Freightos Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 21, 2023

There are 6 speakers on the call.

Operator

Hello, all. Welcome to Freitas' Q2 2023 Earnings Conference Call. My name is Eitan Buchmann, and I'm the Chief Marketing Officer at Freitas. A press release with detailed financial results for Q2 2023 was released earlier today and is available at fredo.com/investors. Today, I'm joined by Betsy Schreiber, the CEO of Freetos and Ran Chelaib, Freetos' CFO.

Operator

Following the prepared remarks, we will open the call for questions. We are sharing slides during the call, so we recommend using Zoom instead of dialing in by phone. The slides as well as a recording of this earnings call will be available on the Investor Relations section of our website shortly after the call. Please note, we have recently launched a new investor website that also includes the opportunity for a period of complementary access to Freitas' data product, Freitas Terminal, which you will see later in this call. We encourage everyone to have a look at fretus.com/investors.

Operator

Moreover, please note that on September 7, our CEO, Zvi, will participate in the TD Cohen Global Transportation Conference in Boston and on September 12 in the H. C. Wainwright Global Investment Conference in New York City.

Speaker 1

Please be

Operator

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. 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.

Operator

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 atfredos.com/investors. The company undertakes no obligation to update any information discussed in this call at any time. As I mentioned, we recommend using Zoom's desktop or mobile application to submit questions during course of the call. If you're using the Zoom client, questions can be submitted in writing during the call by using the Q and A feature in Zoom. With that, let me please introduce Doctor.

Operator

Tzvi Schaeiber, the CEO of Fredos. Tzvi?

Speaker 2

Thank you, Eitan, and thanks to everyone who has joined. We are 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 1,000,000 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.

Speaker 2

These cohorts of users continue to demonstrate strong retention and growth. In fact, the cohort of users who first placed bookings on Freitas platforms in early 2021 are now doing well over 10 times more bookings per month. Liquidity growth also comes from the supply side. For example, during Q2, both China Eastern Air and Widero went live, while LATAM, Qatar, Avianca and Emirates expanded the range of air cargo services offered via Webcargo by Freitas. These ongoing expansions continue to grow platform transactions significantly.

Speaker 2

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 Freitas 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.

Speaker 2

We believe 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 optimise 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 codesharing in passenger travel. It's quite common in cargo, but shockingly inefficient.

Speaker 2

We recently announced the world's 1st digital cargo interlining booking on a 3rd party platform, with a test shipment on Web Cargo by Freitas by Qatar Airways Cargo on an ITA Airways flight. These are early days, but we're excited that using our interlining technology to combine cargo airlines in thousands of new implementations would unlock new unique supply for our thousands of freight forwarders globally, improve aircraft capacity utilization, broaden the global coverage available on Web Cargo and create all kinds of new business 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'll do that using data from our own Freightos Terminal product. 1st, 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.

Speaker 2

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 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.

Speaker 2

Despite sluggish demand, carriers were able to keep rates at about 20.19 levels, which are $1300 to $1400 per 44 container. Moving from ocean freight to air cargo, rates are being pushed down by the combination of lukewarm demand and increasing 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 diata data from June does show volume improved slightly relative to May, but still 3% lower than last year.

Speaker 2

Air Calgary rates have fallen. Our global Freitas Aerinex 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 prices, forty 4% lower than last August. However, unlike ocean, air cargo rates are still above pre pandemic levels.

Speaker 2

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 us significantly reduce 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 recovering slightly. Higher freight rates could positively impact our business in 2 ways.

Speaker 2

1st, 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. 2nd, 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 the 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%.

Speaker 2

Similarly, June data shows a 6.5% dip in North American export and cargo compared to last year, while Arie bookings grew a strong 70% year on year. This shows the 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 platforms, we come on a 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.

Speaker 2

The team and I are excited to continue to scale Freitas 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 Q2 results and Q3 guidance.

Speaker 3

Thanks, Zvi, and good to see everyone. I'm pleased to review our Q2 'twenty three quarterly results. Revenues for q2 'twenty three was $5,100,000 down 1.3% compared to q2 of 'twenty 2 or 2.6% on a constant currency basis. Our IFRS gross margins remained excellent at 57% 0.3% percent compared to 59.6 percent last year, with the non IFRS gross margin stable at 65%. Gross margins reflect the mix of our very high solution segment margins mixed with, somewhat lower margin in our platform business segment.

Speaker 3

Over the long run, we expect gross margins to increase as our transactional Platform business matures. Adjusted EBITDA in Q2 2023 was negative 5 point $3,000,000 compared to a negative $3,600,000 in Q2 of 'twenty two, primarily due to the cost of being a public company. Perhaps a more meaningful comparison is to Q1 'twenty three, our first quarter as a public company, efficiency plan announcement in July as well as our constant emphasis on efficiency. We believe we will grow transaction across our platforms to between 1,000,000 transaction a year. Structure, particularly in dollars.

Speaker 3

As industry rates remain low with 5% 13%, we are pleased to be able to achieve such growth rates on a lean cost structure, particularly in light of the broader market condition. Combined with our operational efficiency spend as well as our high and stable growth margins, we are anticipating adjusted EBITDA losses of $5,100,000 to $4,500,000 As industry rates remain low, we anticipate gross bookings value which are at $146,500,000,000 $156,500,000,000 Marketplaces thrive on liquidity, so transactions are the 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. The 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.

Speaker 3

In our solution business segment, revenue is typically recurring in high gross margins. Beyond revenue, we've also found that our software and data businesses strongly support acquisition and retention of our 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.

Speaker 3

Let me pass it back to Zvi for some remarks before we take some questions.

Speaker 2

Thanks, Ron. 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.

Speaker 2

I think Eitan may have dropped off, so I'm going to take some questions. Eitan, are you there? Okay. Good. So a question from Greg here, Greg Pendy.

Speaker 2

Hi, Greg. Can you help us understand how to think about the new carriers you're adding in 3Q versus guidance of transactions? How much, if any, will 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.

Speaker 2

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 a help us with a significant jump. So we can still grow.

Speaker 2

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 will be joining. Good. Any other questions? Okay.

Speaker 2

Hold on a sec.

Operator

Okay. Here we go.

Speaker 1

I see

Operator

there's a question from Jason. Jason, I'm going to unmute you right now. Your line should be open.

Speaker 1

Thanks. Good afternoon, guys. Good morning, everybody else. So, two questions. 1, the full year guidance implies an acceleration in transactions.

Speaker 1

Just maybe talk about the rest 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 Q1? And what could be the catalyst to accelerate growth in solutions revenue?

Speaker 1

By the way, Jason Helfstein from Oppenheimer. Thank

Speaker 2

you. 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.

Speaker 2

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're 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 markets down.

Speaker 2

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're still adding the 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. So does that answer your first question?

Speaker 1

Yes. I mean, it's really more about the Q4, just the guide implies that actually acceleration in the Q4 with the Q3 being the bottom, I think, if you look at number of transactions.

Speaker 2

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.

Speaker 2

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 your second question with solutions, yes, I mean, look, I think we're as you know, we're 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 has been quite good.

Speaker 2

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'd 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'll be able to grow solutions much more as the market goes into its next upturn.

Speaker 1

Thank you.

Operator

Okay. Our next question is from Brian Dobson of Chardan. Brian, your line is open. Hey, Brian.

Speaker 2

Brian, you're muted, I think.

Speaker 4

Thanks very much. So you had some positive commentary in your release regarding signs of life in global freight indices in the Q3 as you're heading to the peak period. Do you have any additional color on where relative strength is stemming from in terms of industry or geography?

Speaker 2

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 tonnes, they don't necessarily tell us what's in it, unless it's special handling.

Speaker 2

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 2 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.

Speaker 2

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.

Speaker 2

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 more downward pressure on price even if the volumes are holding up okay.

Speaker 4

Yeah, thanks. That's very helpful color. And last month, you rolled out digital interlining on Web Cargo. How's the early feedback been? Has that been positive?

Speaker 2

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.

Speaker 2

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 then literally, it's hard to believe they literally spend a day or 2 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. There's no airline who drove flies everywhere.

Speaker 2

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.

Speaker 2

We've got good momentum, great feedback, but it will take a good while till it really affects our bottom line.

Speaker 4

Excellent. Thanks very much for that call.

Speaker 2

Thanks, Brian.

Operator

Okay. Thank you, Brian. Our next caller is George Sutton from Craig Hallum. George, your line is open. George,

Speaker 2

you're still muted.

Speaker 5

Sorry about that. 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?

Speaker 2

Yes, sure. Just pull up my notes so I don't get it wrong. Yes. So we mentioned 2 new ones. 1 is China Eastern, which is one of the which is a substantial Asian carrier.

Speaker 2

Even so, we don't yet have the 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, but still the exposure will be gradually. Another one is Widero, 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 forwarder.

Speaker 2

So those are the 2 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 that Qatar and Emirates reminded those are the 2 biggest cargo airlines in the world.

Speaker 2

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 our network on web cargo by Freitas, which is always good to see.

Speaker 5

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're seeing relative to what the market overall is seeing, and I'm looking at sort of a competitive landscape comment from that.

Speaker 2

Okay. Well, if you're asking in terms of competition, from what we know, of course, our competitors are both our competitors for airline e 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.

Speaker 2

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 in 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.

Speaker 2

And as you know, when you're in 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, yeah, feeling good about that.

Speaker 5

Perfect. Thank you.

Speaker 2

Thanks, George.

Operator

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 fredo.com/investors. Thank you, everybody, for attending. That concludes this call.

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Freightos Q2 2023
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