Global-E Online Ltd. (GLBE) Earnings Call Transcript & Summary

All right. Thanks, everybody, for joining us to chat with Amir CEO of Global-e and Ofer, CFO. Thanks for being here. I'm James Faucette, senior research analyst at Morgan Stanley.

And maybe to kick off, Amir, it's interesting because when I talk to investors, -- maybe it's just their background of what they're used to looking at. But some investors are like, "Oh, Global-e, they're a logistics company." Others are like, "No, Global-e is a payments company and others are like, no, they're services web company, et cetera." So how do you describe or how should investors view Global-e because it is kind of a unique animal and you do a lot of important key things for your merchant partners. So how do you describe what Global-e is?

Yes, it's a great question, James, because we're actually that we're like we're none of the -- in all of the ones that you mentioned. And we tend to think of ourselves as a full kind of end-to-end solution -- we are what -- and we do, what we need to do in order to solve the overall problem that our clients or the merchants have, which is essentially to be able to capitalize on their cross-border sales. So yes, a part of it is to take care of the payment side. But we are -- as you said, we're not a payments company in the sense, for example, that we are the merchant of record. So we are not just -- and we don't act as kind of a gateway or we act -- all the payments that we work with more than 10 different gateways and we [indiscernible] read them in very smart way in order to have to solve the problem of cross-border payments and currencies for our merchants. Same goes on logistics. We're not a logistics company. We don't have our own trucks or planes or warehouses. But we do solve the logistical problem for many of our merchants by, again, contracting with more than 25 different providers optimizing between them and operating that network in a very efficient way across borders. So we're like -- and the same is true for the technology. We don't sell our technology per se. We don't even license our technology. We service that utilizes a lot of the technology, but it's all geared for the same thing to solve the real life problem that our brands have, which is that they have, in many cases, a lot of international traffic, whenever they will have around 30% of their traffic coming from international, but very little sales coming out typically less than 5% or even less than we see. And that disparity needs to be solved on all these fronts, payments and currencies and shipping and duties and taxes and returns and customers end-to-end, you need to solve all of these at a very high level in order to generate that precious conversion.

So -- and I think that actually highlights a really important point. I know that when -- even for I -- for me, when I was first getting to know Global-e, as I said, okay, well, you do all of these different things, but the real important or the real key point for your customer is X. And then I would look at it and we talk to more customers and were like, well, it's actually did. And what I realize is like particularly for the role that you're playing in their business and brand development, you can't remove one and slot something else and you kind of have to provide all of those things, right?

Correct. And it's -- I would say it's a very common kind of tendency. And I actually do it myself. I'm both Ofer and I, we come from a management consultant consultancy background. So we are -- we've been taught to 80-20, everything, everything has a Pareto and it's true for this business as well. But the catcher and the thing that a lot of people miss when they look at it from 30,000 feet is that yes, there is a Pareto, but the Pareto is on a per market basis. So if you look at -- if you're now a U.S. brand and you want to sell to the U.K., then there are a few important things that you need to take care of, which is an efficient shipping offering to make sure that you're doing the taxes calculation are correct and that you handle the U.K. VAT correctly. But actually, payments is not that important in the U.K. because you can get around -- you can get by with supporting Visa, MasterCard and PayPal and maybe American Express and you're done. But -- so that's 80/20 for selling into the U.K. But at the same time, if you want to sell into the Netherlands, you have to take care of accepting Klarna and iDEAL. Otherwise, you're missing out on 2/3 of the market. And if you're selling into France, you need to have a shipping offering into convenience stores because that's the way that French customers prefer to get their goods. And then again, if you're selling to, let's say, Australia, you need to get the GST right. You need to have a local registering with the authorities and get the calculation of the GST, right. So there is an 80-20, but it's on a per market basis. And the problem is that the only place where there is no 80/20 is on the traffic because the traffic that 30% of international traffic is super, super fragmented and you rarely find a single international market that is more than, let's say, 2 or 3 percentage points for a brand. And if -- and that's where the real problem lies. Because if you had -- I always say that if basically the international was only 3% of everybody's traffic, we wouldn't be fitting it. We wouldn't have a business, we would just not be interesting. 30% is not something you can just brush off and say, "Oh, you know what, I'm going to forgo that and I'm going to concentrate only on my domestic business," but then again, if you want to solve that, you need to go market by market. And so for all of these things that are important in that specific market, and that's where it breaks.

Right. Right, right. So let's talk about end market. There's been obviously, a significant, I think, is probably an understatement amount of commentary regarding the consumer and consumer behavior this year -- what can you talk about what you're seeing or can call out from the demand side, particularly if we think about the variance across certain regions, like where are consumers changing behavior, particularly as it relates to the Global-e and Global-e's merchants and customers and where aren't they kind of help -- can you help establish fact versus perception right now?

So we definitely see -- we have seen a change in the last few months over the entire e-commerce arena. However, there are differences between us and other players and also between different geographies across the world. I think that the most important point to start with is the fact that since we are enabling cross-border direct-to-consumer e-commerce and the brands are pushing that very hard as they tend to prefer this channel and strategize it over time. we have seen less of an effect than others, and we expect that to also continue in the future. Since there's a strong push on one side and then some softness in some of the markets on the other side. So as we look forward, if the economy is a bit weak, I think that there will be influence on every company out there, but I think the gap between us and others will widen. And over time since we have a very strong engine that is working and pushing towards a positive outcome. In terms of the different geographies, at least for us, what we have seen is an influence from the geopolitical situation in Europe, specifically around Ukraine/Russia conflict or war since that broke, basically, we had to shut down Russia and Ukraine. This was just less than 2% of our business. But then we've also seen additional effect in Central Eastern Europe and in some of the European markets. We haven't seen any negative effect around the world, in the U.S., in Australia and Canada and other large markets. And then it started in March and April, the certain weakness in the CE market and in some of the European markets, not all of them, by the way. And then through May, we've seen an improvement, which we believe is due to the fact that Unfortunately, people get used to anything, even this -- even when there's a war, people in Poland, in the Czech Republic and so on, started consuming again. So we've seen it coming back, not to the same level that it was previously at but very close to that. So basically, on a geographical level, that's what we have been seeing so far.

So I want to ask too is just from an accounting perspective and an FX perspective, since you're involved in so many different geographies. How has the U.S. dollar strength this year impacted your business? And how have you anticipated its impact for the rest of this year?

That's a very, very good question. Actually, we sort of bifurcated in -- and we divide it into 2. The real exposure that we have, the real economic exposure is relatively low. Since we sell out of quite a few markets, it's diversified, and we sell into different markets with different currencies. We have a very high degree of natural hedge. So for example, in Europe, outbound and inbound are very similar. This is approximately 30% of our business. No exposure, almost no exposure at all. And again, the same with other currencies, not to the same degree, but similar principles. So our real exposure is relatively low, and it's also a short exposure because on average is 2 or 3 days. But then we do have what we call reporting exposure since we report in USD, and some of our revenue and costs are in other currencies. When the USD appreciates versus all the currencies of most of the global currencies are at least the important ones, then we do see an impact. It does have a negative impact on our revenues since some of the revenue is in euros, British pounds or other currencies. It has a positive impact on our cost because we do have a lot of costs in those currencies and in Israeli shekel. So basically, to put some numbers on it with the current run rate of the U.S. dollars versus other currencies. We do see an impact of we say 2% to 3% on top line, a negative impact and a positive impact on the cost side.

So if I wanted to start to parse this to Ofer is if I say looking at top line, I think that as we came into the year versus kind of how you've looked at the outlook for the rest of the year, you're saying that from wars and changing consumer a little bit of softness in buying behavior, particularly out of the Central European countries, et cetera, like that was a cumulative, call it, 5% hit to revenue. But if we have a U.S. dollar impact of 200 to 300 basis points, it creates this interesting thing where it's like, yes, you took the hit from Russia and Ukraine, but it's almost like the U.S. dollar weakness was basically as important as any weakness in underlying demand from other geographies. Is that fair?

Well, we...

At least in terms of the way that you formed [indiscernible] the outlook.

Yes, it's still pretty volatile. So it's hard to really pinpoint a number. But yes, it does have impact on the way we report our revenues. Yes, it is, I would say, similar in terms of magnitude to the impact of stopping our service to Russia and Ukraine.

Got it. Got it. So let's talk about the interesting things, though, which are, to me, at least, the new customers and brands, et cetera. Can you talk about the traction you've been seeing from a bookings perspective? It feels like the adoption tailwinds that we observed during COVID, at least as it relates to engagement with these brands and merchants. That was a big uplift from COVID, but it seems like it maybe even has accelerated in the early part of 2022. Can you talk us through what's driving those trends?

Absolutely. And you're right. I agree with your notion that these already were in things. Obviously, short-term quarterly results on the demand side is important. But at the end of the day, longer term, if you take into account the stickiness of our model and the fact that we've had historically and to date, churn levels that are sub 2% for many, many years. And at the same time, we are growing very nicely with our existing brands as reflected in our NDRs that we disclosed from time to time. It means that really the important stuff on the longer term is the supply side is the merchants that are going live. And on that, you're right. The acceleration that we've seen in the uptake, we haven't seen any retraction of that. So when people talk about kind of COVID relief, again, it's kind of like what Ofer mentioned on the demand side. Yes, we are seeing some levels of COVID relief in demand from consumers in different parts of the world where they now have some option to go back to at least do some of their shopping in physical stores. But from the seller side from the merchant side, we don't see any retraction. We haven't had a single case of a merchant that was in the pipeline and said, "Okay, you know what, now that COVID is finally such wood is hopefully over, we're going to put on ice or plans to go direct to consumer, we're going to concentrate on just opening more stores internationally or kind of work more of distributors and franchisees." It's going in the -- in one direction, the trend was there. And again, it's -- we're sitting on a trend, as Ofer mentioned, we're seeing on trends that are a decade, it's not something new. It's not a fab that came out of COVID and now is going to shift to another place. For a decade, brands have been gradually going online. And within online have been gradually going to direct to consumer because that's the holy grail at the end for a brand to have a direct connection to its customers and to be able to disintermediate that as much as possible. So in that sense, that demand or the interest in our service is as strong as ever, are the investments that we've been making and we continue to make in increasing our capacity to take more and more merchants live without compromising on quality of service to our existing merchants. They're starting to bear fruit. So we've seen 2 kind of January to May, we've onboarded twice the number of merchants that we've onboarded at the same period of previous year. And bookings as well, as we've disclosed, is about double that in the same period of 2021. So that, I think, is really the -- as you said, that's the important piece to look at when you look at the future growth potential of the business, and on that, not only are we not seeing any slowdown, we're seeing bigger and bigger interest from bigger and bigger brands that previously, we're not kind of -- we're sitting on the fencing, we don't know if this is for us, maybe we'll -- maybe it's a 2022 or 2023 project, all of a sudden, what COVID did was to put that front and center in the strategy of many brands. And you see that some of them went public, Adidas, which we also disclosed has become a client of ours now. Even before that, mid last year, they came out with a 5-year strategy, irrespective of us, they came out with a 5-year strategy saying we are going direct to consumer that's our 5-year plan. Now one of the many elements to it. One of the important ones was direct to consumer and within direct-to-consumer most of it -- most of the emphasis was on lot. So this is the trend. This is where brands are going, and we are facilitating that.

So I want to talk a little bit more about Adidas. And I think in your quarterly report update from the March quarter, you also mentioned Ralph Lauren and a couple of other major brands. But talking about Adidas, all right? So one of the key concerns that we hear from investors a lot is that when big brands, once they hit a certain level of scale or operational activity in particular markets, they'll just take it in-house, right? And so to me, Adidas is kind of interesting too because to your point, is like they've got this 5-year strategy. We're going to go direct-to-consumer. We're going to be global. And then for them to say, "Oh, by the way, we're going to use Global-e, at least as part of that strategy." Can you talk about like what the things are that you're going to be doing for global -- for Adidas, what Global-e will be doing for Adidas? And what the opportunity set is incrementally for Global-e from somebody like an Adidas? Like how does that play out over time?

Yes. Sure thing. So basically, the way to think about it and the way it manifests itself in real life is that on the one hand, yes, it is logical to say that if a brand has a certain scale in a certain market, it makes sense for them to disintermediate even us and go and they have the resources and allegedly the know-how to put in place whatever is needed to localize for that market. But in reality -- and brands have done that, there are brands, including Adidas that corporate some of these markets by themselves and other clients of ours as well. But it really depends on the starting position because this is the thing that I would say, in most of the case, and for a second, I'm going to put a deal aside.

Yes, just general.

But for a general kind of big brands, a lot of them have gone down that path in previous times where an offering like Global-e wasn't available. So they're only path. They -- as I often mentioned, we're one of the -- good things about Global-e is that we're not inventing a problem. We don't need to persuade the merchants that they have a problem and that we are the solution. They know they have a problem. They see the disparity in their stats between kind of traffic and sales. And so previously, they only hope to start to solve that was to go market by market and localized. And some of these brands, when we engage with them, they already have a few of these markets localized. So typically, the path to that is to say, okay, you keep on doing -- in many cases, we come to them saying, okay, you're doing actually quite a good job in these and these markets. You've invested over time. For the time being, we recommend that you keep doing that by themselves, and we just take the rest of the world. But it is extremely rare, if not just doesn't happen, you see a brand that works with Global-e reaches a certain scale in a certain market and then says, okay, now it's time for us to internalize it. That's like in 2022, that doesn't happen, because even for a large brand like an Adidas and here, I'll kind of go back to Adidas, even for such a large brand, at the end of the day, if they reach in a single international market, a capacity of like $50 million or $100 million, which starts to make sense in order to think about localizing it, it's still going to be the same proportion out of the business. It's going to be 1% or 2% of their overall online activity, which by itself is far from 100% of their overall revenue. Good luck as the VP of e-commerce going to your CTO and your CFO and your CEO and getting priority for investing resources and time and ongoing maintenance and operation in operating a market that is just 1% of your business. They're going to say, listen, you have this Global-e, you're happy with it. Just take that money and put it into online marketing and generate more traffic. It's not worth the extra efforts but that more margin that Global-e takes on top of the actual costs. To take that one notch up, somebody like an Adidas does have -- it's such a global -- such a global giant that they have markets like the U.S., for example. Honestly, we will probably never pitch for the U.S. because they have such methods in the U.S. that is almost like a brand -- a domestic brand altogether. But even for an Adidas, there is that set of markets where they have that scale is going to be the U.S. and Germany and a few others. But they have a hefty chunk of, let's say, we can argue whether it's 20% or 50% of their international potential that is still spread across so many markets that it's not going to make sense for them. And for that specific case of an Adidas, we've actually built what we call the multi-local offering, which is -- it basically enables them and that this is what we do with Adidas. So the first 16 markets that we went live with actually are comprised of one market, which is the UAE, which is a relatively big market for Adidas where they went live on fully domestically with us. So they are trading -- they have a local offering, which we might place -- and -- but the transaction is done fully within the UAE. So we have kind of Global-e UAE, which is acting as a merchant on record and selling the goods to the UAE consumer and then kind of buying the goods domestically from Adidas in the UAE inventory that they already have on the ground and they basically ship it directly to the consumer. But on the back of it, we were also able to enable like that, a number set of 15 other markets in the region that can all rely on the capabilities and inventory that they have in the UAE and so cross-border who are kind of classic [indiscernible]. So that level of flexibility and ability to optimize the use of the existing assets and infrastructure is really one of the things that is, I would say, key in order to be eligible to work with such a brand, and that requires scale and know-how.

I think that's one of the things for me is like when I talk about particularly where Global-e has seen a little success and where a lot of the opportunity still lies is when you think about these brands and their brand image and their brand messaging, et cetera. There's virtually no part of that is like we're really good at running websites in a foreign language in some other place, right? And so if you're Adidas, I mean, do you want the evolution of your brand and the experimentation part of it is going to be online. And so doing it in big markets like the U.S. and Germany makes sense. But then once you kind of have that language, if you will, establish taking that into all these literally potentially hundreds of markets for a company like Adidas, I just don't see where that fits within their -- their core competency as a business.

Absolutely. And the good thing is or where we fit in is because Adidas exactly right. Both the Adidas of the world, and the smaller brands, they all -- their business is building the brand and merchandising and building the right products and running the right promotions and marketing correctly. Marketing is I would say, a core competency for a lot of them.

Yes, absolutely.

We are knowing how to market. But when it comes to the boring stuff of getting the transaction actually done and acquiring the payments in a high acceptance rates and low fraud rate and delivering it optimally to the consumer and taking care of duties and taxes registration and in order to facilitate a duty drawback in case of a return, these are all things that just doesn't make sense to, a, it doesn't make sense for them to develop that expertise. And even if they can, if they don't have the scale, even the largest of brand when it comes to individual international markets, they don't have the scale. It can only come from somebody like us who aggregate a lot of hundreds and hundreds and soon thousands of brands on the same platform. But I think to open that, so it does make sense for them to outsource it but they want to arches it in a way that doesn't hurt their brand. It doesn't take away because theoretically, they can take these products and put them on a local marketplace in a specific country, which has solved all the -- for that specific market or maybe even for a subset of markets, but then they are donating their brand, their hard-earned brand equity. They're donating it to the marketplace and they're donating their relationship with those consumers to that marketplace instead of keeping that to themselves, which in the long run is their main competitive advantage.

So let's go back really quickly. This multi-local opportunity and solution that you touched about with Adidas. It seems like that would be applicable for a while a lot of different brands potentially, especially the ones that have large and maybe in country, at least some in-country presence, et cetera. How conversation has been tracking with clients as far as that as a new offering set? And how much of a contributor to the step-up in bookings is the ability to go do this multi-local offering?

I would say there's definitely a pipeline that we have with brands that are, I would say, relevant or eligible for the multi-local offering. It's not huge in terms of your number of brands because they're not that make for which it makes sense. And it's either a function of scale of the brand or verticals. So for example, with a lot of our consumer electronics brands that we're talking to now, they -- even if they're not super -- even if they're not in Adidas side, Still, the multi-local offering is the relevant one for them, but there is because of more regulatory constraints on ability to import goods into the specific international markets, specifically in consumer electronics, it's much easier to import them on a commercial level and have the inventory in place rather than try to sell it cross-border for technical reasons as I want to don't want to bore the audience nor you with. But -- so there is a growing pipeline on that. But I would say it's probably not going to change a lot in proportion because a lot of our -- even the larger opportunities that we have in the pipeline, it's not really critical for them to work cross-border and there, especially the more native kind of digitally native brands, the new age brands that start off on Instagram and stuff. They don't have that legacy network of distributors and local inventories and all of that. They just want to sell -- for them, it's like what we talked about earlier to the extreme. Their value is in kind of dropping the right products with the right marketing and with the right celebrity endorsement and just they don't even care about trying to optimize by themselves having local inventory in market. So for them, it's not really a relevant offering. But we are seeing it taking an increasing important part in our pipeline in terms of kind of enabling certain opportunities that beforehand wouldn't really be relevant and wouldn't enter the pipeline in.

Right. We have just a few minutes. Any questions from the audience here, you do raise your hand. So quickly, I want to touch on Flow, that acquisition. How does Flow fit with what Global-e has done historically, what does Flow bring incrementally to the business?

Sure. So the idea behind the Flow acquisition was that -- everything that we've discussed to this point and definitely the Adidas is...

[indiscernible]

This is more relevant for enterprise merchants. And when it comes to real SMBs, on the one hand, there is great potential in SMB, there is a lot of -- especially the -- as I call them, the kind of the new age brands, they start off small, start of the S side of the SMB, but they have great potential. But these types of brands, I would say, even though we've -- over the years, we've managed to kind of streamline the onboarding process, even on our enterprise platform, and kind of automate a lot of it. But at the end of the day, there is a limit to how small you can go in terms of client and still makes sense -- for it to still make sense to onboard them on a platform that was -- I'm sorry, originally built for enterprise. So we figured -- we need a different approach. We need a platform either we build it or we buy it, but we need a platform that from the get-go has SMBs in mind that is much more self-service, much more kind of self-onboarding much more kind of API-driven and kind of low-touch type of platform and basically Flow fit that exact description. It was also a very good fit with us because it's also founder led and it was just the right size and they also had already an agreement with a Shopify, where we have an exclusivity with Shopify, which is concentrated on the enterprise side of the house, they had contracted with Shopify to provide kind of a white label merchant of record solution, which is relevant for the smaller Shopify merchants. And by the way, not just the Shopify, it's being built in a generic way so that we can provide these white label services to other platforms through other platforms as well. So this is really where the synergy lies -- and this is also why it's been -- the integration process has been going very well. It's on track. The -- basically, the relevant teams are already merged into Global-e and the work on the integration into Shopify, that merchant of record white label merchant record solution, which is the centerpiece of the kind of the tech side work on what used to be Flow, which is now the SMB division off Global-e is again, tracking very well against our expectations. And even I would say on the synergy side, we've managed to -- once we actually close the deal and we're able to dive in more deeply, we actually realized that there are more synergies than we expected and we were able to kind of capitalize on them even earlier than expected, which is part of what drove our kind of outlook going forward on the EBITDA side.

So just on that last to wrap up, Ofer, can you remind us quickly what we should be expecting around EBITDA and margin trajectory generally through this year? And over what time frame do we still expect to achieve kind of that 20% EBITDA margins?

So looking at the remaining of 2022, basically, we expect gross margins to be a bit volatile, but to be relatively stable over the year and continue to increase over time, not at the same pace that we have seen in previous years. which was very fast. We don't think we can duplicate that, but we certainly believe that we can improve over time. In terms of adjusted EBITDA, as Amir mentioned, we kept in our updated guidance, the same numbers that we had previously, partially driven by the synergies that we were able to realize with Flow and additional drivers as well. And -- but I think the more important point here is sort of the future. And we still have the same sort of midterm to long-term targets that we had previously, gross margins of over 40%. We are already almost there. And we think that as we scale up, we can improve a bit more and achieve adjusted EBITDA margins of over 20%. The time frame for that would be, I would say, 3 to 5 years.

That's great. Amir, Ofer, thank you very much for joining us today at the Morgan Stanley FinTech conference.

Thank you for having us. Pleasure as always. Thank you very much.

Thanks.

Thanks, James.