Last Quarter’s The Surprisingly Good News

Two quarters ago quarter (Q1 2022), in the face of a revenue hit due to the war,  Global-e Online (GLBE) reiterated its non-GAAP EBITDA guidance, repeating several times that positive free cash flow is the only way it plans to grow.

The company maintained its full year non-GAAP EBITDA guidance even on that lower revenue, and arithmetic will tell you that this implies a higher EBITDA margin (EBITDA/revenue).

As for the quarter just reported and guidance, the company beat every metric we follow for the current quarter, and while there is a little softness for next quarter, the full year guidance was a beat across the board as well.

Please enjoy the transcription of the conversation with our CEO below.

One-on-One with the CEO of Global-e Online (GLBE)

Ophir Gottlieb:
Everything worked for Global-e in Q2.

Revenue and GMV growth for the quarter, Q2 outpaced guidance, your profitability measures were excellent relative to the consensus.

The Flow integration is going better than expected already, per the [earnings] call.

Newly issued organic full year revenue guidance was raised again in spite of macro headwinds.

So, I know that on the call, you guys said that European e-commerce market has softened from last year due to the war, but it was one of those where it’s not quite as bad as expected.

Can you talk about what you’re seeing in regard to macro in general, doesn’t just have to be Europe and how it compares to what you saw, let’s say in Q1.

I have to say, how bad is it?

Amir Schlachet (GLBE CEO):
Yeah, it’s a good question. I would say, kind of end of Q1, as the war broke out, I think it was end February, and we saw the first impact. So, it depended on the region you were looking at.

And it really kind of carried through I would say, the first half of Q2 as well, where there were the obvious, if you take the direct impact, it was kind of Russia, Belarus, and obviously Ukraine, where there was just no business to be done, very difficult to trade in and out of war zones.

But for that, if you look more kind of macro, it really depended on not just the region and sometimes even the specific countries. We saw at the beginning, we did see some pretty large impact, especially on countries that were kind of surrounding the area, if you want.

Central, Eastern Europe and kind of major European countries that I think consumers are always affected.

Consumer sentiment is always affected when there’s a war being fought on your soil, on your continent.

But on the other side there was Germany and France. We saw notable drops in year-in-years comps.

But at the same time, places like the UK, definitely the US, Canada, et cetera, large markets that are firmer.

Australia, large kind of B2C e-commerce markets that are further afield, were not impacted at all.

Even though there was already talk about a potential kind of looming recession and other scary bits in the economical press, it wasn’t looking that bad.

I would say, as the further you got from the actual war, the less impact there was from the war itself.

And actually, we didn’t see a lot of impacts apart for that. Out of fears of recession and what have you. And actually, when it came to the middle of Q2, we saw a pretty nice bounce back in most of the markets, still hasn’t rebounded 100%, but we did see conditions improve or consumer-end improved.

And that was basically what drove the results obviously of the quarter, and also gave us kind of the confidence to raise the guide. But I must say that the markets are far from being… I’m talking consumer markets, not the financial markets, obviously.

You can tell me about the financial market.

But in terms of what we’re seeing in consumer kind behavior, it feels like it’s not settled down. There’s a question, what’s going to happen in the winter when the winter comes.

And again, especially in Europe where household costs are going to rise, inflation, inflationary fears, et cetera.

So, I don’t think the ship has reached safe harbor yet. These are still kind of choppy waters.

But I’ll put it this way, when I talk in the prism of globally, this is mainly short-term impacts, the way we look at it. And that’s the benefit of you not covering us [as an analyst of record].

So, if we had to talk about expectations for the coming quarter or two, then definitely this is something we’re looking at. And it’s obviously very impactful on our quarter-by-quarter results.

But actually, we’re looking at the longer term in terms of our growth prospects.

The main impact is not from consumer behavior, because consumer behavior in the short term is going to go up or down and things are going to happen. But generally speaking, we are sitting on a trend that is consistent and strong, which is essentially the move…

Well, two trends that are augmenting each other, or I should say, amplifying each other.

One is generally the move to e-commerce, the move to direct-to-consumer e-commerce, out of total retail, that has been growing steadily over the last decade.

This is not something that is a quarter or two, is going to impact the longer-term trend, is clear upwards strong trend.

And the second one is cross border, to move to trade cross border, which is growing twice as fast as e-commerce by itself.

So, basically, longer term, what’s more impactful in our results is the supply side, if you want; is the inclination of brands of retailers to move to direct to consumer and to want to start selling directly to their consumers all around the world.

In that, war or no war, recession or no recession, we’re seeing basically zero impact on the interest levels from merchants in terms of how easy it is for us to persuade them that this should be high up on their strategic agenda and how quickly they want to sign up and go live.

We haven’t seen any retraction, not COVID relief and not looming recessions, almost on the contrary, because as brands are fearing recession impact, they will likely turn to try and find whatever ways they can to generate more revenues without piling up more costs.

And this is part of what we do for them. So, in the longer term, we’re not that interested in consumer sentiment, we’re more interested in merchant sentiment and that is strong and steady.

A long answer to a short question.

OG:
It’s a great answer. So, this is how I’m looking at it.

Obviously, I’m speaking to a lot of CEOs, and almost all of them are surprising me. I think they’re surprising themselves, where you set a budget for 2022.

Let’s say, calendar year and in six months the budget changes, which is not what I normally hear from CEOs or CFOs.

So, companies are shrinking their focus lists and looking to expand growth, but in a smaller number of areas than perhaps they had in their original plans.

It does seem to me like cross border e-commerce is one of the areas that remains on the focus list.

So, other things may be falling off, but that is not. I think you just said that, but is that what you’re seeing. It’s a hard question to answer.

Does this make Global-E’s business slightly insulated from, let’s say, a worsening recession in your view?

AR:
Well, first of all, yes, that is definitely what we’re seeing. And again, as I said earlier, this it’s not something new, it’s a trend that has been there for the last decade or so.

I think in that regard, putting recession aside for a second, what COVID did to our business is really to take a lot of the merchants, a lot of the brands that were sitting on the fence, not really sure whether this is a…

We never get no, as an answer. We never get, okay, no, cross border, direct to consumer is not interesting for us, that never happens.

But we used to get a lot of answers saying, “this is definitely something on my agenda, but I’m not sure if it’s a 2022 project or a 2023 project, or I need to do this first or that first.”

And I think COVID really helped in putting direct to consumer cross border front and center, because essentially a lot of these brands realize that in real time that, A, online is the only channel that is resilient, and B, in terms of their expansion abroad, they cannot rely on the traditional routes, if you want; on distributors and department stores, because all of that was shut down as well.

So, it’s almost like that is even their business continuity plan if you want.

So, that really helped in putting direct to consumer cross border front and center.

And I think again, even before we talk about recession, even generally speaking, when brands these days look at their growth prospects, their domestic business is the easiest to attack is kind of the part that is most susceptible to new entrants trying to eat their lunch.

For almost all of them, they have a huge untapped potential in terms of the brand equity that they have in other markets.

It’s literally money lying on the floor, if they’ve already put it in the marketing budget.

They’ve created a brand, they’re promoting a brand, it’s especially pronounced in brands that rely on social marketing, et cetera, because that is international by nature.

And they look at their Google Analytics, and they see 30% of their traffic coming from international buyers or potential buyers. But only, let’s say 5% of their sales.

That is literally money on the floor, and that is something that is structurally impossible for them to pick up on their own.

Even if they are large brands, they can’t really go market-by-market and localize it in order to generate that conversion.

And so, I don’t want to say we’re isolated from any recession, because I don’t think anybody’s really isolated.

But I think when it comes to the priority list for these brands, we are very, very high on their agenda, because we do exactly what everybody’s looking for; especially in a stress scenario.

We generate more revenues for them, without any capital investment. And we generate more revenues out of operational expenses that they’ve already committed.

And down the line, it, obviously, offers them a lot more benefits.

And just one additional angle on that, I think another thing that is really helping us is that, you probably saw in our releases that brands like Adidas and Disney and a lot of these thought leaders in the world of retail and brands are choosing this as their strategic solution going forward.

So, if you look at Adidas, for example, new Adidas, CEO, new Adidas management put down, I think, it was like a year ago or so; put down a five-year strategic plan.

What does that plan revolve around? Direct to consumer, and within direct to consumer, it’s mostly online.

That is their strategic goal as a brand, because of all the obvious benefits. They want the direct relationship with the consumer.

They want the consumer data, they want to cut the middle man, and they understand that is their strength as a brand.

And in today’s world, in 2022, with the capabilities that the internet is giving them and online marketing is giving them and companies like us are giving them, they don’t need the middle man.

There’s no reason for them to donate margins and to donate their brand equity to a third party.

And when brands look at Adidas and Nike, have publicly gone in that direction, and now, Disney, and other gigantic brands. It really helps because a lot of brands are looking at them and following suit.

And the third element, I think, is also the rise of what we call kind of new age brands, or digitally native brands like SKIMS by Kim Kardashian, and Keith and Aimé Leon Dore and other brands like that that were born on the internet, born on Instagram, if you want.

And they have no legacy, they have no ties to any distribution networks, et cetera.

And they again are global by nature.

So, they’re not even thinking on the same lines as the Adidas of the world, where they’re kind of transitioned from a physical business to an online business.

They’re online from the get go.

And they are also, obviously, putting international front and center, because their crowd of followers comes inherently from all around the world.

So, all the arrows are pointing in the same direction. And I think it’s definitely helping us to continue growing in spite of, and in some cases, even thanks to the situation that these brands are in.

OG:
What role, if any, does a persistently strengthening US dollar have on Global-e? Is there a direct impact?

AR:
The impact is multidirectional, actually, because some of them are… Obviously, it depends on which currencies it’s strengthening versus that moment.

But on the one hand, it obviously makes US exports a little less attractive, but if at the same time the Euro is weakening, which has happened over the last few months or a couple of quarters, then it helps to promote exports out of the Euro zone, same vis-à-vis, the pound sterling.

Because the dollar is our reporting currency, but we do a lot of business in other currencies as well, in euros, in Pound Sterling, in other currencies.

And a lot of our expenses are actually in Israeli shekel. There are movements all around, and it’s hard to give a very sustained answer to that.

But I think one of the main benefits for us as a business is that we are highly diversified, because both in terms of our actual kind of consumer activity, we’re almost perfectly hedged in a lot of the major currencies, just a natural hedge, because we have income and expenses, almost always not from the same territory.

But we will sell to US consumers from our European brands in US dollars, collect these dollars.

But then we have these dollars to pay for the goods, to our US merchants, who are selling to other countries in the non-dollar currencies. We are very diversified in that sense.

And we are also diversified in terms of the territories where the merchants are operating from. So, it’s almost a third each.

A third from the UK, a third from the continent of Europe, and a third from the US.

And we are also starting now to grow our APAC business, so it’ll be even more diversified going forward. There are no huge effects of the movement and currencies of us, either way.

OG:
Okay. Before the recent acquisitions of Flow and Borderfree; I still saw Global-e as the clear leader.

And now that you have Flow, and its sort of SMB focused tools, and Borderfree with its large enterprise solutions, it just feels like the entire ecosystem now rests within your firm.

When Pitney Bowes owned Borderfree, it just wasn’t working for them.

So, Pitney Bowes has this fantastic logistics expertise, but they’re really not e-commerce and technology.

So, the price of Borderfree, the acquisition, appears to have been phenomenally good for Global-e stakeholders.

Can you talk about how that piece will move ahead in the coming years and how that integration will go? Because the integration with Flow was already going essentially better than planned.

AR:
I agree. I think the transaction was very, very good for Global-e shareholders, and that’s why we did it.

But I’m actually very optimistic about our ability to integrate and extract the value out of this acquisition, because of a few factors.

One, one of the things that Borderfree did great, under Pitney Bowes, was the marketing bit, the demand generation bits, which they really developed.

I think product-wise and offering wise, it kind of fell behind a bit. And that’s why they floundered a bit from a business perspective.

But what they have done tremendously well is to create, build, and maintain some very nice assets and capabilities around traffic generation for their brands.

And this was one of the main motivations for this acquisition, so that we can take this underutilized great asset and apply it to the broader kind of merchant base that Global-e has and to further expedite its development, so this is one.

And it will also enable us to partner up with Pitney Bowes on the logistics side, and get a lot of value out of that. They have great services to certain territories like Canada and others. It’s part of the deal.

We struck a referral partnership with them, because they have a lot of clients.

That was the original rationale for them to buy Borderfree to begin with, because they thought they could leverage their existing relationships and offer also this product, hadn’t worked that well.

But we think that if we concentrate on what we do best, which is the cross border and the technology bit. We can partner with them, and they can refer their merchants to us from logistics and other businesses that they own.

So, it’s really synergetic as a partnership there. And the team, I think is going to be, I would say even easier to integrate than Flow, because there’s a lot of overlapping locations, half of it is in Israel, which is like a 10-minute drive from our office.

It’s going to be easy to eventually move them to our offices.

And they have a team in Ireland, which we also have, and the team in the US. And plus, we now have a lot more experience having done the Flow post-merger integration.

So, from all these perspectives, I’m highly optimistic.

And I think I’m looking at the team, obviously we’re talking to them, they’re highly motivated, and we speak the same language.

I think they also feel, I’m speaking on their behalf, but I think they also feel that they have found a home. All we care about is what they care about, which is cross border.

OG:
Absolutely.

AR:
I think it’s a great fit, and I’m very, very happy that we managed to do this. It’s a bit of an unusual situation, because they were 800-pound gorilla at some point in this system, and we were kind of the new entrant.

But nevertheless, it’s great that we managed to join forces.

OG:
Awesome. Okay. Amir, I look forward to speaking with you next quarter. Thank you, guys. Enjoy the rest of your day and your week. I appreciate it.

AR:
Thank you very much. You too.

Risks and Competition

For a recent IPO, risks are going to be substantial. For a recent IPO that works in cross border e-commerce, risk is going to be… substantially substantial.

The company lists Borderfree (Pitney Bowes), eShopWorld, and flow.io as direct competitors, while noting that its top competition comes from in direct to consumer (D2C) offerings.

Flow is no longer a competitor – it’s a part of GLBE and the same goes for Borderfree.

In this D2C realm, the company calls out merchants that do not yet have international operations and merchants that have established their own in-house solution.

Interestingly, the company also notes that this second group of companies is also an easier cohort to sell to because they realize the complexities of the undertaking and many times are now looking to hand it off.

The first group is difficult to sell to because GLBE must both introduce its brand and convey the complexity-chain.

• In the near-term, you could not have chosen a company likely more negatively impacted by worldwide supply chain issues as its entire business is in fact that supply chain. Yet, somehow, since it only relies on air freight, it has side stepped those risks for now.

• The growth of its business depends on its ability to attract new merchants while those same merchants may attempt to build out their own cross-border functionality.

• As worldwide commerce become more complex, so too does GLBE’s work to reduce that complexity. Any single part of the complexity-chain could derail the entire offering.

• The company’s current valuation relies very heavily on not just large growth, but full-fledged hyper growth. This company has to deliver over 50% CAGR for the next two years (2022 and 2023) and then at least 35% CAGR for the foreseeable future, in our opinion.

• The company has a limited operating history, so we don’t really know where it goes after COVID because we don’t have a long enough history from which to extrapolate the future.

• From what I have read, sales cycles are rather lengthy, unlike the click and sign-up process of Shopify and BigCommerce. After all, we have visited the complexity of cross-border e-commerce, and that means the decision to select a vendor is also likely complex.

• An interesting thing to consider, much like BigCommerce but unlike Shopify, GLBE relies on third-party services, such as shipping partners and payment providers, and we imagine some of these are not as stable as western world investors are used to.

Failures at any point along the ‘complexity chain’ create a failure overall. The company has noted limited redundancy is many markets.

• At any time, if business looks too good, Google or Amazon could pull a… Google and Amazon, as they did on Roku, and suddenly disrupt GLBE’s growth with virtually unlimited resources and data.

• The strong dollar can bludgeon near-term margins and growth and GLBE has material exposure to both currency uncertainty and worldwide economic recession risk.

Conclusion

Thanks for reading, friends.

The author is long GLBE at the time of this writing. 

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