Freightos Limited Ordinary shares (NASDAQ:CRGO) Q2 2023 Earnings Call Transcript

Freightos Limited Ordinary shares (NASDAQ:CRGO) Q2 2023 Earnings Call Transcript August 22, 2023

Zvi Schreiber: Thank you, Eytan, and thanks to everyone who’s joined. And we’re pleased to report continued growth in Q2 and significant progress in our mission to digitalize global freight and to make buying and selling of freight services smoother and more efficient for importers, exporters, carriers, and freight forwarders. Total transactions booked across our platform grew 59% year-on-year in Q2, reaching 239,000 transactions, a run rate of almost 1 million transactions per year. This growth is driven by a number of factors. The first is persistent use by existing users who place the majority of our bookings. These cohorts of users continue to demonstrate strong retention and growth. In fact, the cohort of users who first placed bookings are on Freightos’ platforms in early 2021 are now doing well over 10 times more bookings per month.

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Liquidity growth also comes from the supply side. For example, during Q2, both China Eastern Air and Wideroe went live, while LATAM, Qatar, Avianca and Emirates expanded the range of air cargo services offered via WebCargo by Freightos, these ongoing expansions continue to grow platform transactions significantly. For example, one major airline partner who has worked with us for over a year still saw transactions grow by over 25% quarter-on-quarter. The second factor in the growth is unique buyer users. Over 16,400 unique business users booked shipments via the Freightos platforms in the quarter. The growth in demand continues to attract more sellers who in turn attract new buyers, creating a sustainable flywheel growth dynamic. This network marketplace effect is core to our growth strategy and our ability to capture the vast market opportunity, which is still ahead of us.

We believe that that our ongoing investment in product development is also supporting the expanded usage by existing customers and the attraction of new customers. One example is our newly launched Airline Dashboard, which provides valuable analytics to carriers leveraging our vast market data, to help them optimize pricing, improve conversion rates, and to help them be more agile in updating their airline cargo services. Another important innovation is interlining booking, where one airline purchases cargo services from another. Interlining is similar to code sharing in passenger travel. It’s quite common in cargo, but shockingly inefficient. We recently announced the world’s first digital cargo interlining booking on the third-party platform with the test shipment on WebCargo by Freightos by Qatar Airways cargo on our ITA Airways flight.

These are early days, but we are excited that using our interlining technology to combine cargo airlines in thousands of new permutations would unlock new unique supplies for our thousands of freight forwarders globally to improve aircraft capacity utilization, broaden the global coverage available on work cargo and creates all kinds of new businesses opportunities for us and our customers. As you all know, the freight market is going through a significant cyclical downturn this year. Let’s take a quick look at the industry conditions that form the backdrop to our results and projections. And we will do that using data from our own Freightos Terminal product. First, on a broader industry level, ocean freight rates from China to the North American West Coast tracked by our bellwether FBX01 index finally saw a small increase in the first half of August, but are still down more than 90% from their peak.

At the same time, rates have begun to rebound since mid-July, up $500 per 40-foot container. As we get closer to the holidays and enter the typical shipping peak season months, volumes to the U.S. are projected by the National Retail Federation to increase by 6% between July and August and be slightly above 2019 levels through the peak season months. Asia to North Europe trade, demand increased 3% for the year from June ‘22 to this June, though it was down year-on-year for the entire quarter. Despite sluggish demand, carriers were able to keep rates at about 2019 levels, which are $1,300 to $1,400 for 40-foot container. Moving from ocean freight to air cargo, rates are being pushed down by the combination of lukewarm demand and increase in capacity, and the increased capacity is largely due to passenger travel recovery.

Many passenger planes do have cargo capacity as well. A significant rebound is not expected at least until air cargo’s typical peak season, which is in Q4. The latest IATA data from June does show volume improved slightly relative to May, but still 3% lower than last year. Air cargo rates have fallen. Our global Freightos Air Index, FAX, is down 55% from its peak. FAX for Asia to Europe is down 48% from a year ago, while Asia to North America rates are 43% lower. And transatlantic price is 44% lower than last August. However, unlike ocean, air cargo rates are still above pre-pandemic levels. All these market conditions were an important factor in our decision to initiate the organizational efficiency plan we announced in July, to ensure we are on track to reach profitability on our existing cash reserves.

This plan saw a significantly reduced spend while barely compromising our investment in both high growth and profitable offerings. Just to recap, we regrettably reduced headcount by 50 employees, approximately 13% of the team, and focused our growth efforts on the platform business for carriers, freight forwarders and enterprise importers and exporters, together with ongoing investment in our solutions business which comprises software and data subscriptions. As I mentioned, global freight rates in Q3 appear to be recovered slightly. Higher freight rates could positively impact our business in two ways. First, in the portion of our business where we’re paid a percentage of the transaction rather than a flat fee, higher rates do increase our revenue.

Second, higher rates mean more revenue for freight forwarders, which should make it easier for our customers to spend money on new solutions. Having said that, despite the strong booking volumes, we’re still in the early days of digitalizing freight industry and therefore measure our success by transaction growth more than by platform monetization. To summarize, we believe that we’re on track to digitalize one of the largest offline industries in the world. If we look at one of our core lanes, for example, European air cargo exports, while industry volumes in June dropped slightly year-over-year, our booking volumes on those lanes grew by over 40%. Similarly, June data shows a 6.5% dip in North American export air cargo compared to last year, while Ari [ph] bookings grew a strong 70% year-on-year, this shows that demand for our innovative solutions is strong with the efficiency and transparency we offer, winning over cyclical industry conditions.

As a pioneer in digital freight platforms, we come on with strong market leadership and are well positioned to continue to benefit from this demand. And still only a fraction of the global freight industry is aligned. So, we’re only scratching the surface of this market’s potential. The team and I are excited to continue to scale Freightos as a sustainable and capital efficient business. We have a positive trajectory, outstanding growth signals, and the people and resources we need to deliver. Let me now hand it over to our CFO, Ran to discuss our Q2 results and Q3 guidance.

Ran Shalev: Thanks, Zvi, and good to see everyone. I’m pleased to review our Q2 ‘23 quarterly results. Revenue for Q2 ‘23 was $5.1 million, down 1.3% compared to Q2 of ‘22 or 2.6% on a constant currency basis. Our IFRS gross margins remained excellent at 57.3% compared to 59.6% last year, with the non-IFRS gross margin stable at 65%. Gross margins reflect a mix of our very high solution segment margins, mixed with somewhat lower margin in our platform business segment. Over the long run, we expect gross margins to increase as our transactional platform business matures. Adjusted EBITDA in Q2 ‘23 was negative $5.3 million compared to a negative $3.6 million in Q2 of ‘22, primarily due to the cost of being a public company.

Perhaps a more meaningful comparison is to Q1 ‘23, our first quarter as a public company when adjusted EBITDA was negative $5.8 million as I mentioned in our last call. The quarter-over-quarter improvement reflects both the efficiency plan announcement in July, as well as our constant emphasis on efficiency. We believe we’ll grow transaction across our platforms to between 1 million transactions a year, structured particularly in dollars. As industry rates remain low with 5% and 13%, we are pleased to be able to achieve such growth rate on a lean cost structure, particularly in light of the broader market conditions. Combined with our operational efficiency plan, as well as our high and stable gross margins, we are anticipating adjusted EBITDA losses of $5.1 million to $4.5 million.

As industry rates remain low, we anticipate gross bookings value [Technical Difficulty] between $146.5 million and $156.5 million. Marketplaces thrive on liquidity, so transactions are North Star of our platform segment. We continue to expand our market share by growing both our supply and demand, while enhancing our underlying platform. The majority of our transactions are still monetized on a fixed fee basis, which we are increasing gradually as we increase the value delivered to our partners. Fixed fee structure may reduce our short term revenue growth, but it also ensures that our revenue is less exposed to gross bookings value fluctuations. In our solutions business segment, revenue is typically recurring and high gross margins. Beyond revenue we’ve also found that our software and data businesses strongly support acquisition and retention of users responsible for transactions.

This powerful strategy is known as SaaS enabled marketplace. As for our full year guidance, we are reiterating our previous expectations. The figures are presented in the press release and on this slide. Let me pass it back to Zvi for some remarks before we take some questions.

Zvi Schreiber: Thanks, Ran. We’re pleased to see indications that the global freight industry may be heading towards a gradual recovery. That said, we’re building a digital platform business that can thrive in all market conditions. We continue to invest in research and development, and expect to see in the coming months a number of exciting AI-driven features, new carrier launches, more integrations with the leading supply chain software providers and other innovations which will roll out with our carrier, freight forwarder, and importer and exporter partners. Okay. I think Eytan may have dropped off. So, I’m going to take some questions. Eytan, are you there? Okay.

A – Zvi Schreiber: Good. So, question from Greg here, Greg Pendy. Hi Greg. Can you help us understand how to think about the new carriers you are adding in 3Q versus guidance for transactions? How much if any more new carriers add or is that mostly growth with existing carriers? So, yes, I think the answer is that we do see — we didn’t have any major new carrier announcements during the summer, but obviously those are lumpy, they happen from time to time. And so, it’s natural that — you’re not going to every quarter have a major carrier joining. But we are in touch with — there are still several major carriers who are not yet on our network, especially in Asia, but also a couple of others, in the West as well. And you can be sure that we’re in touch with all the carriers.

And I certainly hope that in Q3 we’ll get a couple of them over the line and that can make — help us with a significant jump. So, we can still grow. We can grow a little bit without new carriers, but the big jumps do come as new carriers come. And I believe we have a good pipeline of carriers who’ll be joining. Good. Any other questions? Okay. Hold on a sec.

Eytan Buchman: Okay. Here we go. I can see there’s a question from, Jason. Jason, I’m going to unmute you right now. Your line should be open.

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Q&A Session

Jason Helfstein: Thanks. Good afternoon, guys. Good morning, everybody else. So, two questions. One, the full year guidance implies an acceleration in transactions. Just maybe talk about the risks of this outlook or the puts and takes. So, how conservative could this be versus what are the risks? And then the second question, on the solutions segment, talk about how you think about contract terms, your ability to raise prices or upsell more services? Why did revenue growth start to basically slow in the first quarter and what could be the catalyst to accelerate growth in solutions revenue? And by the way, Jason Helfstein from Oppenheimer. Thank you.

Zvi Schreiber: Thanks, Jason. Yes. So, look, our ability to predict transactions growth has been pretty good. Of course, like, any prediction, it’s not perfect. But, I think we’ve got a good record of predicting transactions. We do expect, if I tie it back to Greg’s question, we do expect some acceleration at both. With new carriers, we had a couple of small carriers joining in Q2. We hope to have a couple of big carriers, during the second half of the year. But also we still do add — we are still adding new freight forwarders every day. The reason why you didn’t see more growth in transactions is, A, no major new carriers, but also because the market is down, air volumes are down. If you look at the financial results of the cargo airlines in Q2, you can see the market is down, so.

But we do see that — we hope that the market will stabilize. And in Q4, we hope to see an increase. Q4 is peak season for air, because by that point, it’s too late for retailers to send stuff by ocean. So Q4 tends to be a strong quarter in air. So given peak season ahead of us, given that we are still adding forwarders, given that we do hope to have a couple more carriers, even bigger carriers during the second half of the year, I think we feel good about our projections for increased transactions in the second half. Does that answer your first question?

Jason Helfstein: Yes. I mean, it’s really more about the fourth quarter, just the guide implies its — actually acceleration in the fourth quarter with the third quarter being the bottom, I think, if you look at the number of transactions.

Zvi Schreiber: Yes. So, as I said, we do take into account the seasonality and Q4, the majority of our bookings are air. Q4 is normally strong. Plus by then I do hope that we’ll have a couple more carriers online. So, I think, we feel — we can’t guarantee anything 100% like any prediction. I think we feel good about our prediction for a strong Q4 in terms of number of transactions. We’ve got some good confidence in that. Regarding the second question with solutions, yes, I mean, look, I think, as you know, we are selling software to a distressed industry. If you look at the financial results of freight forwarders, ocean carriers, they’re down tens of percent year-on-year. And so, we have been able to — we were able to increase prices by a few percent this year.

And our retention rate is — has been quite good. But, yes, our ability to sell big new tickets in this market right now with all our customers hurting, it’s been harder than we would like. Again, it’s a cyclical industry. Hopefully, next year will be easier. But I feel overall, we’ve done well in a tough, tough market to maintain our revenue, to increase prices a little bit, to retain well over high-90s percent retention of customers. So, overall, I think that’s going well, and I think we will be able to grow solutions much more as the market goes into its next upturn.

Jason Helfstein: Thank you.

Eytan Buchman: Okay. Our next question is from Brian Dobson of Chardan. Brian, your line is open.

Brian Dobson: Thanks very much. So, you had some positive commentary in your release regarding signs of life in global freight indices in the third quarter as you are heading to the peak period. Do you have any additional color on where that strength or relative strength is stemming from in terms of industry or geography?

Zvi Schreiber: That’s a great question. We do not have the breakdown by industry, because we tend not to — we see the volume — we see how many containers are shipped, how many tons are shipped by air. We don’t always know exactly which industry it relates to necessarily. It depends a little bit on the circumstances. But in air typically, a freight forwarder books, whatever it is, 5 tons. They don’t necessarily tell us what’s in it, unless it’s special handling. But in many cases, we don’t actually know. So, I cannot give you breakdown by industry. But I think we’re seeing across the board an uptick. I don’t want to call it a recovery yet, but an uptick in ocean rates, both sort of Asia- Europe, Asia-North America, which are the two sort of biggest trade lanes.

And I believe it’s related to the fact that we’re approaching the — we’re starting the ocean peak season. This is the time when retailers are starting to ship stuff out of Asia to have on the shelf for Thanksgiving or Christmas. So, I think this is the normal sort of seasonal uptick, but it’s good to see that even in the soft market, we are seeing that uptick this year. Some people worry there wouldn’t be that. I think also retail spending is — you may know this better than me, Brian, but retail spending is holding up okay. I’m not saying it’s great, but consumers — despite inflation and other worries, consumer spending has not slowed down too much or not as much as some people fear. So I think overall there’s a feeling in the industry, certainly on the ocean side that we’ve seen the worst.

Having said that, there are still threats. There’s still a backlog of orders for ships, and there’s still planes coming on board. So, there still can be down — more downward pressure on price, even if the volumes are holding up okay.

Brian Dobson: Yes. Thanks. That’s very helpful color. And last month, you rolled out digital interlining on WebCargo. How’s the early feedback been? Has that been positive?

Zvi Schreiber: The early feedback has been excellent. Now, I don’t want to mislead you. I mean, we’re still just doing test shipments, there’s no volume yet to speak of — and that will take many months to get to real volume. But the feedback has been excellent. We have a number of airlines who’ve already signed agreements or negotiating agreements to join that. I mean, you would not believe — if you’re not from the industry, you would not believe how painful it is for airlines right now to do interlining of cargo. And they’re literally — it’s hard to believe, they literally spend a day or two going back and forth by email and phone calls. And actually, there’s a lot less interlining happening than should, because interlining makes perfect sense.

No — there’s no airline who flies everywhere. So interlining should be a very important way of getting cargo across the globe. And yet it’s so painful with the manual process that there is today. So the feedback has been universally excellent. Having said that, things take time with airlines. So I think it will take — I think we’re on our way now. We’ve got good momentum, great feedback, but it will take a good while till it really affects our bottom line.

Eytan Buchman: Our next caller is George Sutton from Craig-Hallum.

George Sutton: So, Zvi, you very quickly went through the new carriers added in the quarter and certain carriers that had expanded. Could you just go through those again real quick?

Zvi Schreiber: Yes, sure. Just pull up my notes so I don’t get it wrong. Yes. So, we mentioned two new ones. One is China Eastern, which is one of the — which is a substantial Asian carrier. Even so we don’t yet have that whole network, it’s rolling out in stages. But that was actually, I said — maybe I sort of misspoke before, because there was one major new airline. Still the exposure will be gradually. Another one is Wideroe, which is a smaller regional Scandinavian airline. But we like that as well. I think it’s really important to have the niche airlines as well, or the niche airlines because that really helps us to provide comprehensive coverage, which is very attractive to the freight forwarders. So those are the two new ones.

Like I say, we’re working hard to bring on some more of the big familiar names that we’re missing. We have many of them. We saw expansion in airlines like Qatar, LATAM, Avianca, and Emirates. So Qatar and Emirates, reminder, those are the two biggest cargo airlines in the world. So, both of them expanded the range. I don’t have permission to say exact details, but they gave us new countries or new products or bigger weight breaks. So it’s very exciting to see that it’s going in the right direction, both with new airlines, but also existing airlines. They like us as a channel and then they come back and say, okay, now we want to put more of a network on WebCargo by Freightos, which is always good to see.

George Sutton: So, I thought the most meaningful comment you made was that you saw 40% growth in your air cargo exports from Europe at a time that the market fell. And I wondered if you could just talk about the digitization of the market, what you are seeing relative to what the market overall is seeing, and I’m looking at sort of a competitive landscape comment from that.

Zvi Schreiber: Okay. Well, if you’re asking in terms of competition, from what we know, we — of course, our competitors are both, our competitors for airline bookings are private companies. So, we don’t see direct — they don’t publish numbers. However, we do often get feedback from the airlines if they choose to share with us, sort of how big we are versus other platforms. Sometimes they choose to share that with us, and then we get some good indications. And the indications are really positive. I think we’ve got a substantial market lead at least from all the data points, I have at least 5x sort of the nearest competitor, which is a very substantial lead when you’re a marketplace, it means we have more liquidity.

And that seems to have held up. That seems to be at least — the lead seems to be at least as big as it was a year ago. So, I’m very, very encouraged that we maintain a very strong leadership position. And as you know, when you’re a marketplace, that’s what it’s all about. If you’ve got the liquidity, then that can be very self-sustaining because the buyers and the sellers come to you because that’s where all the liquidity is. So, yes, feeling good about that.

George Sutton: Perfect. Thank you.

Zvi Schreiber: Thanks, George.

Eytan Buchman: Okay. Well, seeing there are no more questions here, I’d like to thank everybody for joining. A reminder that a recording of this webcast will be available on our website at freightos.com/investors. Thank you everybody for attending. That concludes this call.