The WiseTech Global Ltd (ASX: WTC) share price is crashing more than 20% lower today following the release of the company's half-year results. Forecast growth was lower than previous rates of growth leading to a sell-down of WiseTech shares.
At the time of writing, the WiseTech share price is trading 20.45% lower at $23.42.
WiseTech's business
WiseTech develops and provides software solutions to the logistics execution industry around the world. The company has more than 15,000 customers across over 150 countries including 40 of the top 50 third party logistics providers and the 25 largest global freight forwarders.
In recent years, WiseTech has been relentless in its focus on growth through acquisitions, having made 15 acquisitions across Europe, Asia, Australasia, and the United States in FY19.
WiseTech's 1H20 results
WiseTech reported revenue was up 31% to $205.9 million in 1H20 compared to $156.7 million in 1H19. Between 1HFY16 and 1HFY20, revenue has grown at a compound annual growth rate of 43%, fueled by both organic and acquisitive growth.
$126.5 million in first-half revenue was attributable to existing and new customers of WiseTech's CargoWise platform, while $79.3 million was attributable to acquisitions made since 2012 that are not embedded in CargoWise.
CargoWise One is WiseTech's flagship software program which provides for integration, automation, and communication within the supply chain. Modules can be added to manage everything from accounting to land-transport.
Recurring and diversified revenue
90% of WiseTech's revenue is recurring, with this figure rising to 99% on the CargoWise platform which has an annual attrition rate of less than 1%.
Existing customer revenue grew $17 million in 1H20, providing 70% of CargoWise revenue growth. Revenue has also been further diversified with the top 10 customers now accounting for 19% of revenue compared to 25% in 1H19. No single customer accounts for more than 5% of revenue.
EBITDA growth despite margin compression
Earnings before interest, tax, depreciation and amortisation (EBITDA) increased 29% to 62.5 million. EBITDA has grown at a compound annual growth rate of 45% between 1HFY16 (pro forma) and 1HFY20.
Nonetheless, the overall EBITDA margin has fallen from 34% in 1H18 to 30% in the current half. For the CargoWise platform, however, EBITDA margin has increased from 46% to 49% over the same period. This reflects continued improvements in efficiency.
Operating expenses
$28.8 million was spent on sales and marketing, equating to 14% of revenue and up from $18.1 million in 1H19. WiseTech reports the additional spend was used to amplify the brand, support new product launches, and provide marketing in new geographies and adjacencies.
Product design and development cost WiseTech $38.3 million during the half, equivalent to 19% of revenue and up from $31.2 million in the prior corresponding period (pcp). This was attributed to new acquisitions which generally have higher levels of maintenance and support changes.
General and administration expenses accounted for $39.8 million or 19% of revenue. This reflects increased investment to support acquisition management teams and additional headcount in corporate functions for global growth.
Continued high investment in R&D
WiseTech is investing heavily in innovation and product development, spending $73.3 million in 1H20, up from $51.2 million in the pcp. More than 450 upgrades and enhancements were made to the CargoWise platform in the half.
The increase in spend reflects growth in the innovation pipeline of commercialisable development, acquisitions, and additional investment in industry experts and skilled software developers.
Over the last 5 years, WiseTech has invested $368 million in R&D with some 3,500 features and enhancements added to its software products in this time. By contrast, sales spend is relatively low, accounting for 14% of revenue this half. Just 12% of WiseTech's workforce is dedicated to sales and marketing, compared to 49% dedicated to innovation initiatives.
Profits and dividends
Gross profit margin was static at 82% for the half, down from 86% in 1H17 and 85% in 1H18. Net profit after tax and amortisation (NPATA) of $33.5 million was reported, up 22%.
Basic earnings per share came in at 18.8 cents, a 147% improvement on 7.6 cents in 1H19. An interim fully franked dividend of 1.7 cents per share was declared, payable in April 2020.
Balance sheet
WiseTech has total assets of $1,205.8 million with total liabilities of $375.7 million. The company had cash and cash equivalents of $233.1 million at the end of 2019, down from $260.1 million at the end of June 2019. The decrease in cash and cash equivalents mainly reflected acquisition payments and investment in capitalised development, partly offset by cash from operating activities.
Funding alternatives in place include share issuance to acquisition sellers and an undrawn debt facility of $190 million. Current borrowing liabilities are $0.2 million with non-current borrowing liabilities of $0.4 million.
WiseTech reports that its balance sheet is strong with healthy cash generation to support growth and strategic initiatives.
Outlook
WiseTech has forecast FY20 revenue of $420 million to $450 million, which would represent growth of 21% – 29% compared to FY19. FY20 EBITDA is predicted to be in the range of $114 million to $132 million providing growth of 5% – 22% over FY19.
This would represent slower growth than has previously been achieved, however, WiseTech has previously reported that much of the heavy lifting in terms of geographic acquisitions has been completed.
The industry environment in early 2020 has been subdued with the coronavirus closing manufacturing and delaying trade. US imports from Asia fell on a year-on-year basis in December and January for the first time in a decade. Container departures have slumped across Asia and particularly from China since late January.
WiseTech nonetheless reports that it is focused on a potent growth strategy in FY20 by driving innovation and global expansion. The strategy centres around driving usage of the CargoWise platform through greater usage by existing customers and increasing new customers on the platform.
WiseTech is looking to accelerate into new products, geographies, and adjacencies with long term growth to be driven by innovation and acquisitions. Strategic acquisitions are anticipated in order to secure resources and market entry, with the company previously advising the focus would be on smaller, but important European economies and key remaining markets in Asia.
