Nir Zohar (from right), Micha Kaufman, Shai Wininger, and Shlomi Ben Haim.

Israeli software companies thrive amidst macroeconomic transformation

Growth and cash reserves bolstered the bottom line in the financial reports of Wix, Fiverr, JFrog, and even Lemonade

The drastic change in the macroeconomic environment is probably the best thing that happened to Israeli software companies. Most of the big names in the round of IPOs between 2019-2022 were born in an era of zero interest after the 2008 crisis and as such have never experienced a crisis situation. The wake-up call that jolted everyone in the middle of 2022 sent the global high-tech industry, including the Israeli ecosystem, of course, into a state of shock. However, now, the business results presented by the software companies show that those who knew how to recognize the new reality quickly and implemented efficient processes and focused on the more profitable customers are reaping the rewards.
The financial reports published over the weekend by Wix, Fiverr, JFrog, and even Lemonade signal that financial discipline ultimately works. After a series of cuts, both in personnel and in investment in marketing, growth is beginning to seep into the bottom line as well. There is also another direct and even more immediate effect of the big macroeconomic change - financial income.
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מימין ניר זוהר מיכה קאופמן שי וינינגר שלומי בן חיים
מימין ניר זוהר מיכה קאופמן שי וינינגר שלומי בן חיים
Nir Zohar (from right), Micha Kaufman, Shai Wininger, and Shlomi Ben Haim.
(Photo: Orel Cohen, Nimrod Glickman, Dor Malka, Kyle Chesser)
All the software companies that have been issued in recent years are sitting on significant cash coffers, ranging from half a billion dollars in the case of JFrog to close to a billion dollars in the case of Lemonade, Wix, and Fiverr. Income from interest on these balances further improves the bottom line, and in Fiverr's case, they are responsible for moving the company from an operating loss of $4 million to a balanced bottom line.
Fiverr’s operating profit of $13 million - the company's first operating profit according to Generally Accepted Accounting Principles (GAAP) - has already swelled to $33.6 million in the net profit line. In the cases of JFrog and Lemonade, which are still losing money, the interest rate helped to paint a brighter picture. Despite the improvement presented by most of the companies, none is yet talking about returning to a significant rate of hiring. Moreover, most of them intend to make the most of the existing budgets to preserve the current spending base.
The main improvement among the Israeli-founded firms was presented by Wix and Fiverr, which operate in tangential fields that are affected by activity in the small business and e-commerce market. Fiverr, which built a platform that connects freelancers with companies, published excellent reports, which were better than the forecasts in every parameter and saw the company increase its annual forecast by more than 10%, so that it now expects revenues of $365-358 million. These revenues will reflect an annual growth rate of 6-8%.
Although this number is far from the double-digit growth that characterized it since the IPO, the transition to profitability is what really matters considering that in the corresponding quarter Fiverr reported a loss of $40 million. A moderate growth rate and profitability are exactly what Wall Street investors want to see in 2023, which is why Fiverr shares reacted to the reports with a 20% jump.
Investors also splurged on Wix, which built a platform for setting up websites and online stores. Nir Zohar, the company's president, said after the publication of the reports that there are signs of a renewed revival in the small business sector, which helped Wix beat the quarterly forecasts and led to the raising of the annual growth forecast. Along with the growth, Wix also upgraded the cash flow forecast that, according to the updated forecast, will reach $200-210 million, about $20-30 million more than the previous expectation.
JFrog also had plenty to celebrate on Thursday when it once more crossed the $3 billion mark in market capitalization and recorded a higher than usual turnover. The company, which had developed a system of record that powers organizations to build, manage, and distribute software quickly and securely, posted a rapid 24% growth in revenue, although it has yet to become profitable according to GAAP.
However, deducting accounting items such as employee option plans and acquisitions, it recorded an operating profit of $8.2 million, which was also reflected in a cash flow of $16 million. The most significant development in JFrog is the increase in the share of cloud-based activity, which grew by 44% compared to the corresponding quarter and already constitutes a third of the company's revenues. Another positive sign is the increase in the number of customers with an annual acquisition rate (ARR) of over a million dollars, from 17 to 24 in the last quarter. JFrog expects revenues of approximately $345 million in 2023, which will reflect an annual growth rate of 23% and an operating profit before accounting items of $25 million.
The company which spoiled the positive picture that emerged from the reports of the Israeli software firms was insurtech company Lemonade, which despite making a series of cuts, freezing recruitments and pledging that from now on it will grow without increasing losses, is still struggling to present a positive bottom line. On the one hand, the company's revenues were higher than forecasts and reached $104.6 million, more than double than in the corresponding quarter, but on the other hand, the loss remained the same at $67 million. The high loss is particularly surprising because it came after efficiency measures at the insurtech company that included layoffs and halting recruitment, alongside other cost-saving measures, chief among them the reduction of marketing and sales expenses. Lemonade's report emphasizes once again how complex the activity in the highly regulated and risky insurance market is. Most of the damage to Lemonade's performance, which also led to a sharp drop in its stock, which was actually on the path to recovery this year, was due to the climate crisis.

As a small insurance company, which is highly concentrated in a few geographic areas, Lemonade was severely affected by severe weather in the U.S. during the second quarter, which, it claims, had a historic number of storms. But even if the weather in the third quarter improves, Lemonade expects its revenues this quarter to remain at a similar level of $102-104 million. This is because, according to the company, it is holding back on marketing.
The regulator in each and every state in the U.S. has to approve the rates for Lemonade, and until they are approved, it cannot raise the prices of the policies. Lemonade is waiting for the approval of the new premiums and does not want to market policies in the meantime at the old pricing, which was determined when the interest rate was zero and there was no inflation. Lemonade estimates that the new pricing will come into effect by the end of the year, which means that in the second half of 2023, there will be a slowdown and only in 2024 will the company return to a rapid growth rate. Lemonade's annual forecast assumes revenues of $402-408 million and an adjusted EBITDA loss of about $200 million. Since the beginning of the year, the company has already burned almost $100 million.
It is interesting to note that, although the executives of all the companies, with the exception of Shlomi Ben-Haim of JFrog, who lives in the U.S., are prominent activists in the protest against the judicial coup, the issue did not come up in conversations with the investors after the publication of the results. The questions directed at the executives focused entirely on business, as was also the case at Check Point's investor call.
Nir Zohar, the president of Wix, addressed this issue in a conversation with journalists from Israel on Thursday: "We don’t know to characterize whether foreign investors from shares are staying away from shares of Israeli companies. But my fear is that, in the end, the investors will not tell you that they do not buy or sell because you are Israeli. They will simply avoid it. As soon as Israel continues to suffer an increase in risk because of the instability and the noise facing the credit rating agencies, it will have an effect. We will not know how to quantify it, but we will know when we suffer from it. The instability and noise are harmful to the country, regardless of who started it and what they did. The government's responsibility is to solve this crisis."