Earnings Call Transcript - CRGO Q1 2025

Operator, Operator

Hello, everyone. Welcome to Freightos Q1 2025 Earnings Conference Call. A press release with detailed financial results was released earlier today and is 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; and Pablo Pinillos, CFO. 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 a recording of this earnings call will be available on our website shortly after the call. Please be aware that today's discussion contains forward-looking statements, which are subject to a number of risks and uncertainties. Actual results may differ materially due to various 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'll 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. Before we begin, I'd like to note our upcoming investor events. During tomorrow and Thursday, Freightos will participate virtually in the Sidoti Microcap conference. In June, the company will participate in the Investor Summit and in August in the Oppenheimer Technology, Internet & Communications Conference also virtually. Links to webcast and other event updates can be found on our website. Today's earnings call will begin with an overview of Q1 performance by Zvi. Next, Pablo will present the financial results and the guidance for Q2 and full year 2025. 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.

Zvi Schreiber, CEO

Good morning, everyone, and thank you for joining us to discuss Freightos' first quarter 2025 results. I'm pleased to report another quarter of strong performance with record revenues and our 21st consecutive quarter of record transactions. I believe this demonstrates again that we're making steady progress in the monumental task of digitalizing international shipping. Here are some highlights. In Q1, we facilitated over 370,000 transactions, representing a 25% increase from Q1 of last year. We added 4 new carriers to our platform this quarter, bringing the total number of carriers selling digitally on our platform to 71. Following quarter end, we launched a comprehensive Freightos enterprise Software-as-a-Service solution for enterprise importers and exporters. This Freightos enterprise product integrates our acquisition of Shipsta from last August into our software suite creating new sales and cross-sell opportunities. Let's talk about market conditions. In air cargo, where Freightos has its strongest presence, global volumes were up 8% year-over-year, reflecting healthy underlying market conditions. Rates as measured by our FAX index were 6% lower compared to last year which was when the Red Sea crisis began pushing ocean cargo to air. Having said that, some of the strength in air cargo may have been short-term, front-loading ahead of expected tariffs. In Ocean, China's U.S. ocean volumes dropped significantly in the market during the few weeks when a 145% tariff applied on that lane. Our Bellwether FPX-01 index, which has been elevated for 1.5 years since the Red Sea crisis started, approximately halved in March, almost down to $2,000 for shipping a 40' container transpacific. It's the first time in a while that we're seeing the rates more similar to the long-term average. With that data as backdrop, let me address current effects, namely tariffs and trade policy developments. Strategically, we firmly believe that trade policy shifts won't fundamentally alter global trade or materially impact our opportunity to digitalize global freight. Supply chains simply don't reorganize overnight. These changes take years, and trade will continue to flow, albeit sometimes through different routes. In the short term, the impact of rapidly changing tariffs on our business is mixed. On the positive side, market volatility and rapid changes actually increase the need for our marketplace and for our real-time data. However, we did see some headwinds when specific trade lanes were affected by high tariffs. For example, when China-U.S. tariffs peaked at 145%, we experienced a dip in China to U.S. transactions on our Freightos.com platform and our clearance, customs clearance. Though I should note that this particular trade lane of China to U.S. represents less than 2% of our total transactions. The good news is that in the last 2 weeks, we're seeing a possible stabilization in trade relations. The recent U.S.-China agreement has postponed the most significant tariffs for at least 90 days, with China reducing the tariffs to 10% and the U.S. reducing theirs to 30%. Initial market reaction has been positive and ocean freight volumes and rates are expected to hold up and normalize in coming months unless massive tariffs return later on. Besides general tariffs, one notable change, which seems likely to stick is the cancellation of the U.S. de minimis customs exemption for small imports. This exemption primarily benefited direct-to-consumer e-commerce vendors, such as Shein and Temu, who are sending millions of small packages direct to consumers, mostly on charter airplanes. As such, it has no material impact on our business. In fact, we expect some capacity to re-enter the general air cargo stock market in Asia and become available on our platform, so this particular change may actually be positive for us. Overall, there's growing optimism, albeit no certainty that we're on a path to more stable trade conditions. Looking ahead, we're well positioned to be a valuable resource for the industry during these dynamic times. With shifting trade patterns and the Suez Canal still largely out of commission, our platform becomes even more valuable when market conditions require rapid adaptation and real-time price visibility. With all of these factors in mind, we're pleased to reiterate our guidance for the year. Of course, we'll continue to monitor the evolving market conditions. The fundamental shift towards digital freight booking remains strong and our relatively small share of global volumes today. In fact, that relatively small share of digital transactions gives us tremendous headway for the growth of digitalization. Having addressed current affairs, let me now walk you through our progress across our key strategic areas. As a reminder, we organized our business around two revenue segments, platform and solutions. A third strategic focus area is network effects, which drive our sustainable competitive advantage and capital-efficient growth. Let's start with our platform, which connects importers, exporters, freight forwarders, and carriers to our marketplace. Our transaction volume growth was strong in Q1, and the onboarding of 4 new carriers during the quarter further validates our platform's value proposition. Our airline network already represents carriers responsible for 70% of global capacity, although not all of the carriers make all their capacity available yet. Our growth strategy focuses on expanding our platform across multiple dimensions: adding new types of transactions, enriching existing types with additional services, creating new buyer-seller combinations, and leveraging our growing data assets. A great example of this strategy in action is an agreement we recently signed with a major North American ground transportation provider. This partnership will enable freight forwarders to book trucking services relevant to air cargo directly through our platform, spanning door-to-door, last mile airport-to-door, first mile door-to-airport, and airport-to-airport services. When integrated with our air cargo bookings, this creates a seamless connection between air and ground transportation, making it significantly easier for freight forwarders or carriers to manage multimodal shipments through a single interface. We expect to announce more details about this partnership soon. This type of expansion reinforces our flywheel effect. As we add more value to each transaction, we attract more participants to the platform, which in turn increases liquidity and creates opportunities for new services. Moving to our Solutions segment, Q1 saw several notable enterprise customer wins; for example, a global industrial conglomerate renewed their license for Freightos terminal data at favorable terms that reflect the growing value they derive from our platform. We also signed a new 5-year contract with a major European building materials manufacturer for our procurement solution, enabling them to streamline freight sourcing processes and optimize carrier selection. We continue to see progress in upselling existing customers across our growing suite of enterprise tools. For example, in Q2 a top 5 global pharmaceutical company that leverages Freightos enterprise procurement and benchmarking solutions renewed and expanded their contract. Our data solutions achieved 100% customer retention in Q1, demonstrating the critical value our market intelligence provides to customers during a period of significant market volatility and uncertainty. We also see a growing market interest in index linking, which should increase opportunities for our data and related products. This momentum in our enterprise and data businesses sets the stage for our comprehensive Freightos Enterprise Suite launch, which occurred shortly after quarter end. This new offering is designed to serve the complex needs of multinational shippers, bringing together our digital freight booking capabilities, rate management tools, and business intelligence, all in one unified platform. Enterprise shippers can now seamlessly manage their entire freight procurement and execution process in one product suite. Early feedback from pilot customers has been encouraging as they experience significant efficiency gains from having their entire workflow digitalized in one place. The Freightos Enterprise Suite also creates natural synergies with our platform business as these multinational shippers often work with multiple logistics service providers already active on our marketplaces. Moving to network effects, we continue to see strong cohort performance from both buyers and sellers on our platform. Looking at biodynamics, unique buyer users grew 10% year-over-year to 19,700, demonstrating the continued appeal of our platform. In addition, transactions per user grew approximately 8% compared to the previous quarter. Our cohort data further reinforces this trend. Once freight forwarders stopped using our platform, their booking volumes consistently grow over time with mature cohorts, reaching over 500% of their initial transaction volumes. Similarly, on the carrier side, we're seeing strong adoption patterns with cohorts of carriers steadily increasing their activity on the platform. Our carrier network expanded to 71 carriers this quarter, including new specialized cargo operators that enhance our coverage. This virtuous cycle of growing engagement from both buyers and sellers continues to strengthen our competitive position and drive sustainable growth. To sum up, although Q1 is typically the seasonally weakest quarter, Q1 2025 demonstrated the continued strength of our business model and the resilience of our digital transformation in global freight. We delivered record revenue, record transactions, expanded our carrier network, and broadened our product offering with the launch of Freightos' Enterprise Suite just after the quarter. While macro uncertainties around tariffs and trade policies may affect global trade volumes, the vast majority of international freight services are still booked offline, representing a huge growth opportunity for our digital platform.

Pablo Pinillos, CFO

Thank you, Zvi. In the first quarter as CFO, I've had the opportunity to deep dive into our business model and operations and I have been particularly impressed by the robust unit economics, the effectiveness of our go-to-market strategy, and the vast market potential of our platform. As digitalization becomes increasingly critical for efficient global trade, these strengths position us well for continued growth. I'm pleased to report that we met or exceeded our guidance across key metrics this quarter, and we are well positioned to continue executing on our plans for the rest of 2025. We generated revenue of $6.9 million, representing 30% growth year-on-year. This growth was driven by platform revenue of $2.3 million, up 23% year-on-year, and solutions revenue of $4.6 million, up 33% year-on-year. We saw strong contributions from enterprise procurement solutions added through the acquisition of Shipsta, SaaS solutions, and customer clearance services. Our gross margin continued to improve, reaching 66.8% this quarter on an IFRS basis, up from 62.6% in Q1 last year. While our non-IFRS gross margin increases to 73.7% from 70.3% a year ago, demonstrating the scalability of our platform. Since I joined, I've made it a priority to continue the disciplined cost management the company had displayed, all while investing in strategic growth initiatives. As a result, adjusted EBITDA improved to negative $3.0 million from negative $3.6 million in Q1 last year, reflecting our revenue growth, gross margin expansion, and continued operational efficiency gains as we scale. We remain on track to achieve breakeven adjusted EBITDA by the end of 2026. We ended the quarter with $36.4 million in cash and cash equivalents, maintaining a strong balance sheet as we progress towards our profitability goals. Looking ahead for the second quarter of 2025, we expect 380,000 to 385,000 transactions, representing growth of 20% to 22% year-on-year and GBV of $278 million to $285 million, up 37% to 40% year-on-year. Revenue is expected to reach $7.0 million to $7.1 million, representing growth of 23% to 25% year-on-year and adjusted EBITDA is expected to be a loss of $2.8 million to $2.9 million. For the full year 2025, we are reiterating our previous guidance. While we recognize the evolving macro environment, including present trade policy changes, potential freight rate volatility, and broader economic uncertainties, the resilience of our business model and our strong balance sheet position us well to navigate these dynamics while continuing to invest in growth opportunities. The fact that the vast majority of international freight is still being booked offline represents significant growth opportunities for our digital solutions, regardless of short-term trade policy fluctuations. With that, we will open the call to questions.

Operator, Operator

Okay. Thank you, Pablo. The first question will come from the line of Jason Helfstein.

Jason Helfstein, Analyst

Great. It’s clear that you're successfully managing the business over the last few quarters, especially regarding revenue amidst the volatility. You've pointed out that the China to U.S. segment is a relatively minor part of your business, so there's minimal exposure. While one could argue that you could compensate in other areas, could you elaborate on what factors investors should be aware of that might impact your ability to achieve your targets for the year? I have a follow-up after that.

Zvi Schreiber, CEO

This is Zvi. Let's break down our two revenue segments: Platform and Solutions. The Platform segment is, in the short term, affected by trade fluctuations. If trade decreases in a specific area, we see fewer transactions there, although we might gain transactions in another area. While we have significant growth potential in the long run, short-term changes in the market can pose challenges. For instance, we did experience a decline when high tariffs were introduced, which impacted us even though it was a minor part of our transactions. The Platform's performance is closely tied to trade volume. There is still considerable growth potential, but lower volumes can hinder progress. Conversely, during times of reduced overall trade volume, when customers search for alternatives, that can benefit our marketplace. Therefore, even in a downturn, we may gain more transactions from customers looking to adapt. The Solutions segment is also sensitive to broader economic conditions. If a severe trade conflict arises, which we hope to avoid, it could create uncertainty. In such scenarios, enterprises may be hesitant to commit to large expenditures, which could negatively impact our Solutions revenue. We experienced this to some extent in Q1, but the situation improved when reciprocal tariffs were reduced, particularly between the U.S. and China. During periods of heightened uncertainty, enterprise customers tend to be cautious, affecting our ability to secure significant deals. Any economic uncertainty or downturn presents challenges for us, although it does not diminish our overall growth opportunities, it does complicate our ability to achieve revenue targets in Solutions.

Jason Helfstein, Analyst

And then just maybe longer term, obviously, you have many companies thinking about diversifying their supply chain, not slowing down China, but obviously diversifying. Maybe just given the flexibility of what you offer, just talk about how that could be a tailwind for you?

Zvi Schreiber, CEO

Yes, I believe it is. I've mentioned this before; I dislike capitalizing on disruptions, but we do. Recently, we've experienced significant shifts in trade over the past three months, and the Suez Canal is still largely closed to most shipping. While there was speculation about an announcement from President Trump regarding a deal that might lead to its reopening, companies are currently reconsidering their logistics. Just a week ago, many were looking to shift operations from China to Vietnam, and now they might be contemplating moving from Vietnam back to China—it's uncertain. Overall, as a marketplace and platform, we benefit from the volatility created by these changes. We offer valuable tools for the industry, including data and alternatives. The global landscape doesn't seem poised to return to stability anytime soon, with ongoing conflicts, trade disputes, weather issues, and labor strikes continually disrupting the situation. In that sense, we do gain an advantage because we provide essential tools to navigate these challenges.

Operator, Operator

Okay. The next question will come from George Sutton.

George Sutton, Analyst

I’m interested in the opportunity with Temu and Shein. How soon do you anticipate that supply could be available again on your platform? It seems that was previously being handled directly.

Zvi Schreiber, CEO

Yes, that's a great question, George. Shein and Temu primarily used direct shipping and charter planes, rarely utilizing our platform for specific cargo needs like 5 cubic meters or 300 kilograms. Instead, they would charter entire planes and fill them with just a few small packages until a couple of weeks ago when the de minimis exemption was removed. Honestly, I anticipated a quick change, but as I noted in my remarks, the air cargo rates from Asia to the U.S., according to our FAX index, have not significantly decreased in the past few weeks. This would normally be an early sign, even before we analyzed the bookings on our platform, as the pricing would indicate shifts in market behavior. I’m trying to determine what has happened to these charter planes. I expected that they would be repurposed for standard air cargo, which should increase capacity, lower rates, and boost our volumes. However, I haven't observed that development yet. It’s only been two weeks, so it’s still early. We're keeping a close watch and continuing discussions with our network to understand the situation with those charter planes.

George Sutton, Analyst

Got you. Could you walk through the revenue dynamic behind the new partnership? What will that do for you differently than your normal platform?

Zvi Schreiber, CEO

Sorry, which new partnership?

Operator, Operator

Trucking.

George Sutton, Analyst

You mentioned a new massive end-to-end partnership in the U.S.?

Zvi Schreiber, CEO

The trucking partnership will take some time to show its effects. It won't have an immediate impact, but it will gradually start influencing our operations over several months. We're excited about this as we aim to provide our freight forwarders, and eventually importers and exporters, with a comprehensive service that includes door-to-door logistics across all transport modes. Currently, our main platform is WebCargo by Freightos, which focuses on air cargo. For example, customers often book routes like Heathrow to JFK, but they then have to figure out the last mile logistics off our platform. Similarly, for domestic U.S. bookings, like from Boston to LAX, users might evaluate air rates on our site but might prefer trucking if time isn't a constraint. With this new partnership, they will have access to trucking services for both last mile and middle mile logistics, as well as hub-to-hub transportation options. Over time, this should help attract more customers, increase wallet share, enhance customer retention, and provide a competitive edge. This initiative aligns with our broader strategy to be a one-stop shop for all transaction types and stages.

George Sutton, Analyst

Okay. That's it for me, a belated welcome to Pablo.

Operator, Operator

Thanks. I'll read a couple of questions from the chat. So the first one is, why does the guidance range imply potential acceleration in transaction growth for the remainder of the year, while the GBV outlook appears more conservative? The second question is do you expect further M&A in 2025? Are there gaps in the platform you're looking to fill via acquisitions?

Zvi Schreiber, CEO

Okay. So regarding the first question, thanks for the questions. The first question, we're being more cautious on GBV because we don't know what's going to happen to prices. And there are reasons to think that the prices in the market could drop. It doesn't affect our revenue too much because a lot of our transactional revenue is sort of flat fee. So it doesn't affect our revenue too much. But we do think that although our transactions will continue to grow, we think in ocean, there could be a price drop, especially if the Red Sea reopens. I think there's another question coming on that. That would significantly drop prices. But also, if there's a slight slowdown because of tariffs, and also because, as we mentioned before on the air side, with the de minimis, we haven't seen it yet, but that could reduce air rates. So we're just being cautious with our outlook to GBV because it's completely out of our control; the rates for ocean and airfreight could drop. Second question, do we expect further M&A? Probably not. You never know if some of the right opportunity comes up, but we've committed to preserve our cash to get to breakeven by the end of next year with the cash that we have. The Shipsta acquisition, luckily, wasn't too expensive, and it's producing revenue and it's strategically important. So we did that one anyway. But now we're probably going to be cautious. So unless there's a very good opportunity, which isn't expensive or which we can finance, we're probably going to focus on organic growth and just for the sake of being cautious with our cash balance.

Operator, Operator

Right. Zvi, you mentioned that there's a question on the Red Sea. I think you answered it in the previous question, but maybe it's worth sort of clarifying the point.

Zvi Schreiber, CEO

Yes, I want to clarify that the Red Sea is not reopened. What you're referring to is President Trump's announcement of a deal with the Houthi Rebels, which suggested they wouldn't attack American ships. However, American ships transporting containers are nearly non-existent, so I am not aware of any carriers that have resumed using the Red Sea or the Suez route. Therefore, in practice, it hasn't reopened. Ships that were taking the longer route around Africa continue to do so. If the Red Sea does reopen, it could lower rates, but it won't impact us too much—just a little. Ocean rates could drop significantly if that supply returns. We anticipated ocean rates to decline considerably during the slowdown in China-U.S. trade due to temporary tariffs, but that didn't happen as expected, mainly because the ocean liners have become proficient at reducing capacity by blanking sailings. Thus, even if the Red Sea reopens, there could be a significant drop in rates, but it's also possible carriers may reduce supply deliberately to support the rates.

Operator, Operator

Okay. Last question, I believe, probably for Pablo. Why do we see a mismatch between GBV and revenue growth? Can we expect revenue to improve as a percentage of GBV?

Pablo Pinillos, CFO

Sure. So as Zvi mentioned before, a large portion of our transactional bookings is based on a flat fee. And our transactional booking mix between flat fee and not flat fee; we try to evolve it over time. But that's the main reason why that mismatch is happening right now. As we evolve and scale, we will try to correct and continue to grow that.

Zvi Schreiber, CEO

To clarify, only the platform revenue is tied to GBV. The overall revenue, specifically the solutions revenue, has only an indirect connection to GBV, while the platform revenue is directly related. However, as Pablo noted, this revenue is often based on a flat fee, which is more linked to the volume of transactions.

Pablo Pinillos, CFO

Okay. And we actually do have another question. What constitutes the economic moat for Freighters? Can other competitors intermediate freight with the digital platform sort of jump into the same business model? And is there any player in the market that can make a similar platform like Freightos?

Zvi Schreiber, CEO

Yes, the greatest advantage for a platform or marketplace comes from the network effect. That's why I highlight this in my remarks every quarter. I always mention that when you want to purchase a secondhand dishwasher on eBay, it's not the technology that draws you there; it's the presence of sellers. Similarly, if you wish to sell your secondhand toaster, you choose eBay because that’s where the buyers are. Our network, consisting of both buyers and sellers, serves as our advantage. This is why every quarter we report not only on the number of transactions but also on the number of sellers and buyers, which allows you to track how we are strengthening our position. Can others replicate this? We do face some competition, particularly in air bookings, which account for our largest volume. There are a few smaller players competing with us, but we remain significantly ahead due to our competitive edge. We benefit from network effects and operate in both air and ocean freight, collaborating with freight forwarders, importers, and exporters. This is crucial; it’s not just about having more buyers and sellers but also about expanding services. The recent addition of trucking services complements our air and ocean offerings, which enhances our advantage by attracting buyers who seek comprehensive transportation solutions. The breadth of our platform and the extensive network of buyers and sellers create a robust competitive edge. Many marketplaces endure for decades due to this. For instance, look at the New York Stock Exchange or the London Stock Exchange; they are very defensible businesses. Although new exchanges can be created, they often lack the necessary liquidity. I believe this advantageous position is promising, and it should help us maintain our leadership in the market for many years ahead.

Operator, Operator

Okay. So we have no more questions. We wish everyone a good day, and thank you.

Zvi Schreiber, CEO

Thanks, everyone. Thanks, Anat.

Pablo Pinillos, CFO

Thank you, everyone. Thanks, Anat.