The secret behind the surprise success of Monday, Fiverr and Riskified

Strange things are happening in Israeli high-tech. While the wave of layoffs in the industry is in full swing - from startups to big tech monsters like Meta and Amazon - it is the local companies that are presenting positive financial reports.

Third quarter financial reports generally caused great concern, mainly because they showed lukewarm results from the giants in the field after the rise in interest rates. There were quite a few expectations for profit warnings, but after those didn’t materialize, many experts believed that companies would slightly miss targets and reduce forecasts for the last quarter. However, in reality the opposite happened: Israeli high-tech companies, specifically software as a service companies (SaaS), not only beat the forecasts for the most part, but also raised expectations for the current quarter.

Riskified opening trading in New York.

The most outstanding were Monday, Fiverr and Nice, who all presented a double-digit growth rate and gave optimistic forecasts for the last quarter of 2022. WalkMe surprised with revenues slightly higher than expected and a loss that was significantly lower than forecasts. Even Taboola and Outbrain, whose revenue model depends on online advertising, which has suffered a blow in recent months, managed to surprise - both in revenue and in the bottom line. JFrog and Riskified, which presented relatively lukewarm quarters at the beginning of the year, when the general situation in the market was better, presented improved performance in the third quarter.

There are many potential explanations for this resurgence, the simplest of which being that contrary to past downturns, this time Fed Chairman Jerome Powell has managed to arrange a soft landing for the American economy, and therefore there won't be a real recession beyond the slowdown experienced in recent months. This is the most optimistic explanation, not to mention the most naive, in view of the fact that the rate of inflation is still very high, which could be seen in the form of the consumer price index, which rose less than expected. The war between Russia and Ukraine is not over yet, and it is not clear when it will end, and also the trade war between the U.S. and China is still far from over.

The other possible explanation could be lowering forecasts in advance. Panic and upheaval in Wall Street from the beginning of 2022 dropped the stocks to historic lows and caused the executives of public companies to be more cautious. This is probably a more reasonable explanation, but it is insufficient and cannot be the only explanation, as most companies are still showing double-digit growth rates.

Beyond the classic SaaS companies mentioned here, one can see better numbers in other markets as well - even with large figures of around the billion dollar mark, as in the case of Check Point, which grew by 9%, and SolarEdge, whose revenues grew by 59% in the last quarter. Even Wix managed to pleasantly surprise its investors, even though they were already prepared for another weak quarter, as has happened since the beginning of the year. There is no doubt that the growth rate is lower today than it was in 2021, but on the other hand, the benchmark for comparison with last year, which was abnormal on every level and scale due to the impact of Covid, is a challenging comparison.

Conversations with marketing and sales teams, who operate in the field, offer an interesting explanation for the stream of positive reports, but it is an explanation that is actually a reason for pessimism. Quite a few salespeople, both in high-tech organizations and in the retail sector, feel that some companies have been going on buying sprees due to an understanding that budgets will shrink in 2023. It is important to remember that the 2022 budgets were built and approved at the height of the prosperity period in 2021. Organizations today have significant "leftovers" from these generous budgets, and those involved in the field understand that if they are not used now, they will simply disappear.

Forecasts for the last quarter are excellent, and in some cases have even increased, but they should not necessarily be seen as a signal for continued improvement in 2023. It is possible that the results of the third quarter and those we will see in the fourth quarter are a kind of "last hurrah" before a recession hits the U.S. and the extensive cuts in budgets will reflect negatively on Israeli companies, as well and even hit cyber budgets.

The Achilles heel of most Israeli high-tech companies, even the fast growing ones, was and remains profitability. Although they have all changed their mantra and are reciting the lexicon they have adapted in recent months - with expressions such as "operational discipline" and "efficiency" - most of them still do not see profitability on the horizon.

The improvement in profitability and efficiency indicators, which they managed to present this quarter and thus beat the forecasts, is mainly due to layoffs and cuts in the marketing and sales budgets, a phenomenon that will further deepen in the current quarter. The adjustment of cost structures is essential for a year that is expected to be weak, but it will not be enough for a scenario of stagnation in growth, which will once again expose the gaps in the business models of some companies.

What works in the public companies' favor and differs from the startup sector, which is already reporting a slowdown in sales, is the fact that they are public and have more mature products and a better-known brand. Although many of them were issued at an inflated value - especially those that were not issued through a SPAC merger - being public provides the security cushion that startups sometimes lack. This is because startup clients are concerned for their very existence, and their products are often less mature or not comprehensive enough. In times of uncertainty, organizations will prefer a product from a more stable company, which already has a proven history, in order to decrease risk.