Freightos Ltd Q2 FY2024 Earnings Call

And welcome to Freightos Q2 2024 Earnings Conference Call. A press release with detailed financial results and a press release announcing our acquisition of Shipsta were released earlier today and are available on the Investor Relations section of our website freightos.com/investors. My name is Anat Earon-Heilborn, and I'm joined today by Dr. Zvi Schreiber, the CEO of Freightos; Ran Shalev, CFO; and Christian Wilhelm, Founder and MD of Shipsta. Following the prepared remarks, we will open the call for questions. We are sharing slides during the call, so we recommend using Zoom on a computer rather than dialing in by phone. The slides, as well as recordings of this earnings call, will also be available on our website shortly after the call. Please be aware that today's discussion contains forward-looking statements that are subject to a number of risks and uncertainties. Actual results may differ materially due to various risk factors. Please refer to today's press release and our SEC filings for more information on risk factors and other factors which could impact forward-looking statements. Copies of these reports are available online. In discussing the results of our operations, we will be providing and referring to certain non-IFRS financial measures. You can find reconciliations to the most directly comparable IFRS financial measures, along with additional information regarding those non-IFRS financial measures in the press release on our website at freightos.com/investors. The company undertakes no obligation to update any information discussed in this call at any time. Please note that in September, Management will participate in the H.C. Wainwright Annual Global Investment Conference virtually and in October, Zvi will be at the LD Micro Conference in Los Angeles. Participation in investor conferences and events may be updated from time to time, and upcoming events are listed on Freightos Investor website. In addition, on September 23 and 24th, we will be holding our Annual Freightos Conference for industry executives from around the world in Spain. If you would like to attend, please reach out to us via ir@freightos.com. Today's earnings call will begin with an overview of Q2 performance by Zvi. We will then go deeper into the Shipsta story with Christian, and back to Zvi for insights into the current freight market trends. Next, Ran will present the financial results and the guidance for Q3 and the full year. We will conclude with Q&A. Questions can be submitted in writing during the call using the Q&A feature in Zoom. Zvi, please go ahead.

Good morning, everyone, and thank you for joining us today to discuss Freightos results for the second quarter of 2024. Our team is excited to announce the acquisition of Shipsta, but first, let’s review the quarter. I’m happy to report that we had a strong quarter, showing continued operational progress and reaffirming the demand for our platform in the freight industry. In Q2, we facilitated 316.5 thousand transactions, which is a 32% increase year-over-year, surpassing our expectations. This growth indicates a broader industry shift towards digital solutions. The momentum we’re experiencing goes beyond just increased transactions; it highlights Freightos’ role as a vital component in the logistics ecosystem, where transparency, efficiency, and scale are more crucial than ever. Our success in transaction growth is reflected in our gross booking value, which reached $203.4 million this quarter, a 31% increase from the same quarter last year. Gross booking value is influenced not only by transaction growth but also by external market rates. Initially, we anticipated that gross booking value growth might lag behind transaction growth due to softening market prices, but we observed that the ongoing Red Sea crisis helped support rates. As we expand our platform, we have increased our sell-side network to 51 carriers, up from 37 in Q2 last year. On the demand side, our unique buyer users grew by 16%, reaching about 19,000. This growth in both buyers and sellers on the platform illustrates the network effects driving our sustained growth. The more users we have on both sides of the marketplace, the more valuable our platform becomes, and this quarter’s results affirm that we’re on the right path. The fact that transaction growth is outpacing user growth shows our high retention rates and reflects a key characteristic of marketplace businesses: the number of transactions increases with the product of buyer and seller participation, as each new participant creates additional potential combinations. Among the new airlines that joined our carrier account in Q2 is Singapore Airlines, which we announced in a press release in May. This press release emphasized the significant growth in digital bookings for shipments from Asia that we experienced on our platforms in late 2023. The trend of Asian airlines joining our platform continued in the first half of 2024, and we anticipate that Asian bookings will accelerate with Singapore as a national carrier on the platform, although the Red Sea crisis is temporarily affecting air capacity in Asia and impacting transactions. In June, we announced that Coyne Airways and Thai Airways made their capacity available on our platform, further supporting Asian expansion and extending WebCargo by Freightos' reach in Africa, the Gulf, and the Caspian regions. I want to clarify that the demand we’re seeing for air cargo out of Asia is not largely influenced by Chinese e-commerce platforms like Shein and Temu, as those shipments typically involve chartering entire planes. Historically, we have seen strong growth in our carrier cohort analysis, with carriers benefiting greatly from being part of the platform, often experiencing huge increases in booking volumes within a short time after going live. We have solid confidence in this positive trend and believe there are strong fundamental drivers for it to continue. In Q2, however, some of the newer carriers have been expanding their capacity more slowly than we initially expected, and a couple of major new airlines have delayed their go-lives due to internal IT project delays. These temporary setbacks lead us to adopt a more cautious approach regarding transactions in our guidance for the second half of the year. We are continually improving our air platform software technology. For instance, we launched the capability for users to schedule repeat bookings in advance, automating their air cargo operations with each booking occurring automatically at current live rates. Additionally, to further enhance transaction aspects and integrate more components onto our platform, we introduced access to insurance services via a partner during the booking process. This initiative is currently in the pilot stage. We have also improved our ability to offer better comparisons between spot market and negotiated air cargo rates, aiding customers in navigating the complex environment where both types of rates play significant roles. More details on contract rates will be discussed when we return to Shipsta. Our expansion efforts now include new services for handling dangerous goods through Coyne and incorporating temperature-controlled shipments, including pharmaceuticals across more airlines and regions. These ongoing expansions are crucial for our growth, following the initial automation of general cargo. Furthermore, we are making great strides in trucking bookings within the United States through 7L Freight, the subsidiary we acquired. Trucking is an area where we see substantial potential for growth, and we are already observing strong results, with synergies between trucking and air transportation. A major strategic move for us is the acquisition of Shipsta. It’s important to recognize that large importers and exporters, like manufacturers and retailers, typically procure most of their freight services under annual fixed-price contracts negotiated periodically through complex tender processes. Such tenders often involve intricate documents, and for large companies, spot buying usually accounts for less than half of their volume, especially in ocean shipping. As we noted in our press release, Shipsta specializes in assisting supply chain organizations in managing their tender bidding and negotiation processes for long-term freight procurement, typically on an annual or quarterly basis. Shipsta is an excellent complement to Freightos' historical focus on digitizing the spot market for pricing and bookings. Combining both spot and contract rates furthers our goal to be the preferred digital global freight booking platform, delivering a unique and comprehensive digital solution for freight procurement. I’ll now hand over the call to Christian Wilhelm, the Founder and Managing Director of Shipsta based in Luxembourg. Christian and his co-founder, Stefan Maratzki, are true industry innovators, and with their extensive background in tender procurement and related functions at Kuehne & Nagel, the world’s largest freight forwarder, they established Shipsta in 2015. They have developed an impressive product and brought in top enterprise customers, which Christian will discuss. Christian, alongside our teams, has been collaborating on industry ideas for years, and I am thrilled to welcome them to the Freightos family. Christian, please go ahead.

Thank you, Zvi, and hello to everyone. When we started Shipsta, we recognized the challenge with global enterprise freight, fragmented systems, reliance on manual processes, and the growing complexity of a logistic landscape. The process of retailers and manufacturers negotiating annual or quarterly freight contracts is shockingly labor-intensive and prone to errors due to massive excess being emailed back and forth for many weeks. Shipsta was created to address this issue head-on with the next-generation platform that brings together data, automation, and AI to streamline the entire procurement process. At the head of Shipsta's offering is a powerful rate management system, serving as a single source of truth for all negotiated rates, which not only centralizes data but also enables real-time market monitoring, allowing clients to respond swiftly to market fluctuations. The platform's flexibility is a key strength, supporting various procurement events from quick rate rephrasing to complex global tenders, catering to the diverse needs of the freight industry. Our platform is designed to be a comprehensive solution, supporting all modes of transport: air, ocean, road, and rail, and integrating seamlessly with existing systems like ERP and TMS, transportation management systems, with adaptability that makes Shipsta a valuable tool for a wide range of industries, from manufacturing to pharma, automotive, and retail. We serve companies of various sizes with procurement strategies that require frequent rate updates or prefer annual contracts with periodic rephrases. Today, over 4,600 users across more than 50 enterprise customers, 30% of which are Fortune 500 companies, rely on Shipsta to manage their logistic operations more efficiently and effectively. Among them are, for example, Puma, ThyssenKrupp, Rockwool, Master Builders Solutions, and Allnex. Shipsta's core value proposition addresses the most pressing pain points in the logistics industry. We understand the challenges of logistics supply chain disruptions, rising fuel prices, and the need to meet sustainability goals and regulatory compliance. Our platform is built to frame disruptions and identify market opportunities proactively, allowing enterprises to negotiate better rates and optimize their operations. With seamless connectivity enabled by flexible APIs, Shipsta integrates with existing technology ecosystems, ensuring that even the most fragmented systems can be unified. Additionally, our automated transport assignment feature optimizes both cost and time, making it easier for enterprises to navigate capacity constraints and streamline their logistics processes. We deliver all of this through a software-as-a-service license model based on a modular design and pricing based on the customer's annual freight spend, aiming to upsell additional models to our customers over time. In summary, Shipsta is more than a procurement platform; it's a strategic partner for enterprises looking to modernize their logistics operations, achieve greater efficiency, and maintain a competitive edge in a rapidly evolving market. Joining forces with Freightos is an exciting new chapter for Shipsta, and we look forward to providing the industry with more innovative and powerful solutions, particularly enabling shipment booking execution and improved market intelligence, and better optimizing global freight transportation for forwarders, carriers, and shippers. I will now turn the call back to Zvi.

Thank you, Christian, and welcome again to you, your team, and your customers into the Freightos family. Shipsta and Freightos share a vision of a digitalized freight industry, but we approach it from different ends. Freightos focuses more on spot procurement and Shipsta more on tenders, the long-term contracts. This marriage creates the world's most comprehensive platform. We're thrilled about the opportunities this acquisition brings, enabling us to offer a truly comprehensive procurement platform to both Freightos and Shipsta customers and to address the estimated 50% to 70% of the massive freight market, which is served by tenders rather than spot. We see not only immediate cross-sell opportunities but also significant product integration potential. Most immediately, Freightos Terminal, our data product is already a leader in stock price data, and now it will be rich with contract rate benchmarking. Over the coming months, we'll integrate our platforms to allow a truly seamless procurement experience across spot and contract. Let me now briefly discuss market conditions during the quarter. Let's take a look at ocean and air volumes. The chart on the left shows that global ocean freight container volumes for Q2 increased a healthy 6.5% compared to Q1 and were 5.7% higher than Q2 of last year. The relatively sharp monthly increase in May marked an early start to the ocean peak season, possibly reflecting importers seeking to avoid possible Red Sea-driven delays later in the year by stocking up earlier than usual for the shopping season. While we're still seeing strength into August, we do expect volumes to start declining in September although rates will still be propped up by the Red Sea crisis. On the right side, IATA data for global air cargo volumes shows that global demand continued to grow in Q2, increasing 15% compared to Q2 last year. Volumes were more than 6% higher than in Q1. This growth in months that are typically a slow season for air cargo is largely attributed to the continued strength of B2C e-commerce volumes out of China, while Red Sea disruptions to ocean freight also continued to push some ocean volumes into the air. Nonetheless, we've actually seen weak spot bookings out of Asia in recent months because the Red Sea crisis has left little capacity available for the spot market. Moreover, we are seeing reduced demand on our platform in some European countries, which is presumably driven by macroeconomic conditions. This adds to our caution in predicting volume growth in the second half of the year. Moving on to air and ocean price levels, let's look at the indices that we publish on our own Freightos Terminal. Starting with ocean, container shipping rates as tracked by our FBX Indices, a pair on the left, measured in dollars per 40-foot container. The year began relatively stable after a tumultuous Q4 last year. Reduced demand after the Lunar New Year led to a new normal, and carriers adjusted to the Red Sea diversions circumventing Africa with most of the savings. As a result, rates eased in late Q1 and early Q2. This changed in May following congestion and a spike in demand caused by importers front-loading imports for the peak season, as I mentioned before. The earlier-than-anticipated demand, which was luckily exacerbated by shippers' concern over a repeated 2021 holiday season, when there were serious backups, drove a sharp increase in ocean rates in May. As a result, global ocean rates clocked in at 65% higher than the end of Q1 and more than 250% higher than the year prior. The right chart shows air cargo rates as tracked by our Freightos Air Index, FAX, measured in dollars per kilogram. Q2 rates closed the quarter about 9% lower than at the end of Q1 and level with the end of Q2 levels last year. While global rates eased through Q2 last year in line with typical seasonality, prices this year climbed in June. This rate strength is partly attributable to continued B2C e-commerce volume strength out of China as well as the ongoing Red Sea crisis, as we mentioned. On average, though, FAX was 11% lower in Q2 '24 compared to Q2 '23. In summary, the results we've shared today are a clear indicator of our continued positive growth direction and the robustness of our strategy. Our strong performance this quarter reflects not only our ability to grow but our long-term focus. The digital transformation of the freight industry is still in its early stages, and now more than ever, Freightos is uniquely positioned to lead this industry transformation. We're confident in our ability to deliver long-term value to our shareholders as we build on the foundations we've established. I look forward to sharing more news of our success with you in future quarters. Now let's turn to our CFO, Ran Shalev, who will discuss our Q2 results and our outlook for the rest of the year.

Thank you, Zvi. Our second quarter results surpassed expectations across all metrics, delivering both revenue growth and improved operational efficiency, reflected both in record high growth margins and strong improvement in adjusted EBITDA, where the loss was more than $2 million lower than last year. We successfully completed an acquisition while maintaining focus on daily operations, showcasing our team's exceptional performance and adaptability. Revenue for Q2 '24 was $5.7 million, up 11% compared to Q2 of '23. With each of our revenue segments, Platform & Solutions growing 11% year-on-year. These two segments represent two different revenue models, but from a business perspective, they are closely linked with most of our customers using platform and solutions in tandem. Our SaaS product enhances our marketplaces by increasing user engagement and driving more transactions, which strengthens user retention and supports our platform growth. We're seeing more and more use cases where transaction fees combine with SaaS and data subscriptions, which is helping us generate additional revenues. Shipsta is also fundamentally a platform that connects buyers and sellers to freight services but will be included in the future in our Solutions segment due to its subscription revenue model. Our gross profitability this quarter has exceeded expectations. IFRS gross margins rose to 65%, an 8 percentage point increase from 57% in Q2 '23. Even more impressively, our non-IFRS gross margins, which really represent the margins we operate based on, achieved a record 72%, up 7 percentage points from 65% in the same period last year. This significant improvement stems from the economies of scale realized by our business leads, which are growing and maturing as anticipated and from a higher degree of process automation. These results align with our long-term model, which projects non-IFRS gross margins rising to 80%. We are continuously improving the efficiency with which we are running our business. In the second quarter of this year, our adjusted EBITDA was negative $3.1 million, which is much better than the negative $5.3 million we saw in the same period last year and also a significant sequential improvement from the negative $3.6 million in Q1 of this year. This is a testament to the ongoing success of the efficiency measures which we have implemented for about a year now, as well as the incredibly hard work of the team. The impact of the Shipsta acquisition on our long-term profitability target is positive. Although it is currently loss-making, we believe that together we can accelerate our joint path to profitability. At the end of June, we had $47.3 million in cash and short-term bank deposits that are sufficient for our needs, and we're still being very careful with how we spend our cash. Our goal remains to reach breakeven and start generating positive cash flow with the money we have. We are paying approximately $4.9 million for Shipsta, in cash and in assumed negative working capital, which will be reflected in the Q3 cash flow. In addition, there is an equity consideration of approximately 640,000 shares that will also be reflected in Q3 share count. Lastly, the agreement includes share units to be granted to the Shipsta founders and key executives contingent upon future business performance. With that, I will move to the Q3 and full year guidance. We expect transactions to grow 20% to 24% year-on-year in Q3. Our full year expectations of 25% to 27% growth in transactions are consistent with our long-term model, which shows annual transaction growth of 20% to 30%. Even so, we do expect transaction growth in the second half to be lower than that of the first half for market reasons, which we explained, including volume uncertainty in Europe that has disrupted due to the Red Sea crisis affecting shipping patterns in Asia and some temporary delays in a few major airlines' rollout due to their own internal issues. As for GBV, we expect 23% to 27% growth just slightly lagging behind transaction growth due to the expectation that rates are slightly lower than Q3 last year. Q3 revenues are expected to reach $5.9 million to $6 million, and adjusted EBITDA, a loss of $3.3 million to $3.4 million. The contribution of Shipsta is expected to be reflected mostly in Q4 results and to be approximately $800,000 in revenues and a small loss. We are pleased to guide for a lower EBITDA loss than previously expected for the full year due to our strong execution and tight cost control. We are committed to continue balancing growth and profitability responsibly as we make progress toward our long-term goals of digitizing the entire international freight industry.

Okay. Thank you, Ran. We will now move to the Q&A session. The first question comes from James Rush. James, you can unmute now.

Great. Thanks, guys. Congrats on the results and the acquisition. Can you talk a little bit about the revenue and cost synergy opportunities between Freightos and Shipsta? And maybe what makes Shipsta unique relative to other tender management solutions out there?

Thanks, James. This is Zvi. I appreciate the question. Regarding revenue, we outlined our short-term expectations in the press release before we could fully explore the synergies. We mentioned that for the remainder of this year, we anticipate around $800,000 in revenue. That gives you an idea of our current run rate. However, we didn't acquire them for their existing revenue but for the potential we can achieve together. There are strong synergies; we both serve some of the same major customers, including large enterprises, retailers, and manufacturers, and we believe our data products can be cross-sold with their platform almost immediately. We didn't factor this into our expectations for this year since it's already close to September, but we believe we can significantly grow together next year, as our products complement each other well. Regarding your second question about what's unique about Shipsta, there are two key points. First and foremost, they offer a modern solution. Founded in 2015, the company has developed cloud-based software with an impressive customer base, featuring top-tier clients. While there are other tendering platforms, many of them are outdated. Shipsta provides a truly modern solution. We've heard excellent feedback from customers and during our due diligence, confirming the strength of their product and technology. That's the most critical aspect; it stands out as one of the best contemporary solutions. The second point is the opportunity to acquire them. We're mindful of our cash flow and can't pursue large acquisitions at the moment. However, the timing of this acquisition at the price we secured was attractive, and we felt fortunate to have acted on that opportunity.

Great. It looks like a good deal.

Does that answer your question, James?

It does. That was perfect. This is probably the first time I've heard you mention U.S. trucking in quite some time, and it sounds like you're seeing some positive developments there. Can you discuss recent trends in that segment of the business? Additionally, could we get an update on your Ocean initiatives? Thanks.

Yeah. Okay. Good questions also. To be perfectly honest, we sort of summed a little bit into U.S. trucking because we acquired a company called 7L Freight a couple of years ago. We mainly bought them for their air; they've got a very good solution for air cargo, which is our strongest segment, and we bought them for that. But they do trucking, in particular, less than truckload, which is a big market in the U.S. The last estimate I saw was $80 billion — but can't quote me on it. It's a big market. It does complement what we do because we're less interested in just pure LTL, and that's fine. It's not strategic for us because we're focused on air and ocean, but of course, there's nothing wrong with having a growing business in trucking as well. The strategic part, of course, is that when you do air, then there's a first mile and last mile; you've got a truck to the airport, you've got a truck from the airport. So obviously, trucking does connect — every shipment needs trucking as well. That's why it becomes strategic. Secondarily, within the United States, we've just been starting to see some momentum also with domestic air cargo within the U.S. Whenever someone is looking at domestic cargo in the U.S., they also want to look at LTL alternatives. So anytime somebody wants to track something from New York Airport to LAX, they say, wait a second, what's the time and cost by air, and what's the timing cost by truck. So having those alternatives just makes the air platform better because people always want to keep track of that. So that's where there is progress in U.S. trucking, and that's where it's strategic because it also connects to what we're doing in air. And then I think you asked about Ocean, James? On our platform for the end customer, Freightos.com, we do quite a lot of ocean freight, but it's still mostly coming out of Excel sheets. It's not fully digital. People are booking online; they're paying online. But the rates and the capacity are not fully live; it's still coming out of weekly Excel sheets. So we have quite a bit of ocean, but it's not done in a fully digital way, like we're doing in air, where we have a lot of airlines connected in real-time. So we're being patient, and we are seeing some progress. We do have a couple of ocean liners, more or less of the big ones, who we do not have an API — a digital connection. We have a couple promising to have that by the end of this year. I feel like we're in the same place in ocean that we were in air in 2019. The first carriers are going live, and a few more carriers promising to go live. I'm still optimistic we'll have the same success in ocean that we had in air, or even ocean is even bigger, but it seems to be lagging by five years, but moving in the right direction.

Okay. Thanks for taking my questions.

Thanks, James.

Okay. So the next question is from Jason Helfstein.

Hi. This is Steve, standing in for Jason. So two questions from us. One, you drove significant leverage in gross profit this quarter. Revenue was up 11%, year-over-year cost of revenue down 9%. So just talk a bit, if possible, about how you achieve that leverage? And then second question, you raised your full year revenue guide while lowering GBV a bit. So are you seeing more strength in platform take rate or is it more a meaningful acceleration in solutions revenue, that's kind of offsetting that and getting the model to kind of fit? Thanks.

Okay. Sure. I'm sorry, you were a little cut off. I didn't hear who was standing in for Jason. If that's okay, I apologize, but the little crackle on the line. Thanks for the question. Look, I mean, the revenue — the increase in revenue guidance for the year is also due to the Shipsta acquisition contributing. That was the main thing that how — the revenue is growing, as you see on – according to our expectations, a little lower in the first half. But the extra, the raising of the expectations for the second half is also driven by the Shipsta acquisition, which will contribute to that. In terms of the increase in gross profit, I think there are two things there. One is scale. The bigger we get, the more economies of scale we have. But also, of course, it's a factor of our continued investment in research and development. We're investing a lot of money in software. Most of it is providing features to our customers, but some of it is also automating our own operations. We are able now, in air for example, well over 90%. I don't have the number at my fingertips, but one in 90% of bookings go through with no human interaction at all. Some of the things that used to need human support because our biggest cost of goods sold is actually customer support people, which is our biggest cost of goods sold. And that's just getting less as we just get more automated in how we support our operations, if that makes sense.

Yeah. Perfect. And it’s Steve – on for Jason. Thanks, everyone.

Thanks, Steve.

Okay. It looks like there are no more questions. So thanks, everyone for joining. You're always free to ask us additional questions at ir@freightos.com. Have a good day.

Thanks, everyone.