WiseTech Global Limited (WTC) Earnings Call Transcript & Summary

Welcome to the WiseTech Global Investor Briefing Call. I'd like to introduce Chief Growth Officer, Gail Williamson.

Good morning, everyone. Thank you for listening in to our first half 2020 results briefing. We appreciate your interest and support, particularly on this very busy reporting day. Earlier this morning, we lodged with the ASX our statutory accounts, our results release and our investor presentation. Each of these is also available from our investor center at wisetechglobal.com. Joining me today is our Founder and CEO, Richard White; and CFO, Andrew Cartledge. We'll take about half an hour to talk through the financial highlights, performance and strategic delivery, and of course, our outlook for the full year. After which, we'll all be available to answer your questions and discuss the business further. Over to you, Richard.

Good morning, and thank you for joining us today. In the interest of time, we will start on Slide 9. In the first half '20, our business delivered high-quality growth in revenues and earnings while we continue to expand our technology platform to grow our global footprint. The strength of the core business and strategic actions are clear in the continued revenue growth, up 31% to $205.9 million for first half '20, a CAGR of 43% over the last 4 years. EBITDA grew 29% to $62.5 million, a 45% CAGR over the last 4 years. Despite significant geopolitical and trade war tariff headwinds for logistics organizations that played out late in 2019, both revenue and EBITDA continued to grow, significantly bolstered by execution in global rollouts and greater use by existing customers. Recurring revenue for CargoWise came in at 99%, with 95% of that revenue usage-based and is now up to 90% recurring for the group overall, including 40 acquisitions to the 31st of December 2019. We continue to enjoy negligible customer attrition running at less than 1% per annum, as it has for the last 7.5 years since we started measurement. Our customers stay and grow transactions and users due to the power, depth and productivity of our global platform, which is why we continue to invest about half our global workforce and over 1/3 of our revenues each period in product development. Investing deeply and innovating continuously over the very long term makes our product easier to sell, so our revenues grow faster and makes our sales and marketing efforts highly efficient, consuming just 14% of revenue and 12% of our people. Keep in mind, this includes the sales and marketing efforts of the dozens of strategic assets we have acquired. EBITDA was $62.5 million, with a healthy margin of 30%, including our acquisitions. It is worth noting that our EBITDA margin, excluding acquisitions, was 49%, up 19 percentage points since FY '16 as we continue to see the benefits of our disciplined and highly efficient commercial model in our core business. That is including the investment we made in expanding our global infrastructure and G&A to support our growth. Overall, our net profit for the half year grew 160% to $59.9 million, reflecting both the strong growth in profit year-on-year to $27.2 million and a required P&L adjustment for this period of $32.7 million fair value gain, resulting from reduced contingent consideration liabilities in relation to acquired earnouts. More important than our strong financial performance is the continued execution of our 5 levers of growth. Together, these levers work to build long-term revenue, drive customer growth and accelerate our global expansion. We remain relentless about innovation, investing $73 million compared to $113 million for the full year '19 in further expanding our pipeline of commercializable innovations and delivering over 450 product enhancements seamlessly across the CargoWise platform. We continue to accelerate our development capability within our 35-plus development centers worldwide, hundreds of upgrades, including initiatives around trade requirements, landside logistics, container automation and leveraging acquired technologies to address new customer segments and expand our TAM. We have continued to invest resources into our pipeline with machine learning, natural language processing, process automation, guided decision support along with global customs, global data sets, enterprise engines and platform expansion. We drive greater usage by our existing customers across transactions, modules and geographies, providing 70% of our organic CargoWise revenue growth in the first half '20. This growth was generated by a large customer base adding more transactions, users and geographies and using more modules. We made significant progress in global rollouts with DHL, DSV's integration of Panalpina and commencing work with Bolloré on their global rollout. We continue to deepen and diversify our customer base so that our top 10 customers are now only 19% of revenue and none are more than 5%. Now 40 of the top 50 global 3PLs and all 25 of the top 25 global freight forwarders are using our solutions somewhere in the world. We continue to bring new customers onto the platform with new regional customer deals. And this month, we signed a new global rollout of freight forwarding and customs to Aramex with more global signings in the short-term pipeline. We now have over 280 external Wise partner organizations across the world, actively referring, promoting or implementing our platform. We have 48 partner networks actively promoting CargoWise, and over 3,700 new CargoWise certifications were completed in the half, a total of 19,000 practitioners who utilize or advise on CargoWise in their roles every day. Turning to strategic acquisitions. We secure these for resources to accelerate our technology development and market entry. In the first half '20, we have progressed product and tech builds across over 30 assets, along with commercial foundation, development and localizations. In addition, since the 1st of July 2019, we have completed a further 4 valuable strategic acquisitions in Switzerland and South Korea, an adjacent technology for container yards and logistics-focused machine learning. And while we focus our time and resources on delivering our long-term strategy, our revenue generation continues unabated. Our CargoWise operations are a powerhouse from which we extend our market leadership. You can see the strength of the platform and commercial model we have built over the long term and the revenue trajectory of organic growth across all the cohorts. This revenue grows during extensive business transformation, license conversions and development programs. The expansion of the CargoWise platform and adoption by existing customers provides diversification and resilience through market cycles. All CargoWise cohorts grew revenue in the first half as they did in the full year '19. We are rightfully proud of our less than 1% attrition rate, which includes all forms of departure, including bankruptcy and consolidations, and it is a key KPI by which we monitor ourselves. A key catalyst in growing market leadership is further global rollouts by the world's largest freight forwarders. The top 25 forwarders continue to grow share of market with collective revenues of $350 billion annually, and significant volume across ocean and air. We have 10 global forwarders already rolled out or committed to global rollout, including 8 of the top 25 and the world's largest and most profitable. Rollouts take time, often many years. However, a completed rollout is still early penetration, with significant increases in transaction throughput as customers utilize productivity tools, automations and access new products and additional modules. And more and more, the platform provides an effective tool for digital transformation and for consolidation across the industry. During the first half '20, several customers in rollout accelerated their rollout plans or announced rapid rollout commitments. CargoWise's strength lies in the diversified drivers of revenue and the highly efficient commercial model. The transformation of which over the last 10 years is provided in the appendix. This WiseTech way is responsible for the 90% jump in EBITDA for our core business from 30% in FY '16 to a 49% margin, even while supporting our global expansion and accelerated global footprint. Organic revenue drivers are listed here on the left but not all drivers add revenue in the period. For instance, in FY '18, we saw a significant increase from one-off license sales and large pipeline product launches, items which not present in this half. For further information, this is available later in the pack. In any given period, we see growth through existing users, new product launches and transitioning license arrangements. Contributing to the powerful total revenue growth of 31% year-on-year, CargoWise revenue grew 24%, delivering $126.5 million of prior year base of $102.3 million, healthy despite trade war headwinds for logistics providers in late 2019. As expected, revenue growth from acquired strategic assets was relatively flat with the exception of the inclusion of $22.6 million from full year impact of 14 acquisitions in FY '19 and $0.4 million from 3 acquisitions completed in the first half '20. These assets are important strategically, and their revenues will transform over the long term as they build up the commercial foundation and development components. In addition to revenue growth up 31% reflecting the execution of our strategy and the CargoWise recurring revenue of 99%, EBITDA grew to $62.5 million. Group EBITDA margin, while lower at 30%, actually reflected strong profitable growth particularly offset by lower margins from our acquired businesses. Overall EBITDA has nearly doubled since first half '18. And in first half '20, our CargoWise EBITDA margin, excluding acquisitions but including M&A costs, was 49%. Importantly, we continue to improve the high quality of our revenue and ongoing license transitions. Excluding acquisitions, CargoWise has achieved a 99% recurring revenue, with 99% of revenue from On-Demand licensing. We have prioritized license transition and long-term revenue quality over short-term revenue benefit in swiftly moving existing CargoWise customers to Seat plus Transaction Licensing. This focused drive saw 95% of CargoWise revenue move to transaction licensing, up from 81% in the 6 months since FY '19 and 71% in the first half '19. Acquired business revenue from OTL will transition over the coming years towards On-Demand licensing and STL where appropriate. We have a proven historical expertise in customer license transition with less than 1% attrition throughout our transition changes. I'll now hand to Andrew to walk through our strong financial position and disciplined use of capital.

Well, thanks, Richard. For completeness, this table covers revenue down to EPS. As mentioned earlier, NPAT for first half '20 includes a nonrecurring $32.7 million gain for fair value changes on contingent consideration. Hence, EBITDA, up 29%, and NPATA, up 22%, provide a more useful guide to performance for the period. In the appendix, you'll find a performance summary with key operating metrics compared to the prior corresponding period, and the key operating metrics for the first half '20, excluding acquisitions, along with other more detailed materials. Our gross profit margin remained strong at 82%, unchanged from first half '19. We continue to invest in our business to support current and future growth in line with our strategic growth levers. Product design and development expenses of $38.3 million reflected our significant ongoing investment in the development and maintenance of CargoWise, and increased investment in expanding and retaining our skilled development workforce. Sales and marketing expenditure was $28.8 million or 14% of revenue, with the increase reflecting sales and marketing expenses from strategic assets, sales commissions on CargoWise and additional investment in marketing capacity and content infrastructure to support our geographic expansion and multilingual capabilities to support new regions and growth into new technology adjacencies. G&A expenses were $39.8 million and represent 19% of revenue as we continue to invest in this area to support the increased scale of the business and the expansion of our global footprint, including additional investment in M&A, inclusion of the management teams of many of our strategic assets and additional headcount in corporate functions. However, we see long-term opportunity for further efficiencies as we scale. In first half '20, we capitalized $35 million or 48% of our total innovation and product development spend, while we ensure we fully expense maintenance, bug fixes, and research costs. The 43% increase in total R&D spend over first half '19 reflects the significant growth in the innovation pipeline of commercializable development, acquisitions and additional investment in industry experts and skilled software developers. At 31 December, 2019, our intangible assets have grown to $844.6 million and mainly comprise the value of our investments for growth, our acquired strategic assets and the net book value of our capitalized computer software and development costs. Along with other IFRS-reporting technology companies, we capitalize our commercializable technology assets, and you can see these additions in development costs here, too. The chart of S&P 500 companies illustrates the changing asset profile of the largest companies over the last 40 years or so. Today's largest companies have intangible assets of more than 5x the value of their tangible assets. Year-after-year, our high-growth CargoWise platform generates significant levels of cash, which we relentlessly reinvest back into innovation and important future expansion. Our operating cash performance delivered 36% growth to $69.7 million, and the operating cash flow conversion ratio was 111%. Free cash flow was relatively stable at $28 million, and the conversion ratio was 45%. Noncash items and EBITDA mainly reflect share-based payments. Continued investment on development and innovation of $33 million is reflected in capitalized development. Other net capital investment of $8.7 million mostly reflected upgrades and expansions to our IT infrastructure to enhance the scalability and reliability of our platform and increase capacity for future growth. Net cash is up significantly at $232.5 million, reflecting our $336 million capital raising in the second half 2019 and strong operating cash flows offset by payments related to strategic acquisitions and product investments. This chart illustrates the cash flow for the period. Net cash flows from operating activities of $62.4 million reflect receipts from customers partially offset by payments to suppliers and employees and taxes paid. Our investments for growth totaling $80.9 million consists of our investments in our IT infrastructure and global facilities, investments in product development and payments for the acquisition of strategic assets, resulting in a closing cash balance of $233.1 million. We continue to have a strong balance sheet and healthy cash generation to support our growth and strategic initiatives. We also have a debt facility of $190 million, which is currently undrawn, with a further $200 million accordion facility in place. The increase in intangible assets reflects significant acquisition goodwill and continuing product investments. The increase in property, plant and equipment is primarily a result of the adoption of AASB 16 leases from the 1st of July and is offset in lease liabilities. For further information, please refer to note 3 in the financial statements. The changes in other current and noncurrent liabilities largely reflects contingent earnouts for multiple acquisitions, including the acquisition of new businesses, earnout payments and updates to fair value estimates. And finally, in line with our policy to pay dividends up to 20% of net profit after tax, we declared a $0.017 per share, fully franked interim dividend, which will be paid in April 2020. The dividend represents approximately 20% of NPAT, excluding the noncash $32.7 million contribution from the gain for fair value changes on contingent consideration. I'll now hand back to Richard.

We are investing to grow with the addressable market and technology for global logistics in the hundreds of billions, and the spend on digital transformation itself, hundreds of millions more again. We are moving fast to build out our technology lead. We're investing in simultaneously expanding out from the CargoWise of today, capturing new customers and markets, along with increased usage and scope of our technology solutions. These strategic assets are providing key development capacity to fuel our pipeline. We are expanding the global CargoWise platform, expanding technologies in new addressable markets, expanding the platform to near, expanding the WiseTech commercial foundation to new markets, investing in transforming our content architectures, channels and brands, while also growing R&D speed and scale. This year, we'll be rolling out our new global brands and digital platforms. The investment in innovation can be seen in these KPIs and our pipeline to come. Focusing on extending CargoWise functionality with new components and enterprise-layer capabilities and building out the ecosystem with real whole of cargo chain data integration and visibility into a single platform. And just as we have created a truly modeless and borderless international freight forwarding global platform used by the world's largest logistics providers, our teams are building out key components for globally integrated platform capability for customs and border compliance, landside logistics optimization and transport management systems and international e-commerce. And in our longer-term pipeline, we are building out our global integrated platform for the consumers of logistics services, CargoWise neo. The multi-generation development of neo is significant and will progress over a number of years. At this stage, early beta release to selected beneficial cargo owners and logistics providers is planned by the end of the calendar year 2020. We have amassed over 1,200 leading experts, technologists and industry people for an upfront spend of $470 million, securing 40 strategic assets, moving swiftly on our strategy. With these key assets and market positions, we capture centuries of hard-to-access capability and significant development capacity with local feet on the ground. We have done this with our own originators and internal M&A engine. Our acquisitions are strategic, not revenue roll-ups. We are building highly efficient and scalable mini WiseTechs with significant market positions in key customer bases across the world. These positions are secured ensuring we have the resources to fuel that growth. But the businesses themselves will be in transition over a number of years. The task we have set ourselves is not simple. Building lasting value takes more time than an asset stripping revenue roll-up. It involves integration and product development and reshaping each strategic asset's commercial foundations covering content architectures, channel development, sales, licensing and servicing and support systems. The value from each asset is in the skilled staff we acquire, the local infrastructure, the new capabilities for CargoWise used by global customers, acquired customers and expanded revenue streams from both. We are working hard to ensure that we are able to scale with the rate of growth, the complexity and uniqueness of acquired businesses and to ensure that the milestones agreed with the leaders create value for the group. During the first half, we drove integration, utilizing our engineered processes and universal architectures, along with teams from core and strategic assets. In addition to this overview, the appendix provides more information on the acquisitions. We are moving swiftly and with determination to grow our moat. We think long term, which has enabled us to make the investments over many years to develop 4 foundational components on which we build the operating system for global logistics: one, our global integrated platform to which we apply our relentless technology development; two, the vast cleansed and verified data sets we build to which we can apply machine learning, automations and event-driven exception management; three, our hyper-scalable efficient commercial model that speeds on-boarding and disciplined resource usage; four, our powerful network of CargoWise connections to ring in thousands of nodes that bring millions of further connections. And as always, we will focus each period on the disciplined execution of our 5 levels of growth. Meanwhile, these pain points we identified years ago within the industry continue to escalate and become more interdependent each year, [ with setting ] even the largest logistics providers. CargoWise is designed to turn these problems into tailwinds. Each one of these negatives remains individually and collectively opportunities for us to grow. In some periods, there can be unprecedented events that can create challenges among the opportunities as we are seeing currently. The predicted early 2020 recovery from the end of 2019 China export trade volume softness, as seen in the chart bottom left, was in effect in early January. However, the unexpected outbreak of the coronavirus and the effective shutdown of China, a critical driver of global manufacturing and supply chain and a 16% contributor to global GDP, created negative flow and effects to manufacturing, slowing supply chains and economic trade across the world. Our global data highlights the severe decline in container departures out of Asia, and specifically China, impacting the supply chain of manufacturing and export product to the world. While we have a diversified array of revenue drivers that provide us with resilient organic revenue growth across our global platform, we do anticipate that the manufacturing slowdown will potentially delay execution of logistics activities by logistics service providers who use our solution. The speed of recovery of China manufacturing, replenishment of inventories worldwide and restoration of supply chain volumes, once started, will likely create a significant rebound in volumes and logistics transactions. However, the interim delay may cause some transactional revenues to move into the next reporting period and potentially delay the launch of new products planned for the second half of 2020. In considering adjustments to our guidance for FY '20, we have prudently taken into account the already real and future potential of the coronavirus on China manufacturing and export trade, along with the continued growth of the group during the first half '20, the power of the CargoWise platform, drivers of organic growth, annual customer attrition rates of less than 1% and continued relentless investment in innovation and expansion of our global business. Together, these give us the basis to expect subject to currency movements, FY '20 revenue of $420 million to $450 million, a revenue growth of 21% to 29% and EBITDA of $114 million to $132 million and EBITDA growth of 5% to 22%. While this significant disruption in the supply chain as a result of coronavirus has impacted China manufacturing and export trade volumes, what has not changed throughout this period is the accelerated adoption and continued rollout of the CargoWise solution among our customers. These short-term challenges that represent immediate headwinds for the industry and the world economy, in no way diminish the rising demand drivers for our platform among logistic providers. Our success has been founded on long-term focus and strategy, which has enabled us to make deep investments to cement our technology and product leadership. We will continue to focus on delivering on our 5 levers of growth as we build the operating system for global logistics. We have delivered strong progress in the first half of '20 across our technology and operations, which will create long-term value for shareholders. And we continue to drive the business through 2020 and beyond in the uncompromising execution of our strategy. Thank you. And now we'll open for questions.

[Operator Instructions] Your first question comes from Lucy Huang from Bank of America.

I've got 3. So firstly, are you able to give us an indication of how much growth you saw in transaction volumes in the first half? And understanding that there was an impact from the coronavirus in China, are you able to quantify what that impact was on volumes transacted through the system? And then secondly, I guess in the context of lower trade volumes currently. In terms of your discussions with customers, are you seeing them delay their, I guess, digitization plans into next year? Just wondering if I guess trade issues are causing them to delay rollout plans. And then just thirdly, you've rolled out majority of the customs clearance modules, just wondering what the takeups be and whether there has been a significant contribution to revenues from the capability.

Thank you for that. So I think the first thing is it's important to understand -- let's go back to the graph on that page. The -- there's 2 effects going on with volumes, and the first is that China-U.S. trade was quite badly affected in the last quarter of calendar 2019. Didn't affect Australia particularly but it certainly affected globally, the volumes coming out of China, particularly the U.S. trade war and the imminent arrival of the Phase 1 tariff agreement, massively destocked the supply chain in that last quarter, the last part of 2019. Now it was expected by everybody that it would recover in January. And if you look at the graph, there was a really big spike in the second week of January, which is about when people get back to work and things start moving quickly. But then the New Year's -- China New Year and then the coronavirus hit, and of course, you can see on the graph, what's occurred in trade volumes. However, most of our customers are actually -- this is the answer to the second question. Most of our customers have actually got our long-term programs, and particularly, a number of them have sped up in recent times their rollout. And we've said that in the script, and we confirm that there are a number of customers rolling out very rapidly. We see when these things happen that it's actually an increase in adoption rather than a decrease. We don't expect any deferrals. In fact, we expect some pickup in those sort of things. What was the third question?

It was around the customs, which we haven't rolled out to all customers yet.

Right. So we've done South Africa and China. We've done a lot of the English-speaking countries, but we're still deep in the build of that universal custom set, which includes quite a lot of countries. That isn't yet commercial and available, but it will be coming on the next period of time.

I just have one follow-up question. So I guess in terms of exposure to China, how big is that in terms of the revenue base?

There's lots of different drivers for revenue. A number of customers have transitional pricing arrangements that don't vary because of volume. A lot of customers have commitment agreements that have a floor to the revenue. And there's a lot of other revenues that come from other places up in China. So it's a complex mix, and the real question is you don't know what the resolution for coronavirus is. If it's short, then the impact is smaller. If it's long, the impact is larger. But it's not a one-to-one connection between us and the volumes. We do have some connection, but it's relatively resilient in the sense of the customer meetings.

Your next question comes from Paul Mason from Evans & Partners.

Just first question is related to the last one that was being asked. Maybe could you give us a bit of a view on -- so with the revision to your guidance, what you've assumed around the impact on volumes through your platform in order to revise your guidance down to where it's sitting currently?

Okay. Andrew will answer that question. Andrew?

Yes. Paul, we've looked at it in several ways, really on a tops-down basis in terms of the projected impacts on GDP and how that sort of would run through the numbers given the impact from China. Also looked at it on a bottoms-up basis with our transactional activity that we see through China. And so we looked at it a number of ways. And of course, as everybody knows right now, the length of this disruption is not able to be determined. So we've kind of used the basis of a combination of GDP and transactional information. We've been sort of prudent in the way that we've approached the guidance that we've given you here. And obviously, there's quite a deal of uncertainty in terms of the way that's going to turn out.

Okay. Well, maybe I could rephrase it a bit. So have you assumed that like coronavirus has an impact that basically extends through the entire second half? Or only like a portion of it?

No. Just a portion of it in terms of the way that we've extended the guidance at the moment. If that extends longer than that, then that will be a different outcome. But yes, we're -- it's part way through the second half right now with the timing coming.

I think we have to make assumptions that whatever happens to China is going to recover as quickly as it possibly can. And that it's unlikely -- because of the integration of the world supply chains, it's very unlikely that China will stand out of the production system for very long. But we just don't know -- I don't -- we're not predicting, and I don't believe anybody can predict the full extent of this. But we've made an assumption that it will be relatively quick to come back. But it does take a long time to recover from these things because the destocking that occurred in the last quarter of 2019 calendar is going to be fulfilled first before you get back to the normal trade volumes. So there's -- it's a complex mix of those 2 things.

Okay. And just a second question on the contingent liability online that you guys have booked. Could you maybe give us an overview of which elements have contributed to that?