J Capital Research ("J Cap") is an investment advisor to private funds. J Cap has analyzed the U.S.- and Australian-listed company WiseTech Global (“WTC”) and is hereby publishing the outcome and the conclusions of our analysis, based on publicly available information. We or some of our clients may be short shares of WTC, and, for this reason, there might be a conflict of interest.
June 30, 2020

WiseTech: Taking Out the Trash

​WiseTech Global Limited (WTCHF, WTC AUS) has been trying to sweep its failed acquisition strategy under the carpet by writing down earn-outs without writing off the equivalent item—goodwill. Sadly, the garbage keeps accumulating, and we expect investors will have an unpleasant surprise when the company reports annual results for FY2020 in August. Look for goodwill write-downs of around $200-$300 mln.

WiseTech frantically rid itself of 40% of the earn-outs from 17 poor-performing acquisitions in May. In a series of scathing interviews with former executives, customers, and competitors of the company’s largest acquisition to date, Containerchain, we have learned that more bad news is about to come out. Containerchain is bleeding accounts, and most of the $87 mln in associated goodwill will have to be written off. This is the first major “auditing” event, for KPMG since serious questions have been raised about WiseTech’s acquisitions performance. We expect the auditors to test goodwill for impairment. It is time for WiseTech to come clean with investors.

Over the past week, Richard White has sold $46 mln in shares, while Co-Founder and Director Maree Isaacs has sold $4 mln in shares. Richard White told the AFR last year “Growing a technology company as rapidly as WiseTech Global, most insiders and founders have very limited opportunity to sell as they are almost always in possession of material non-public inside information.” If there is a write-down in goodwill, we would ask ASIC to review these share sales.
Initiation: October 16, 2019
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The Illusion of Success

  • Overstated profit: We estimate that overstated profit in the three years since WiseTech listed may be as high as $116 mln. That would be an overstatement of 178%.
  • Overstated organic growth: Using the company’s own numbers, we estimate WiseTech’s underlying, organic growth rate at 10% not the 25% claimed. That means an estimated 80% of the company’s top-line growth is from purchased revenue.
  • Suspect European revenue growth: We estimate that European revenues were overstated by as much as $48 mln in FY 2018. We have obtained financial fillings of European subsidiaries that showed declines in revenue and that support our estimates, and we have spoken with former employees who reported much lower organic growth.
  • How do they get away with it? WiseTech is able to shield subsidiaries from audit scrutiny through an Australian peculiarity called the “deed of cross guarantee.” Simply put, the auditors aren't looking at the numbers closely enough. WiseTech’s Australian subsidiaries, through which much of the international revenue has been channeled, have been shielded from audit scrutiny.
  • Chair of Audit Committee resigned: On Tuesday, Christine Holman, who joined the board only 10 months ago, in December 2018, and is chair of the Audit and Risk Management Committee, resigned.
  • IPO magic: Prior to IPO, WiseTech profit growth was around 6%, but it soared by 1,100%, from $3.4 to $44.2 mln, in FY 2017. We find this suspect, and a number of changes to financial oversight seem suspicious: the CFO was swapped out for someone who had been at GE for 24 years and had no software experience. The lead audit partner changed.
  • Stock promote: You may be forgiven for thinking that WiseTech, trading at 30x revenue, is an Australian tech darling like Atlassian (TEAM US), built by two coders in their garage, that has become a global behemoth. WiseTech is more of a clunker. It began life in 1994 as Eagle Developments International and was unspectacular for 20 years. The company has been cobbled together through hasty acquisitions. Its core product is held in low regard by clients. Revenue grew at a 12.5% CAGR in the six years before listing. After listing, revenue growth leapt to 40% annually. We have spent months analyzing the company and concluded that WiseTech is manipulating its accounts to make growth and profit appear higher than they really are.
  • Who’s making the money? The insiders are cashing in on the story that WiseTech is pushing out to investors. Management and directors have sold $259 mln in stock since listing. Public investors will not be as fortunate. That is why we are short the stock.

The Closer You Look, the Uglier It Gets

  • Weak response: WiseTech’s response to our first report follows a well-worn playbook by cherry picking immaterial points to refute, remaining silent on major points, and taking a high moral tone about “short sellers.” Tellingly, the company failed to provide any information on the abrupt resignation of the head of the Audit Committee, and it confirmed that, indeed, key subsidiaries with the majority of profit are not individually audited. 
  • Paying more for less: Since its public markets debut, WiseTech has spent $400 mln acquiring 34 companies. We do not think the acquisitions have been great logistics software companies that can gain from being part of the WTC network. Instead, WiseTech’s acquisition spree looks like a frantic effort to maintain the narrative that this is a fast-growing technology business.
  • Poorly integrated, underperforming acquisitions: Our interviews with 18 former employees and competitors show that most acquisitions remain standalones two years post acquisition, as WiseTech fails to devote resources to integration. When WiseTech does attempt to integrate these businesses, it usually raises prices on existing customers, and they tend to go elsewhere.
  • Desperate? WiseTech has been offering virtually free access to the CargoWise platform. In two interviews, we learned that these price cuts are measures to counteract decline in WiseTech’s home market, Australia.
  • Faltering: We believe WiseTech is misleading investors that the customer attrition is less than 1% on its CargoWise One platform. The company fails to mention the huge churn in acquired customers who are not converted to the CargoWise platform. Not only do many of these customers fail to convert, but in many cases, they look for alternative platforms. We commissioned a third-party survey of 13 customers featured on WiseTech’s website and found that 25% of them are looking to switch.
  • Cashing out: Management and directors who have sold $259 mln since listing have no incentive to slow down the pace of acquisition, because the perception of fast growth supports a high share value.
  • Exaggerated claims: We found that WiseTech has misrepresented its client relationships. They claim 25 of the top 25 freight forwarding companies as “customers,” while we found only seven use CargoWise One. We commissioned a survey of companies WiseTech touts on its website as model clients. Half said WiseTech’s service was terrible, and 25% wanted to switch providers.

WiseTech May Be the First Company to Die from Covid19

  • Corona ate my homework: WTC blamed the coronavirus for a 17% downward revision to Ebitda guidance in its H1 2020 report, but behind the numbers was a shocking decline in profitability. For every lost $1 in revenue guidance, WTC lost $2 in profit. In H1 2019, WTC reported about $0.31 in Ebitda for every $1 in new revenue. This profit decline is all because of poorly performing acquisitions.
  • WiseTech caught the flu in July 2019: WiseTech Net Profit After Tax and Adjustments (NPATA) is down 5% QoQ but down 14% when we further adjust for the $6 mln ($3 mln H1 2020) free kick to profit from an accounting change to capital leases.
  • Hand in the cookie jar: WiseTech’s acquisitions are not performing and so the company is paying less in earn-outs. Contingent liabilities are being removed from the balance sheet and plumping up profits as “fair value gains” over on the income statement, without a corresponding write-down of goodwill assets.
  • When corona isn’t enough: WiseTech could not show growth in the rate of new organic revenue growth in H1 2020, so the company just straight-out made it up and claimed a 24% acceleration when in fact new organic revenue growth declined 20%. The rate of new acquired revenue growth declined by 24%.
  • Government report supports our view of WTC: The Australian Tax Office published WiseTech’s revenue, profit, and tax payable for FY2018 on December 12, 2019. Revenue was lower by $47 mln than in WiseTech’s public report, and tax was half what they claim. This almost exactly matches the estimate from our October 16, 2019 report for missing revenue and profit. The tax document may expose misstatements in WTC’s reports to investors. At a minimum, the ATO shows that international acquisitions make no profits.
  • Stuffing away costs: In H1 2020, operating expenses rose 37%, but capitalized software expenses grew 69%. That supports our contention that WTC is faking its profit by hiding expenses.
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