WiseTech Global (WTC) was co-founded in 1994 by Richard White (who remains the CEO) and Maree Isaacs (who is a director) initially writing code to help automate processes for freight forwarders. It now operates its flagship software, CargoWise, an integrated global logistics management platform, designed to help companies manage tariffs, regulation, tracking, cross-border compliance, taxes and other supply chain execution functions across the world.
Recurring license revenue. c.89% of FY22 group revenue was considered recurring, providing high quality and resilient income throughout the cycle.
Strong operating leverage. FY22 saw a gross profit margin of 85% and a 50% EBITDA margin (up from 41% in FY21) reflecting benefits of exceeding cost reduction program targets and pricing offsetting inflation. Whilst we don’t expect the margin to materially increase from here, a 50% EBITDA margin helps justify the premium to market.
Product innovation driving growth opportunity. Nearly c.30% of revenue is reinvested into R&D, with customers increasingly signing up to more features on the platform. The launch of future products could see WTC’s addressable market materially expand as it moves into adjacent opportunities.
Increasingly complex supply chains driving adoption. As global supply chains become more complex, companies will likely continue to spend on software infrastructure to assist the management process. WTC is amongst the market leaders and should see continued adoption of its products.
M&A integral to strategy. The industry is highly fragmented, and WTC has been aggressively pursuing M&A opportunities to improve its strategic offering, posing both up and downside risks.
Investment View
We rate WTC a hold. The company has a significant growth opportunity ahead of it, however at current valuations, we struggle to justify a more positive position. There are significant risks to new product launches, and short-term growth stagnation with the product rollouts. Risks also surround the integration of M&A activity, potentially diluting returns.
We would need to see evidence of continued historical growth rates for us to be more positive on the stock and note risks to future product launches, which have been ascribed significant earnings benefit and valuations by the market.
Business Overview
WiseTech Global (WTC) is a leading provider of software solutions for the global freight and logistics industries. The company was founded in 1994 and is headquartered in Sydney, Australia. It operates globally, with a presence in over 160 countries, in 30 languages and over 18,000 customers that include some of the largest and most complex logistics companies in the world. It employs over 2,000 people globally. Richard White (co-founder and CEO) currently owns c.40% of the company.
WTC’s software platform, CargoWise One, provides a comprehensive suite of integrated applications to manage all operational aspects of a logistics business, including end-to-end supply chain visibility, cross-border compliance, real-time tracking, and financial management. The platform is highly configurable and scalable, allowing customers to customise it to meet their specific business needs and grow as their businesses expand.
Historically, logistics providers have utilised manual data entry into legacy systems, requiring large staff numbers. Often the legacy systems are not integrated to adjacent software and has limited functionality, with upgrades being expensive and requiring bespoke solutions. This provides WTC a clear growth pathway and sustainable competitive advantages with its encompassing and integrated software being consistently updated.
Large global freight forwarders (LGFF) are WTC’s largest customers, including companies like DHL, UPS, and Toll. Of the 25 largest, 10 of them are customers, with a key priority for the sales team to sign the remaining. WTC also targets Third Party Logistics (3PL) providers, which provide a wider scope of logistics services and a more integrated approach to supply chain management. Both industries continue to grow, providing support for WTC’s revenue growth.
Compared to many listed peers, WTC has a compelling investment proposition, driven by a high recurring revenue and industry leading margins. WTC records recurring revenue from On-Demand License usage and from One Time License (OTL) Maintenance. Non-recurring income is from OTL purchases and support services, including bespoke and consulting work.
Figure 1: High consistent recurring income driving revenue growth (A$m)
WTC boasts industry leading margins as it continues to improve its operating leverage. It has reached a scale where it can comfortably and consistently deliver higher margins, inclusive of significant reinvestment in its products. Margins have improved from c.30% in 2016 to current FY23 guidance of between 51%-53%. In FY21, margins benefitted particularly from a more targeted sales approach and cost decreases in travel & entertainment in response to the Covid-19 environment. Cost out programs also came in above expectations, and this continued into FY22.
Figure 2: Operating leverage driving stronger margins and EBITDA growth
Key Earnings Considerations
LGFF rollout adoption and contract wins. LGFF are the key customers that WTC is targeting. Of the top 25 LGFF, WTC currently has contracts with 10, providing a solid growth runway opportunity. If WTC announces any new enterprise customers, there could be a material earnings uplift.
Product expansion and existing customer seat growth. As WTC’s customers grow, so too does the potential need for more licenses to operate WTC’s software. Increases in adoption of seat licenses could materially impact WTC’s growth and recurring revenue profile. Further, customers could adopt increased functionality on the platform, leading to higher revenues per user. Historically, existing customers’ increasing adoption of products and licenses has been a significant driver of growth.
Shipping volumes. WTC derives a small, fixed fee revenue for each cargo that is moved utilising its software. We expect with the rise of e-commerce and online orders, that the number of cargos needing to be moved will also continue to increase, providing a solid growth pipeline for WTC. Any material changes in shipping volumes would impact WTC’s revenues, although this stream is less material than the software seat licenses to overall group revenue. As the economy softens and retail sales slows due to rate rises, there is some potential risk to short-term earnings.
Inflation impacts on margin. The majority of WTC’s spend is on its employees across product development, sales and marketing and general administration. Whilst WTC has demonstrated significant scale to date, there is a risk that margins may not improve from the current level and incremental revenue gains will come at higher costs.
M&A strategy and integration. M&A has been a significant part of WTC’s growth strategy since listing. Most recently in January 2023, WTC proposed to acquire Envase (a software provider of supply chain technology, specialising in drayage (short haul) transport management) for US$230m, the largest acquisition to date. We expect the acquisition to be accretive, however there are always risks to integration and realised synergies.
Large Total Addressable Market
WTC estimates that its core addressable market of global supply chain execution software is US$4.7b. With the anticipated launch of its product expansion ‘CargoWise Neo’ product (no date set), it plans to enter the end-to-end supply chain management segment, including procurement and supply chain planning. Both markets are estimated to be US$5.2b and US$5.3b respectively, providing a total future addressable market of US$15.2b. In its core segment for FY22, WTC is currently c.9.4% penetrated, providing significant room for growth. We expect the addressable market to also grow over time as the underlying supply chain industry continues to grow.
Figure 3: Global supply chain management IT segment total addressable market
Key Growth Drivers
Revenue growth has been significant, growing CargoWise revenues 31%pa from FY16 to FY22, with strategic acquisitions also contributing incremental revenue. Continued customer adoption has seen an acceleration in this growth, however forecasting future revenue trends is challenging given the opaque nature of Enterprise Software. We break down the 6 key drivers of growth for CargoWise below. We note that the recurring revenue growth drivers are averages over a six-year period and that discrete annual growth drivers may vary each year.
Figure 4: CargoWise recurring revenue growth drivers
LGFF rollout. Large Global Freight Forwarders (LGFF) are WTC’s key target customers. It was also the most significant component of growth, being a function of customer wins and existing customer growth (both organically and through acquisitions). Historically this has contributed to 12%pa revenue growth, as they roll out the software to different jurisdictions, and continue to add seat licenses. Further, as the LGFF participate in M&A activity, it is likely that they will roll out software to the newly acquired companies, providing additional continued growth opportunities.
Figure 5: CargoWise rollout over time to key customers
New Customers. WTC has an opportunity to grow outside of the large players, and take share with some of the smaller players, noting the 3PL market is highly fragmented. There are still incentives for firms to adopt software and incentivise digital efficiency. However, there is a smaller overall pool of these companies, and given smaller scale, will be a smaller overall opportunity. Historically this has added 6%pa of revenue growth for WTC, which we believe will be difficult to maintain.
Existing customer growth and market share. Smaller customers of WTC have continued to grow and take market share, ever increasing their reliance on CargoWise as they scale. This has historically provided 3%pa revenue growth. We see this growth at risk, especially after the supply chain disruptions over the last few years where the larger players have been able to better withstand the volatility.
Digital freight forwarders are a recent competitor in the space, which offer web-based real time offerings. As these become more commonplace with the rise of e-commerce, there is a risk that existing WTC customers may lose market share, potentially leading to some churn for WTC. We view the historic growth rate at risk for this segment.
Market Growth. Supply chain volatility provided some supernormal profits for freight forwarders and logistics companies, leading to overall market growth. The increasing prevalence of online sales is further increasing growth for logistics market, and also the number of shipping transactions, thereby increasing WTC’s revenue. Historically this has contributed 3%pa to revenue growth for WTC and we expect a relatively similar growth level for the foreseeable future.
New product releases. Feature improvement has been a key source of up and cross selling opportunities for WTC and has historically contributed 3%pa revenue growth. There is scope for this growth rate to improve based on the proposed features earmarked for future years. The release of NEO should see WTC penetrate adjacent markets, opening further opportunities for new customers. WTC spends c.30% of revenue on R&D and is constantly adding new products based on client needs and feedback.
New product enhancements reflected in price increases. WTC’s strong product proposition and low customer churn (<1%) provides a unique opportunity for a sustained competitive advantage and therefore pricing power. WTC has put through several price increases above inflation over the last few years and has not experienced lower customer demand. Historically price rises have contributed 4%pa to revenue growth, and we believe this level of price increases is sustainable.
Valuation Considerations
WTC trades on a lofty multiple given its superior margins and above market earnings growth rates. Whilst WTC does have a market leading product, there are several competitors offering similar product functionality. We list the key peers and valuation metrics below.
Figure 6: WTC expensive compared to peers, but has a superior margin
Compared to its own 5-year history, WTC is currently trading on a 12month forward PE that is below 1 standard deviation and not far off its peak lows. We caution that given higher relative interest rates and bond yields, that the PE may potentially have further to de-rate to a more normalised level. The closest peer is Descartes Systems Group Inc, which trades at a lower multiple, however has a lower earnings growth rate and margin. On an FY25 basis, the PE is quite similar, implying that the short-term higher PE for WTC is offset by higher future earnings growth rates.
Figure 7: WTC PER -1SD below its 5-year history
Figure 8: PER in line with its peers, although trading range is wide
Relative to the ASX200, WTC has traded at a significant premium of 4.9x. It is currently trading below this, although not by a significant level. On an EV/EBITDA basis relative to history, WTC is trading slightly below its 5-year average.
Figure 9: WTC historically trades 4.9x the ASX200 index PE, currently closer to 4x
Figure 10: EV/EBITDA currently in line with its peers, although trading range is wide
As a growth stock, there is material volatility with the trading of the share price. Global interest rate expectations will largely impact the investor sentiment towards risk assets. We note the macro environment is likely to continue to be volatile, which may present opportunities for us to be more positive or negative on the outlook for returns of the stock.
Investment Thesis
We rate WTC a Hold. The company has a significant opportunity for further growth and is a global leader in a fragmented market. We expect continued growth and operating leverage driven by a digital transformation from the logistics industry, as well as an increasing total addressable market through new product launches and enhancements. WTC’s integrated platform is clearly superior to legacy in-house systems which require significant expenditure on manual data processing and has demonstrated its efficiencies for customers outlined by a <1% churn rate.
However, WTC trades on a multiple well in excess of the market. Whilst a higher multiple is justified by the sustainable competitive advantage, high growth rates and margins, we would prefer to see a lower multiple for us to be more positive. There are also considerable risks for the business, with WTC making numerous acquisitions in the past, creating potential integration risks. There is substantial earnings and valuation ascribed to future product launches which may not come to fruition, although WTC does have a strong reputation for successful feature rollouts, as evidenced by its continual spending of c.30% of revenue on R&D.
It is difficult to accurately forecast growth given the opaque nature of enterprise software deals. For us to be more positive, we would need to see evidence that historical growth rates can continue to be achieved, where we believe the growth is at risk as the company matures and there become less customers to roll-out to.
Risks to Investment View
