WiseTech Global Ltd (ASX: WTC) shares were down more than 12% this morning before entering into a trading halt again after research firm J Capital released Part 2 of its short report. This Rask video explains short selling:
About WiseTech
WiseTech Global was founded in 1994 by Richard White to provide software to the logistics sector. Since then it has grown to become a global provider of logistics software, claiming to service 19 of the top 20 logistics companies globally. WiseTech makes money by charging its customers on a ‘per use’ basis rather than as a subscription model. Meaning, WiseTech directly benefits as its customers grow their businesses.
What’s Happened?
On Thursday last week, China-based research firm J Capital Research published a short report that sent WiseTech shares down 10% before they were placed in a trading halt. The 31-page report, which you can read about here, accuses WiseTech of overstating profit and organic growth, and describes WiseTech’s reported European revenue growth as “suspect”, among other claims.
After market close on Friday last week, WiseTech released its response to the claims, saying that the company, “rejects entirely the allegations of financial impropriety and irregularity contained in the document”.
Rask Media’s Jaz Harrison detailed WiseTech’s response in this article here.
Part 2 Of The Report
Just after 10:30am this morning, J Capital released the second part of its report which addressed WiseTech’s response and then went on to shine a spotlight on WiseTech’s acquisitions and CargoWise One customer attrition rates, among other things.
A pause in trading of WiseTech shares on the ASX occurred around 15 minutes later, with shares eventually entering into a trading halt, but not before tumbling 12.3%.
Acquisitions
The large portion of this second 31-page report details WiseTech’s supposed, “poorly integrated, underperforming acquisitions”. J Capital claims to have conducted interviews with 18 former employees and competitors, which the research firm claims to show that WiseTech fails to devote resources to integration of acquired companies, and when the company eventually does, it usually raises prices on existing customers who then tend to go elsewhere.
J Capital focused on seven of WiseTech’s acquisitions in the report, accounting for $130 million of the $400 million cash consideration paid for acquisitions since IPO. In doing so, the research firm interviewed 14 former employees from these companies, spoke with competitors, visited offices, and obtained publicly available financial reports from three subsidiaries.
According to the research firm, the feedback from former executives of acquired companies was consistent in that, “integration has been slow or non-existent, promised features never get added, and WiseTech’s vertical management style makes decisions slow and bottlenecks hard to break through.”
“Exaggerated” Customer Claims
J Capital also argues that WiseTech has been misrepresenting its client relationships. Although WiseTech considers all of the top 25 freight forwarding companies as customers, which J Capital accepts is true, the research firm believes only seven use WiseTech’s core CargoWise One platform: “The rest either use one of the software services the company acquired, one of the modules, or have a subsidiary (usually acquired) that uses CargoWise One.”
According to J Capital, customers such as Mainfreight, K&N, and Allport have proprietary systems, while Australia Post, CEVA, DHL and Palpolina use competitor Expedient.
Additionally, through a third-party survey company, J Capital interviewed executive users of CargoWise One from 13 companies that are, “featured promotionally by WiseTech” on its website. According to the research firm, of these companies, just over half said the service was terrible, four considered the software too expensive, and five said they were satisfied with the system.
Customer Attrition Rates
J Capital believes WiseTech is misleading investors that its customer attrition, also known as churn, is less than 1% on its CargoWise One platform. According to the research firm:
“The company fails to mention the huge churn in acquired customers who are not converted to the CargoWise One platform. Not only do many of these customers fail to convert, but in many cases, they look for alternative platforms.”
What Next?
For shareholders and investors the key question is: what next?
While we eagerly await the next response from the company, we can attempt to understand the gravity of the concerns raised…
1. Should WiseTech shareholders have expected some issues with accounting and integration given that the company’s strategy has long been part roll-up, part organic growth?
Yes. In a roll-up or serial acquirer, it’s easy (and surprisingly common) for companies with highly-paid accountants and corporate advisers to be a little creative with the numbers. However, acquisition accounting does not always end in disaster.
2. If the market’s organic growth expectations are higher than might be reasonable for WiseTech, is a reduction in the organic growth figure a big deal?
Maybe. Given that WiseTech shares are richly priced, a reduction in underlying growth forecasts could impact analysts’ valuations.
However, WiseTech has long-term growth potential with more demand for software expected to facilitate many more complex logistical solutions. That is, more packages will be sent, more customs clearances will be needed, and more billing will take place. WiseTech will benefit from these trends.
3. Is the customer churn, integration and alleged double-speak a big deal?
Yes. Double-speak is extremely common for ASX-listed companies. But if what Jcap say is true it doesn’t put management in a good light.
However, again, it may not be a game-changer for WiseTech as the company still has high levels of customer retention given the nature of its business. The worst case is it’ll probably impact revenue growth rates, may lead to non-cash write-downs to goodwill in the future and could impact workplace morale.
All things considered, it’s hard to know exactly what is going on but we hope management will do a little more to clear up any concerns raised in the reports.
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Disclosure: At the time of publishing, Cathryn does not own shares in any of the companies mentioned.
