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

Good morning, everybody. Thanks for joining us here on the fourth and final day of the Morgan Stanley TMT Conference.

Saving the best for the last.

Certainly, Global-e, as you guys have generated a lot of conversation in the dinners that I have been in this week and in just hallways, et cetera, a lot of people becoming familiar with the name or at least exposed to the company for the first time. Before we start with Global-e CEO and Co-Founder Amir, my name is James Faucette. I am the senior analyst here at Morgan Stanley. I do have a disclosure to read. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. So may be Amir because at least so many of the people I have spoken to this week have said, Global-e, I have heard about them, but what do they do again? Why don't you give us the explanation instead of just hearing me go through it.

Sure, thanks. So I will give you the gist of it. The gist of it is that we help brands from all around the world to sell internationally direct-to-consumer online. That is kind of the tagline. What that means, if I go and if I try to explain it one layer further, we basically give the brands 3 layers of service; one is a full set of end-to-end capabilities that enable us to fully localize the customer experience on their side, it is kind of think it as a plug-in through whichever platform they are running on Shopify, Salesforce, whatever. Once it is installed, it fully localizes the customer experience, including local currency, local pricing, local payment methods, various shipping offerings, duty and taxes calculation, you name it, full end-to-end localization. So it makes it very easy for the shopper to shop regardless of where they are coming from. And what that generates basically is a 60% uplift on average, proven 60% uplift in international conversion rate. So that is one. But it does not stop there because once the transaction is done, we actually handle the transaction behind the scenes for the merchant. We become the merchant on record, and we bear the risk and the complexity that is involved with an international transaction. We take the fraud risk up on ourselves, we take the foreign exchange exposure on returns, we handle the actual logistics, so it becomes a true domestic localized transaction for the merchant itself. But at the same time, they enjoy all the benefits of selling directly to the end consumer because they have all the details of the consumer. They have a relationship with him or her better. Last but not least, we tied it all together with our data because we do not just provide them the capabilities and the service around it. We also use the vast amount of data that we have. We work with more than 1,000 brands setting out of 28 countries currently. Last year, we did more than 10 million transactions and literally more than 1 billion user interaction. So we have a vast and diverse data asset that we can use to very specific, very curated recommendations for each brand, depending on their vertical, their price point, their size, et cetera, and tell them not just what they can do with all our capabilities, but what we think they should do in order to fully optimize the conversion rate from each market. So that's kind of what, it's not really a gist, but that is a high level what we do.

So let's step from there, just into maybe giving a quick overview of how things were progressed in 2022, like what you were able to achieve last year and then what you are seeing so far in 2023? There's a lot.

Yes, it is probably I think a lot have happened in 2022. But if I try to take it to kind of the more 30,000 feet level, we made progress on pretty much all the elements of our strategic plan. First, we grew very aggressively in the territories that we are already active in. We generated close to 70% growth in 2022. We also kind of saw first real activities coming out of our new areas of business development, geographically speaking, especially APAC. Started -- just early in 2022, we started our business going out of Japan and going out of Australia. And within the year, we already saw great progress with live merchants coming online and very large deals already being signed and a very big pipeline. We made 2 acquisitions, one in January, where we acquired Flow Commerce, which is a similar type of service, but built for SMBs with SMBs in mind, kind of a fully automated productized offering. And with that, we enlarged our partnership with Shopify which I assume we'll speak about maybe a little later, but we struck another layer of partnership with them and are now powering what is called Shopify Markets Pro, which is essentially the merchant on record cross-border solution for SMBs on Shopify. In mid year, we also acquired another player in the field called Borderfree which we are now integrating and simulating into Global-e, with the reasons for that being mostly on the side of demand generation, so kind of I talked about the 3 layers that we provide to our merchants earlier, we are actually now working on adding a fourth layer that will come even earlier upstream and not just help merchants to convert the international traffic that they have, but actually help them to generate more high-quality cross-border traffic using proprietary assets and capabilities, the basis of which we acquired from Borderfree and we are now in the phase of augmenting them with our scale, with our know-how and kind of [indiscernible] them in order to develop our own proprietary demand generation.

Got it.

A lot more.

Yes, lots more. And like you signed some big brands like Adidas.

Adidas and Disney and many other world-known brands that have joined the platform and also built kind of bookings book, which is the biggest we've ever had.

So on that, look, I think from our seats, we see a massive opportunity for cross-border e-commerce. And when you think about the direct-to-consumer and the ability to even for the examples I gave is like, hey I can build a global brand, if I am doing custom-painted motorcycle helmets and I am putting them on Instagram.

We have a couple of those.

Yes, yes, and suddenly, they take off in Indonesia, right, that kind of thing. So the ability for people to build global brands that are direct-to-consumer, we see is a massive opportunity. And one of the big questions we often get is like, well, how big is the market on it? Well, I don't know because there is so much friction that it is really hard to assess like how big the market could be once you start to reduce that friction. So it's easy to dream big dreams. But when you talked about you grew roughly 70% last year, our forecast right now are for low 40s this year on kind of an assumption of same-store sales growth of roughly flat. But what's stopping you from growing even faster? What are the limiters there? And how can you lean in to take advantage of the opportunity set that is massive right now?

I think the main limitation is actually ourselves. We could theoretically grow faster, but we are pacing ourselves and I can say that as a CEO and as a management team, most of our efforts goes into managing that growth because at the end of the day, it's a reputation-based business. We are only as good as our reputation is. And of course, we aim to grow and capture as much of this opportunity as we can and as quickly as we can. But we also know, and we have seen occasions in the past where companies in our field have gotten their eyes off the ball, if you want. The minute you start to not perform at a 100% for your existing merchants and you don't give your new merchants the same onboarding experience that they expect from a partner -- cross-border partner like us, it is a very quick depth spiral. So we are focused on growing as fast as we can and growing our resources and headcount as fast as we can without kind of risking a degraded service level to our merchants.

Got it. Got it. So let us talk about like that client lifecycle. First, to the point-of-sale, what is the biggest reason not to use Global-e? I mean, it seems pretty like the sales pitch and the benefit, et cetera, seems pretty apparent to me, even if you are a large global brand, as you may have a lot of capabilities, but like running websites in foreign countries is not probably part of your core competency or your brand development or product development, et cetera. So what are the pushbacks, if any, that your team receives from potential clients?

I would say the most common pushback from when we talk -- when we have to bifurcate it because from small and mid-sized merchants, there is very little pushback because they realize very well that they cannot do this by themselves and there is absolutely no chance. And it's just a matter of getting to them, putting this in front of them and taking them through hand-in-hand through the process. We never get an answer that like now this is not interesting for us. With the larger opportunities, there are, I would say, 2 types of hurdles: One is a misunderstanding of just how complicated this is because if you are now whatever the CIO or a Chief Marketing Officer or VP of e-commerce of a large brand, you may actually look at this and say, hey, I actually have lots of resources and lots of capabilities. This does not seem like that complicated. All I need is to add maybe another payment processor and maybe another international carrier and maybe connect duties and taxes calculator and I can do it myself. There is no reason for me to pay whatever these guys are taking, if it is whatever 6%, 7% out of my GMV, it's not worth it. And it's basically our job to educate them and to show them that A, it is not that simple to do it themselves, and we are very, I would say, because we pride ourselves of being real partners with them, we show them -- we break down their business and we say, okay, listen, here if you talk about you mentioned Adidas -- so we will never pitch for Adidas to give us their business in the U.S. or to give us their business in Germany because these are true home markets for them. There is no reason for them to create cross-border into these markets. But there's always -- even for these brands, there is always market #8, 9, 10 onwards, where they are still meaningful in terms of volume on an aggregate level, but there is absolutely no chance they can devote the necessary resources to build the expertise in order to trade in those. So doing that kind of education is part of it. The other pushback is sometimes, and they say, okay, this is great, but this is not the right timing because we are re-platforming now or we are in the process of changing our OMS or ERP or whatever 3-letter acronym you want to choose. After we do that, we'll have the resources and [indiscernible] to onboard this. But even with the largest of brands, we very rarely get the answer like that this is…

Right, right. So then let us take the opposite side of that. Let us say I am a merchant or a brand. I am ramping on the platform. What does that process look like? And what keeps a brand like Adidas from saying, okay, Global-e, we want you to do geographies 7 through 35 immediately. Like what kind of is the limitation in ramping?

So first of all, in terms of the implementation for a typical, I would say, enterprise merchant, it will run from call it, 12 to 16 weeks like the Adidases of the world. That is obviously assuming there is no roadblocks and a smooth-running process. By the way, just an anecdote, the tech side of the integration, it is very rarely on the critical path. Tech side is typically done way before they are ready to launch. Most of the time goes into them as the merchant taking all those decisions -- all those business decisions that they now have to take now that they have all these capabilities and all this know-how, they need to decide exactly what the experience is going to be in each market and that takes time. In terms of the actual kind of process, it is field-proven process. We have our own implementation teams. We come with all the logistics side and the tech. And there is project managers from our side that specialize exactly in tailoring these integrations for the large merchants. Now in terms of rolling out geographies, that really differs between, kind of, call it, the new age brands that were born on the internet, born on Instagram, like SKIMS from Kim Kardashian or Kylie Cosmetics, which we recently launched with. These brands, they don't have any legacy. They do not have any kind of local infrastructure, and they run very lean operations. So typically, we just go live with a big bang for all the markets. The more traditional brands, the Adidases of the world, the Disneys of the world, they take a much more kind of gradual approach. It is almost kind of in their DNA because that's the way they think about global expansion market by market. We try to persuade them, listen, there's no downside to just opening the rest of the world. And even if it is not optimized yet and you have not really run marketing in those markets, still there are shoppers coming into [indiscernible], why not give them a good experience. But we do not fight it too hard and typically, these brands come out with even a multi-year rollout like Adidas is -- the rollout plan and Disney's rollout plan are they spend more than a year. And that is fine because we truly look at it as a long-term relationship. Our churn rates historically have been less than 2% per annum. We have merchants running on the platform already for more than 8 to 9 years and they are still running strong. So we do not mind if the ramp-up takes more time as long as the relationship is there.

So that is the geographic ramp or as we bring, take a brand to a new country and launch them. If we think back to last year's cohort of geographies and brands or the prior years, how long until the average merchant reaches actual transaction scale within those corridors? So if I launch it, let's say, the example I always use is Michael Kors in Paraguay right? Let's say they launch that corridor, how long before it reaches what you would assume to be like a normalized run rate of retail activity?

So on that, typically it does take, I would say, several weeks probably an average to ramp up. Not that from a technical perspective from day 1 everybody can buy, but at the end of the day, it's a -- there is a natural process if you want that turnover of the consumers because the consumer that went into the Michael Kors website from Paraguay just a minute before we launched, got a very bad customer experience. It was in U.S. dollars. She couldn't pay with the Paraguayan payment method, et cetera, et cetera. She is not coming back, not anytime soon. So once we go live, we need to give it time for the new cohort of consumers if you want to start and get into the site, understand that, hey, this is now fully localized. That is a great experience. I am going to purchase. So typically, it takes quite a few weeks to a month. And we actually recommend to most of our brands, not all of them listen to us, but we do recommend for them to not increase their kind of marketing activities immediately, but rather wait the couple of weeks until it settles down and they see what the new kind of baseline is and then take the informed decision on starting to run demand generation campaign.

Got it. Got it. I have been kind of dominating conversation here with Amir. If there are any questions, please raise your hand. Let us start here with [ Alex ]. Let's get a mic or Alex why don't you just pose the question and I'll repeat it.

[indiscernible]

Yes. So just for the benefit of those on the webcast, the question was, can you just describe quickly like how Shopify Markets Pro works, your role in that and how that's different from maybe what you would do for a bigger brand?

Sure thing. So basically the way works on Shopify is you will have the kind of the enterprise brands, think of them generally speaking, as the plus brands. Those that are bigger that are really more enterprise. They will typically require and can benefit from our full enterprise offering, which is what I described earlier, they will have a direct relationship with Global-e. We will -- and so we do have a strategic partnership with Shopify on that as well, which we signed just prior to our IPO in May '21 that gives us exclusivity for basically any such enterprise brands on Shopify. What we do there is we have a native app that we built together with Shopify that takes all these cross-border capabilities that I talked about and embed them natively into the Shopify backend into the Shopify checkout. And basically, they get the full service directly from Global-e, including all the customer success and all the services envelope around it, just like any other merchants on any other platform would get. That in terms of quantifying it, that's about half of the cross-border GMV potential on Shopify. It's concentrated in those kind of, call it, 15,000, 20,000 plus merchants. The other half, and in numbers we are talking about Shopify has been public with about $28 billion or $30 billion of cross-border GMV that is currently running on Shopify. So about $15 billion of that is on the kind of direct side on the enterprise side. The other half is spread across literally hundreds of thousands of merchants, each of them relatively small, but in aggregate, they have a lot of potential. But each one of them is way too small in order to justify the full end-to-end kind of enterprise treatment that we do. And as I said, in our decade of operation, we have onboarded 1,000 merchants. Here, we are talking about hundreds of thousands that are potential. So we understood from the get-go that if we want to address that, we need a completely different approach. We need a platform that is self-served, geared from the get-go for SMBs. That is the flow technology that we acquired. We basically retooled it and augmented it with our know-how, our expertise, our scale. And that is exactly what's powering behind the scene, Shopify markets grow. So currently it is still in early access mode. So it is currently by invitation-only. But once it goes general availability, which is planned for some time mid-Q2, what will happen is that if you are one of those small merchants and you believe you have a potential, you will, I would say, figuratively speaking, just take a box and say, okay, I want to use Shopify Markets Pro. That will automatically kick in the technical part of the integration and kind of onboard you. There is a very small KYC process that we will need to run because even in that solution, we become the merchant and record, we take all that liability [indiscernible]. So we run a very short and simple KYC and boom, you are online. The goal is to be able to do it, I would say, almost instantaneously, definitely within a day. And you get all those capabilities that you need in order to sell cross-border minus the really kind of sophisticated stuff that you anyhow don't need as a smaller merchant.

[indiscernible]

Yes. So the only -- is on the translation of the pages. Even on the enterprise side, we do not translate the actual content for reasons that I will be happy to elaborate on, but it doesn't matter right now, but it is also not necessary in order to generate conversion from many of the markets. If the merchant wants to translate the page by themselves, that's fine, and it obviously works seamlessly with that. But in most cases, you can actually get most of the value just by trading in English. So on neither of the solutions do we translate the pages themselves. We do localize the relevant content, which, as we said, is the pricing. The pricing will be in local currency. The pricing is also localized in terms of how it's rounded according to local marketing conventions like $0.99 here in the U.S. versus the next JPY 100 in Japan and so on and so forth. And yes, all the rest of the experience will be localized local payment methods, multiple shipping offerings, duties and taxes, pre-guarantee for landed cost and so on and so forth. The rest of the experience is going to be very similar to what I described.

Got it. Got a question here.

A follow up -- is there a difference between that business and the core business?

Yes, there is a difference in take rates. I would say, economically, this is a new product. So we are still in discussions with our auditors as to exactly how this will be handled accounting-wise. But putting aside accounting from an economics perspective, it is, on the one hand, a lower take rate model because it is a Shopify product. We actually "sell" the product wholesale to Shopify and Shopify are the ones that are determining the pricing for the merchants, and it is basically their product. So it's inherently lower take rate from economic perspective. Having said that, it is also much lower cost to serve because we don't have any sales and marketing going in. It is, again, Shopify's products. So they are the ones who are going to market it. They are the ones who are going to serve these merchants. So a part for R&D, we are not going to have any major operational expenses on that. So when you get to the EBITDA line, it is supposed to be relatively similar to our enterprise business.

Got it. There's a question around here.

As you prove out for larger merchants, new markets they didn't previously serve without your help. What keeps them from ultimately deciding to try to do it themselves and effectively compete with Global-e over time?

First of all, nothing stops them from doing that. Our contracts are no -- without any commitments, our typical contracts even for the larger merchants is a 1-year minimum and then a 3-month termination of convenience. So theoretically, they can do that. In practicality, we have rarely seen that happen over the last decade. We have seen a lot of the opposite happen where they say a large brand will come to us and say, hey, we have these whatever, 3, 5, 6 markets that we are already fully localized in. We don't need you guys for that. We're good. You just take market number 7 onwards as long as that 7 onwards is enough of a business for us and a meaningful chunk of their business, we are fine. What happens down the line typically is that, first, they see how flexible it is, how efficient it is, how easy it is to work this way, and sometimes even something happens on one of those markets that they do by themselves, the regulatory change or there is something that kind of changes their mind or it may be our customer success team that manages to persuade them that it is going to be much more efficient to do it through us and they dismantle those websites and hand them over to us. It has happened with Mark & Spencer's on multiple layers, it has happened with many of the brands along the years. So theoretically, they can. To give you some numbers, according to our back-of-the-envelope calculations, a single lane needs to be around, call it, $50 million to $100 million in order for it to even start to be an option for a brand to do it by themselves. The main mitigation from our perspective is the performance that we can generate. And at the end of the day, our take rates, it may sound relatively high because even for an enterprise brand, we will typically charge, call it, 5% of the order, which sounds a lot. But actually, if you think of it, from a merchant perspective, that is a gross take rate because what it includes is the payment acquiring fees, which otherwise they will need to pay out of pocket, payment acquiring costs money, and they know that. It includes the fraud protection, which anyhow will cost them money even if they are best-in-class. It includes customer services. It includes the overall management of the offering. So if they are true to themselves and they build the full business case, including all the auxiliary costs, they typically see that the real added cost from working through Global-e, depending on the size of the brand and the situation, can be between 100 and 200 basis points, not more than that. So to pay that and get in return, the peace of mind and the flexibility of all this international thing being somebody else's problem and concentrating on what you do best as a brand, which is building great products and marketing and so on and so forth, that at the end of the day is what is preventing them from doing it by themselves, not anything contractual and not any real-life limitation. It is the lack of know-how and the lack of focus that they have.

So I mean, in the last minute here, I want to go back to margins. And how are you balancing growth with your margin structure? Just recap for us where we are today and then where do you think we can get to and over what time-frame and what the key drivers are to realize your target margins?

So we have invested a lot over ever since IPO-ed in expanding basically all our margin structure. So when we IPO-ed, we had a gross profitability margin of around 33%-ish, we have crossed the 40% mark. We are now last quarter at around 41.5%. And in parallel, we have also invested a lot in extending our EBITDA margins. Our long-term goal, we have been cash positive since 2019. We generated cash way before it was fashionable because we thought this is the right way to build a sustainable business. We've never had a losing client, and we never had a losing transaction. So we plan to continue doing that. We do prioritize growth, but we do plan to do it while remaining cash positive and maintaining, I would say, stronger revenue growth than operational cost growth. So we do plan to continue inching upwards, both our take rate and our gross profitability margin, even though the take rates are probably going to stay relatively stable, but we do have levers to pull to extend our gross profitability, not at the same pace that we have done since the IPO, but continue to push it higher. And at the same time, continue to invest in operational excellence and continue to move our EBITDA margins toward the long-term goal, which is 20%.

That's great. Well Amir, that's all the time we have. Thank you very much for joining us. Global-e, it is always a fascinating company to talk about. I appreciate it.

Thank you for having me.