The following content is a collection of random notes on WiseTech Global. The accuracy of the data has not been verified. This is not a recommendation to trade in the securities of WiseTech Global.
Chapter 1: Introduction
Boring is the journey of a carton box from the time it is taped and sealed in a remote factory in Southeast Asia. Pushed from one escalator to another, it lands in the warehouse of the factory. Here it lies waiting to be stacked into a bigger carton box. The carton box then gets loaded into a truck and then waits for the truck to be fully loaded. The fully loaded truck now carries the carton boxes to the freight terminal.
At the freight terminal it hopes that the customs paperwork has the right product description and destination details. If customs checks are cleared, the carton box is loaded into a container that will be shipped via rail, road, sea or air. The container load is verified at each international border before it reaches the destination terminal. Carton boxes are unloaded and shipped to the nearest warehouse. It is in this warehouse that the carton box is picked for its final destination.
If you have lost interest in this article then it is in this boring landscape that WiseTech Global operates. WiseTech provides software that help execute complex logistics transactions and manage frieght operations from a single platform, CargoWise. WiseTech started off a solution for a sepific logistics challenge for freight operator in AU/NZ. However, over time, it has expanded from Australia into global trade and from a specific solution for freight forwarders to solving complex problems for freight, customs, landside logistics and warehouse.
Here is a screenshot of the long term plan for WiseTech. The company is hoping to move into customs and compliance and then into landside logistics and finally into warehouse.
While software helps a lot to move a carton box from the doors of the factory to the footsteps of a house, there isnt a single software that can encapsulate all the operations. Most logistics providers use custom build software or license multiple software to manage different operations. The provider then employs human resources to port data from one software to another. For instance, the trucking company that is engaged to pick a load at the source uses a software that is different from the trucking company that is engaged to pick a load at the destination. The inefficiency in the process is painful but it is too complex a problem to be solved. Like Richard White says, "I have a healthy disrespect for status-quo". A read of Wisetech's
credo and mantras reflects on their culture that allows WiseTech to take on these complex problems and solve it one innovation at a time.
Here in lies the need for a single operating system for logistics at a global scale.
Chapter 2: Cargowise
Before penning the thoughts of mine on WiesTech global, it is critical to understand the software product that WiseTech delivers. CargoWise is a 'software as a service' (SaaS) with a global dataset. The users of Cargowise, launch the software on their device and the software connects to the cloud and launches an application that contains multiple modules (freight, customs, warehouse etc).
Each module represents different aspect of the logistics chain. The software is licensed as a pay as you go (PAYG) model. The more the usage, the higher the cost of software. This licensing model has played a significant role in the success of WiseTech. In favourable economic conditions, users of CargoWise are happy to pay extra to leverage the efficiencies of the software. When times are tough, the operating costs are lower as usage of CargoWise is less.
This is a moat for the business, for when times are tough, companies that use CargoWise use this lean period to move away from expensive software and migrate into the PAYG model of WiseTech. Richard White (CEO of WiseTech) compares migrating software in a logistics company to performing surgery on a person running marathon. So when business volumes are low, logistics companies find the breathing space to migrate IT software. That could possible explain the 3% growth per month that WiseTech experienced during the GFC of 2008.
Apart from being a single platform that caters to multiple aspects of logistics and being licensed as PAYG, WiseTech also follows a support model that is cost accretive for the company. CargoWise doesn't provide support over phone. All support requests have to be logged in via the CargoWise application. For first time users of CargoWise, this is a challenge and a deterent from using the software. Such a model of operation allows for WiseTech to employ more engineers in the R&D space. Similarly, WiseTech doesnt have a large pool of sales and implement engineers. For sales, the company relies on digital marketing and customer references. Apart from that, new acquisitions bring in new customers as well. As for implementation, WiseTech relies on its network of certified partners and operators.
WiseTech is one of few companies that has less employees for sales, implementation and support and most of its employees are engaged in R&D. One of the mantras of WiseTech is to 'lead with content'. This mantra encourages creating documentation and video tutorials. It is in this context that WiseTech Academy had 13,400 courses completed in FY23. Similarly, LinkedIn post cover features of CargoWise and hopefully that makes it easier to drive sales conversation.
CargoWise as a product is most capable in the freight forwarding business (by sea and air) and the following product modules are still in the early stages of adoption.
1) Frieght forwarding by road and rail
2) Customs and compliance
3) Warehousing
Unlike other software product companies, development of new features in CargoWise requires experienced engineers in the field of logistics. For instance, developing a customs module for Mexico would require experienced operators in Mexico. This is one of many reasons why WiseTech would acquire smaller local companies. It provides quick access to local experienced operators. Without these acquisitions, WiseTech engineers in Sydney would have a tough task at creating customs module for Mexico. These acquisitions are then integrated into CargoWise by adding new code for the existing CargoWise product.
CargoWise is being developed as a global operating system for logistics and this is a slow and gradual process. For instance, WiseTech acquired many small companies around the world to develop the customs capability of CargoWise. The acquisitions occurred 6 years ago and the adoption of the customs module has only picked up in 2023. Similarly, major acquisitions were made in land side logistics in 2023. The adoption of this product module will happen some time in the future. In the words of Richard White, "product, product, product is the marketing and sales for the company".
An existing customer of CargoWise would find it delightful to know that they are able to perform more and more with their existing software without spending any time to ink a new contract.
Chapter 3: WiseTech Global
Let me not reinvent the wheel. Instead, let me share some of the many conversations that I have heard about WiseTech. These conversations shed light on the birth of WiseTech and its history.
How I built a $20 billion software compounder | WiseTech CEO Richard White (youtube.com)
How Richard White went from mechanic to a $9.7 billion fortune (forbes.com.au)
346: Enable and Empower Your Supply Chain, with WiseTech (youtube.com)
Untangling the global supply chain - Richard White of WiseTech | ASX CEO Connect Series (equitymates.com)
Why this Multi-BILLION Dollar Aussie Company Listed On The ASX: Going Public w/ Richard White (youtube.com)
Bootstrapped Legends: Richard White & CargoWise | The Highpoint (simplecast.com)
https://www.news.com.au/finance/secrets-of-my-success-how-richard-white-became-one-of-australias-richest-people/video/c347a5c8c1607c383257150afb8dc366
The above links talk about the journey of WiseTech but it doesnt capture the growth of the company in other aspects. So, here are some charts to capture the growth of the company.
The following chart shows the consistent growth in revenues. The estimated revenue of FY24 is $1.04M to $1.09M. Customs , warehouse and landside logistics are some of new features of the product that were launched around 2023. So while the cost of development has been upfronted, the revenue from these new features would come in next 2-5 years as these new features get adopted more.
WiseTech Global is a cash flow positive company and it generates more cash each year. In FY23, they completed two major acquisitions in Blume and Envase. This has resulted in the net cash holding dropping from 483M to 143M.
As the revenues and profit grows, more and more is invested to enhance new product features. Here is a chart that represents the growth in R&D spends and new product features. Though the spending on R&D has increased, it has not resulted in an increase in the number of new product features. This is a number that will be keenly watched in FY24 and FY25.
KPMG are the auditors of the company and the cost has seen a steady growth
Chapter 4: Acquisitions
Logistics software industry is a fragmented market with a lot of small niche players for each market segment. Acquisitions have been a strategy of WiseTech since the beginning. The highly cash positive business of WiseTech allows it to make small acquisitions and then turn them around in due course. However, if WiseTech didn't have the cash from operations, these acquisitions would have been difficult to assimilate. As they say, 'money makes money'.
There are many benefits of acquisitions in the logistics industry. Apart from new customer, acquisitions allow CargoWise to expand into new regions, expand into new product categories and gain access to highly skilled employees. When CargoWise product capability was expanded from freight forwarding to customs, WiseTech had to develop customs capabilities for major countries. How would it achieve these capabilities? They went around acquiring small local companies from around the globe and used the local talent to add customs capabilities to the CargoWise product. This wasn't a 6-month process but more a 6-month to 6-year project.
The following screenshots shows how WiseTech acquired companies in the customs space between FY12 and FY20. It has then integrated these capabilities into its own product CargoWise. These customs capabilities has allowed WiseTech to onboard Kuhne Nagel (a Swiss company) as its customer. For reference, Kuhne Nagel is around 130 years old Swiss company that hold the number one position in world wide freight movement. They use their own software for freight movement but have partnered with WiseTech for the customs module. What would come out of the partnership will be known in 2-5 years time. However, if it wasn't for those many small acquisitions, WiseTech would not be able to have a conversation with Kuhne Nagel. Kuhne Nagel is a 10% margin business and having their own software development team is a huge cost for Kuhne Nagel.
FedEx Trade Networks also
confirmed, after 30 June 2023, that they intend to roll
out CargoWise global customs alongside their ongoing
global forwarding rollout. These are mere announcements, and it would take a few years for the revenues from the customs module to become significant.
After Customs, WiseTech has been focused on acquisitions in the warehouse and transport management systems. However, recent acquisitions have been in the digital document and landside logistics space. The warehousing solution has been rolled out in 2023 but the benefits of landside logistics, container and truck load optimization and digital documentation will be in FY24 and beyond.
WiseTech has used up a lot of free cash for acquiring Envase and Blume in FY23 and hence it is possible that there are no major acquisitions happening in FY24. WiseTech offers upto 20% of NPAT as dividends but it is quite possible that WiseTech uses up its cash to acquire companies in FY25.
WiseTech not only uses its free cash but also uses its own shares as a leverage to offer value to potential acquisitions. The acquired companies gain value from the growth of WiseTech shares. At a market cap of 24B, WiseTech has grown 17 times its IPO price. A small logistics company somewhere in the world, would not mind being acquired WiseTech if they would get some shares of WiseTech in return.
Acquistions for WiseTech come in different form. Some are small and can be quickly integrated into the core product. For example, CargoGuide and CargoSphere acquisitions were quickly integrated into the core product. However, an acquisition like Trinium, Envase and Blume will need time before they can be fully integrated with the core product. As WiseTech is a R&D focussed organization, employees of the acquired company in the areas of sales, implementation and support will need to be redeployed into other departments.
Chapter 5: Business moats and challenges
For WiseTech to be successful, it needs to stay ahead of existing and emerging software providers. Richard White once mentioned that inertia of the customer is the biggest competitor for WiseTech. Logistics companies don't want to change their software because of the complex nature of the migration. Therefore, CargoWise should be able to add new features and modules to add enough value for customers to make the decision to move to CargoWise. However, once they have made the move, they then become very sticky customer. As CargoWise adds more and more products to its core platform, it would become more difficult for existing customers to find a replacement.
The ability of the business to generate 100M cash each year means that WiseTech can acquire new engineers and new companies. Engineers are the raw material that is required to build the software features of CargoWise. Acquisitions, as mention in chapter 4, are valueable to the growth of CargoWise. On the other hand, if WiseTech didnt have the ability to generate cash, it would have struggled to hire new engineers and acquire new capabilities. This would limit their ability to grow. The ability to generate 100M plus free cash each year is a great safety net for the business.
The top 5 shareholders of WiseTech own 80% of the shares. This then allows the business to make corporate decisions that are best suited for the business than the shareholders. Top 20 shareholders have ~93% of the shareholding and it indicates how tightly these shares are held.
Logistics industry is a low margin business and hence there isn't a great desire to spend money on IT. Therefore, the ability of new startup companies to emerge in this sector is very low and their ability to remain profitable is challenging. At the same time, customers of WiseTech can remain profitable and use their profits to acquire other operators and in turn grow WiseTech's business. Thus the low margin profile of logistics industry is a great enty barrier for other software companies.
The raw material for WiseTech is its engineering talent and its cash and share capital. WiseTech is engagement with schools using the grok academy and has partnerships with number of universities in Australia. This allows for a steady stream of engineers into the company. In my mind, young students in university studying IT would aspire to work for WiseTech because of its
earn and learn program. As on date, WiseTech is not as aspirational as Google, Apple, Microsoft, Facebook or Atlassian. However, the employee friendly policies of WiseTech would mean, it would transform itself into an aspirational workplace for young engineering talent. The employee attrition rate at WiseTech is at 6% and it is a number that needs to be watched closely to understand the culture of WiseTech. The level of attrition is far lower than other global tech companies.
The number of employees has doubled to ~3000 employees in the last 6 years. However, the number of new product features has remained the same at ~1100. This number will be watched closely to understand how well WiseTech is able to scale its operations.
Finally, WiseTech has had a single CEO for the past 30 years. The passing of the leadership would remain a challenge for the organization.
Chapter 6: Conclusion
WiseTech is a tech giant in the making that is understood well by some investors. The ability to deliver on its promises is a highlight for me. For instance, in the last 5 years, WiseTech has met its revenue and profit guidance (or exceeded it). Similarly, WiseTech had committed to more female representation in the company's board. As on Feb 2024, the board of WiseTech would have more 30% female representation.
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