that?
No, you're right. I think that definitely channels and partners can help accelerate that. We recently released that Deloitte partnership, right? What we're thinking about is, hey, when we target the decision makers at some of the largest e-commerce companies in the world, who influences them? That's Deloitte. That's maybe Accenture, a few others.
Yeah.
Right? How do we make sure that they understand the value that Riskified provides and can communicate that to those decision makers?
Yeah.
That's one form of partnership that can help us accelerate the sales cycle. Some of the others, you know, kind of based on Tien-Tsin's question, hey, how can we partner, whether it's a PayFac, a gateway, a platform, where they have relationship to a wider range of merchants that maybe we don't wanna go after.
Sure.
-on our own, but be more part of that, you know, platform play.
What are you saying? There's an opportunity there or?
Opportunity.
Cool. I usually ask this upfront, but in the interest of time, I'm gonna ask you, I guess, what two or three things are you focused on most today? Like, how are you spending your day?
I'm kinda shifted into planning towards 2024. Just thinking about how we best allocate the U.S. dollars, the current, you know, spend environment that we have. Where are we gonna get the highest returns? you know, that's always a debate for the next incremental U.S. dollar. You know, is it developing that next product to cross-sell internally, or is that something that we could potentially partner with? Maybe there's a great acquisition opportunity.
I can see you doing it yourself or using AI to do this.
Using AI. You know, it talks very confidently. It's just right sometimes.
Yeah, yeah.
That's the only problem with it.
Cool. Last question from me. What's misunderstood by the stock market? Like, what are they missing about Riskified?
Look, I think initially we were probably categorized into, you know, unprofitable tech IPOs-
Sure.
-that did not perform very well. I think now that people have a better understanding and line of sight into profitability, growth, what it can look like in a more normalized e-commerce environment, I think we feel better about the conversations and the interest that we have. When's the right time to get into the stock? How do we solve the float issues?
Sure.
That's what we're focused on.
Perfect. Any final words?
No, thank you.
Got it. Thank you, man.
All right. Thanks a lot.