Freightos Limited (CRGO) Earnings Call Transcript & Summary

Okay. Good morning, and welcome to the Sidoti Virtual Microcap Conference. And thank you for joining us today. I'm Anja Soderstrom, Senior Equity Analyst here at Sidoti. And as I mentioned, next up, we have Freightos. We have Zvi Schreiber, who's the Chairman and CEO with us; and we also have Pablo Pinillos, the CFO; and Anat Earon-Heilborn, she's the IR. We will start with a presentation by the management team followed by Q&A. [Operator Instructions] And with that, I'll wish you welcome.

Thanks, Anja. Hi, everyone. I'm Zvi Schreiber. I'm the Founder and CEO of Freightos. I'd like to start by just quickly telling you why and how I started Freightos 13 years ago, and then I'll jump into the slides. So, I'm a software guy. I've got a background in software. I've been creating software companies before. And -- but for just 2 years, in 2011, 2012, I was managing a hardware company called Lightech, making electronic power supplies for LED lights. And I sold that company to GE Lighting after 2 years. But during those 2 years, I was doing international shipping. So, it's the only time in my career I was dealing with physical goods, and we were shipping China to U.S., China to Europe, shipping by ocean, shipping by air. And I was kind of shocked back then, and it hasn't changed all that much, but I was shocked that there was no website where I could see all the prices and compare. And when you call up a freight forwarder, freight forwarders are like the travel agents, the companies who are in shipments, when you call up a freight forwarder to get a price quote, back then, you would wait 2 or 3 days and the price quote would be non-binding. So, it didn't match the invoice anyway. And I was like, guys, I'm not the first guy to ship something from China to the U.S. Why is this so manual and so obfuscated. Anyway, fast forward, we've spent the last years digitalizing the industry. The industry is still mostly offline, so we're still at the beginning of that journey. But we've already established ourselves as a leader. We're doing well over 1 million digital bookings a year, which is still a small part of the industry, but we are the leaders in digitizing this huge industry. And it is a big industry, hundreds of billions of dollars. As you know, if you buy a product in a shop in America or in Europe for that matter, 90% of products are shipped. So, this is really the backbone of the global economy, the global physical economy in many, many ways. And it's about time we got digitalized. So, let me dive into the presentation disclaimer. So, because we're a marketplace or a platform, we'd like to start with the number of transactions in the same way that if you're Uber, even sometimes before the revenue and EBITDA, your key KPI to see if you're winning is how many rides are hailed with Uber taxes or if you're Booking.com, you look at the number of nights booked. That's your first indication that you're really becoming the leading marketplace. So, we do the same. We track each quarter even before we announce financials, we announced also the number of transactions. And look at this, it's grown like 3.5x in the last 3 years. So, it's been growing very rapidly. It's been growing every quarter. And let's look at the quality of the network, a healthy marketplace as many buyers, many sellers. In our case, as I'll explain, it's actually a three-sided marketplace. We have carriers, we have freight forwarders. And we have the importers and exporters, and we've got a strong position in all of them. We have 13,000 importers and exporters, lots of little ones, but some big names that you see here like Electrolux and RockWool and other famous names. So, I don't have permission to show their logo. 4,000 freight forwarders and 71 carriers, mostly airlines, but also getting started with Ocean Liners as well. But of course, financials are critical as well. And so you'll see that our revenue has been growing every single quarter. Our margin is very healthy. Our non-IFRS margin has been growing consistently. It's now 74%. We're aiming to get it up to 80%. So, we've got some growing high-margin revenue, growing margins. And the plan is this, we're not yet breakeven, and that's because we want to -- there's such a big opportunity. We want to make sure we're investing money in sales and marketing, investing money in research and development. We don't want to break even too soon. We've got the cash to keep investing. We got more than $30 million in the bank as of the last report. And so, the idea is to keep investing, but also keep growing. Each quarter, pretty much we lose less. You draw the line, and you'll see that by the end of 2026, we'll be breakeven, EBITDA breakeven and very shortly after that cash flow breakeven, it's almost the same. And we have plenty of cash to get there. So, even if you see that we're losing money, it's intentionally. We want to invest that money to keep growing and then we'll break even when we get to a suitable size next year. Okay. So, let's talk a little bit about the market and the opportunity that we have.

I'm sorry to interrupt. Did you want to share the slides or...

I am sharing.

Because I can't see them.

Goodness. It says very clearly, you are screen sharing. Maybe can -- if any of the participants can see my slides, please just put it in the chat or the Q&A.

Yes, they can see them. I'm sorry. Since, I just cannot see them. Okay. Sorry about that.

Okay. All right. So let me just get that up again. I've lost them, of course, hold on a second. Okay. So, this is the least that you need to know about our...

Zvi, you're not sharing the slides. You're sharing the outlook. Do you want me to share my -- from my side?

Give me one second. It says, now it's paused and I don't know why. Share. Okay, how about now?

Perfect.

Okay. Apologies for the small technical issue there. All right. So, this is kind of the least thing you need to know about our industry. You've got the importers and exporters. Now we're all doing business to business. We're dealing with commercial things. We're not dealing with small packages to consumer. We're dealing with pallets and full containers. And so, our end customer is the importer or exporter in the industry that they're known as the shippers, but that, that's gets confusing. So, I'll just call them importer or exporter. Then you've got the freight forwarders. Freight forwarders are a bit like the travel agents for the industry. But it's more complicated than a travel agent. Because when you buy an airline ticket and you walk us up on the plane, you walk us off the plane, cargo doesn't do that. So a freight forwarder has to take care of the first mile and the ship or the plane and the last mile and the customs and the insurance, they pull that all together. It's a big industry. There's 100,000 freight forwarders in the world. The biggest freight forwarders do tens of billions of dollars. Some freight forwarders, you might know, some of the biggest American freight forwarders are Expeditors. C.H. Robinson is a trucking company, but also a very big freight forwarder. But in the world, some of the biggest freight forwarders are DSV, Kuehne + Nagel and then also DHL and UPS also have a Freight Forwarding division separate to the Small Parcel division. And then, you've got the actual carriers. They're the ones who are transporting the goods. We work mostly with a lot of success with airlines, starting to get going with Ocean Liners. They've been very slow to create digital connections, but that's happening. We're interested in trucking as well. We're not focused on the trucking market per se. There are other companies who do digital platform for trucking. But we are very interested in trucking when it's part of an international shipments. So, trucking the first mile to the port, the last mile from the port. That is within our wheelhouse. And what happens today, we've started to change it, but still most transactions today are offline. And there's e-mails going between the import and exporter e-mails the freight forwarder, says I want to quote. There's usually two freight forwarders involved, one at the origin, one at the destination. They e-mail the carriers. There's Excel sheets flying around and a very, very manual process. And we've started to digitalize it, but still most of the industry is offline, which is good. It means, there's a big opportunity for us to grow. And the industry has all the problems you might expect from an industry which has so many human intermediaries. It takes -- still if you're not using Freightos, it's still common to wait 2 or 3 days for a price quote. There's big discrepancies. The prices aren't consistent. The prices aren't binding. There's wasted capacity, wasted carbon emissions, wasted time, et cetera. If I may for a second, sort of, zoom out to 100,000 feet view, this is how I like to look at our mission, sort of, from a strategic perspective. In the first decade of this century, even starting a bit before that in the '90s, B2C business consumer, e-commerce started to take off. And there were many individual retailers like Zappos and dedicated retailers like Amazon. But then what happened is Amazon actually switched their business model from being primarily a retailer to being primarily a marketplace or a platform. And in every area, the marketplaces won most. So, hotels started selling online, Marriott started selling online, but Booking.com is worth a lot more than them. Some taxi companies went online, but Uber is worth more than most of the taxi companies combined. So, being a platform is a very exciting business model. In the second decade, of this century, B2B started going online. And again, there were many individual companies like Dell and thousands of others who started selling B2B online. But again, the biggest winners were platforms like SAP Ariba, Magento, Amazon themselves have a small footprint in B2B as well. And now, in this decade, in the 2020s, it's finally time for international business-to-business to go online. It's a lot more complicated, because it requires shipping and also foreign currency, et cetera. And we're positioning ourselves to be the platform for business-to-business -- global business-to-business e-commerce. Okay. So, let's drill down a little bit. I've said we're a platform. But if you're interested in investing in Freightos, it's worth taking a few minutes to understand a little bit more detail about how our business is structured. And so, we first of all, when you look at our financials, the first thing you'll notice, and Pablo will present it later at this time, there's two segments: Platform and Solutions. What does that mean? Platform means transactional revenue, any revenue which is tied to a specific transaction. It could be a flat fee or a percentage. And we actually have two parts to our Platform. One is called just Freightos, which is connecting the importers and exporters to the freight forwarders. And the second part of our platform, which for now is actually called WebCargo by Freightos for historic reasons, is connecting the freight forwarders to the carriers, mainly the airlines, but also a lot of emphasis on growing with the Ocean Liners. If you know the world of passenger travel, there's a very nice metaphor or analogy. Freightos is a little bit like Booking.com or Expedia, it's a public site where any customer, in this case, an importer and exporter can compare prices. And WebCargo by Freightos is actually analogous to Sabre, Amadeus. You may be familiar with those companies. If you're not, you can look them up or you can even search your inbox, you'll find that many times when you buy an airline ticket. Until today, it's issued by Sabre or Amadeus. So there, they provide the digital infrastructure to connect the travel agents in their case to the carriers. And they've been doing that for decades. These are very profitable, stable companies. Now, when I and the team wanted to start Freightos, those years ago, there wasn't -- it would have been nice if there was an Amadeus and we could just connect and start selling like Expedia, but there wasn't. So, we built our own -- we built the Amadeus as well as the Booking.com. And that's why we ended up with two parts of our platform. So, that's part of why it took us more time and money to actually complete our solution. But it also means we have an even bigger opportunity and an even bigger moat to competition, because there is no Amadeus that someone else can connect to and get started. Now, all of that is the Platform side, but there's also a Solution side. We didn't invent this. It's a very winning strategy to sell software together with marketplace. Actually, Sabre and Amadeus provides software to travel agents as well or OpenTable provides software to restaurants and then also provide a marketplace for restaurants. So, it's a SaaS-enabled marketplace as a winning strategy, and that's what we do. So, we have a SaaS business and data business, which are subscription businesses with recurring revenue. And those we call Solutions. And so, you'll see in our revenue platform, which is transactional and solutions, which is subscription. And these things all go together. In most cases, it's not two separate businesses. It's two models, but it tends to be the same freight forwarders who buy on WebCargo and sell on Freightos and use our SaaS and sometimes use our data as well. So, this all goes together very nicely with the same customers. Okay. I get asked a lot about the impact of tariffs. So, I thought I'd just take that head on and save you all putting it in the Q&A later. So, here's our perspective on tariffs. First of all, if I look at the big picture, world trade isn't going anywhere. Even we'll see whether -- right now, there's optimism because the more punitive tariffs were paused for 90 days. Hopefully, they stay paused. So, right now, there's some optimism that we've avoided an extreme trade war. But even if there is an extreme trade war, it takes many years to build factories and supply chains. Manufacturing isn't all going to come back to America tomorrow. The Americans don't want those jobs in most cases. So, world trade is here to stay. And the big opportunity, the bigger trend is that there's this huge industry which needs to go digital. And so, in the big picture, this doesn't change the opportunity that we have. But in the short term, it can be both a headwind and a tailwind. It can be a headwind, because there can be short-term impact on lanes. For example, when for a few weeks, there was 145% tariff on Chinese goods coming to America. It did reduce our transactions in that particular lane. Luckily, that name is a small part of our overall transaction. So, it doesn't have a meaningful impact. But of course, we did see a drop in volumes in that lane during those weeks. On the other hand, the positive thing is that volatility can actually increase platform usage. So, people who get lazy and say, I'm always importing from China. I'm not going to bother using a marketplace, suddenly you're going to need to find shipping from Vietnam or from somewhere else, then actually -- we actually find more usage for a marketplace when there's volatility. So, it's good as well. Of course, we're continuing to monitor and respond. I don't want to be complacent. Right now, it looks like there won't be an all-out trade war. If there is an all-out trade war, it could be at least temporarily a headwind. It could also, in some other ways, be a tailwind. We're keeping a close eye and responding to as things develop. Okay. So, a little bit about the industry traction, and then I'll hand over to Pablo. We talked about the transactions which are growing every quarter, the network. We've really got an amazing list of airlines, freight forwarders, shippers, importers and exporters that is who work with us. And we've got this double -- the exciting thing about the marketplace is that you get this network effect, a 2-sided network effect that all the sellers attract buyers, because there's interesting stuff to buy and all the buyers attract sellers because they want to fill their planes and their ships. But in our case, it's actually a three-sided marketplace because we have the carriers and the freight forwarders and the importers and there's a fantastic growth dynamic. Even if we didn't spend money on sales and marketing, we would continue growing to some extent. All right. Good. So, let me hand over now to Pablo to take you through the financials at a high level, and we'll try to leave 5 minutes for Q&A at the end.

Sure. So, do you want me to share my slides directly?

Yes, please.

Sure. Just one second. So, hi, everyone. I'm Pablo Pinillos, CFO, and I'm going to talk about a little bit about the financials. So, as Zvi said at the beginning of his presentation, you can see a very nice growth year-over-year. Last year, we finished at 23.8%, and we are targeting to grow between 20% to 30% to 29.0% to 30.6% that we aim to continue that trajectory -- growth trajectory over the years as our long-term strategy and long-term growth strategy that I will show later on. And as you can see, our revenue breakdown is basically in two different areas, Solution revenue and Platform revenue, both continually growing. Solution revenue right now represents 2/3 of our revenues and Platform revenue is 1/3 of our revenues. But over time, we expect that Platform revenue will grow much, much faster. And the reason why is Platform revenue will grow much faster is because,, as you understand, the characteristics of that revenue is basically two levers, take rate and growth rate. From a take rate perspective, the Freightos -- the Freightos platform, we have a very healthy take rate. We need to double down on helping that platform to grow. WebCargo, we have a really healthy growth rate, but our take rate is not that healthy as in the freightos.com. So, we are working very hard to get to that point where we can grow both platforms and get a healthy take rate. We have a very high capital efficient growth, gross margin evolution, very healthy gross margins. You can see over time quarter-over-quarter that we've been increasing that gross margin. And as we said at the beginning, we aim to finish at 80% of non-IFRS gross margin probably next year or the following one. And we are very efficient from a sales and marketing expenses. As you can see on the right side, with -- as a percentage of the GBV last year compared to all other platforms, we finished at 1.6% overall cost of sales and marketing versus others that you can see on the right that they are efficient, but less than we are right now. We are tracking. We are on a really good track and really looking to get profitable next year -- in Q4, next year, you can see our adjusted EBITDA, how it's evolving, and you can draw the line and with the revenue growth and the efficiency that we are getting from our bottom line that we will get EBITDA positive in Q4 next year. And from a cash management, we manage our cash very closely. We finished the quarter at $36 million. So, with that, it means that we will not need to raise any capital over the following years. At this stage, we have enough capital to be profitable at the end of next year. This is our guidance for next year, the guidance that we made public 2 days ago. From Q2 and fiscal year transactions, growing between 20% and 30% almost number of transactions GBV revenues and getting our adjusted EBITDA to the right levels to be able to be positive in Q4 next year. And this is our long-term growth model. We have to be able, we want to be able, and we believe we can be able to grow our transactions and our GBV between 20% and 30% year-on-year and the revenue growth between 25% and 30% year-over-year. The gross profit, we will get between 70% and 80%, as Zvi said, and reducing the adjusted EBITDA margin 8 to 10 percentage points every year and turning positive during 2026. And just last slide, our capital structure at the end of last quarter, 50.2 million total company shares outstanding, including strategic shareholders, as you can see with Qatar, FedEx, LATAM. Employee equity grants, 6.5 million, and we have public warrants at a price of $11.5 of 14.9 million. And with that, we can open for questions.

Good. Thanks, Pablo. So, I see a number of questions here, which I'll take. The question here for Pablo, I wonder if you have an answer. How does the margin profile compare to peers and what drives the difference? So, think about that for a minute in terms of the margin. I'm not sure...

Yes, I can. I can talk a little bit about that. We -- as you have seen, we have two revenue streams. We have one revenue stream that is SaaS business and a second revenue stream, which is more transactional business, the Platform business. Gain efficiency, the SaaS business is a very healthy profile from a SaaS business perspective, as you can imagine, in the SaaS world, and we are doing a lot of efficiencies in the transaction. So, that is helping us to get more efficient and getting to the levels that we want. If you compare to peers from a marketplace and platform perspective, the gross margins are lower than where we are.

Yes. And what drives the difference? I think -- Look, a, let's just explain what are our cost of goods sold, right? What's the 26% that is in gross margin is mostly support. A little bit -- sometimes we handle payments and then there's a credit card fees. But most of the cost of support. And the way we drive that higher is by making our support more automated. We make the product more and more self-service, more and more automated support. And as we scale and as we invest in research and development, we're able to reduce our support cost. Some other marketplaces may be as they're less efficient in terms of the automation, but also if they're B2C and they're always doing everything with credit cards, that can also impact their margin, whereas we have a lot of transactions where we don't need to handle payment and our margin is higher as well. Okay. How does the company set pricing? Well, how does any company set pricing? We do a market survey and we see how much the market can take. We set prices on the transactional, it's either a flat fee or it's a percentage. Usually, if we handle payment, it's a percentage. If we don't handle payments, it's usually a flat fee. And we aim to -- we invest in research and development. We aim to add more value to the transactions and then the market can -- is willing to pay us a higher fee. So, it's all about understanding how valuable we're proving ourselves to the customer and then negotiating that they should pay us a fee accordingly. Same with the SaaS, we charge per -- either per user per month or more often per site per month. And it's a negot -- we have a set price and then sometimes there's a negotiation. But it all really depends on our ability to keep enhancing the software using AI more and more, of course, more and more AI features in our software. And the more valuable our software becomes, the more we're able to increase our price and to avoid too much negotiation around that price. Okay. What is the greatest obstacles that you face in growing the top line? Well, first of all, we are growing the top line. So, there are no obstacles which are blocking us, but there are lots of things we would like to clear. One of them is that, it took us long enough. It was only in 2020 that we had a sort of a good number of airlines starting to connect to us digitally. And with Ocean Liners, we're still not there. We have a couple of big Ocean Liners. But the Ocean Liners finally being ready to create a digital connection would certainly help our growth. But then again, we're going to grow regardless, but that would help more. Okay. Let's go on. We've only got a couple of minutes. I'll buzz through these. Will the companies raise capital over the next 2 years? No, we don't need to. We have enough money to get to breakeven. And certainly, if the price remains at this level, there's no appetite of our Board of Directors to dilute our shareholders at anything like this price. Remember that a lot of our big sophisticated investors actually paid $10 and still think it's worth that. And so, we don't need to raise money, and we probably won't raise money, because we have enough cash to get to breakeven. The business is moving ahead nicely, yet the share price has performed unusually poorly. What do you think Wall Street is missing? It's a great question. Anja sort of asked me that as we were preparing for the call. I don't know. It's a great -- it's a huge opportunity. I mean, we could literally -- if we keep performing, eventually, we could grow faster. We could be the next Booking.com, which is worth $100 billion. There is that kind of scale of opportunity here. So, it's a very exciting opportunity. We don't have a lot of competition. We're clear leaders, which is very -- the most important thing. I think that -- look, we're still relatively microcap and a lot of investors just don't look at that. We seem to have a bit of a stigma just because we went public through a SPAC. Now that doesn't change our business, but there seems to be a little bit of a -- a lot of unworthy companies went public through a SPAC. So, I think there's a bit of a stigma, which eventually will shake off. But yes, I look at it as an opportunity, hopefully. Okay. I think, we've only got a few seconds there. Long term, what factors are most likely to cause a material change in demand? Is it simply global GDP? Does nearshoring play into this? So look, we're the leading digital platform, and we've only -- we've digitized single percentage points. So, if world trade grows a few percent with GDP, that's great. If global trade shrinks a few percent because of nearshoring, it probably won't happen, but it's not impossible. It makes very little difference. We can still grow thousands of percent. And so, that's really the overall growth -- the industry goes up or down a few points makes very little difference to the overall opportunity. Okay. I think, we've got time for one more very quickly. Can you compare and contrast your business to Flexport? Yes. So, Flexport is a well-known digital freight forwarder. Unlike us, they are a freight forwarder. They are themselves a freight forwarders. So they've got higher revenue, much lower margin, probably single digits if they're even making a profit or gross profit probably single digits, maybe 10, maybe teens at most. And they're a customer of ours. They use our technologies. So, we -- our position is very much to be a neutral platform, and I think that's a great position. Their position is to be an actual service provider and to compete with all the freight forwarders using technology. And that's a different model with advantages and disadvantages, and we're very pleased to work with them. All right. I think, we're at time here actually. There are one or two questions I didn't get to. Apologies for that. But feel free, everyone, to send an e-mail to [email protected], and we'll be sure to get back to you.