$WTC held their AGM this morning – online only, to the chagrin of many shareholders. However, in fairness to the Board, it appears that all questions were aired and discussed without grouping or editorialising. Furthermore, the Board has committed to move back to a hybrid mode next year, in response to requests from shareholders. So, that’s a positive.

In this straw, I outline in some detail why I have exited $WTC (again!), and conclude with some reflection on tech valuations.

Update on The Investigation

There was a separate detailed release on the progress to date on the investigation. This involves an external legal firm as well as forensic accountancy services. 21 staff have been interviewed c. 30 interviews. Chair Richard Dammery has said there is no deadline for the conclusion of the review - it will take as long as it needs to take.

So far, there has been no evidence of any wrong-doing or breaches of company policies. It seems to me that RW has exercised judgement in being able to separate his personal life from his work life, and where relationships inextricably overlapped, he appears to have made appropriate disclosures before the fact. Importantly, there is no evidence of any misuse of company funds.

While there is further for the investigations to run, I believe that in due course this chapter will close with RW's professional reputation and standing in his new role intact.

RD spoke about the toll this whole fiasco has taken on RW, and played a recorded statement from RW where he expressed his regret for the impact the entire episode has had on everyone, including employees and shareholders. (He also appeared live later in the meeting to answer a question, restating his unchanged commitment to the company, and his intention to continue to be a major shareholder for the very long term, continuing his gradual sell-down policy.)

Guidance Downgrade

More significantly - and this is what has moved the SP today – there was a material downgrade to FY25 guidance.

• Revenue from $1,300-1,350m (25-30% growth) to $1,200-1,300m (15-25% growth)
• EBITDA from $660-700m (33-41% growth) to $600-660m (21-33% growth)
• EBITDA margin from 51-52% to 50-51%

The reason: Management distraction leading to a delay in the launch of Container Transport Optimisation, one of the three new products being launched this FY. The others being ComplianceWise and CargoWise Next.

The only other quantitative information I could discern was acting CEO Andrew referring to a further $50m (I think) of cost synergies from acquisitions, which will drive continuing EBITDA Margin improvements into FY26, probably towards 54% (my view). (I'd already expected them to get to 54% by FY27, and ultimately all the way to 60% in the long term in my central case!)

My Assessment

As I’ve written here before, the reason I sold in late August and early September after the FY Results, is that I considered the FY25 guidance to be aggressive and with the SP at $130 flying well past my upper valuation limit. I expect this to set-up $WTC for a miss or a downgrade in the FY25 results, or at the HY.

But that was before the "RW circus" erupted. Of course, when given the chance to buy back after the "circus came to town" at $106, I took that chance.

That FY guidance was downgraded today was, therefore, not a surprise to me. But what is a surprise was for management and the Board to lay the blame for this solely at the feet of "circus" distractions, leading to delays in the new product launch. And on further discussions in Q&A, to reveal the pivotal role RW plays in the key decisions around the launch.

That is thesis-challenging for me. I genuinely believed that RW had built a strong bench under him, and that with the amount of planning and investment that has gone into the development of the new products since the acquisition of Envase, Blume and Matchbox, my assumption was that his hand would not be mission-critical for getting the products launched. I was wrong.

Why am I attaching so much weight to this?

Well, we don’t yet know who the new CEO will be. The search will take some time. Evidently, this is an operation that still requires careful direction at the operational level from whoever is in charge. And what that means is that the Founder and Founder CEO will be intimately involved in important operational decisions going forward. Yet this will also be the domain of the new CEO. The organisation has clearly not yet matured to the level where the Executives below the CEO are driving key day-to-day decisions (I consider "Go-No-Go" on a product launch something you might expect to see within the authority of a COO in conjuction with the EVP Sales and Marketing/Customers.)

What is also a concern is to see how much of the guidance change is placed at the feet of the new products. All of it! At face value, taking the mid-points, we’re talking $75m of revenue and $50m of EBITDA, or, in other words over one-quarter of the originally planned growth for FY25 in what would have been less than full year contributions in any event, as new products were progressively rolled out to customers through the year (we know they hadn't started in August/September before the circus came to town).

Don’t get me wrong, $WTC’s updated growth is still impressive. But even with the FY25 guidance, my valuation range was $103 ($92 - $123). I haven’t gone back and looked at what would be reasonable with the new guidance, but its lower.

Now I realise that when you do valuations you can get whatever numbers you like. An increasing gap is opening up between several of the better analysts and me. So maybe my work is flawed. For example, going into today, GS have a 12m TP of $138. (My numbers are a valuation today, not a 12m TP, but even so, that puts GS 35% ahead of me, which is maybe OK given $WTC’s track record of returns over the last 5+ years.)

But given that the SP early today was at $125 (an 18% return in 4-5 weeks for me) and that:

1) it once again exceeds my upper limit on valuation;

2) my valuation will need to be adjusted down to take account of the guidance change – likely in the order of 3-5%;

3) based on what we’ve learned today, I believe that $WTC faces the risk of an ongoing reduction in organisation effectiveness, until a new CEO is established in their role; and

4) while the market seems to be looking past a lot of this today, this company remains very highly rated with a forward P/E of 107x.

I'd rather step aside for a while and see how things pan out, simply based on valuation and because I consider the ingredients remain in place for further operational mis-steps that the valuation cannot bear.

That said, I’m pretty confident $WTC will hit the new guidance. Andrew is the numbers guy, and he’ll understand the importance of NOT missing his first guidance. Importantly, with $WTC’s excellent visibility to the recurring revenues, and now clarity on new product role-outs and a diminishing opportunity for them to contribute to the full year, there is also the small matter that the all important EBITDA guidance range has ACTUALLY WIDENED, despite being 3 months further down the track from when it was first set.

And maybe, just maybe, the original FY25 Guidance was a bit of an over-reach (that was my original hypothesis, after all) and the "circus" provides a nice little smokescreen. After all, it's not the first time $WTC has been overly aggressive on initial FY Guidance!

A Reflection on Tech Valuations

Among many of the topics of conversation around the table at last night's excellent Brisbane Strawman gathering organised by @CanadianAussie, valuations of some techs were discussed, including $XRO, $PME, $WTC and $TNE. (As well as some smaller ones like $CAT, $SPZ etc. which I am not addressing here.)

Perhaps with the exception of $XRO among the larger caps, which has only recently passed through its inflection point (FY24), these other 3 tech darlings all have highly elevated P/Es (and other multiples like EV/EBITDA), both in historical terms, and on a comparitive basis. For these, I don't thingk you can really say "don't look at P/E, after all they're just passing through the inflection". And if, like me, you do DCFs, you have to have significantly long, strong growth runways with good terminal P/Es to support the valuations.

I've long been a tech bull, and for most of the last 8 years have held each of $XRO, $WTC and TNE - sometimes all at the same time. And I admit that my adherence to my valuation methodology has meant I've never owned $PME, which has probably been my costliest decision!

However, tech bull though I am, I am struggling to see value from here in these names. I still want to own them, but only if I can see the returns. I won't follow the herd.

While I still hold $XRO in RL (having re-entered in August around $130), I'm having doubts here again too, given the very pedestrian subscriber growth recently announced.

Maybe, I'm finally becoming a small cap investor after all!

Disc: Not held

And there it is. (25% to 100%)

ASX Announcement

RW has settled the court case.

I believe that, like a crash of thunder, that clears the air. Yes, there will be aftershocks and questions about key man risk and behaviour relevant to the business will remain. But I think this fundamentally resolves several questions.

I'm not condoing the behaviour. It's none of my business, And I don't know the full facts.

Accordingly, I have re-initiated a 5% RL positon at $106 and am leaving my p50% estimate of valuation at $103 unchanged until the next results.

Rock on.

Disc: Held in RL

P.S. Discussion with Board:

Dammery: Option 1 ..., Option 2 ..., or Option 3 - Just make it go away.

RW: Oh, Okay then, I'll take Option 3.

The Australian this morning commenting on reports that $WTC Board “confront tough choices with White” with reports of one option being considered in having White taking leave of absence.

Given all the salacious press of recent days/weeks, I’ve been waiting for this shoe to drop.

To be clear, I believe $WTC is currently overvalued, and I have exited my RL position after the FY results as reported here in earlier straws.

I wonder what this news is going to do to the SP?

It is on the top of my watch list to re-enter on a significant fall.

There’s little doubt that Richard’s personal issues will be a distraction for him, but $WTC is large enough that should he step back for a bit, it will be a good test of the bench below him as to whether performance continues without missing a beat. That is actually something I’d like to understand better.

Disc. Not held

In this straw, I summarise the market response, analyst response, and my own valuation update, following the surprisingly good result/outlook yesterday for $WTC.

Suffice to say, its a pattern we've seen before.

Market Reponse

The market opened positively, yesterday up 20% with the day's volumes of 1.8m about 4x daily norms. Today has added another 9%+ (at time of writing) on another 1.7m shares, taking the cumulative uplift to around 29%. Just to be clear, that's about $9bn market cap added.

Analysts

Overnight, several analysts updated their valuations and TPs. (Remember there TP's are 12m targets)

Here's a snapshot of the individuals I've been able to track:

The more complete set on marketscreener.com has moved as follows:

Prior to result: Average $92.82 ($55-$115; n= 18)

Post result: Average $107.32 ($55-$129; n=18)

An average change of +16%, albeit not all have updated.

My Valuation

I have previously reported the details of my detailed, long-run DCF model, built a couple of years ago.

Today was the first day I updated it following the Blume and Envase acquisitions early last year, which always muddy the waters, and I find that I need a clear 12 months for things to stablise, which they appear to.

Based on my range of scenarios for revenue and margin evolution, I get the following:

P(exp.) = $103; Range ($92 - $123)

My Divestment Decision

Earlier this year I sold my full $WTC holding at c.$96, because at that time the SP had flown up towards the top of my valuation range. On 5th August, I bought the position back at a cost base of $87.37, ... courtesy I think of the unwinding of the Japanese carry trade.

Although $WTC is a quality business, its share price is fairly volatile, partly because the market continually misjudges the temporary impact of %GM compression following acquisitions (which are about acquiring capability and market footprint, to then fold into Cargowise). This time a further misreading was due to $WTC taking time to develop the next set of product enhancements, resulting in high R&D and capex, with organic revenue slower to respond.

But whenever the market gets behind the eight-ball on what's really going on, and the result surprises, there is an over-reaction. This most recent "over-reaction" has even caught me by surprise. Having realised a gain of almost 40% in less than three weeks, I have today sold down 50% of my RL position.

I know it can be dumb to sell your winners. Real dumb. But over the last 8 years I have consistently sold down $WTC when it hits the top of my valuation range and bought back when the SP moves to the low end of the band.

One measure I track is the EV/EBITDA(forward) mulitple. Historically, this moves around quite a bit within the band of 38 to 52. Today at my exit price, it hit around 58. I'm confident history will prove that's not sustainable.

Whether its P/E or EV/EBITDA or any other valuation multiple, $WTC moves around quite a lot. So even though it is probably my favourite stock, and the business on the ASX I understand well (second only to $PNV), I do tend to move in and out of it every 1 to 2 years.

I didn't sell my entire position because sometimes the market gets completely irrational about $WTC, and it is not uncommon for it to go even higher over the coming weeks. Worst case, scenario, I'll hold what is still a 5% position in my portfolio for the long term.

Happy Days.

Disc: Held in RL (5%)

This morning I sold my entire RL holding of $WTC for $96.00. The basis of the change in my valuation is set out separately in my valuation post. (I admit to feeling a bit foolish in having got caught up in the group think of the many recent analyst upgrades, which caused me to overlook some things in plain sight.)

I consider $WTC to be one of the best companies on the ASX, however, my assessment of valuation risks to the downside of the price received this morning, meant that my criteria for selling (set out recently in the "When to Sell" forum) was triggered. While I am aware of the potential folly of selling your winners, this is the fourth time since 2016 that I have done this for $WTC and the decisions to date have all been sound and turbocharged my returns. Of course, I might be completely wrong this time. Only time will tell.

Put simply, with a forward p/e of 118x (and this is a firm that is well past the inflection point), but only having achieved 15% organic revenue growth in the latest half over pcp, it would not take much for a material correction to the SP. History indicates there is a high likelihood of that happening - of course the past is no guarantee of the future.

It was a hard decision to take, but ultimately I am driven by my analysis and assessment of risk-reward.

Disc: No longer held. On watch list

I’ll kick off by correcting the introductory remark in my straw this morning. Although revenue was a modest beat to consensus at (+3%), EBITDA and EPS were strong beats, with EBITDA +14% better than consensus. Hence the strong SP response, ending up over 11% on the day at the close.

As ever, it was a joy to hear Richard White talking about the business. So, rather than go through more detailed analysis of the results, I’ll focus on three big themes.

1.     The Acquisitions and how they play into the strategy

2.     Customer Value - proof?

3.     Machine Learning/AI

1.     The Acquisitions and how they play into the strategy

In one year, $WTC has taken a decisive set of steps in landside logistics, focused on North America.

The significant Blume and Envase acquisitions in early 2023 extend Cargowise capabilities from the port into import/export container haulage and rail. Blume is a leader in North America in internodal rail and Envase covers all aspects of container movements including trucking companies, port, depots and warehouses. These acquisitions further penetrate the supply chain, stepping beyond the original focus of the freight-forwarder and customs clearing, providing more of the solution onwards to end customers.

Later in the year, the smaller acquisition of Matchbox, complemented these capabilities. Matchbox allows operators working on the platform to swap container assets, thus significantly reducing the haulage from destination back to the base depot, yielding potentially significant cost savings to customers.

The next piece is the November acquisition of Sistemas Casa, the Mexican customs and international freight software solutions provider.

Richard briefly pointed out the growing importance of Mexico as a major trade partner to the US. What he didn’t dwell on, is that with increase risk perception around China, a lot of manufacturing investment is now heading into Mexico. So the time is right for $WTC to be building out its capabilities in landside logistics, to position itself for the growth in tradeflows within North America.

With this step change in capability, it is hardly surprising that $WTC is ramping up its R&D spending – now at 35% of revenue. Product development is 62% of $WTC’s headcount! This, added to the margin compression resulting from including the lower margin acquired businesses. I am curious to understand whether the deep integration of Blume and Envase is underway, given that the initial plan was to run them alongside Cargowise for a period until the understood better how to integrate. (I didn’t get the chance to ask this today, as I was in listen-only mode. One for next time)

There was a clue that serious integration is happening, because of the discussion about delays to the next release of Cargowise into FY25. This would make sense if there was serious effort underway to incorporate deeper landside capabilities in the next release. It also explains the lower revenue growth reported for Envase and Blume, as staff will have been focused on integration into cargowise, and not selling the legacy platform (Hey, Bucephulus, feel like round 2?).

Without giving guidance, RW indicated that the next release will drive strong revenue growth, as it will make several new revenue streams available. New features, new automations, and other customer efficiencies. These major releases will take place towards the end of the FY and feature in FY25. So, a key marker will be to understand how revenue growth evolves from FY24 into FY25 and into FY26.

2.     Customer Value

The following slide attracted a lot of discussion on the call. It is a benchmarking slide prepared by Armstrong and Associates. It shows that of the Top 25 Global Freightforwarders that have Cargowise “In Production”, container volumes grew 82% between FY11-FY23. Whereas for the remainder of the Top25, growth was only 12%. (Note: $WTC now has 13 of the Top 25 global freightforwarders as customers, and six were or  transitioned into production during the benchmark period).

Richard held this up as $WTC’s key calling card, predicting that with them now having 13 of the top 25 freightforwarders as customers, they may have reached the point where Cargowise has become the defacto industry standard.

Now, at this point I remind myself that correlation is different from causation. Indeed, industry consolidation will be one driver of growth of leading enterprises. However, Richard is clearly arguing that part of the difference is the value that Cargowise delivers its customers in terms of efficiency and differentiated ability for them to serve their end customers. However, what I think is irrelevant, and there is no doubt that this slide will be used by the sales and marketing team over the coming years!

3.     Machine Learning and AI

Richard always gets asked about what $WTC is doing in big data, ML (machine learning) and AI. To date, he has resisted engaging in hype, other than to say they have always applying machine learning and AI, because ultimately Cargowise handles many tens of billions of transactions over time, giving the firm unique insights into the movement of materials account the world. Indeed, the business and its solutions cover jurisdictions and modes accounting for 55% of global trade with products in development extending this to over 70%.

Today for the first time, he made more of a feature about this talking to the slide below.

He linked this to the earlier material on product development, making it clear that they are aggressively applying these capabilities to their products, whether to the data itself, to coding, to training staff and customers, or to recruiting talent.

As an example, they’ve used generative AI to produce the results video in French, German, Spanish and Mandarin.

https://www.wisetechglobal.com/news/1h24-results-briefing-presentation-ai-generated-avatars/

Overall Takeaways

$WTC have been a little crafty. They took the hit six months ago to re-set margin guidance because of the impact of the acquisitions, and today they solidly beat that guidance.

In fact, today, by leaving the guidance unchanged, it is likely the FY guidance will also be beaten – almost certainly at the EBITDA level (which CFO Andrew Cartledge as much as admitted).

Digesting larger acquisitions than usual, with the step up in revenue, organic revenue growth is softer than we’ve seen recently, despite many global freight forwarders underway with their global rollouts. Of course, the last few years have been challenging in the global supply chains, and so I wonder whether that has played into the rate of deployment? There was no discussion on this, and only time will tell.

Clearly, $WTC are investing heavily in building the platform to be capable of delivering more functionality, capability and efficiency to customers. Over $1bn has been spent in the last 5 years in R&D alone, delivering 576 new cargowise product suite enhancements in 1H24 alone, taking the total in the last 5 years to over 5,500.

So with the next big upgrade and release of Cargowise put back to FY25, we’ll need to wait 12-18 months to see whether all this investment drives an uptick in organic revenue growth. (This was the case after the M&A spree of 2016-2019).

I’ve updated my valuation for $WTC. As with any company on such a high multiple, the range of uncertainty is high. My thesis is predicated on continued strong revenue growth far out into the future, with progressive margin improvement at all lines of the P&L progressively over time.

I’ve settled on a central valuation of $86, generated from scenarios ranging from $70 all the way up to $111. This time, I’ve discarded some of the valuations that rely on sustained higher growth rates for longer, until we see what FY25 and FY26 can deliver.

With today’s close at $88.75, the market is already ahead of me by a whisker, but given the potential upside, I’m very happy to hold $WTC and glad I topped up on the SP weakness that followed the results 6 months ago.

$WTC is now my second largest RL position, second only to $ALU (sniff).

Global logistics SaaS provider $WTC released their 1H FY24 Results this morning.

ASX Announcement

Overall, the results are strong, with a minor bea tof consensus on revenue, EBITDA, and EPS. Deciphering the results is a bit messy, because we now have the pull period impact on the Blume and Envase acquisitions, which flatter the PC revenue comparison, but degrade costs and margins, due to these business being smaller and less profitable. Recall, the market got the first look at this at FY23, which resulted in a 35% correction to SP over 3 months, which has largely reversed. So who knows how the market will react today, as SP has pretty much recovered to around consensus.

Their Highlights

• Total revenue of $500.4 million, up 32% (up 15% organically) on 1H23

• CargoWise revenue of $420.7 million, up 40% (up 19% organically) on 1H23, driven by recent M&A and customer growth including new Large Global Freight Forwarder (LGFF) rollouts

• 46% EBITDA margin ahead of expectations

• Organic EBITDA up 16% to $230.6 million, with increased product investment for future growth contributing to flat organic EBITDA margins of 53%

• Underlying NPAT2 of $128.4 million, up 5% on 1H23; with statutory NPAT of $118.2 million, up 8%

• Strong free cash flow of $155.3 million, up 13% on 1H23

• Interim dividend of 7.70cps, up 17% on 1H23; representing payout ratio of 20% of Underlying NPAT

• Over $1 billion invested in product development over the last five years, delivering more than 5,500 new product enhancements to underpin revenue growth

• Further enhanced CargoWise Landside Logistics capability with acquisition of MatchBox Exchange, extending and strengthening WiseTech’s position in one of its six key development priority areas

• CargoWise customer penetration momentum continues with LGFF wins – Sinotrans 3 (Top 25), APL Logistics and Yamato Transport

My Initial Analysis

15% organic revenue growth is lower than we've seen over recent years, however it is still a strong result.

46% EBItDA Margin is ahead of expectations, which were knocked back at FY23 as a result of the acquisitions. If history is repeated, we'll see $WTC progressively grind out the efficiencies and restore margins over the 2-3 year period.

Expenses increased significantly, partly as a result of the full period effect of the acquired businesses, but also because product development has been ramped up. After initially announcing a "wait and see" intent to run the acquired landside logstics software alongside Cargowise, it looks as though RW is going for it and driving integration into Cargowise - this at the expense of not focusing on short term revenue growth from the new businesses. I think this has to be the right strategy, and it will be interesting to hear if RW talks to this in further detail on the call shortly. He is not shy about this, calling out the slower growth of Envase and Blume in the presentation slides.

The bottom line is weak, with reported NPAT growth of only 8.4% - a cold shower compared with the 41% see at the prior 1H report.

However, all the drivers of this were well-signalled at the FY23 and AGM, and the SP tooks its pain then.

Guidance for the FY is re-affirmed, which will see FY24 passing the 1bn revenue mark.

Cash generation was strong, with FCF of $155.3 (excluding smaller the Matchbox acqisition which occurred during the period).

FY23 larger acquisitions has seen $WTC take on some debt, but if was good to see $25m of the $200 LT debt paid off in the half. Net debt is now very modest and strong cashflows will rapidly reduce this to zero.

My Key Takeaway

Hard to precisely track where $WTC is against my model, given the inevitable muddying of waters that comes in the year or so after M&A. However, broadly the strategy appears on track, guidance being held to is good, and the beat to consensus is no bad thing.

I'll update after the call if there is anything significant to add. As the above is just a quick read out.

Disc: Held in RL and SM

No new disclosures that I could see at today's $WTC AGM.

A small sell-off today (low volumes) continues the 5-day trend, potentially as short term holders decided to hop-off in the absence of any upgrade and short-term catalysts beyond macro.

At a September conference RW indicated that EBITDA margins, guided this year to be 44%-45% (down 2%-3% on FY23), will gradually return to >50% by FY26.

This is because FY24 will bear the full year impact of the significant Blume and Envase acquisitions which are lower margin businesses. The $WTC track record has been to take 2-3 years to drive out the efficiences across the entire group as acquisitions are digested and integrated fully.

This margin expansion will turbocharge EPS growth, indicated by the EBITDA growth rate guidance range of 18% - 27%, noting the strong underlying Cargowise engine is forecast to grow revenue at 34% - 43%.

In a recent research note, Goldman Sachs noted that $WTC is unique as a global firm that is seeking to build a complete operating systems for global logistics. (Although refer to my earlier deep dives into $WTC which shows just how large and fragmented the global logistics eco-system is,)

$WTC currently trading at $64.00, which is well below my current Strawman valuation of $71.00, which is a little stale now and when updated in February '24 will likely be more like $80.00.

FWIW consensis is around $76 (range $52 to $95, n=15)

Below, is the slide showing their current product development priorities.

Disc: Held in RL but not on SM

This announcement on the $WTC website (and some business press) didn’t event make the threshold of an ASX announcement, but the article gives some insight into how Richard White is incrementally building out the capabilities to achieve a complete operating system for global logistics.

M&A often the smartest when it is small and focuses on adding complementary capability!

————

Adds empty container optimization platform to its landside logistics solution

SYDNEY, Australia – WiseTech Global(ASX:WTC), developer of leading logistics execution software CargoWise, today announces it has acquired MatchBox Exchange, provider of a breakthrough online open market platform for the reuse and exchange of shipping containers between operators in the landside logistics space. Headquartered in Australia, MatchBox Exchange was acquired from private shareholders.

MatchBox Exchange operates in Australia, India, Indonesia, Israel, New Zealand, Malaysia, Philippines, Singapore, Taiwan, Thailand and Vietnam. Its customers are comprised of transport companies and their customers, freight forwarders and importers/exporters.

The MatchBox Exchange platform matches those who have a supply of empty containers with those who need them. MatchBox Exchange collaborates with global shipping lines, such as Maersk, CMA-CGM, MSC, Hapag-Lloyd, ONE, HMM and Yang Ming through direct integrations, to enable customers to conveniently reuse containers, or request or offer empty containers across businesses for their import or export needs. This helps landside logistics to be more efficient and productive by enabling faster turn-around times and reducing the cost and inefficiencies of transporting, hiring, de-hiring and storing empty containers.

Richard White, Founder and CEO of WiseTech Global, said: “We welcome the MatchBox Exchange team to WiseTech Global. There are a huge number of containers moving around the globe at any one time with 862 million TEU (Twenty Foot Equivalent Units) in 2022[1]. MatchBox Exchange brings new digital capability to optimize the reuse of shipping containers to reduce unnecessary trucking trips, increase container utilization and improve productivity. This is a great example of true optimization by offering more than mere visibility, creating actionable data for end-to-end process optimization across the supply chain.

“This transaction demonstrates WiseTech’s continued investment in our landside logistics development priority, enhancing our CargoWise ecosystem in the container optimization space, while helping to reduce traffic congestion in ports from unnecessary transport of empty containers. This brings us another step closer to delivering on our vision to be the operating system for global logistics,” he said.

MatchBox Exchange’s CEO, Carl Marchese, said: “Joining WiseTech Global will provide the scale and resources to grow the use of the MatchBox Exchange platform in new landside logistics markets, optimizing the reuse and exchange of empty shipping containers, driving better utilization of trucks and improving collaboration and productivity through digital processes.”

[1] Statista Report: Container throughput at ports worldwide

Disc: Held in RL and SM … been chipping away adding more as we head towards peak bond rates.

$WTC is currently my second largest holding in RL and 7-months ago I posted a valuation of $71 (with my usual range around that $54-$84).

Prior to the results, I trimmed some at $88, rightly anticipating that the %GM erosion of including Envase and Blume would result in a sell-off and price correction on softer 12m guidance. After all, we've been there before. (But, honest, I'm not a trader)

Over recent months, I have added several small-cap higher-risk positions to my portfolio (e.g., $DSE, $BOT, $SGI) and this week I wanted to offset that by increasing at the quality end, to keep my overall portfolio risk profile in balance.

Richard White recently presented an update on the company, and spoke powerfully about the opportunity in US landside logistics, which is what Envase and Blume are all about, as well as an expectation of $40m efficiency to be squeezed out incrementally, as they do after all acquisitions.

Although I haven't updated my model for the FY results incorporating Blume and Envase, a quick eyeball of the results points to a valuation now in the region of $77 (with range probably around $60 to $90, although I have scernarios north of $100).

So, WTC came top of my merit list of quality stocks to increase, and I've just added another 10% given the SP today of $65.52. I'm not done yet, but let see where the market goes. I'll keep some powder dry if bond markets drive SP lower.

Remember, often we already own our best ideas!

Disc: Held in RL only (5%)

P.S. Also, there was a degree of comfort buying as $PME sails further out of reach!

$WTC reported its FY23 results this morning and I’ll be joining RW for the call at 10:00. But in advance of that here’s my quick take. Bottom line – keep on Truckin’.

Their Highlights

• FY23 Total Revenue of $816.8 million, up 29% (up 21% organically) on FY22
• CargoWise recurring revenue of $650.1 million, up 48% (up 37% organically) on FY22, driven by existing and new customer growth including new Large Global Freight Forwarder (LGFF) rollouts
• Executed a strategic move into North American landside logistics with acquisitions of Envase Technologies and Blume Global, extending and strengthening WiseTech’s position in one of its six key development priorities
• Signed first global customs rollout with world’s largest freight forwarder, Kuehne+Nagel (K+N); post year-end momentum with expansion of FedEx global rollout to include global customs
• EBITDA ex. M&A costs of $412.1 million up 28% on FY22. EBITDA of $385.7 million up 21% on FY22
• Organic EBITDA margin up 2 percentage points (pp) to 53%, reflecting enhanced operating leverage, new product releases, pricing and ongoing financial discipline. EBITDA margin of 47%, down 3pp on FY22 reflecting recent M&A
• Underlying NPAT 3 of $247.6 million, up 30% on FY22; with statutory NPAT of $212.2 million, up 9%
• Strong free cash flow of $291.4 million, up 23% on FY22
• Final dividend of 8.40 cents per share (cps), up 31% on FY22 and representing a payout ratio of 20% of Underlying NPAT

My Analysis

Everything said about $WTC has to be understood in the context that the market has priced it to perfection, with the SP having run up over 70% since the start of the year.

The numbers speak for themselves, so I don’t need to write much about them.

What I will focus on is that, after such a stellar FY21-FY-22 comparison, there is the potential for disappointment in today’s result. However, I am not disappointed and I believe the market consensus shows that many analysts are just not doing their jobs properly. There is no other way to explain it.

While organic revenue growth of 21% was a smidge below my model of 22%, EBITDA growth of +28% (excluding impacts of M&A) was stronger than I expected.

RW has signalled the big step up in R&D spend, and this is to be expected. With several tuck-in acquisitions and the larger Envase and Blume – leaders in North American landside logistics – total R&D (capitalised and non-capitalised) increased a whopping 45% to $261.9m. But I am glad $WTC is doing this, as they need to continue to invest heavily to achieve the long term vision.

Because of the impacts of the acquisitions, expenses are elevated and margins are reduced from EBITDA down to NPAT. There is also a healthy tax bill.

This is an established pattern for $WTC, and over the coming 2-3 years we will see margins grind back upwards as integration proceeds. Over the years, $WTC has achieved a core capability in integrating acquisitions. Envas eand Blume are at the larger scale, so their margin impacts are largers. This is not without risk, but I have a high level of confidence in the team.

There is always a lot to highlight in the $WTC disclosures. For me the standout one this year is that today, the $WTC portfolio covers territories and activity they estimate account for 55% of global manufactured tradeflow. With the developments in progress and the global rollouts under way, they expect that to expand to c. 70% over the coming years.

Another standout, is that the DHL rollout appears to have followed the K-N lead by including global customs as part of the scope. This was the big announcement last year, and the belief was that after K-N taking the plunge, other leaders would follow. So that appears to be playing out.

My Key Takeaways

A good result, but the market (which I say has behaved independent of newsflow through the year in driving up the SP, as funds have increased exposure to the ASX best quality larger cap tech play) has priced $WTC for perfection.

Earlier this year, after a deep dive, I valued $WTC at $71.00 (with a wide range of scenarios ranging from $49 to $84).

Presented recently with the opportunity to sell some at $88, I took the money, selling down one-third of my RL holding. Partly because I expect the market may well cool to this result. If we see a solid pullback over the coming weeks, which I think could happen, I’ll be waiting. ;-) (... but I'm not a trader!!)

A great company. A good result. But it is in the valuation in my view.

About to join RW for his call.

Disc: Held in RL

In this third and final straw supporting my recent valuation of $WTC, I examine the cost structure of the business and set out the rationale for its evolution over time. I conclude with some remarks about risks.

Straw 1 assessed the competitive market opportunity and identified the potential for $WTC to grow over the 20 years 2022 to 2042 as it establishes the operating system for global logistics. Under the scenarios modelled, $WTC grows to achieve between 5% and 10% share of the global logistics software market, up from an estimated 1% today. So, while by any measure it’s a Bull Case analysis, it's one that doesn’t require global domination! Straw 2 then explored how $WTC grows revenues from existing customers, by analysing how each existing customer “cohort” has grown over time. The analysis showed that $WTC likely has a decade or more of strong growth locked in from those customers it has already contracted today. Beyond that, if it expands its customer offering to encompass the entire logistics ecosystem, it will not run out of growth headroom any time soon.

What remains for this straw is to examine the profitability (cost structure) of $WTC and analyse how this might evolve over time. The approach is simple:

1. Start by understanding $WTC margin evolution to date
2. Develop a peer group of global industry software leaders, establishing these as possible long term futures for $WTC
3. Assess the high-level similarities and differences, leading to the scenarios for $WTC cost structure evolution.

1.  Margin Evolution to Date

Figure 1 and Figure 2 show the evolution of Cost of Sales and Expenses, respectively, both as a % of revenue.

Figure 1  $WTC Cost of Sales as a % of Revenue

Source: Company Accounts

Figure 2  Expenses as a % of Revenue

Source: Company Accounts

In both cases, the period from 2017 to 2020 saw increasing costs, followed by clear downward trends in the last two years. These trends are easy to explain. Between 2016 and 2020, $WTC acquired 28 businesses, both expanding its global market footprint and acquiring functionality to be integrated into Cargowise, as noted in Straw 2. The acquired businesses were generally small, with high relative costs contributing to the progressive erosion of % margins. This has been communicated clearly in investor presentations over the last 5 years.

Over the last two years, $WTC has undertaken an efficiency drive, removing overheads and turning off legacy platforms as the functionality has been progressively integrated into Cargowise. This led to both Gross Margin increasing to 85%, and Expenses have been driven down to 45%. Again, CEO Richard White (RW) has explained this clearly over recent presentations.

Over time, I expect the general trend of increasing margins to continue as operating leverage progressively expands. Of course, it won’t be a linear process. For example, the three most recent and historically large acquisitions will likely temporarily move margins backwards again. In the case of the 2023 acquisitions, these will be run as separate software programs, while $WTC takes time to figure out the best way to integrate them into the Cargowise stack. However, even if the transition takes 2-3 years, it is not going to be material in the overall scheme of the next twenty years. $WTC now has a track record and an established internal capability of integrating acquisitions and driving efficiency.

So, the key question in developing the valuation was to evaluate how these margins might be expected to evolve into the future, over the long term.

2. Margins in the Global Software Giants

To understand how margins at $WTC might reasonably evolve over the next two decade, a group of global software giants who have already made the journey to scale were considered. The “Peer Group” selected are shown in Figure 3, with their current revenues compared with $WTC’s current and future modelled revenues. Note that the vertical axis is a log scale! We might think of $WTC here on Strawman as a big company, but when viewed through a global lens, it really is still a Baby Giant – or perhaps at least an adolescent.

Figure 3: Revenues for $WTC (Actual and Modelled) and the Global Software Peer Group

Source: Company Accounts

Considerations in selecting the peer group:

• Intuit – similar in revenue today to that modelled for $WTC for 2042
• SAP and Oracle – global competitors, already active in the logistics software ecosystem (focus on Transport Management Systems)
• Salesforce and Adobe – global pure SaaS players
• Microsoft – a giant, diversified, much more than software but likely shows a limit on G&A operating leverage

3 Evaluating Margin Evolution at $WTC

3.1 Gross Margin

First up, gross margin. Figure 4 shows how the Peer Group compares with $WTC.

Figure 4: % Gross Margin

Source: Company Accounts

First, we can ignore $MSFT. With its hardware and cloud computing divisions, it will have lower gross margins than the pureplay software cos.

The clear leaders are $ADBE and $ORCL, with GMs of 88% and 86% respectively. Looking at $WTC, even though it is two orders of magnitude smaller than these giants, %GM has gone from 81% to 85% as the business has scaled and acquisitions integrated into the unified Cargowise platform. At this level it already surpasses the remaining members of the Peer Group. Therefore, I have modelled that as $WTC scales, %GM expands to achieve the best-in-class level of 88% of $ADBE by 2042. I’ve modelled this as a steady progression over time although, in reality, things will ebb and flow, particularly as $WTC continues to acquire capability and market position through M&A. I haven’t varied this between different modelled scenarios as I don’t consider it to be a significant uncertainty. Conceivably, it might under- or over-shoot, but this is a relatively unimportant sensitivity in the SP.

3.2 Expenses

Next comes the expense categories Sales and Markets (S&M), Research and Development (R&D) and General and Administration (G&A), including their embedded components of depreciation and amortisation. The analysis is shown in Figure 5.

Figure 5: Expenses

Source: Company Accounts

Let’s consider each element in turn.

Sales and Marketing

Operating leverage has seen S&M% for $WTC fall rapidly from 14% to 8%, which is remarkably already significantly lower than the peer group, including $MSFT which has huge brand value. Reasons for this probably lie in its B2B and logistics sector pureplay focus, plus its established brand value in the global freight-forwarder segment. While it is possible that $WTC will continue to enjoy further operating leverage, there is an argument that the game gets harder from here on. Hitherto, most of its growth has come from its core capability of freight-forwarding, where it is already a market leader. Over time, as it seeks to enter and then build a leadership position in other parts of the software ecosystem for logistics (discussed in Straw 1), it will face increased competition from the players already established in those segments (think $ORCL and $SAP in global transportation). In order to reflect this expected increased competition, I’ve held %S&M spend constant at 8% in all scenarios modelled. Another argument to hold it at a constant %, is that as new modules are added to Cargowise, there will be an ongoing need to engage existing cusomters to make the case for extending global rollouts. Of course, it shouldn't be a hard sell at customer efficiencies should propel the business case for adoption.

G&A

Again, %G&A has fallen from 20% to 15% from 2019 to 2022. G&A is an expense segment where economics of scale should continue to apply. This can be clearly seen when we look at the Peer Group. $WTC is assumed to progressively reduce %G&A as it scales to a limit of 7%, consistent with that achieved by $SAP and $ADBE. The valuation is probably conservative in that $WTC’s industry focus and software pureplay business model likely means that a leaner corporate structure relative to the competition should be achievable. The gap from 7% to the 3% achieved by $MSFT and $ORCL is further potential upside in the valuation.

R&D

R&D is the largest expense and strategically most important. In the model, I assume that $WTC maintains a relatively high R&D spend – 16% in the high valuation scenarios and 20% in the lower valuation scenarios. The reasons are clear. If $WTC is to succeed in building the operating system for global logistics over the next 20 years, it will have to continue to extend the existing platform. For the platform to be attractive to customers, they will need to continually invest to reduce the friction of customers moving from their existing solutions and onto Cargowise in a way that helps customers reduce their costs. $WTC will therefore need to continually refresh its technology stack to stay at the cutting edge of user experience and information technology, including ML, AI and process automation. This will require perennial investment as well as attracting, developing and retaining top talent.

$WTC’s focus on logistics confers an advantage over its key competitors $SAP and $ORCL, who have to invest in developing solutions for a much wider range of industries and functions. $WTC’s focus will facilitate its ultimate success.

3.3 Bringing it all together

The relative focus on different margin levers will vary with time. RW has demonstrated in presentations over recent year that $WTC has a lot optionality in how resources are allocated. For example, when to push on M&A to accelerate the development of functionality (2016-2019) or when to focus on consolidation and driving efficiency (2020-2022). To date, $WTC has demonstrated that these levers can be pulled without impacting the momentum of revenue growth and supporting customers in their global rollouts.

This is where $WTC's global network of implementation partners is key. The partners (logistics IT consultants) do the heavy lifting of helping customers in their multi-year global rollouts (process mapping, change mangement etc.). The economics of the consulting business is essentially the cost+ model constrained my manpower. By having external partners bear this load, this further enables $WTC to retain a lean organisation model and to not be capacity constrained in supporting customer implementations.

RISKS

I briefly summarise three key risks as follows:

• Leadership: RW is the founder, major shareholder and leader of $WTC. As investors we like that, but the market has little visibility of the breadth and depth of the leadership bench below him. Several years ago, when the Bucephulus short report came out, management (RW) looked shaky in their ability to respond. This was widely perceived in the market and no doubt sent a warning shot across RW’s and the Board's bows. Developing the leadership bench and board strength will continue to be an important issue. Hopefully, RW’s vision will sustain him for decades to come. Equally, $WTC is at a scale that another capable leader should be able to take it forward should, for any reason, RW no longer be around. As investors, we have to trust the Board is regularly reviewing the succession plans, but it is perhaps a question to put the Board on notice at the AGM.
• Technology: $WTC continues to invest heavily in their SaaS platform, and with it disrupt many of the solutions currently in place in the industry. But all new technologies may in time themselves be disrupted. A key potentially disruptive technology in logistics is blockchain. RW has told me (2020) that this is a technology $WTC is tracking, and at this stage they don’t see it as a competitive threat. But it is one to watch as several initiatives are underway across the global in applying blockchain in supply chain management.
• Competition: $WTC’s progress to date has leveraged their leadership in the global freight-forwarding segment. However, the investment thesis relies on them succeeding across the entire global logistics ecosystem. Inevitably, they will have to take on leaders in other segments of this market (see Straw 1). It must be an open question as to whether they will succeed and, if they do succeed, what margins will ultimately be achieved.
• Cyber Security: $WTC holds mission critical data and entire process flows for its clients. A serious data security breach could disrupt operations, damage reputation and open the firm to a world of pain (e.g. litigation). I can't assess this risk, so the only way to manage it is through limiting position size.

CONCLUSIONS

When I started this deep dive, WTC’s SP was in the mid-$50s. When modelling outputs fell consistently in the range $49 to $98, I decided that risk and reward were heavily skewed to the upside. Today with the SP as $73 the market has also moved on. With the analysis described in these three straws, I have a framework to continue to track $WTC’s progress over the years. As I have gone into different aspects of the business, I feel that the market is probably now at fair value. That said, I have hopefully explained some of the areas in which there is scope for $WTC to continue to surprise to the upside. It remains my largest and highest conviction holding.

Disc: Held RL (6.0%). Not held in SM

This is the second of a series of straws that sets out the basis for my latest valuation of $WTC of $71, which was generated following a deepdive I conducted on the logistics sector earlier this year.

In my first Straw (“Straw 1”), I tested my long-term revenue growth scenario assumptions to see if they made sense in a competitive context, considering the wider systems ecosytem in global logistics. In this straw, I look at historical drivers of growth, using insights from an analysis of historical performance. In performing this analysis, I have gone back over some of the detail Richard White (RW) has shared with investors over the last 4 years.

1.    How Enterprise Customer Growth Happens

With SaaS, it can be easy to think about revenue drivers as number of customers multiplied by average revenue per customer (ARPC). At one level, that’s correct. It can be a good way of understanding growth in a simple, retail product, where a customer subscribes to a product (e.g., MS Office 365), pays the annual subscription, and renews it every year. And where perhaps ARPC can be increased by selling more modules to a customers (e.g., make it Pro, add Visio etc.)

However, the reality of enterprise software is often more complex. Customer adoption can take many years as customers are onboarded, the solution is integrated into the workflows, incremental functionality is added over time, and organisational efficiencies extracted. This is often described as “land and expand”. But in cases like $WTC it’s more like “land, roll-out (to functions, business segments, and geographies), consolidate, expand, deploy to acquisitions and repeat”. The last bit is when the customer acquires a business and then deploys the software (and standardised processes) to the acquired entity.

In the FY2019 Presentation RW gave us a worked example of what this looked like at one of $WTC’s customers. This is shown in Figure 1. The diagram shows the growth trajectory in a single customer where Cargowise was rolled out to 11,500 users across 58 countries over several years. Cargowise revenues are based on both the number of seats (users) and the volume of cargo transactions flowing through the platform. The graph illustrates that after the first onboarding, the rollout and adoption of Cargowise drives a 7 year first wave of revenue growth, followed by a second wave of another 3+ years (presumably as new functionality is included), and a third wave of step up in revenue when the customer acquires another freight-forwarder.

Of course, as the business grows organically over this time, so too does the use of Cargowise (seats and volumes) and with it $WTC revenues. This real example from 2019 shows a decade of growth from one $WTC customer. To provide some quantification of this, SaaS firms often report a “net revenue retention” rate.

Figure 1: Example of a Global Rollout

Source: $WTC FY2019 Results Investor Presentation, slide 28

With 11,500 users in the case example above, it is worth noting that the global freight forwarders are large organisations. I’ve looked up total employees at a few as follows: UPS (534,000), DHL (400,000), Kuehne + Nagel (78,000) and DSV (75,000). These are truly global companies with a presence in typically 50-100 countries or more. So, rolling out a system across such an enterprise takes years.

Now wind the clock forward to 1HFY23 to look at the progression of customer additions shown in Figure 2. Note the number of large customers added since 2019. Given that Figure 1 showed data from a global rollout that must have begun 7-10 years before 2019, then clearly the step up in new customers during FY21, FY22 and FY23 each have up to a decade of revenue growth to run. In fact, RW reported at 1HFY23, that $WTC currently has 15 global rollouts in progress, and that 4 new global rollouts have been contracted since 1 July 2022. It is worth noting that some of the logos on the list are among the world’s Top25 Global Freight Forwarders.

 Figure 2: 

Source: $WTC 1H FY23 Results Presentation, slide 20

2.    Quantifying Global Growth – Cohort Analysis

So, the question is, how material and long-lived is the growth that is built into the existing customer base?

To understand this, we need to turn to the appendix of the 1H FY23 results presentation, slide 28 provides the “cohort analysis” of customers based on the year in which they were contracted. This is shown in Figure 3.

While the detailed numbers on the graph are not provided by $WTC, I’ve had a go at reading the results presented. (Warning: these are my estimates off the graph – shown in red and purple text – however, I am broadly comfortable with the results since the total values are known.) I’ve summarised the results in Table 1.

Figure 3: Analysis of Customer Cohort Growth

Source: $WTC 1H FY23 Results Presentation, slide 28

Table 1: Summary of Customer Cohort Growth Analysis

Source: Analysis of growth rates implied by data in Figure 3

The picture is remarkable. It shows is that Cargowise revenue from customers onboard during FY06 and earlier, grew at a CAGR of 29% from 2015 through 2022 – a period ending at least 16 years after initial onboarding. The cohorts onboarded from 2007 to 2015 achieved a CAGR of a slightly less impressive 24% - a period where all cohorts had been onboard for between 7 and 15 years.

What’s interesting when you look at Figure 3 is that, over the last two years, the rate of growth appears to be accelerating, reflecting the step up in major new customer wins shown in the last three years in Figure 2.

3.    What Does It All Mean

In “Straw 1”, I undertook a high-level analysis of the potential for revenues at $WTC to grow over 20 years as it pursues its ambition of building the operating system for global logistics. That analysis noted that, although the historical focus has been on Global Freight Forwarders (a minor part of total global logistics services), the 31 acquisitions undertaken by $WTC in the last 7 years already span nearly all parts of the global logistics ecosystem. Now, many of today’s customers are much more than just Global Freight Forwarders. Many, such as Maersk, DB Group, UPS and FedEx to name a few, are fully integrated global logistics providers.

The cohort analysis presented in this straw shows that $WTC’s existing customers have the potential to support growth of 20-30% per annum for at least the next decade and well into a second, without adding any new customers! So, over time, the strategic challenge for $WTC is less about acquiring new customers, and more about broadening and deepening the penetration of a fully-functioning Cargowise solution into its customers operations.

Above that, further growth will over time come by integrating $WTC’s customers’ customers into the Cargowise ecosystem using CargoWise Neo.

In Straw 1, my central valuation scenario assumes revenue growth for the next year of 24% progressively trending down year by year to 10% by 2042. The key insight of the cohort analysis in this straw is that once a customer contracts to use Cargowise, it can grow revenues strongly for long periods of time as it rolls out the system to all countries and divisions, switches on more and more functionality, experiences its own organic volume growth, and from time to time experiences steps changes in growth due to acquistions.

When I started generating the various revenue growth scenarios in my model, I was initially nervous about extending signfiicant growth into a second decade. Having concluded the deep-dive, Straw 1 tells me that it is entirely plausible given the market opportunity. This Straw indicates that the progress over the last two decades shows no maturation of growth and that revenue growth from customers can grow at rates signfiicantly greater than 20% for decades.

If anything, I leave the exercise wondering if I have been too conservative.

Up Next

Straw 3 will examine the final piece – “Margin Evolution.”

Disc: Held IRL; not on SM

Several weeks ago, I posted my valuation for $WTC. This was the culmination of a deep dive into the company and its industry. (I've held $WTC IRL since Sept-2016. I don't hold it on SM, because the company has proven itself. All my SM holdings are yet to do so.)

This is the first of several straws over the the coming weeks (and months?) where I unpack my research and assumptions that lead to the valuation.

To understand the global market runway and the competition ahead of $WTC is it important to understand the overall global logistics market, and the role software plays in that market. Valuing $WTC has involved making projections of the company over the next 20 years, as this is the timeframe I believe it will take to achieve its vision of creating the operating system for the global logistics industry.

In this straw I ask the basic question: do the revenue projections in the model (shown at the end of the straw in Figure 5) make sense in a competitive market context.? My conclusion is that they do.

1.    The Global Logistics Market

The global logistics market is huge, estimated today to be around $7,000 bn. Of course, most of this market is not addressable by $WTC (think operating big ships, planes, trains, trucks, and vans, warehouses, and all the fuel and people to drive/fly/sail them.) However, it is a vast global market which drives the opportunity for software to enable it and to make it more efficient.

Arriving at the above figure, I identified 10 studies estimating the global logistics market in 2021 to range from US$6,300 bn to US$10,700 bn. These identified growth rates over the next 3 to 10 years varying widely between 4% and 10%. The major drivers of growth to be significantly above global GDP growth (average c. 3%) are: ongoing global e-commerce growth; ongoing unbundling of supply chains enabled by technology; opportunities for value-adding services by supply chain service providers; and greater participation of middle income countries in international trade.

Conservatively, I’ve assumed a market size of US$7,000bn in 2019 growing at 5% for the next 23 years, reaching US$22,000bn in 2042. In considering this growth, I have considered current unfolding trends of re-shoring and East-West decoupling, which have the potential to reduce global trade, while equally creating new inefficiencies and higher overall supply chain costs.

Figure 1 provides an estimate of the elements of the global logistics industry. Here you can see transportation, warehousing, and distribution make up the lion’s share. It is interesting to note that freight-forwarding, where $WTC has developed a core capability, represents a very small component of the overall industry. 

Figure 1 Estimate of the Current Global Logistics Market

Sources: Estimates using Technavio (2020) “Global Logistics Services Market 2020-2024”; Logistics Management (2020) “2019 State of Logistics Report”, Armstrong and Armstrong “Top 50 Global Freight Forwarders”

2. The Global Logistics Software Market

Estimating the size of the global market for logistics software systems is more challenging. This is due to a combination of factors: 1) different studies choose different definitions and boundaries; 2) I have not purchased the studies themselves, so have been unable to get into the details of each (as each is worth several thousand dollars); 3) many market participants are privately held, so identifying revenues is not straightforward and 4) some of the giant enterprise software companies in the space (e.g., SAP and Oracle) don’t break out the revenues for their supply chain solutions.

Complications aside, I have reviewed 9 sources and estimated the size of the global market for logistics software solutions to be in the range of US$30 - US$50 bn, taking US$40bn as the central estimate. I have rejected some higher estimates (up to $74bn), as these appear to include revenue from technologies such as RFID-related systems and devices.

As a point of triangulation, the US listed firm E2Open estimates the global market at US$54bn in their 10-K, however, no sources were provided. In any event, I am happy that my estimate is on the conservative side of things.

Growth over the next decade is typically estimated to lie in the range of 8% to 12% p.a., or at roughly twice the rate of the underlying logistics market. This is hardly surprising for several reasons. First, global rollouts of best-in-class systems are a relatively recent phenomenon. Firms are progressively embracing digitalisation. Many have decided to move beyond limited, legacy in-house systems, and/or their existing ERPs. Across the board, adoption of cloud-based solutions, including by legacy ERP providers like SAP and Oracle, are becoming the norm.

Modelling Assumptions:

·      Global logistics software market 2019 = US$40 bn;

·      CAGR 2019-2029 = 10%; CAGR 2029-2042 = 5%

·      Global logistics software market in 2042 = $US200 bn

Based on these figures, the industry currently spends c. 0.6% of its revenues on software. This rises to 0.9% by 2042.

The return on this investment is huge, even if unquantified: savings in direct labour; better asset utilisation; and delivery of value-adding customer services enabled by leveraging data and improved visibility and transparency.

3. Structure of the Software Industry

The global logistics software industry today is highly fragmented. Figure 2. provides one visualisation of the current software ecosystem supporting the global logistics industry.  Having spent over 6 years attending $WTC presentations, this was a revelation to me. It is important to note that each box contains only the leaders in each market segment, there are many more minor players, and in-house “home-grown” solutions are excluded, unless these have been commercialised outside their original "home".

Interestingly, while each segment of the industry has several leaders ($WTC being one in the Freight-Forwarding Software segment – look carefully and you’ll find Cargowise in the central box on the bottom row), no industry participant is a leader in more than one segment. Even the ERP software giants SAP’s and Oracle’s leadership positions are only in the Transportation Management Systems segment. I estimate (from several sources) that to be the largest segment at c. 25% of the total market – unsurprising given Figure 1.

My assessment is incomplete, as I have not analysed if there are individual companies owning multiple software solutions in multiple segments. That’s for the “to do” list, but I didn’t come across any examples. (See also comments below about industry consolidation.)

Figure 2: Map of the Global Logistics Industry Software Market

Source: Alcott Global (2022) “2021 Put Logistics Technology on the Map”

Historically, initial industry focus was providing software for enterprise planning and scheduling of transport and distribution, enabling transactions and operations between manufacturers and distributors, and transport asset optimisation. An important source of initial code generation in the 1990’s was demand from the internal supply chains of international corporations (e.g., FMCG, pharmaceuticals, consumer electronics, automotive etc. when I grew up as an operatoins manager!). These were the early actors to aggressively ride the globalisation wave that created global supply chains.

With increasing globalisation, outsourcing/offshoring and unbundling of integrated supply chains, over time, the focus has shifted to increasing the end-to-end visibility through the supply chain, digitalisation of workflows and documentation, establishing and managing master data, increasing automation, and recently using advanced analytics for simulation and optimisation. More recently customer service has increasingly become a focus, increasing the visibility of customers into their supply chains. (As end customers, over recent years, we’ve all gained the ability to track our e-commerce orders from order processing through to the van arriving at our address from an initial source anywhere in the world.)

In parallel, enterprise systems on premises have transitioned to systems deployed via the cloud, with enterprise data held in the cloud. These latter innovations are still at early stages of adoption, with $WTC a key player. This trend has further enabled data access and data flow across supply chain participants. Importantly, it has also provided a huge data asset to both supply chain participants, 3PL/4PL players, and their software providers. For example, in 2020 $WTC reported that CargoWise handled 50 bn transactions globally, and in 2022 it reported that the software was active in jurisdictions covering 90% of global trade flows.

Despite these trends evolving for 30 to 40 years, it is important to recognise that many activities within global logistics still use dated legacy systems requiring human intervention (yes, spreadsheets!), multiple data entry(leading to waste and errors), and systems that don’t “talk to each other”.

Therefore, thinking out to 2042 (another 20 years away), based on an underlying industry growth of 5% p.a., with ongoing tailwinds from e-commerce, digitalisation and enabling of work flows, through-chain visibility, automation, and optimisation - there is going to be a lot of sustained innovation, growth, and investment in an industry that remains highly fragmented.

I’ve therefore assumed the overall software industry supporting global logistics services continues to grow at an annual rate of 10% to 2032 falling to 5% p.a. for the decade after that. This might be conservative - again, that is by design.

On this basis, the c. $40bn logistics software market today should be worth c. $200bn in 2042.

A “sense-check” of these projections follows: In 2019 software represented c. 0.6% of the industry cost structure. Under this projection, it rises to 0.9% by 2042. That investment supports increased labour productivity as well as improved asset utilisation, realistically driving improvements an order of magnitude greater than the increased software costs.

4.    Wisetech’s Industry Position Today and Strategy for Tomorrow

As shown in Figure 3 (below), $WTC’s core capability lies in systems to support the international freight forwarding industry - the blue bit in the middle of the diagram. However, as we saw in Figure 1 (above), freight forwarding is only one small, albeit vitally important part of the overall global logistics industry – around 3% of total industry revenues. It is, however, a segment where IT systems are disproportionately important.

However, $WTC’s vision is to become the overall operating system for global logistics! which is what the image below is intended to convey (Note: while the terminology in Figure 3 is a bit different to Figure 2, you can see that the $WTC vision spans the lion’s share of the ecosystem.)

Figure 3

Source: $WTC Investor Presentation, 1H FY23.

In 2019, $WTC’s revenues of A$348m represented only 0.7% share of the global logistics software market. (Interestingly, before I started this deep dive, I wrote down in my journal that I thought the number would be 4-6%! I was almost an order or magnitude out.)

Across the modelled growth scenarios supporting my valuation, by 2042 $WTC revenues range from A$10.5bn to $21.1bn (see Figure 5 at the end of this Straw). This would be between 4% - 8% of the global systems market share. (Assuming A$=US$0.75)

To be clear, in this high-level analysis, I am not trying to generate long terms predictions of what the market will look like. Rather, I am trying to satisfy myself that the long-term revenue growth scenarios modelled out for two decades are plausible given the overall scale, growth, and current/potential future industry structures.

The takeaway of this “back of the envelope” estimate is to observe that, if $WTC succeeds over the next 20 years in building a leading global operating system for the logistics industry (as it has done over the last 20 years in global freight forwarding), then the strong, sustained revenue growth figures assumed in the valuation scenarios would ultimately see 4% - 8% of all global logistics software system spend being in $WTC solutions. That’s a good share of a global market, but by no means beyond the realms of plausibility. It is consistent with a long-term industry structure where several large players share sizeable but minority portions of the market, leaving ample space for leading niche solutions in specialist subsectors of the market or in serving particular industry verticals (e.g. pharmaceuticals, automotive etc.)

5. Industry Consolidation - $WTC already doing its bit

Today, as Figure 2 shows, the industry today is highly fragmented. Over time, it is likely to mature and consolidate. In fact, this has already been underway for several years, with $WTC playing its part.

$WTC is a leader in the freight-forwarding segment. However (as shown in the excellent summary straw by @Magneto), since 2016 $WTC has executed 31 acquisitions across the software eco-system including in: Transport Management Systems across shipping, air, road, rail, and port/terminal including container optimisation; Freight management systems; Warehousing Systems; Customs, Tariffs and Compliance Systems; Trucking Systems for Couriers; Cargo Visibility Systems; and Automation.

While I have not analysed M&A activity in the sector, I have not come across any evidence to indicate that other industry players have been as active across the entire logistics eco-system. On the contrary, Figure 2 appears to indicate that few if any industry players are leaders in more than one segment. So, it appears that $WTC is an early mover in seeking to build a solution to serve all parts of the industry.

What is also clear, is that $WTC have recently stepped up the ambition. The 2023 acquisitions of Blume and Envase represent a higher level of materiality in building out from $WTC’s core capability in international freight forwarding, a market where it is starting to dominate. Figure 4 below shows both the recent acquisitions feature as leading systems in their own rights outside of $WTC’s core capability.

Most companies acquired over the last 7 years were usually small (mostly <$20m) until the more recent larger acquisitions of Containerchain (Feb 2019, $492m), Envase (Jan 2023, $230m) and Blume Global (Feb 2023, $414m).

Figure 4: Acquisitions in N. American Landside Logistics Materially Builds out $WTC capability

6.    Risks - Other Possible Futures

Valuation requires future quantitative projections, but those projections are not a prediction of what the future will be. The future is uncertain. Many futures other than those considered here are possible. Let’s consider two extremes.

In the extreme success case, which has not been modelled, $WTC becomes a dominant player not only in freight forwarding, but across the industry. If you like, the “Microsoft of global logistics”. In that case, its ultimate market share could be much higher than 4% to 8%. (After all, if you think about the global market for spreadsheets, Excel has 79%, Google Sheets has 16%, Apple Numbers has 5% - although Excel has been at it for 38 years!)

But there is also an extreme Bear Case. Perhaps there is an alternative future, when completely new applications based on a disruptive technology, such as Blockchain, emerges. Such a disruptor could conceivably mean that $WTC never achieves its long-term ambition. So, it will be important to keep an eye on emerging disruptions, particularly Blockchain. Once every couple of years, I ask RW how $WTC perceives this threat. According to RW, so far, so good. (However, incumbents often fail to see disruption until it’s too late!)

So far, $WTC has proven itself to be adept at operating at global scale, successfully identifying and integrating acquisitions across the globe (an important capability), while simulatneously investing heavily in developing the CargoWise platform, acquiring new customers, supporting customer growth over many years, while consistently expanding gross margins and operating margins. There is a lot to be positive about.

7. My Final Take-Aways

In this straw, I wanted to consider the revenue projections in my current valuation scenarios (see latest Valuation, and revenue extract below in Figure 5) in terms of the current market in which $WTC operates, and how that market might evolve over the next two decades. I learned a lot doing the work, and I hope that at least some here will find it interesting, and also share any alternative perspectives they have.

My own bias is clear. I am a $WTC bull. It is one of the top 5 holdings in my RL portfolio, and incremental sell-downs over the years have long returned the initial investments made.

While its metrics might not be quite as strong as $PME, it is not far short of that. And importantly, while $PME is playing in a global market that today is about $3-5bn in value, $WTC's market is an order of magnitude greater and even more highly fragmented.

I believe Richard White to be a unique leader in developing and globally deploying software that is enabling an industry that accounts for some 9% of global GDP. There are few Australians in a similar position. Not bad for someone who started out in the 80's with a spreadsheet to track the equipment for AC/DC worldwide tours!

Figure 5: Valuation Revenue Scenarios

Disc: Held RL (5.5%)

I am currently in the middle of a deep dive to update my valuation of $WTC, following latest results. (Teaser, preliminary work on Bull Case points to very significant valuation upside potential, with the observation that for the 6+ years I have held $WTC, the market has consistently been playing catch up ... this is a characteristic often seen with long-term great companies, because valuation methods just don't run a strong growth trajectory out far enough, before reverting to a more pedestrian industry-level growth.)

As part of any valuation,I usually try and assess where the compeition is at, partly because most management teams don't really help us with this and often equity analysts also aren't much good either, unless they cover multiple firms in a sector. Add to that, competitors are often privately held, so getting the data can be a challenge.

Anyway, I know several of us use Google Trends as a rough, inferential way of identifying trends in competitive positioning. I wanted to share some analysis I have just done comparing Cargowise ($WTCs platform) with two comparison groups:

• Figure 1, leading Freight Management Systems and
• Figure 2, leading Customs Management Systems. (I have more work to do to make sure I have the correct peer groups)

Historically, the data is noisey, but over the last 12-18 months, we are starting to see a strong signal above the noise. My bull case is (and has been for several years) that $WTC ultimately achieves market dominance as the "operating system" for global logistics, which is a huge market with massive potential for digitalisation to reduce friction and increase efficiency.

Both figures support the Bull Case.

Figure 2 is also interesting when you consider the recently annouced Kuehne + Nagel deal selecting CargoWise for their Customs system, having a reputation in the industry (as I understand it) for using their own systems. (No wonder Richard White gave prominence to this at the latest results.)

Grist to the mill.

Figure 1: 5-year trend for Freight Management Systems

Figure 2: 5-year Trends for Customs Management Systems

In addition to the raw Google Trends outputs above (which you can easily run for yourself), I have run the data through a smoothing fliter (11-point, central moving average) to help make the trends clearer, shown in Figures 3 and 4, below.

Figure 3

Figure 4

Note: Descrates Systems Group acquired Questaweb in early 2021.

Disc: Held IRL (5.3%)

I attended the $WTC 1H FY23 results call today, with CEO Richard White (RW) and CFO Andrew Cartledge. My earlier straw picked out the results highlights, which I will not repeat here, other than to discuss the guidance update. My main focus will be on some of the more strategic insights that came from presentation and discussion. So this straw is structured as follows:

1. Results
2. Guidance Update
3. North American Landside Logistics
4. Customer Win Kuehne+Nagel - #1 Top 25 Global Freight Forwarder Global Customs Rollout
5. My Takeaways

There is always such great content in the $WTC presentation – today was no exception.

1. Results

On results, I re-iterate that they were standout on just about every dimension. Figure 1 is Slide 23 from the Appendix is a good overview of just how strong they are when compared on the 1H22 result, which was also great. And just to complete the picture, FCF growth of +53% compares with +85% in 1H FY22 over PCP. However, in the latest period there was both a return to acquisitions and a big step up in investment in the product platform, which flows on to new capability and price increases.

(Just to put both cash flow numbers in context, my current valuation of $63.60 (which now needs updating) assumes annual FCF growth of only 27% moderating progressively to 18% over the decade ahead. I return to this at the end of this straw.)

Figure 1 Key Operating Metrics (slide 32)

2. Update to Guidance

FY23 revenue guidance was increased from $755m-$780m to $790m-$820m, to reflect inorganic contributions from Shipamax, Envase, and Blume which add $35m-$42m. consequently, EBITDA is reduced by $(5)m - $(3)m from the three, and by $(30)m one time acquisition costs.

Looking at revenue, this would mean that H2 growth to PCP would only be 17%-26%, whereas H1 growth over PCP was 35%.

The discussion with the analysts tried to pin this down. For example, to what extent is this due to a slowdown in global freight movements? RW made clear that freight volumes are a relatively small driver of revenues, and they are not seeing volumes fall on the platform because there are 43 major customer rollouts under way.

I noted in my earlier straw on the Blume acquisition (the largest of the three by far), that it is forecast to grow at 45% to 55% from FY23 to FY24. (Call me suspicious, but I think I now know why they didn’t give a growth rate for FY22 to FY23!!)

When challenged, RW reiterated that CargoWise (increasingly the dominant part of the business) is expected to grow revenue at 30%-40% annually over the medium to long term.

Despite all the discussion, I can’t make sense of the new guidance numbers. No doubt we will see some commentary on this in the analyst reports.

One hypothesis I have, is that RW has taken the opportunity of today’s stand out result to build some headroom in the guidance to allow for any delays in deals closing or some contingency for when they get to see inside the acquisitions properly. Who can blame him if that’s true, as we all know the market is unforgiving on a guidance miss.

3. The North American Landside Logistics Build-Out

Envase and Blume (Figure 2) are important steps in building out land-side logistics in North America, the world’s largest and most fragmented logistics markets, the first of $WTC key development priorities (Figure 3). These 6 priorities are the key areas for investment needed to turn $WTC (Cargowise) into the “operating system for global logistics”.

Figure 2 (Slide 19)

Figure 3 (Slide 17)

First of all, RW said integration would be easy, using $WTC’s proven “integration machine”. Both Envase and Blume are SaaS platforms and will be offered as modules within CargoWise using webservices, so there won’t need to be a customer migration process as there has been for earlier acquisitions. This will then give the product team time to figure out how best to develop and integrate the code and capabilities over time (a “fade-in-face-out” approach).

In the past, revenues from acquisitions have usually declined over time, because the service revenues (a lot of body-shop work) provided to clients becomes redundant as functionality is folded into the CargoWise SaaS environment. That is not expected to be the case for Envase and Blume, because of the integration strategy and existing SaaS platforms.

RW articulated two major aspects of value to customers. First, it gives North American customers full transparency and visibility across all modes of the land-based supply chain. This is a challenge today because of the large number of vendors and systems. Second, it gives international customers using sea and air freight into North America, greater visibility and transparency to their end customers in North America. RW said that, while today, the North American logistics market is locally efficient, it is difficult for international customers, because of different standards and conventions. Finally, it develops a more complete and integrated capability to be rolled out in future, particularly to Asia-Pacific.

(As a side note, I am positively struck by the amount of transparency being given in the appendix as to organic and inorganic financial and value drivers. I think RW has learned the lesson from the January 2020 Short Report. Long term holders will know what I mean! I have fond memories of arguing with the Bucephulus author on HC that he didn't understand the $WTC acquisition strategy.)

3. Customer Win Kuehne+Nagel - #1 Top 25 Global Freight Forwarder Global Customs Rollout

The second most significant insight from the presentation was RW celebrating the recently signed deal with Kuehne-Nagel to provide their customes compliance solution.

Customs Compliance is a capability $WTC has spent 5 years investing in. To secure the world’s largest customs clearing agent is something RW sees as transformational – “a watershed deal”. This is an industry space with “40 to 50 systems from hundreds of vendors.” To date, it is one area where (it was implied) $WTC hasn’t achieved that much traction with clients. However, RW believes that with the world’s largest player choosing them, many others will now follow. Global customers today must deal with multiple solution suppliers, with many systems and many contracts. With Cargowise, having “one system, one supplier, and one contract is much more efficient.”

When asked how material he thought this market could be RW said, “It is large. We don’t know quite how large. But then again, when the iPhone was invented no-one knew the potential size of the smartphone market.” Over the last 6 years, I have heard RW speak on many occasions. He does use colourful metaphors, but I have never found them to be inappropriate over time. So, this made me sit up.

As with all CargoWise contracts, the K-N deal is structured with revenue driven by “seats+transactions”. It will be a multi-year rollout. So if RW is right, then this deal opens another decade and more of new growth as industry participants follow the leader and adopt the solution over the coming years. Many will already be existing customers.

4. My (One) Takeaway

I’m not going to refer to the FY23 guidance. It is perfectly fine, and also its not that important, regardless of what the analysts will write in the next few days. Rather, my overall takeaway is that over time I become more and more convinced that $WTC will succeed in building THE operating system for global logistics. They are well on the way and there are many years if not decades to go.

If you look in the Appendix, slide 28 (Figure 4) shows the annual cohort revenue analysis. Look at the bottom light blue “Customers from FY06 and Prior”. Not only is this growing, the curve has started accelerating again over the last two years. This means that these customers are completing rollouts and/or adding seats and/or handling more volume and/or buying more modules and paying increasing prices. Just think what that means. Collectively those customer who came onboard 17+ years ago, are continuing to grow their adoption and use each year adding increasing incremental revenue every year.

Now that's a quality business, even ignoring all the customers who have come onboard since 2006. So now take a look at figure 5. (The prosecution rests.)

Figure 4 (Slide 28)

Figure 5 (Slide 20)

Given that $WTC exists to solve problems for global logistics, removing friction, increasing transparency and efficiency, then maybe, just maybe, winning as a global logistics player will in part come down to who can most effectively adopt an end-to-end operating system. And $WTC is leading the race to become the global operating system. What does this mean for valuation? I don’t know yet and I will take some time to update my model.

However, I currently have a CV FCF growth of 7% after 10 years of higher growth. Such a big number usually makes me nervous. Perhaps I need to add another decade of explicit growth of 15% or more?

In any event. My valuation is going up. Knowing this, I purchased more $WTC this morning during the call at $55.58. I think that is going to prove to be a good investment in 5-10 years time! (I love it when the NASDAQ has a bad day.)

Disc: Held IRL (now 4.8%)

@Strawman I nominate $WTC for a BabyGiants discussion. Will it become a global industry giant?

$WTC just released there 1H FY23 results.

First half financial year 2023 (1H23) overview

• 1H23 Total Revenue of $378.2 million, up 35% (up 32% organically ) on 1H22

• CargoWise revenue of $289.2 million, up 50% (up 46% organically) on 1H22, driven by growth from existing and new customers including new Large Global Freight Forwarder (LGFF) rollouts

• Signed global customs rollout with world’s largest freight forwarder, Kuehne+Nagel

• EBITDA of $187.3 million up 36% on 1H22 (up 42% organically)

• EBITDA margin of 50%, up 1 percentage point (pp) on 1H22 (up 4pp organically to 53%) reflecting enhanced operating leverage, pricing, new product releases, and ongoing financial discipline

• Underlying NPAT 3 of $108.5 million, up 40% on 1H22; with statutory NPAT of $109.0 million, up 41%

• Strong free cash flow of $137.8 million, up 53% on 1H22

• Interim dividend of 6.60 cents per share (cps) fully franked, up 39% on 1H22 and representing a payout ratio of 20% of underlying NPAT

• Acquisitions of Envase Technologies (US$230 million) and Blume Global (US$414 million), two leading North American landside logistics businesses, announced post-period end, extending and strengthening WiseTech’s position in one of its six key development priority areas

• FY23 guidance confirmed and updated for recent M&A activity to revenue of $790 million–$822 million (representing revenue growth of 26%–30% ) and EBITDA excluding M&A costs of $380 million–$412 million (representing EBITDA growth of 19%–29%)

My Takeaways

$WTC is becoming a very consistent performer. From a quick view, all metrics are very good, with continuing expansion of margins showing operating leverage, and powerful cash generation.

Importantly, the key Cargowise platform is showing strong organic growth, +46% over pcp. This is actually accelerating from the +37% FY22 on FY21,

Revenue growth also accelerated at +32% PCP organic compared with the +26% FY22 over FY21.

The rate of FCF growth at +53% has moderated slightly from the +71% FY22 over FY21,

Finally, good to see that despite two chunky acquisitions being announced in recent weeks, dividends are being raised by +39%.

That's just a quick take. Joining the call at 10:00am AEDT.

SP has pulled back in recent weeks from a high of $63.78 to a more reasonable $55.79. Despite the overnight price action of NASDAQ, which should read through to the ASX tech sector this morning, I expect $WTC will buck the trend on these results.

Disc: Held IRL (4%)

$WTC acquires Blume Global from private equity.

Deal headlines and announcement

• Strategically significant acquisition of Blume Global, a leading intermodal rail solutions provider, for US$414 million.
• Blume brings a core platform for execution and visibility of rail transport in North America where its customers include 6 of the 7 Class 1 US railroads.
• Extends WiseTech’s presence in landside logistics, one of the Company’s six key CargoWise development priority areas, through the addition of rail. 

WiseTech Global (ASX:WTC), developer of the leading logistics execution software CargoWise, today announces its acquisition of Blume Global (Blume), provider of a leading solution facilitating intermodal rail in North America, for US$414 million. Headquartered in the United States, Blume is being acquired from funds managed by Apollo, EQT and other minority shareholders.

North America is the world’s largest domestic logistics region1 , and Blume manages intermodal containers and chassis on behalf of 6 of the 7 Class 1 US railroads, ocean carriers and other intermodal equipment providers including global freight forwarders and Beneficial Cargo Owners (BCOs). Blume is a high-growth recurring revenue business and is expected to generate FY242 revenues in the range of US$65 million to US$70 million representing annual growth of 45% to 55%. Before operational synergies, on a standalone basis, Blume expects to achieve FY24 EBITDA margins of approximately 10% and be cash flow breakeven by the end of FY24.

WiseTech expects to fund the transaction via a combination of US$134.8 million from existing cash reserves, US$155.0 million of debt from new facilities and US$124.2 million new WiseTech Global shares issued to the vendors. This represents a funding mix of 70% cash and 30% WiseTech Global shares. The WiseTech Global shares issued to the vendors will be subject to 12-month escrow agreements from the date of completion. In addition, one-off transaction costs of approximately US$10 million will be funded from existing cash reserves. On completion of the transaction, WiseTech Global expects to have available liquidity of approximately $400 million from existing cash reserves and undrawn debt facilities in addition to ongoing strong free cash flow generation.

The transaction is subject to customary conditions precedent including receipt of US regulatory approval and is expected to complete in April 2023.

My Comments

A second and even larger acquisition in a few weeks focused on the North American market. This is $WTC's largest acquisition, easily pipping Containerchain in 2019, which was A$492m (according to @Magneto's very helpful summary. Love these, by the way.)

I do, however, wish there wasn't such a blatant attempt to make the acquisition multiple appear smaller than it is. FY24, really Richard. Give me a break! So backing it out, FY23 forecast revenue is US$45m, so the acquisition multiple is 9.2x revenue. (Note: $WTC trades on 24x FC FY23 Revenue).

$WTC has been relavtively quiet over the last 3 years on the acquisition front, digesting and integrating the buying spree from 2017-2020 that inspired the famous short-seller report. In those three years they have well and truly proven the power of their organic growth, so I am not concerned to see two recent and well-signalled strategic investments.

$WTC has the leading solution for global logistics. If it is to achieve the goal of becoming the dominant operating system for global logistics, then it needs to be a market leader in North America. From that perspective, the deal makes sense.

Once more, I am pleased to see Richard moving to build out capabilities and market footprint for $WTC.

Disc: Held in RL (4%)

$WTC is acquiring privately-held US landbased logistics software firm Envase for US$230m in a 70% cash and 30% new $WTC shares deal.

https://newswire.iguana2.com/af5f4d73c1a54a33/wtc.asx/2A1426884/WTC_WiseTech_acquires_leading_landside_logistics_platform_Envase

Envase is expected to achieve 2023 revenue of $35m and a "low to mid 20% range" EBITDA margin, an acquisition multiple of around 30x EBITDA. (This is a lower multiple than $WTC currently trades on but it is a significantly lower margin business.)

With 1300 customers across North America in trucking, depots, ports and warehouses, this offers a great opportunity to deepen $WTC penetration into landside logistics in a very fragmented and material market.

I am pleased to see Richard White putting that cash pile to good use.

Disc: Held in RL.

Just off the $WTC FY22 results call. The metrics, y-o-y comparisons, and trends over 5-years speak for themselves so I won't rehash.

In the last year, they have added some of the biggest global logistics firms as new clients. Each new client involves an implementation that takes years, and delivers year of revenue growth.

But not only did they grow, they managed internal costs, achieving costs reductions with a annual run rate of $50m. Rarely, if ever, have I seen a firm that is growing so strongly while simultaneously driving efficiency and capability. That is the holy grail of business management.

My main takeaway is that this is on every level an innovation machine with huge running room ahead of it. The global logistics industry is massive. When asked in Q&A what he believes the global TAM to be, CEO and Founder Richard White said "Addressible market is a strange concept. We are solving pieces [of the supply chain management problem] that have never been served by sofware before, and then we are connecting those solutions through the platform, and then adding further value by taking them from on-prem to cloud. None of this is a traditional TAM. What we are doing is taking away labour, risk and reducing IT costs."

I'm going to leave it at that. Looking forward to FY23. RW and his team has such a good handle on the business and such excellent forward visibility that I suspect even with the challenging growth targets, there is space for outperformance. And the market agrees.

I'm going to look at my valuation over the coming weeks. SP is up 10% at time of writing and heading back towards $60, with a p/e over 100. So I can't say buy today, because there will no doubt be an opportunity to get it cheaper.

Disc: Held IRL (6.5% and rising)

https://newswire.iguana2.com/af5f4d73c1a54a33/wtc.asx/2A1392790/WTC_WiseTech_delivers_strong_FY22_performance_and_growth_outlook

$WTC annouces its FY22 results - Highlights

• FY22 Total Revenue of $632.2 million, up 25% (26% ex FX) on FY21 – at top end of guidance range

• CargoWise revenue of $447.9 million, up 35% (37% ex FX) on FY21, driven by Large Global Freight Forwarder (LGFF) rollouts, new customer wins and increased usage from existing customers

• Market penetration momentum continues with the notable win of UPS and four additional new LGFF rollouts in FY22

• EBITDA of $319.0 million up 54% on FY21

• EBITDA margin of 50% up 9 percentage points (pp) on FY21, reflecting enhanced operating leverage, the benefits of exceeding cost reduction program targets and pricing offsetting inflation

• Underlying NPAT 1 of $181.8 million, up 72% on FY21; statutory NPAT of $194.6 million, up 80% on FY21

• Strong free cash flow of $237.3 million, up 71% on FY21; cash at 30 June of $483.4 million

• Final dividend of 6.40 cents per share (cps), up 66% on FY21 and taking full year dividend to 11.15cps, up 71% on FY21

• Strong outlook: FY23 guidance of 20%-23% revenue growth and 21%-30% EBITDA growth

Another great year from one of the ASX's great SaaS firms. Together with $ALU, $WTC remains one of the stars of Aussie tech.

I and others often comment about good operating economics and operating leverage. $WTC is a great case study.

About to go on the investor call. Access here: https://webcast.openbriefing.com/8617/

Disc: Held IRL