Freightos Limited Ordinary shares (NASDAQ:CRGO) Q4 2023 Earnings Call Transcript

Freightos Limited Ordinary shares (NASDAQ:CRGO) Q4 2023 Earnings Call Transcript February 26, 2024

Freightos Limited Ordinary shares beats earnings expectations. Reported EPS is $-0.06, expectations were $-0.17. CRGO isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, everyone. Welcome to Freightos Q4 and Full-Year 2023 Earnings Conference Call. A press release with detailed financial results for Q4 ‘23 was released earlier today and is available on the Investor Relations section of our website freightos.com. My name is [Anati Ron-Halborn] (ph) and I’m joined today by Zvi Schreiber, the CEO of Freitas and Ran Shalev, 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 instead of dialing in by phone. The slides, as well as recordings of this earning call will also 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 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. 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. Questions can be submitted in writing during the call using the Q&A feature in Zoom.

Please note that in May, management will participate in three investor events; the Virtual Investor Summit by the Investor Summit Group; the Wolfe Research Global Transportation Conference, and the Oppenheimer Annual Israeli Conference. Participation in investor conferences and events may be updated from time-to-time, and upcoming events are listed on Freightos investor website. Today’s earnings call will begin with an overview of Q4 and the full-year performance by Zvi, who will also discuss Freightos long-term strategy and the 2024 plan. He will then provide insights into the current freight market trends using Freightos terminal data, including the impact of the Red Sea crisis. Next, Ron will present the financial results, offer guidance for Q1 and the full-year of 2024, and will share our long-term financial targets.

We will conclude with Q&A. Zvi, please go ahead.

Zvi Schreiber: Thanks a lot and thanks to everyone who joined. 2023 was a year of significant achievement for Freightos. It was our first year as a publicly traded company and we take pride in having been able to raise money during a challenging year for tech investment and for the freight industry. We believe this underscores our investors’ faith in our mission to digitalize international freight, bringing efficiency and transparency to one of the world’s most crucial economic infrastructures. Now, the growth of any platform centers around growing transaction volumes. Q4 was the 16th consecutive quarter of record transactions with 287,000 transactions, up 53% year-on-year. Transaction growth throughout the fiscal year has been remarkable with over a million transactions processed on our platforms during 2023.

This consistent and strong growth, even in a tough market, highlights our resilience and the benefits that our users, freight buyers and sellers alike, gained from the marketplace we have built for them. In addition to this resilience, in 2023 we demonstrated sound financial management. Having raised approximately $65 million net of expenses last January, we ended the year with about $52 million in the bank, which positions us to continue to execute our growth plans and reach profitability using available funds, while continuing to carefully control spend. Ran will speak more about our growth plans and expense controls. While the transaction growth is strong and consistent, we’re only scratching the surface of the vast market potential that is available to us.

And I will discuss the overall market potential in more detail a bit later. In the fourth quarter, we again successfully increased the number of both buyers and sellers on our platform. The number of buyers saw a year-over-year increase of 12% reaching approximately 17,600 unique buyer users. This growth not only demonstrates our platform’s expanding appeal, but also strengthens our marketplace’s liquidity and diversity. We’re adding new freight forwarding companies as buyers literally on a daily basis. As we’ve shared in the past, this chart is used to track cohorts of freight forwarders and we consistently see that once a cohort of freight forwarders starts booking on our platform in a given month, their buying volumes continue to grow. So these buyers have limitless lifetime value.

The data for the two years old cohort of the three months of Q4 2021 can be seen on the right hand chart. And we can see that the trend is persistent with monthly bookings by this cohort, up 4 times, 6 times since the first quarter as buyers. Now let’s talk about sellers. It was a strong quarter with unique carrier sellers increasing from 39 in Q3 to 45 in Q4. One of the newest sellers on WebCargo by Freightos is Japan Airlines, for example, which launched as recently as December and this airline was very quick to ramp up its selling through the system. We have a strong pipeline of carriers too. Several additional airlines have signed up during the fourth quarter to start selling early this year. In fact, some new airlines should be live during this first quarter.

Expected new airline sellers include two top 20 carriers. This chart on the right side is now tracking cohorts of carriers as sellers. It shows how carriers reap growing benefits from being part of our platform, with their initial booking and volumes quickly growing by 1,000s of percentage points, sometimes within a few months. These are all signs of a very healthy marketplace, numbers of buyers and sellers growing, while existing buyers and sellers also strongly grow their volumes. That was our platform segment. Complementing our platform is our solutions business, which includes SaaS and data subscriptions for freight forwarders, importers, exporters, and carriers. Q4 was a solid quarter for the solutions business, including our largest SaaS deal ever.

Providing solutions is part of our strategy of being a partner to forwarders and airlines in their digitalization needs. And our solutions actually help our customers to be more automated and to leverage our platforms more. So the platform and solution segments are definitely synergetic. On top of growing our marketplace’s liquidity by adding sellers and buyers, we’re actively pursuing additional growth avenues. I would highlight four ways in which we’re expanding, beyond just adding more buyers and sellers. Firstly, we’re continuously introducing more types of transactions, extending beyond the core offering. In 2023, for example, we launched the ability to book ULDs, which are air cargo containers, similar to booking a whole shipping container for Ocean.

And just recently in 2024, we introduced the ability to get an estimate for the trucking costs from a U.S. airport to the final destination. We expect that in the near future, we will integrate the actual booking of such tracking services into the platform alongside the airline bookings. Secondly, the transactions booked through our platforms are evolving to include more services. We have already integrated payment systems, insurance and customs brokerage right into our platforms. And in 2023 we started to offer customs brokerage capabilities for freight forwarders to co-brand and embed in their own systems. In 2024, we hope to expand this trend as we explore offering more third-party services within our platform and roll out payments for more countries.

We expect the impacts of these additional aspects of each transaction to gradually increase the gross booking value and improve our take rate. Thirdly, we’re creating more opportunities for buyer and seller interactions. To this end in 2023, we introduced interlining, where one airline purchases cargo services from another airline, similarly to co-chairing and passenger air travel. We’ve seen a great deal of interest from carriers and, while it’s still early days, we’ve already started to see transactions of this type of scale. It’s exciting to see the very same airlines, who joined us as sellers now becoming buyers as well. This year we plan to introduce a new version of our white label sales portal for freight forwarders and we already engaged in a number of such pilots.

And we’re not stopping there, our platform generates a wealth of data and we’re making that data work smarter. In mid-2023 we launched Freightos Terminal with market intelligence for global air and ocean freight presented in a beautiful and insightful way. The current Red Sea crisis, regrettable as it is, has actually sparked a spike in interest and attracted new subscribers to our data services, including companies as diverse as a multinational technology conglomerate, an American furniture retail company, and a leading construction equipment company. Our upcoming initiatives to increase utilization of our data are targeted at improving the monetization of these data assets and increasing customer retention. We’ll see examples of the freighters terminal when I talk about the freight industry soon.

Another important initiative for our platforms is merging the software stacks we built and the ones we acquired in a project which is internally known as One Stack. In 2023 we made significant strides in consolidating our technology platforms moving towards a unified system that seamlessly connects international freight service buyers and sellers. The One Stack initiative is set to revolutionize the industry by providing a single platform that encompasses all facets of international freight: carriers, freight forwarders, and shippers, that is importers and exporters, and which spans all modes in one platform. This integration will eliminate complexities and pave the way for a more connected and transparent global freight ecosystem. Our investors are focused on our long-term potential and so I’d like to take this opportunity to provide some more detail about the total market available to Freightos.

Later, Ran will talk about the target growth rates as we move to capture these huge opportunities. Let’s start with WebCargo, which is the part of our platform that connects freight forwarders to carriers, analogous to Amadeus and Sabre in passenger travel. In air cargo, the market size, which also represents our potential gross booking value or GBV was estimated at $134 billion last year. It will take many years to capture this huge market, but we are already a clear market leader and we do have strong growth momentum as we saw earlier. The carrier market for Ocean is even bigger at an estimated $250 billion, but digitalization here is really in its infancy. Finally the market for multimodal services, air, ocean, and first and lost mile brought together freight forwarders and sold to the end customers, the importers and exporters, has a market size of $208 billion at current prices.

We have a tiny fraction of this market, but we are recognized leaders in digitalization, and here we already enjoy a healthy take-weight, in some cases a size 10%. These market sizes, totaling about $600 billion, represent the potential GBV gross booking value for our freighters platform. And that’s just in our core markets of air and ocean freight. Now admittedly, some of these markets are tied up in long-term contracts, but data suggests that 30% to 50% of the international freight markets are transactional in their nature and have potential for platformification, provided, of course, that the platforms that is ours Freightos, add value to the transactions. And as we add more value, we can earn a higher take rate as well from buyers and sellers who benefit from greater liquidity and all the value added services we talked about before.

The assumptions I’ve just shared imply that the total addressable market for our platform business, which over time will be the dominant segment of our business, is of the order of magnitude of $10 billion, and that’s very high margin, reoccurring transactional revenue. Ran will talk later about the growth rates we can expect as we move to capture these huge markets. Now let me switch to discussing freight market conditions. As we’ve discussed in previous quarters, 2023 saw a significant downturn in the freight industry, and while the crisis in the Red Sea has affected the entire industry, reducing capacity and increasing rates temporarily, it has not changed the industry’s cyclical fundamentals. Let’s take a look at ocean and air volumes. The chart of ocean volumes on the left shows typical seasonal patterns with elevated volumes in the summer and through October ahead of the holiday season.

Total quarterly volumes in Q4 were 7% higher than Q4 of 2022. Total global volumes in 2023 were essentially flat on 2022 levels. On the right side, IATA data for global air cargo volumes shows that the global demand continued its gradual recovery in Q4, up 7% from Q4 of 2022. For the year 2023, global volumes were 2% lower than in 2022 and 3.6% lower than 2019 pre-COVID totals. Now let’s look at air and ocean freight price levels using our own freight host terminal. As you probably know, in general rates in 2023 dropped sharply. Ocean container shipping rates dipped to a near-record low for our FBX index in October, as overcapacity pushed rates down. But stricter capacity management by ocean carriers and the start of the Red Sea diversions pushed rates up 14% at the end of the year, when compared to the end of Q3.

The Red Sea crisis also pushed rates up more than 150% in the first six weeks of 2024. Prices are expected to remain above typical levels until Suez Canal traffic resumes fully. As even more new shipping capacity continues to enter the market in 2024, there will be continued downward pressure on prices. On the air cargo side, as tracked by our Freightos air index, rates increased 16% by early December as air cargo entered its typical peak season, which is closer to the holidays. Rates close the year however 21% lower than at the close of 2022. Air cargo rates are also depressed by increasing capacity, in this case due to more aircraft being deployed to serve increased passenger travel, creating cargo capacity as a by-product. In summary, the unfortunate Red Sea crisis is creating a spike in rates, especially ocean, for as long as it lasts, but otherwise both air and ocean freight are subject to significant downward price pressure due to increased capacity.

In closing, I want to extend my gratitude to our dedicated team, whose hard work and commitment to our mission have been the cornerstone of our success in 2023. To our shareholders, your support and belief in our vision and long-term potential fuel our drive to innovate and lead in this transformative journey. Let me now hand over to our CFO, Ran, to discuss our Q4 results, guidance for the first quarter and the current year, and long-term growth goals. Ran?

Ran Shalev: Thanks, Zvi. I’m pleased to share our fourth quarter and full-year results, which surpasses our expectations in transactions, GBB and adjusted EBITDA, and reach the upper end of our revenue forecast. As we conclude our first year as a public company, we are striking a healthy balance between growth and a clear path to profitability. Revenue for Q4 of 2023 was $5.3 million, up 8%, compared to Q4 of ‘22, and total revenues for full-year 2023 was $20.3 million, up 6% compared to the previous year. Total platform revenues in the fourth quarter was $1.9 million, up 1% compared to the fourth quarter of ‘22, as the gains in volumes were offset by drop in prices. Solution revenue were $3.4 million, up 13% from Q4 last year.

Solution revenue growth reflects solid growth in revenues generated by software solutions for freight forwarders and strong uptake of our data solution Freighters Terminal, which Zvi mentioned. We also closed our largest SaaS contract ever, although that revenue is not yet recognized. Looking at our full-year, the picture is more balanced, with platform revenues and solution revenues both increasing 6% from 2022. Profitability measures continues to improve with IFRS gross margins at 62.2%, up from 59.2% in Q4 of ’22 and non-IFRS gross margin reached 70% for the quarter, up from 65.8% in Q4 of 2022. For the full-year, non-IFRS gross margins was 67.4%, up from 65.2% in 2022. As we mentioned in our last call, the improved efficiency that supports our gross margin expansion should continue as we scale, and we therefore anticipate non-IFRS gross margins will remain at approximately 70% going forward.

Adjusted EBITDA in Q4 ‘23 was negative $3.8 million, marking a sequential improvement from the $4.1 million loss in Q3 and continuing the progress seen from Q2 to Q3. We remain committed to balancing growth with expense control and are confident in reaching breakeven with our current cash reserves. Our cash balance at the end of the year, which includes bank deposits and short-term investment was $51.7 million, down only $3.5 million from the end of September. Let’s move on to our Q1 full-year 2024 guidance. In Q1, we expect a mid-20% growth in transactions, reaching between 280,500 and 288,000. We expect transaction growth to accelerate throughout the year, and our full-year expectations reflect at the midpoint of 30% year-on-year increase.

GBV growth is expected to continue to lack transaction growth due to continued low prices in the market. Our assumption for ‘24 is that current freight rates will prevail throughout the year. GBV growth in the first-half of this year will appear muted year-on-year due to higher freight rates in the first-half of 2023. We anticipate generating between $5.2 million and $5.3 million in revenues in Q1 and between $22.4 million and $24 million in the full-year. Year-on-year growth in the first quarter is expected to be lower than the rest of the year, for the reason I just mentioned. In Q1 ‘23, freight prices were much higher than they are currently. Adjusted EBITDA losses are expected to be between $4.2 million and $3.9 million in Q1, a slight increase from Q4 of last year due to seasonal expenses, mainly modest annual raises, and between $15.3 million and $13.8 million for the full-year.

These near-term targets are essential step towards the growth and profitability we aim for in the coming years, positioning us to succeed and capturing the massive opportunity that is ahead of us. Let me now share with you these longer term targets for 2025 to 2030. Growth of a platform starts with liquidity. We aim to grow transactions by 20% to 30% annually by adding buyers, adding sellers, creating new buyer-sellers combinations and adding new types of transactions and transaction features. Gross booking value will also grow 20% to 30% on average, but clearly in this long-term, there will be rate fluctuations that will affect GBV growth. In 2024, we expect revenue growth to still lag transaction growth as our revenue is still mostly from the slower growing solution revenues.

However, we expect that over the years, our fast growing platform revenues will become the dominant part of our revenue and we drive revenue growth to 25% to 30% year-on-year. Our non IFRS gross margins are already close to 70% and we expect those to continue to grow even higher, eventually approaching 80% in line with best-in-class mature software companies. With this top-line growth and higher margins and with our expenses under control, we expect to see adjusted EBITDA continuing to increase steadily. In fact, we think that adjusted EBITDA margins, that is the ratio of adjusted EBITDA over revenues, can grow by 8% to 12% point annually, bringing us to profitability by the end of 2026 and leading freighters to become a highly profitable company in the later years.

Thank you for your attention and support as we move forward with our strategy.

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Q&A Session

Operator: Thank you, Zvi and Ran. We’ll start with the Q&A session now. And the first question will comes from Jason Helfstein from Oppenheimer. Jason, you can now unmute your line.

Jason Helfstein: Thanks, two questions. First, about the first quarter, obviously you’re guarding for slower gross bookings gross, but you’re still [Indiscernible] but revenue will still be growing pretty consistent with what you saw in the fourth quarter. So maybe just talk about kind of, I think you alluded to the fact that, you know, you have some comps on the — some tough comps still on the gross booking side, but then you’re offsetting that with other factors such as take rate or solutions revenue growth. So maybe just unpack how you’re able to kind of turn kind of like more modest GBV growth into still like solidly revenue growth? And then second question on the slide, we talked about the four different areas you’re looking to kind of improve the product.

When could we start to see that like actually flow through like the financials? Is that like back after ‘24? Is that more ‘25? Just maybe elaborate a little more when some of those initiatives actually flow through the model? I guess, and then just one more, I think the EBITDA guidance is a little better than we expected on kind of more muted revenue. Are you purposely kind of doing anything to reduce expenses that might be impacting growth in ‘24 to get the EBITDA faster? Thank you.

Zvi Schreiber: Thanks, Jason. Okay, three interesting questions there. Let me do my best to address them and then Ran, if you want to add anything. Q1 revenue, you’re sort of asking that the growth in revenue is in some ways better than the growth in GBV. You’ve got to remember when you look at GBV that’s Q1 is really, you know, the prices are quite low compared to Q1, the prices in the market are quite low compared to Q1 of last year. Later this year that will be less of an impact, because by the second-half of 2023, the rates were low anyway, so if they’re low this year that will be like-for-like. But in Q1 you’re still seeing GBV depressed by the fact that when you compare to last year, the rates in the market are lower.

And then also, as you’ll appreciate, we’re still in a situation where most of our revenue is from solutions. We’re definitely projecting that will change over time and that platform will grow faster and eventually become a dominant business. But in the end, still the majority of our revenue is solutions and it’s growing, you know, unrelated to the — it’s not directly related to the transactional growth at all. Second of all, those areas of improvement, that’s a great question. I think we talked about new types of transactions like interlining, we talked about new services. I think, you know, the material effect, of course, there’ll be some small effect this year, because those are all things that have started to happen. But I think you won’t see any of those materially affecting this year’s results.

You know, interlining is a great example where we’ve got these new transactions, we’ve got transactions every day, it’s growing, but it’s still at this point a teeny fraction and it will take certainly a year, maybe even two years for it to really have a substantial impact, but it’s something which can be very, very significant for the long-term because it creates new combinations, it creates stickiness, it creates value for our customers. We think it’s really, really important for the long-term. But yes, don’t if — don’t affect — don’t expect any visible impact on this year’s results and even next year it will still be modest in my opinion. And then your third question was about 2024 guidance and you’re sort of saying we’re guiding a little bit better in EBITDA, little bit less in revenue.

Look…

Ran Shalev: Who wants to be I can answer that?

Zvi Schreiber: Okay, yes, well I was just going to say generically and then I’ll let you answer, Ran. But just say generically, yes, there’s always a trade-off between growing more aggressively, but burning more money and growing less aggressively. So it’s always a trade-off that we’re making a judgment call on and maybe Ran can discuss, you know, how we looked at that for this year.

Ran Shalev: So I think that we have — were able to reach to a good balance between growing our gross margins to around the 70% level, together with the fact that we were able to control our OpEx, mainly the part relating to being public expenses where we were able to lower them. So we’re not anticipating any slowdown with new product release that might impact the growth in the future. I think that all in all, we are controlling the OpEx, which eventually falls directly to the bottom line. And therefore, our adjusted EBIDTA is looking batter.

Jason Helfstein: But I guess the question is more like, are you doing it on purpose or it’s just the way the numbers are playing out?

Ran Shalev: No, no, no, that’s how the numbers are playing out, the savings that we have not relating to employees or any kind of savings relating to growth. It’s mainly around, you know, flat expenses relating to G&A and stuff like that.