Q2 2021 Descartes Systems Group Inc Earnings Call

September 9, 2020

[music].

Welcome to the Descartes quarterly results call. My name is Adrian and out of your operator for today's call.

At this time all participants are in listen only mode. Later, we'll conduct a question answer session.

During the question answer session. If you have a question. Please press Star then one on your Touchtone phone.

Please note that this conference is being recorded I'll now turn the call or Scott Pagan Scott Pagan you Beacon begin.

Thanks, and good afternoon, everyone. Joining me remotely in the call today or at Ryan CEO and Allan Brett CFO. We trust that everyone has received a copy of our financial results press release issued earlier today.

Portions of today's call other than historical performance include statements of forward looking information within the meaning of applicable securities laws.

These statements are made under the safe Harbor provisions of those laws.

These forward looking statements include statements related to our assessment of the current and future impact of the Covidien 18 pandemic on our business and financial condition. They carts operating performance financial results and condition.

They cards gross margins in any growth in those gross margins cash flow and use of cash business outlook baseline revenues baseline operating expenses and baseline calibration.

Anticipated and potential revenue.

Losses, and gates anticipated recognition and expensing of specific revenues and expenses.

Potential acquisitions and acquisition strategy.

Cost reduction in integration initiatives and other matters that may constitute forward looking statements.

These forward looking statements involve known and unknown risks uncertainties assumptions and other factors that may cause the actual results performance or achievements descartes to differ materially from the anticipated results performance or achievements implied by such forward looking statements.

These factors are outlined in the press release and then the section entitled certain factors that may affect future results and documents filed in furnished with the SEC.

See another securities commissions across Canada, including or management's discussion and analysis filed today.

We provide forward looking statement solely for the purpose of providing information about managements current expectations and plans relating to the future. You are cautioned that such information may not be appropriate for the purposes.

We don't undertake or accept any obligation or undertaking to release publicly any updates or revisions to any forward looking statements to reflect any change in our expectations or any change in events conditions assumptions or circumstances on which any such statements based except as required by law and with that let me turn the call over to Ed.

Thanks, Scott and welcome everyone to the call last quarter I mentioned, how the call was need for us since we were doing it with each of us remote from each other as opposed to be in one room.

Well, we're doing it remotely again this quarter and it may end up being away we do it in the future hopefully the call will proceed without technical challenges. However, please bear with us in Mcewen a portion of the call as we may need to coordinate to provide answers.

Similar to past calls or the roadmap for the rest of this call.

Ill start with some opening comments, primarily focused on what happened over the last quarter and some of the trends we've seen.

Handed over to Allen, who will go over the Q2 financial results in detail I'll come back and provide some perspective on how recalibrated and looking at the current quarter and beyond and we'll then open it up to the operator to coordinate culinary portion of the call.

So with that let's get to it.

We had a great quarter, especially in light of everything that's been going on in the world continues to be one of the more challenging business environments that we've ever had to operate in.

It's been great to see the logistics industry identified as an essential service industry with emphasis on the continued movement of freight.

It's been an active industry with new priorities being placed on different types of goods and goods flowing from different sources via different modes of transport and two different destinations. The industry is not fully recovered from the streams of the pandemic with areas like air cargo still having a way to go to recover but we've seen the hard work and dedication of logistics and supply chain workers.

Assisted by technology help all of US continue to have the goods and supplies, we need for businesses communities and families.

All right.

Oh all of these workers a tremendous debt of gratitude.

Predict cart we've kept the same business focus that has served us well in the past we ensure that we are delivering secure and reliable technology services to our customers. So that we have all the goods we need the operator business profitably. So our customers could comfortably relying on us as a viable long term technology partner and we invest in our business.

Through acquisitions and otherwise so our customers have the benefit of the latest technologies to make them competitive and efficient.

Our focus in each of these areas is on our customers' needs and we believe that by doing so we put ourselves in the best position to deliver predictable and quality financial results for our broader stakeholders.

And it's that focus which led us to have another great quarter. In Q2, we had record services revenues, we had record cash from operations and excellent cash flow conversion of more than 100% of our adjusted EBITDA. We grew adjusted EBITDA by 13% year over year, our adjusted EBITDA as a percentage of revenues exceeded 40% and we had.

Revenues that exceeded our forecast for the quarter all in all our team rallied together in one of the most challenging business environment, they've dealt with to deliver a great quarter. Thanks to the entire Descartes team for everything they did and while we're reporting to you what ended up happening as we hit July 30, Onest I think it's worthwhile to rewind a bit to recap how we got here.

In April the last month of our Q1, we saw revenues at a low point as the world shutdown April revenues were down about 5% from where we would expect them to be we took numerous internal steps to manage our costs through Q1 and may.

During this sudden downturn, we stop travel we stopped participating and external marketing events, we suspended hiring a new employees and all of these efforts helped but they weren't enough as a business we remain committed to growing our adjusted EBITDA, 10% to 15% per year. We also needed to assume that April revenue numbers that were down 5% would continue as.

Turning through Q3.

So we decided we needed to take additional cost reduction initiatives in May we announced a restructuring that we reduced our costs by approximately $6 million per year or $1.5 million quarter.

You did this by letting approximately 5% of our workforce go and shutting some office facilities.

We immediately took actions on that plan, so that our cost will reduce in Q2 that partially contributed to our performance in Q2.

Ultimately as we got to July 30, Onest, we saw better revenues than we originally forecasted for.

As mentioned April revenues were down about 5%. So we were planning to revenues at that level for May June and July of Q2.

In May we saw revenues up a little bit from April but not significantly. However, we saw better recovery in revenues in June and July as businesses got back to work, particularly the United States.

And looking at the business in general we've seen good revenue traction in the phone areas business is related to E commerce or small package goods and some of those businesses. We've seen volumes that would typically be seen until the black flock Friday holiday period, I'll talk more a bit about ecommerce later in the call.

Businesses, moving food medicine, and other essential goods.

Also saw good revenue traction and finally businesses focused on real time tracking of the location of goods.

We've also seen slower recovery in the phone areas.

First and foremost air cargo in particular some of our businesses are tied to the number of karger flights often cargo is moving in passenger planes. So we've seen a depressed number of flights as people have been reluctant to travel internationally that area.

Still has a way to go for recovery as cargo capacity slowly comes back online it's less of a demand issue at this point.

Retail businesses and shopping malls. This is starting to recover or portions of our businesses that help with the replenishment mall stores and they were impacted wall malls were closed.

In summary openings in the United States, we're starting to see some recovery there.

Finally shipments of commodities and automotive supply chain goods several auto manufacturers suspended production for a period of time those businesses are also now recovery.

We remain committed to growing our business, even when we need to take action to reduce our cost base I was thrilled to see our business respond with revenue growth from our existing business, but we also showed that we could continue to compete.

Fleet and integrate acquisitions, even in a challenging business environment in June we added containers to the did Cartier via acquisition containers is a digital freight platform, allowing logistic service providers.

To have a branded interface for their customers to get quotes book shipments track shipments and analyze performance in the last six months have shown how quickly the world can change and the shift to Digitization is accelerating as a result logistic service providers operate on type margins those that don't move quickly to digitize their customer experience will.

Faced with higher cost to serve without the proper real time connections between client facing platforms and the quoting rating and booking systems that this digitization brings logistic service providers will struggle to efficiently meet customer demand in today's dynamic Martin market.

And this is exactly what we can do with a combined Dick cart and containers offering.

The acquisition was very well received by the market and our customers. In fact, we've already closed several incremental incremental deals with the combined Descartes containers team so with that I'll welcome everyone, who joined from containers in the United Kingdom and Ireland.

We remain committed to growing our business through acquisitions, there's lots of things for cell right. Now included some very high quality assets I suspect those things being for sale reflects the valuations that many technology companies are seen as we've shown it's possible to get acquisitions done in this market.

However, there are new dynamics to be dealt with including evolving valuation expectations and the challenges of remotely sourcing and completing acquisitions, we're confident in our ability to execute and given our familiarity with many of the parties in our market believe it gives us a leg up on others as we complete remote acquisitions.

And I think that reflects one of the core themes of Dick carts historical success, we are dynamic and adjust professionally and quickly could changing markets you've seen in our operations with our quick transition to remote working and reduce cost base, ensuring our continued superior operating performance we've seen in our acquisition performance with us getting the deal done.

And this past quarter and you've seen in how we interact with our stakeholders as we quickly transition to holding our first virtual user conference and our first online annual general meeting.

In short we're experienced with dynamic environments, you can see than our historical performance and we believe we're well structured to show it in the future and with that ill turn the call over to Alan to go through our financial results for the past quarter.

Hey, Thanks, Thanks, Ed as indicated I'm going to walk you through our financial highlights for our second quarter of physical to.

Physical 21, which ended on July 31st.

We're pleased to report revenues of 84.0 million this quarter up 4% from revenues of 80.5 million in Q2 of last year.

Our revenue mix continues to be very strong with services revenue, increasing 5% to a record 75.3 million, which is now 90% of total revenue in the second quarter.

And this compares to services revenue of 71.4 million or 89% of total revenue in the same quarter last year.

License revenues came in at 1.3 million or just over 1% of sales in the quarter.

While professional service and other revenue came in at 7.4 million or 9% of revenue in the second quarter of this year.

Gross margin was solid at 73% of revenue for the second quarter, which is down just slightly from gross margin of 74% in both the second quarter of last year and the first quarter of this year.

As we mentioned last quarter and it added just indicated in order to address the slowdown in our revenue experience in April as the impact of the pandemic started to hit parts of our business.

In late May we completed the restructuring plan, where we reduced approximately 5% of our they before us. While we also closed a few of our smaller offices, where we concluded that the staff with not routine need to return to the office, even when the Pandemics subsides and is determined safe to do so.

We should note that the annual cost savings of this restructuring plan are expected to be approximately 6 million.

While we also recorded a 1.9 million special charge in the quarter related to the cost of putting this restructuring plan in place.

These costs were not recorded sorry were recorded in other charges on the income statement this quarter.

So with continued growth in revenue and continued strong cost control, including the savings of approximately 1 million this quarter from the restructuring plan just mentioned.

We continue to see a strong adjusted EBITDA growth of approximately 13% to 34.0 million or 40.5% of revenue.

When compared to adjusted EBITDA of 30.2 million or 37.5% of revenue for the same period last year.

As a result of the solid operating results cash flow generated from operations came in at a record 34.1 million or just over 100% of adjusted EBITDA for the second quarter. This year and this is up 27% compared to operating cash flow 26.9 million.

Or 89% of adjusted EBITDA in Q2 last year.

Cash flow this quarter was aided by really strong collections from customers.

Hello.

The quarter.

Our strong cash collections are both the reflection of the hard work by our team.

After the pandemic as well as a reflection of the critical nature of most of our services to customers.

As we said in the past operating cash flow will always be subject to unusual events annual or quarterly fluctuations that may result in things like this quarter is 100% conversion rate, but for the most part we expect to continue to see operating cash flow conversion in our more typical range of 90, 80% to 90% of adjusted EBITDA per quarter going forward.

From a GAAP earnings perspective, net income came in at 10.5 million or 12 cents per diluted common share in the second quarter.

Up 22% from net income of 8.6 million or 10 cents per diluted common share in the same period last year.

Overall, we're very pleased with the solid operating results in the second quarter as services revenue improved month by month through the quarter and increased to 90% of our total revenue.

While we achieved 13% growth adjusted EBITDA and generated strong cash flow from operations.

If we look at the balance sheet.

Our cash balance to balances totaled 81.9 million at the end of the second quarter.

During the quarter, we repaid 10.1 million that was outstanding on our credit facility that late in the quarter. While we also used 5.2 million to complete the acquisition of containers that had mentioned that occurred in June of this this year.

Late in the quarter as our previous short form shell based shelf prospectus expired, we filed a new shelf prospectus that will allow us to issue up to 1 billion in various forms of debt and equity capital until August 2022.

So with our cash balances the new shelf in place.

And our unused 350 million line of credit.

We continue to have the capital capacity to allow us to consider all acquisition opportunities in our market consistent with our business plan.

So as we look the second half of the year, we should note the falling as outlined in the outlook section of our Mdna.

After incurring 3 million and capital additions in the first half year.

We expect to incur an additional 2.0 to 3.0 million up further capital expenditures for the balance of this year with this balance expected decline further investments in our network security and the destruction.

We expect amortization expense will be approximately 27 to 28 million for the balance of fiscal 2001 with this figure being subject to adjustment for FX changes and future acquisitions.

Our income tax rate came in at approximately 28.5% of pre tax income in the first half of the year and this is very close to our statutory tax rate in Canada for the us, which our two largest markets.

Going forward, we would expect our income tax rate will continue to trend in the range of 27% to 31% to pre tax income.

Over the balance of year, though as always we should add that our tax rate may fluctuate from quarter to quarter from onetime items that may arise as we operate internationally across multiple countries.

And finally.

We expect stock based compensation will be approximately $3.1 million to $3.3 million for the balance of this year subject to any forfeitures of stock options or share units.

And with that I'll turn it back over to Ed for some closing comments, including our baseline calibration for Q3.

Great. Thanks down before I address calibration as we look forward to Q3 beyond I thought it would be good to recap some of the principles be using planning and executing in our business.

We plan for our business to grow adjusted EBITDA tend to 15% annually.

We plan to grow through a combination of organic and acquisitions.

When we over perform we expect to reinvest that over performance back into our business, we focused on recurring revenues and establishing relationships with customers for life. We thrive on operating a predictable business that allows us forward visibility to our revenues and investment paybacks.

But we also know that while there are short term challenges for all businesses as we deal with the pandemic there are some medium and longer term tailwinds.

For example.

Brexit.

There is new customers regime coming for the UK at a high level, that's like having a brand new country for all of our global customers to have to do business with this impacts imports to and exports from the United Kingdom.

When you look at business like ours, who services include particular strengths in cross border shipments and in providing tariff and duty databases. There are very good opportunities for growth for us as people ramp up to operate in this new environment.

Right now the government is planning for January Onest 2020 transition, so we'll be working with our customers to hit that or any revised date.

Second Tailwinds ecommerce while people have been talking about E commerce for some time its relevance as the world is going through this pandemic has evolved from an emerging issue to a dominant reality.

A seamless impact even in my own extended family I don't parents were not buying very much online and the same pandemic has been a catalyst for it.

It's like the whole extending world just now got access to what can be bought online I've heard people talk about when things get back to normal as if it's a sure thing that things will go back to how they used to be.

We believe in the case of E commerce that will be a permanent shift and preferences, which will continue to see an increasing number of goods bought online. That's why you've seen us make recent investments in the space, including our acquisitions of ship Rush people box Pixie and us.

Okay.

Next tailwind to supply chains, and global trade supply chain relevant has also been vaulted to the forefront because of the pandemic. The best way to understand this is to look around and see how many businesses are having to rethink their supply chains as a consequence of the lockdowns and global trade restrictions.

Businesses need to consider the global trade climate climate and consider whether they're in the ideal locations for manufacturing and supply.

Businesses need to be constantly updating their decisions based on changes in global tariffs unrestricted party sanctions and businesses now need to consider lockdowns and pandemics as no longer a black Swan event and more of a business planning reality to ensure essential goods and supplies can still be delivered in the midst of lockdowns.

The card is right and across areas and supply chain and global trade and we stand ready willing and able to continue helping our customers with these challenge challenges.

The next Halloween is automation, we've seen continuous moves towards business automation with recognition that technology can assist more ensuring critical business tasks are done on a timely or and more cost efficient basis, leveraging new technologies like artificial intelligence and machine learning optimize choices can be automatically made.

To replace educated guesses, we've made significant investments in particular in our routing and scheduling and transportation management solutions to make sure to cart remains relevant in our customers remain leaders.

Next tailwind as remote working.

Before while a worldwide Lockdowns our business was already operating with a portion of our workforce remote but somewhat of a natural thing for us considering a business that we have is moving things from remote places to remote places our customers are distributing remote offices all over the world as they collaborate to move goods. So our business has historically been less about in person meeting.

And more about remote conference calls and meetings to make things happen.

With the Lockdowns or business quickly transitioned to being almost entirely remote and as you've seen from the restructuring we previously announced where we close some offices. There is some roles that will never returned to be in a corporate office our customers have gone through the same experience and our reaching those same conclusions they need to be able to continue to manage freight with remote employees.

And in the same way to zoom and teams help with remote meetings. Our technology is designed to help with the remote management of free whether it be research booking tracking invoices for analytics, we expect to move.

The move to freight management technology systems, we will continue to be a tailwind coming out of the pandemic.

Even with these tailwinds when we look at the business for Q3 and beyond we're cautious as we always are our caution comes from concerns with some business is still not being back to operating at full capacity for example, air cargo and the possibility of a second wave of viruses schools and businesses reopen further.

We've already seen some increased infection levels in Europe.

We're also keeping an eye on the global recovery as governments potentially pull back some of the financial stimulus programs that have helped soften the blow for employees and businesses impact did by the pandemic around the world.

We've provided a comprehensive description of baseline revenues baseline calibration and there are limitations in our quarterly report that we filed today, but to summarize how we saw things that August 1st 2020, using foreign exchange rates of 74 cents to the Canadian dollar $1.18 to the euro and $1.31 to the you.

Hey pound, we estimate that our baseline revenues for the second quarter of 2021 are approximately $85.5 million and our baseline operating expenses are approximately $53 million. We consider this to be our baseline calibration of approximately $27.5 million for the third quarter of 2021.

Were approximately 34% of our baseline revenues as at August Onest 2020.

We've indicated previously that the adjusted EBITDA operating margin range for our business is 35% to 40% as mentioned in our actual results for Q2, which had asked at 40.5%. It's possible that we exceed that operating range again in Q3, as we continue on our commitment to 10% to 15% adjusted EBITDA growth.

But we don't yet see this as a permanent change in our preferred operating range and more because we're being cautious and our levels of investment until there is a more stable environment that provides a better revenue predictability.

Thanks to everyone for joining us on the call today as always were available to talk to you about our business by phone or virtual meeting and we hope sometime sooner rather than later in person and with that I'll turn the call over to questions operator.

And we'll now begin question answer session.

Your next question. Please press Star then line you touched on sung.

When I came back a question.

Your first question comes from asks how from William Blair. Your line is open.

Hey, guys. Thanks for taking my questions.

Yes, I just wanted to ask on the.

Outperformance that you saw relative to your expectations and linked in the quarter was that driven by some of the positive areas that you highlighted.

Being unexpected are performing better than expected because it seems like on the transaction volume side that that kind of trended with with what your expectations, where and Didnt really.

Prove that much in the quarter. So just curious what drove that outperformance relative to your expectations.

I think a little both a we certainly had some some really good performance in the global trade areas and ecommerce areas and.

Most of the rest of the business held in pretty strong. We obviously had some weaker air cargo results as.

A lot of planes that fly passengers weren't in the air and therefore, the ability to those plants wasn't available for.

Cargo, which hurts.

Hurts, our air cargo numbers.

Okay and senior within your broker customer base, but just curious prior to the pandemic. There's obviously a need for these businesses to digitize their were under pressure various factors one of them startups trying to sort of dis intermediate then so one.

During how they're reacting and this type of environment. There. They are putting some of those digitization initiatives on hold or they accelerating then and then you know how does that relate to like macro point capacity matching and then the containers business that that you acquired that would help and digitized.

I think you're not just brokers or I assume you're talking about freight brokerage not customs brokers, but.

Not just brokers really a whole bunch of our customers.

I realize they needed to automate everything in their business come April when they had to send their employees home and anything that wasn't automated became a real problem.

And.

You could see that some of our results right out you know.

The gravitated towards systems like ours that enabled them to do that and I think thats going to continue for the foreseeable future.

Perhaps even outside this pandemic.

Got it.

Thats It for me Thanks, taking my questions guys. Thank.

Thank you, Matt how are you there.

Your next question comes from Paul China from RBC Capital Your line is helping.

Thanks, very much and good afternoon critical and last quarter, you indicated baseline was based on aprils volume.

What's your assumptions for Q3 baseline or using a single month, the average core last quarter and there could be helpful.

Yeah ill jump in to take that I think we gave that baseline call as of August one. So it's really reflective of what we see in the business to that point have we'd see we continue to see some improvement in parts of the network.

At a slower recovery in other parts the networks, that's really the current information including.

A stronger July that said that we saw so it incorporates everything we know taught us first.

And yeah funding in your comments on the linearity of transaction volumes through the quarter. A very helpful mentioned recovery June and July, whereas it was down 5% below your expectations now how is June and July and what it can you quantify that a little bit further in terms of.

You know how that compares versus what youve normally see through June July.

Yeah, I'll start and Ed can jump in.

You know, we're seeing I think it really touches on its comments earlier in the prepared statements and you're seeing certain product lines, where where our numbers are better than June July last year, certainly an E commerce area in parts of our content space.

And we're seeing other parts like air traffic, which just reflective anything you read out there in the the airfreight World, where we're not seen those numbers come back to the levels that they were at overall, we've seen a step up from April in both June and July I wouldn't say we're back to.

Full pre pandemic levels at anything you want to add to.

No I think that's pretty good description.

Okay last one for me.

In regards to comment on mm valuations on things like evaluations and going out for a couple of years or several years and you know in an area that that's been a challenge.

That uniform across the board or.

Are you seeing more expansion in certain segments.

In less than the others and how are you looking in terms of prioritizing allocating capital or are there segments, where you're willing to pay higher multiples, we think it's attractive and strategic.

And others, we think it's less relevant to your business.

Or are you looking at potentially putting a is slowing the pace of M&A on just given that the valuation across the board are more expensive.

Well, there's more for sale now than ever ethic, some of that the function of valuation and.

Bankers and therefore companies seeing that.

People are paying up for some assets right now and as a result, everyone's Russian market and we try to ignore that although nice for us to going to look at a whole lot of businesses. Once certainly the larger assets as we've seen in the past.

Our.

Demanding top dollar any asset that is doing well right now and a pandemic.

You know that they're they're out selling and they're trying to sell for for premium valuation because a lot other businesses have been harmed by this pandemic. So many significant way. So the ones that are that are out and performing well, maybe even better than than normal our they're certainly going for higher rates on our typical tuck in type.

You know smaller acquisitions ones, we've known to people for a while the prices are still in a range that we think is competitive and add just to Atlanta address your in the last part of your question. Eric You know do we've always looked at all these gains and said what do we think there work.

We're willing to pay up for something like like a macro point.

And maybe some of the other assets that we bought when we think one plus one equals three or four and say okay well.

This may look expensive Devry one right now, but we know enough to know that's actually a good price and so you know we continue to look at everything that comes up for sale and evaluated.

It's it's very similar metrics the way we have in the past.

You know ecommerce has done very well for us that's something that.

We look to added ecommerce business he may be willing to pay more for that because we kind of thing you know.

We've done quite well in and we suspect we could do well and that in the next one as well.

Other businesses, where we don't see any kind of a growth are already kind of significant step change your growth Oh, our valuation metrics remain the same.

Thanks, taking my questions.

Hey, Thanks Bye.

Your next question comes from Rhino lunch from Barclays. Your line is open.

Hey, guys. This is Frank on for Brian. Thanks for taking my question Congrats on the quarter.

Just one for me I know that you'd mentioned that continue tailwinds.

Even as the reopening pickup on the ecommerce side I was wondering if you could dig a little deeper and talk about what the three openings what kind of an impact they have on the rest of the areas of your business.

Yeah sure I mean, a I mentioned it a little this in the calls but you know as.

Almost everything in a row was shut down in April so ecommerce was booming in that period of time.

And it is I still see doing very well, but slowed down since then when all the other stores around the.

The World opened up and people had more choices store to backing.

And I think you make you some of that flow through to the rest of the business is right a lot of our retailers.

They werent open during depending on first month or two of the pandemic as they open back up their revenue started to come back and and improve.

Things that are Laggers I mentioned airlines earlier.

You know there our planes in the AG is just not nearly as many as they used to be in there is not nearly specifically as many international flights that used to be airlines a switch some of their planes to handle cargo, but that's not enough to bringing it back to the steady state of normal I think air cargo demand is every bit as robust as as it was before.

What you see right now as air cargo prices have gone up considerably, but the volumes are down because they don't have capacity available to them. They still have customers that want to buy it and they just don't have planes to fly in because theres no passenger floods are not enough passenger flights moving so.

You know without getting in every specific good business most of them or.

Business as usual and frankly, but those are some of the ones that I might highlight as being a little.

Different than normal.

Okay. Thanks, that's all for me.

Andrew Thanks for question.

Constant <unk> cash flow from Stifel. Your line is helping.

Oh, Hey, guys. Good evening, Thanks for taking my question.

Jeremy.

Yes, I do hope.

Thanks.

Recently period you can.

Oh got chaired.

Oh, Yeah, a couple of follow up.

On the M&A side, as well with valuation expectations getting higher Chris on the quality asset does that change the way you look to deploy capital you think you might lean on a bit more debt or you use your own valuable paper to make acquisitions is going to cash than any shifts on that.

Yes.

No nothing nothing seems in our mind, we we would prefer to use our own cash from operations to buy companies and only when we need more than that would we look to financing. Some other way our first choice with interest rates, where they are would be to use our debt facility.

And and after that.

The distant third would be a an equity offering to pay for it but that all depends on the size of the deals right and if we buy something very large.

That all changes because we can only use our cash flow and can only use debt to do it but for our normal deals you know our first second third choices as cash from operations.

And Ah you know with interest rates, where they are right now debt as a a.

Clear second choice doesn't an equity offerings a distant third.

But and then you mentioned that you're seeing some high quality assets for sale. It is there something new here that that's come out as a result of similar or is it just the general because valuations going up.

Thanks, so much as well.

You know I.

I think theres been a rush to technology because people think technology companies are businesses are going to benefit from this some more than others right here in ecommerce business right. Now you are rushing out and trying to steal your company right now, we're a little wary of that right.

And our own business that you know there was a massive jump in April and May be may, but that's come up a bit it's still still a step function up from from normal but.

It's come up as as other stores have opened up those business just trying to sell as fast as they can and for more money than people might think their work you know.

We try to bring the same logic to the table that we've always had which as you know how are we going to get our money back from our shareholders. On this deal if you want more money from here for your company.

We know how we're going to get more money back.

Quickly.

And so you know that's the argument we're looking for when someone says they want a lot of money for their business will.

Certainly what I'm missing here as or some way that I'm going to get the money back even faster now the kogan happened. If that's the case you know we're interested if it's not the case, we took can say sell to somebody else.

Got it could not putting a new piece of the puzzle on the table that.

That wasn't necessarily there before that becomes the new opportunity for you guys to to grab that Pete.

No I don't think Thats not normally we're looking for me if something comes across the table that we think is interesting I mean ecommerce came across like five years ago Das right.

Started looking at it was all couple business for sale. We thought we think we can mixed up into this and we added it.

I don't know the for out looking for that so much and we're not looking for good businesses that we think will be good fits with our business and you know in the process. If we see something that's.

Close to what we do and maybe a little different you know obviously consider as as we always have you see us expand the number of pillars that we have in our.

Arsenal over the years and that's kind of how happens I don't know that were out looking for that so much were out looking for good businesses and and when ideas come up we start thinking about it and saying if we should.

The next step.

So for us it's kinda.

Business as usual, even though sometimes people are asking us to.

To a change or our mindset because they want you know banker once more money for his asset that is trying to get us to think of it differently, but well listen to it but not necessarily going into <unk>.

Change our way of thinking.

So shocking a banker one from our money [laughter] [laughter] for your question.

[laughter] I did have a question about about your data content business, particularly data mine I know that you made announcement of a deal recently, if I'm not mistaken.

Given that there has been such a demand for greater visibility with all the moving parts with co that how's that business progressing are you seeing a pickup on the content side.

Generally from your existing customers any the new customer base, Yeah, Oh, although data content businesses are really doing well right now data minds no exception.

As as as people source goods from different places because of this pandemic they need access to that information information to make good decisions.

As they do that they need and then move it across borders that they're not used to moving it across and they need or.

Our content to figure out what the tariffs and duties are on that.

As they're shipping numerous new suppliers they might not have done in the pandemic they need to be more restricted party screening and so that the data content business Oh, all three aspects of it has been performing quite well in this pandemic.

Okay excellent well again for taking my question is more pathway beginning.

Hey, Thanks have a good day.

Your next question comes as Scott Group from Wolfe Research. Your line is open.

Hey, Thanks afternoon guys.

So just a follow up here I'm not that the calibration as of August 1st is it fair to assume that you've seen some further improvement in trends throughout August and in early September Justice has freight broadly as improved.

That calibration has done as of August 1st and all the knowledge, we had as of August 1st.

We definitely saw June and July a slight upticks and we kind of.

Super to provide that calibration, we took everything we knew through the end of July.

Okay, but the but do you think where are we missing something with within assumption that.

Things and as of September one in theory or better than they were as of August one.

Oh, that's the calibration is not intended to be commentary on it that thats why we pick the data.

And.

Okay.

And then on that the 35% to 40% EBITDA margins, a target and I understand we're a little bit above that now so maybe some caution on spending but do you think there should be some operating leverage is as revenue improves.

That should give you some confidence in insys and sustaining 40% plus outside of a large.

Acquisition.

I look a it's I I think I've said in his prepared comments why we think it's there right now right are we cut costs to deal with the pandemic and then revenue improved and then were.

Being very prudent about adding incremental costs, not knowing what's going to happen in the future.

I think you'll see us continue with that thought process right. We do we do we will continue to add costs to grow our business. One we're comfortable that the revenue.

And is growing and here that on the growth is here to stay and there's a lot on knowns right now.

You know if you followed us for a while you know that we perceive pretty cautiously compared to most tech.

Companies and that's why we kind of have the profit margins that we have.

And you know if if we.

See this continue yeah, I think you you'd see our margins continuing approval. We've always said we thought this this number could improve over time just weren't sure exactly when it's going to happen maybe some of the things that happened in the pandemic caused this gross.

In EBITDA margin.

Accelerate a little faster than normal, but as a group you're going to see us continue to be cautious about adding cost back into the business until we have more certainty about what's going to happen in the revenue side.

Okay and then just just last question curious your views about near shoring or reassuring back to the U.S. or Mexico. Do you think this is going to be a big supply chain theme going forward. The next few years and how do you think your position positively or negatively if that happens.

I mean.

The concept of bringing everything back in United States seems a little farfetched to me I see stuff moving around right now, but it's really moving from China to Southeast Asia.

And I suspect that will continue, especially the southeast Asia gets more sophisticated in their manufacturing processes.

You know from our perspective, and we get paid transaction fees to help people move stuff all around the world and we do better when it keeps changing where the to the places are right because they have to use our services to figure out how to best do that had.

To deal with the change that's been created this pandemic pandemic accelerated some of that change you see that in some of our results and taking a long run.

You know that Oh, if people keep moving manufacturing sites around on I think the will probably benefits us.

You know if they're talking about moving it back to the end state I I'm, not saying no one's going to move back in United States, but I suspect if you're making your yours and you can make them for 20 cents in Vietnam and you can have to make them for $1.50 United States, you're probably not moving it back in United States.

It's acute story on CNN, but it's not really a sub plastics going to have a massive impact in our industry.

Okay. Thank you for the thoughts I appreciate it thanks Scott.

Your next question comes to Steven line from Raymond James Your line is happy.

Hey, guys that I have a couple questions I haven't how much was the FX headwind this quarter.

Yeah, the fairly minor Steven there was a small negative from FX compared to Q2 of last year, but at the very minor in around the half a million range.

And but Ah, yes rates greater out were off a little bit most are starting to see I think here if we look at Q3.

Little bit strengthen the Canadian dollar well, let's call that weakness in the U.S. dollar so that that will reverse itself was a bit but that is minor negative headwind.

But compared to Q2.

Okay got it and then just based on your end Danny I haven't looked like there wasn't much organic growth and Ed I know you mentioned weekly coughlin deployed to any other segment struggling a little over the air cargo that major factor.

Air cargo certainly you know the by far the largest factor in this retail sales.

Were weak early on in the quarter, but started to come back.

But when I when I look at what was the big headwind that we were facing their cargo for sure.

Okay.

Hi, Stephen just given kind of question.

Yeah. They can you hear me.

Yes, you can hear you yeah, Okay, no I was asking so.

How about the visual compliance how is it you know the yet.

Oh, I don't know what do I don't know specific year over year numbers to maybe only could comment on that put a in general so very well I have businesses.

Then everything we hope for and more that's been growing.

And it was a great fit with our existing.

Okay denial business.

And you know, we're making more money than than it ever made before and it was pretty darn profitable will begin with so we've been.

Very happy.

Yeah that now that it's a great performing business to us Steven and both on the revenue side as well as Ed mentioned sort of on the cost side as we pulled that business together with that product line together with yeah. He MK data product line offered.

Okay got it thanks guys.

Hi, Thank you Stephen.

Okay.

And your next question comes to navigate from Canaccord. Your line is open.

Hey, two questions legs, the a the person.

Sorry, if I Miss something at the beginning that joined late but the I think you reiterated the 10% to 15% EBITDA growth target and in some information around valuations on M&A.

So first question would be as you look at the.

The opportunities out there for M&A are you seeing good opportunities that lower valuation or would you say that it's just the higher valuation everywhere I am assuming trade content duty tariff and duty 18 E. Commerce is going to be high valuation, but there are likely some other areas. So are there opportunities for M&A.

And then you're there are a.

Listen or was it a couple of things one yeah. There's opportunities are there smaller tuck in businesses and maybe some of the stuff is not booming right now.

But you know Moreover, even some of the stuff that is booming is asking for higher valuations. You know, we we try to look at each of them and say hey, It is there something we could do with this business that would.

You know improve the business and improve its valuation if it.

Became part of the Descartes ecosystem and so we'll look at them like that I mean, we're looking for what some of the asking for us to what we think of is over paying her mind.

We're we're looking at going all right well, we'll consider that.

Just one plus one equal three or four here because if it does.

Maybe I'm wrong about it being overpaying for right I mean, you look at some of the ones that we've done where we've paid higher multiples are visual compliance macro point.

So.

We were pretty confident going into them that that while everyone thought this was a really high price that we were going to be able to make this look like a low price later.

And that's certainly happened in those two cases and that was our thesis going in and you know we got comfortable enough during the acquisition process to say, yes, Okay, We'll we'll pay something evaluation for.

Multiple for something that's outside the normal bands that we are comfortable operating in but we were doing that with the understanding that we thought that was going to be a great business fit with our business and one plus one would equal three or four.

And that's why we pulled the trigger now if we go and look you walk in your banker you walk in and say Hey, I've got this great business and I'm charging you know on our like for it and we don't see that one plus one equals three or four we're not we're going to walk away.

And nothing's changed about that.

Okay, and then I guess relative to that tend to 50% EBITDA growth target range. I mean, if if you are looking into a better environment than organic growth can return.

That's one driver there a second driver would be M&A, but if you find yourself in a situation where valuations are high and where organic growth is constrained like where do you start to look at its handicapping that tend to 50% EBITDA growth target or is it something you can still drive towards then I'll pass the line.

Well. Thanks, I mean, you know to listen we reiterated today, so I don't I'm not going to sit here I guess, the circumstances to why I might not feel that way in the future, but but we feel that way now we think we're in a position where we can continue to do it thats why we talked about it.

And.

If that changes, we'll let you know.

Okay. Thanks.

Thanks, Rob.

[noise] and this concludes the question answer session.

I'll now turn the call back over to add value chain finally Max.

Okay. Great. Thanks, everyone. We look forward to reporting back to you on our Q3 results in November and have a great. Appreciate your time.

Thank you ladies and gentlemen. This concludes today's conference call. Thank you participating you may now disconnect.

[music].

Welcome to the Descartes quarterly results call. My name is Adrian and out of your operator for today's call.

Hi, I'm all participants are not listen only mode. Later, we'll conduct a questionnaire production.

During the question answer session. If you have a question. Please press Star then one on your Touchtone phone.

Please note that this conference is being recorded an alcoholic Scott pagan Scott Pagan me become bigger.

Thanks, Good afternoon, everyone. Joining me remotely in the call today or had Ryan CEO and Allan Brett Seattle trusted every one of these received a copy of our financial results press release issued earlier today.

Portions of today's call other than historical performance include statements are forward looking information within the meaning of applicable securities laws you.

These statements are made under the safe Harbor provisions of those blocks.

These forward looking statements include statements related to our assessment of the current and future impact of the cobot 19 pandemic on our business and financial condition. They carts operating performance financial results in condition.

They cards gross margins than any growth in those gross margins cash flow and use of cash business outlook baseline revenues baseline operating expenses in baseline calibration.

We anticipate didnt potential revenue.

Losses, and gates anticipated recognition in expensing of specific revenues and expenses.

Actual acquisitions and acquisition strategy.

Cost reduction in integration initiatives and other matters that may constitute forward looking statements.

These factors are outlined in the press release, and then section entitled certain factors that may affect future results and documents filed in furnished with the FCC Pos see another securities commissions across Canada, including her management's discussion and analysis filed today.

We provide forward looking statement solely for the purpose of providing information about managements current expectations plans relating to the future. You are cautioned that such information may not be appropriate for other purposes.

We don't undertake or accept any obligation or undertaking to release publicly any updates or revisions to any forward looking statements to reflect any change in our expectation or any change in events conditions assumptions or circumstances on which any such statements based except as required by law and with that let me turn the call overhead.

Thanks, Scott and welcome everyone to the call last quarter I mentioned, how the call was unique for us since we were doing it with each of us remote from each other as opposed to be one world.

Well, we're doing it remotely again this quarter and it may end up being the way we do it in the future hopefully the call will proceed without technical challenges. However, please bear with us in the queue in a portion of the call as we may need to coordinate to provide answers.

Similar to past calls or the roadmap for the rest of this call.

I'll start with some opening comments, primarily focused on what happened over the last quarter in some of the trends we've seen.

Handed over to Allen, who will go over the Q2 financial results in detail I'll come back and provide some perspective on how we're calibrated and looking at the current quarter and beyond.

And we'll then open it up to the operator to coordinate culinary portion of the call.

So with that let's get to it.

We had a great quarter, especially in light of everything that's been going on in the world continues to be one of the more challenging business environments that we've ever had to operating it's been great to see the logistics industry identified as an essential service industry.

Just on the continued movement of freight.

It's been an active industry with new priorities being placed on different types of goods and goods flowing from different sources via different modes of transport into different destinations. The industry is not fully recovered from the strains of the pandemic with areas like air cargo still having a way to go to recover but we've seen the hard work and dedication of logistics and supply chain workers.

Assisted by technology help all of US continue to have the goods and supplies, we need for businesses communities and families.

All right.

Oh all of these workers a tremendous debt of gratitude.

Predict cart we've kept the same business focus that has served us well in the past we ensure that we are delivering secure and reliable technology services to our customers. So that we have all the goods we need we operate our business profitably. So our customers could comfortably relying on us as a viable long term technology partner and we invest in our business.

Through acquisitions and otherwise so our customers have the benefit of the latest technologies to make them competitive and efficient.

Our focus in each of these areas is on our customers' needs and we believe that by doing so put ourselves in the best position to deliver predictable and quality financial results for our broader stakeholders.

Revenues that exceeded our forecast for the quarter all in all our team rallied together one of the most challenging business environment, they've dealt with to deliver a great quarter. Thanks to the entire Descartes team for everything they did and while reported view what ended up happening as we hit July 30, Onest I think it's worthwhile to rewind a bit to recap how we got here.

In April the last month of our Q1, we saw revenues at a low point as the world shutdown April revenues were down about 5% from where we would expect them to date.

Numerous internal steps to manage our costs through Q1 and may.

During this downturn you stop travel we stopped participating external marketing events, we suspended hiring a new employees and all of these efforts helped but they weren't enough.

As a business, we remain committed to growing our adjusted EBITDA, 10% to 15% per year.

Also needed to assume that April revenue numbers that were down 5% would continue as a trend through Q3.

So we decided we needed to take additional cost reduction initiatives in May we announced a restructuring that we reduced our costs by approximately $6 million per year or $1.5 million quarter. You did this by letting approximately 5% of our workforce go and shutting some office facilities.

We immediately took actions on that plan, so that our cost reduced in Q2 that partially contributed to our performance in Q2.

Ultimately as we got to July 30, Onest, we saw better revenues than we originally forecasted for.

As mentioned April revenues were down about 5%. So we were planning to revenues at that level for May June and July of Q2.

In May we saw revenues up a little bit from April but not significantly. However, we saw better recovery in revenues in June and July as businesses got back to work, particularly the United States.

And looking at the business in general we've seen good revenue traction in the phone areas.

This is related to E commerce or small package goods and some of those businesses. We've seen volumes that typically be seen until the black Friday holiday period, I'll talk more a bit about ecommerce later in the call.

Businesses, moving food medicine, and other essential goods also saw good revenue traction and finally businesses focused on real time tracking of the location of goods.

We've also seen slower recovery in the following areas.

First and foremost air cargo in particular some of our businesses are tied to the number of cargo flights often cargo is moving in passenger planes. So we've seen a depressed number of flights as people have been reluctant to travel internationally that area.

Still has a way to go for recovery as cargo capacity slowly comes back online it's less of a demand issue at this point.

Retail businesses and shopping malls. This is starting to recover or portions of our businesses that help with the replenishment. It mall stores and they were impacted while malls were closed.

In summary openings in the United States, we're starting to see some recovery there.

Finally shipments of commodities and automotive supply chain goods several auto manufacturers suspended production for a period of time those businesses are also now recovery.

Complete and integrate acquisitions, even in a challenging business environment.

In June we added container so the did Cartier via acquisition containers in the digital freight platform, allowing logistic service providers.

To have a branded interface for their customers to get quotes book shipments to track shipments and analyze performance in the last six months have shown how quickly the well can change and the shifted digitization is accelerating as a result logistic service providers operate on type margins those that don't move quickly to digitize their customer experience will be.

Based with higher cost to serve without the proper real time connections between client facing platforms and the quoting rating and booking systems that this digitization brings logistics service providers will struggle to efficiently meet customer demand in today's dynamic Marty market.

This is exactly what we can do with a combined Dick part and containers offer.

The acquisition was very well received by the market and our customers. In fact, we've already closed several incremental incremental deals with a combined descartes containers team so with that I'll welcome everyone, who joined from containers in the United Kingdom and Ireland.

We remain committed to growing our business through acquisitions, there's lots of things, we sell right now, including some very high quality assets I suspect those things being for sale reflects the valuations that many technology companies are seen as we've shown it's possible to get acquisition is done in this market.

However, there are new dynamics to be dealt with including evolving valuation expectations and the challenges of remotely sourcing and completing acquisitions, we're confident in our ability to execute given our familiarity with many of the parties in our market believe it gives us a leg up on others as we complete remote acquisitions.

I think that reflects one of the core things of that carts historical success, we're dynamic and adjust professionally and quickly to changing markets you've seen in our operations with our quick transition to remote working and to reduce cost base, ensuring our continued superior operating performance we've seen in our acquisition performance with us getting the deal done.

In this past quarter and you've seen in how we interact with our stakeholders as we quickly transition to holding or first virtual user conference and our first online annual general meeting.

In short we're experienced with dynamic environments, you can see than our historical performance and we believe we're well structured to show it in the future and with that I'll turn the call over to Alan to go through our financial results for the past quarter.

Hey, Thanks, Thanks, Ed as indicated I'm going to walk you through our financial highlights for our second quarter of physical to.

Physical 21, which ended on July 31st.

We're pleased to report revenues of 84.0 million this quarter up 4% from revenues of 80.5 million in Q2 of last year.

Our revenue mix continues to be very strong with services revenue, increasing 5% to a record 75.3 million, which is now 90% of total revenue in the second club.

And this compares to services revenue of 71.1 million or 89% of total revenue in the same quarter last year.

License revenues came in at 1.3 million or just over 1% of sales in the quarter.

While professional service and other revenue came in at $7.4 million or 9% of revenue in the second quarter of this year.

Gross margin was solid at 73% of revenue for the second quarter, which is down just slightly from gross margin of 74% in both the second quarter of last year and the first quarter of this year.

As we mentioned last quarter and it added just indicated in order to address the slowdown in our revenue experience in April as the impact of the pandemic started the parts of our business.

In late May we completed the restructuring plan, where we reduced approximately 5% partly because while we also closed a few of our smaller offices, where we concluded that the stuff not routine needing to return to the office, even when the Pandemics subsides and is determined safety too so.

We should note that the annual cost savings from this restructuring plan are expected to be approximately 6 million.

We also recorded a 1.9 million special charge in the quarter related to the cost of putting this restructuring plan in place.

These costs were not recorded sorry were recorded in other charges on the income statement this quarter.

So with continued growth in revenue and continued strong cost control, including the savings of approximately 1 million this quarter from the restructuring plan just mentioned.

We continue to see a strong adjusted EBITDA growth of approximately 13% to 34.0 million or 40.5% of revenue.

When compared to adjusted EBITDA of 30.2 million or 37.5% about the same period last year.

As a result of these solid operating results cash flow generated from operations came in as a record 34.1 million or just over 100% of adjusted EBITDA for the second quarter. This year and this is up 27% compared to operating cash flow 26.9 million.

Were 89% of adjusted EBITDA in Q2 last year.

Cash flow this quarter was aided by really strong collections from customers.

Hello.

[music].

Quarter.

Our strong cash collections are both of the flux in to the hard work by our team.

After the pandemic as well as a reflection of the critical nature of most of our services to customers.

As we've said in the past operating cash flow will always be subject to unusual events annual or quarterly fluctuations that may result in things like this quarter is 100% conversion rate, but for the most part we expect to continue to see operating cash flow conversion.

More typical range of 19, 80% to 90% of adjusted EBITDA per quarter going forward.

From a GAAP earnings perspective, net income came in at 10.5 million or 12 cents per diluted common share in the second quarter.

Up 22% from net income of 8.6 million or 10 cents per diluted common share in the same period last year.

Overall, we're very pleased with these solid operating results in the second quarter has services revenue improved month by month through the quarter and increased to 90% of our total revenue.

While we achieve 13% growth in adjusted EBITDA and generated strong cash flow from operations.

If we look at the balance sheet.

Our cash balance to balances totaled 81.9 million at the end of the second quarter.

During the quarter, we repaid 10.1 million that was outstanding on our credit facility that late in the quarter. While we also used 5.2 million typically the acquisition of containers that had mentioned that occurred in June of this this year.

Late in the quarter as our previous short form shelf based shelf prospectus expired, we filed a new shelf prospectus that will allow us to issue up to 1 billion in various forms of debt and equity capital until August 2022.

So with our cash balances the new shelf in place.

And our unused to 350 million line of credit.

We continue to have the capital capacity to allow us to consider all acquisition opportunities in our market consistent with our business plan.

So as we look the second half the year, we should note. The following that line to the outlook section of our Mdna.

After incurring 3 million and capital additions in the first half year.

We expect to incur an additional 2.0 to 3.0 million up further capital expenditures for the balance of this year with this balance expected to quit further investments in our network security and infrastructure.

We expect amortization expense would be approximately 27 to 28 million for the balance of physical 21, with this figure being subject to adjustment for FX changes and future acquisitions.

Our income tax rate came in at approximately 28.5% a pre tax income in the first half of the year and this is very close to our statutory tax rate in Canada.

Which our two largest markets.

Going forward, we would expect our income tax rate will continue that trend in the range of 27% to 31% of pre tax income.

For the balance of year no as always we should add that our tax rate may fluctuate from quarter to quarter from onetime items that may arise as we operate internationally across multiple countries.

And finally.

We expect stock based compensation will be approximately $3.1 million to $3.3 million for the balance of this year subject to any forfeitures of stock options or share units.

And with that I'll turn it back over to Ed for some closing comments, including our baseline calibration for Q3.

Great. Thanks down before I address calibration as we look forward to Q3 beyond I thought it would be good to recap some of the principles views and planning and executing in our business.

We plan for our business to grow adjusted EBITDA, 10% to 15% annually.

We plan to grow through a combination of organic and acquisitions.

We are perform we expect to reinvest that over performance back into our business, we focus on recurring revenues and establishing relationships with customers for life. We thrive on operating a predictable business that allows us forward visibility to our revenues and investment paybacks.

But we also know that while there are short term challenges for all businesses as we deal with the pandemic here are some medium and longer term tailwinds.

For example.

Brexit.

Theres, new customers regime coming for the UK at a high level, that's like having a brand new country for all of our global customers to have to do business with this impacts imports to an exports from the United Kingdom.

When you look at business like ours, who services include particular strengths in cross border shipments and in providing tariff and duty databases. They are very good opportunities for growth for us as people ramp up to operate in this new environment.

Right now the government is planning for a January Onest 2020 transition. So we'll be working with our customers to hit that or any revised date.

Second tailwind as E commerce, while people have been talking about E commerce for some time its relevance as the world is going through this pandemic has evolved from an emerging issue to a dominant reality.

I've seen this impact even in my own extended family I don't parents were not buying very much online and the same pandemic has been a catalyst for it.

It's like the whole extended world just now got access to what can be bought online I've heard people talk about when things get back to normal as if it's a sure thing that things will go back to how they used to be.

We believe in the case of ecommerce that will be a permanent shift and preferences, which will continue to see an increasing number of goods bought online. That's why you've seen us make recent investments in this space, including our acquisitions of ship Rush people box Pixie and us.

Next tailwind to supply chains, and global trade supply chain relevance has also been vault into the forefront because of the pandemic. The best way to understand this is to look around and see how many businesses are having to rethink their supply chains as a consequence of the lockdowns and global trade restrictions.

Businesses need to consider the global trade climate climate and consider whether they're in the ideal locations for manufacturing and supply businesses need to be constantly updating their decisions based on changes in global tariffs unrestricted party sanctions and businesses now need to consider lockdowns and pandemics as no longer a black Swan event.

And more of a business planning reality to ensure essential goods and supplies can still be delivered in the midst of lockdowns. The card is right and across areas and supply chain and global trade and we stand ready willing and able to continue helping our customers with these challenge challenges.

The next tailwind is automation, we've seen continuous moves towards business automation with recognition that technology can assist more ensuring critical business tasks are done on a timely or and more cost efficient basis, leveraging new technologies like artificial intelligence and machine learning optimize choices can be automatically major route.

Place educated guesses, we've made significant investments in particular in or routing and scheduling and transportation management solutions to make sure did cart remains relevant in our customers remain leaders.

Next tailwind is remote working.

Before while a worldwide Lockdowns our business was already operating with a portion of our workforce remote but somewhat of a natural thing for us considering a business that we have is moving things from remote places to remote places our customers are distributed in remote offices all over the world as they collaborate to move goods. So our business has historically been less about in person meeting.

And more about remote conference calls and meetings to make things happen.

With the locked down as our business quickly transitioned to being almost entirely remote and as you've seen from the restructuring we previously announced.

Where we closed some offices theres some roles that will never return to be in a corporate office our customers have gone through the same experience and our reaching those same conclusions they need to be able to continue to manage freight with remote employees and in the same way to zoom teams help with remote meetings. Our technology is designed to help with the remote management of freight weather.

Research booking tracking invoices are analytics, we expect to move.

The move to freight management technology systems will continue to be a tailwind coming out of the pandemic.

We've already seen some increased infection levels in Europe.

We've provided a comprehensive description of baseline revenues baseline calibration and there are limitations in our quarterly report that we filed today, but to summarize how we saw things at August 1st 2020, using foreign exchange rates of 74 cents to the Canadian dollar $1.18 to the euro and $1.31 to the.

Okay pound, we estimate that our baseline revenues for the second quarter of 2021 are approximately $85.5 million and our baseline operating expenses are approximately $53 million. We consider this to be our baseline calibration of approximately 27.5 million for the third quarter of 2021.

Were approximately 34% of our baseline revenues as at August Onest 2020.

Thanks to everyone for joining us on the call today as always were available to talk to you about our business by phone or virtual meeting and we hope sometimes sooner rather than later in person and with that I'll turn the call over to questions operator.

Thank you will now begin the question answer session.

Your next question. Please press Star then one and you touched on song.

When I came back for questions.

And our first question comes from if South from William Blair. Your line is open.

Hey, guys. Thanks for taking my questions.

Just wanted to ask on the.

Outperformance that you saw relative to your expectations. Unlike in the quarter was that driven by some of the positive areas that you highlighted.

Being unexpected are performing better than expected because it seems like on the transaction volume side that that kind of trended with with what your expectations were and Didnt really.

Prove that much in the quarter. So just curious what drove that outperformance relative to your expectations.

I think a little both we certainly had some some really good performance in the global trade areas and ecommerce areas and other most of the rest of the business held in pretty strong. We obviously had some a weaker air cargo results ads.

A lot of planes fly passengers weren't there and therefore, the ability to those plants wasn't available for.

Cargo, which hertz.

You know hearts, our air cargo numbers.

Okay.

Here within your broker customer base, but just curious prior to the pandemic. There's obviously a need for these businesses to digitize they were under pressure various factors one of them start ups trend as sort of Disintermediate. Then so wondering how they're reacting and this type of and virus.

Mentor, they putting some of those digitization initiatives on older. They accelerating then and then how does that relate to like macro point capacity matching and then the containers business that that you acquired that would help and digitized.

I think not just brokers or I assume you're talking about freight brokerage not customs brokers, but.

Not just brokers really a whole bunch of our customers I think realize they needed to automate everything in their business come April when they had to send their employees home and anything that wasnt automated became a real problem.

And.

Thank you could see that some of our results ride out you know.

The gravitated towards systems like ours that enable them to do that metric that's going to continue for the foreseeable future.

Perhaps even outside this pandemic.

Got it.

Is it for me thanks, taking my questions guys. Thanks.

Hey, Matt how are you there.

Your next question comes from Paul China from RBC Capital. Your line is open.

Thanks, very much and good afternoon typical last quarter you indicated baseline was based on April volume.

What's your assumption is for Q3 baseline or using a single month, the average score last quarter or anything there could be helpful.

Yeah ill jump and take that I think.

That baseline call as of August Onest, So, it's really reflective of what we see in the business to that point.

We see continued to see some improvement in parts of the network.

Slower recovery in other parts than that looks so it's really the current information, including Italy stronger July that said that we saw so it incorporates everything we know taught us first.

And.

And your comments on their linearity of transaction volumes to the quarter, a very helpful. Maximum recovery June and July, whereas it was down 5% below your expectations how is June and July.

Quantify that a little bit further in terms of how that compares versus what youve normally see through June July.

Yes, I'll stuff started and Ed can jump in.

You know, we're seeing I think it really touches on his comments earlier in the prepared statements I mean, we're seeing certain product lines, where where a numbers are better than June July last year, certainly an E commerce area in parts of our content space.

And we're seeing other parts like air traffic, let's just reflective anything you read out there in the air freight World, where we're not seen those numbers come back to the levels that they were.

Overall, we've seen a step up from April in both June and July I wouldn't say we're back to.

Pre pandemic levels at anything you want to add though.

No I think that's pretty good description of it.

Okay last one for me.

In regards to comment on mm valuations on seems like evaluations and the going up for a couple of years or several years and you know it's been an area that that's been a challenge.

Does that unit warm across the board or are you seeing more expansion in certain segments.

And others, we think it's lots relevant to your business.

Or are you looking at potentially putting a is slowing the pace of M&A on just given that the valuations across the board are more expensive.

Well, there's more for sale now than ever I think some of that's a function evaluation and.

Bankers and therefore companies seeing that.

People are paying up for some assets right now and as a result everyone's Russian market, we try to ignore that although it's nice for us to going to look at at a whole lot of businesses. Once certainly the larger assets as we've seen in the past.

Our.

Demanding top dollar any asset that is doing well right now and a pandemic.

You know that they're they're up selling and they're trying to sell for for premium valuation because a lot other businesses have been harmed by this pandemic someone's significant way. So the ones that are that are out and performing well, maybe even better than than normal our.

They're certainly going for higher rates on our typical tuck in type smaller acquisitions, the ones, where we've known the people for a while the prices are still in a range that we think is competitive and add just let address your last part of your question. There I think you know.

We've always looked at all he has been some said what do we think there work.

We are willing to pay up for something like like a macro point.

And maybe some of the other assets that we bought when we think one plus one equals three or four and say okay well.

This may look expensive to everyone right now, but we know enough to know that's actually a good price and so you know we continue to look at everything that comes up for sale and evaluated.

It's very similar metrics of the way we have in the past.

You know ecommerce is done very well for us.

In the.

If we looked at an E commerce business, we may be willing to pay more for that because we kind of thing you know.

We've done quite well and then we suspect we could do well in that in the next one as well.

Other businesses, where we don't see any kind of growth are already kind of significant step change your growth.

Our valuation metrics remain the same.

Thanks for taking my questions.

Hey, Thanks Bye.

Your next question comes from Rhino lunch from Barclays. Your line is open.

Hey, guys. This is Frank on for Raimo. Thanks for taking my question congrats on the quarter.

Just one for me I know that you mentioned the continued tailwinds.

Even as the reopening pick up on the ecommerce site I was wondering if you could dig a little deeper and talk about what the three openings what kind of an impact they have on the rest of the areas of your business.

Yeah sure I mean.

I mentioned it a little this in the calls, but you know as.

Almost everything in a row was shut down in April So E. Commerce is booming in that period of time.

And it is I still see doing very well, but slowed down since then when all the other stores around the.

In the World opened up and people had more choices to where to buy things.

And I think you make your some of that flow through to the rest of the business right a lot of our retailers.

They were open during Oh, the Pan first month or two of the pandemic as they open back up their revenue started to come back and and improve.

[noise] things that are Laggers I mentioned airlines earlier.

You know there our planes in the AG is just not nearly as many as they used to be ended not nearly specifically as many international flights that used to be now airlines a switch some of their planes to handle cargo, but that's not enough to bring it back to the steady state of normal I think air cargo demand is every bit as robust as as it was before.

What you see right now as air cargo prices have gone up considerably, but the volumes are down because they don't have capacity available to them. They start customers, who want to buy it and they just don't have planes to fly in and because theres no passenger flights are not enough passenger flights moving so.

No we're not going in every specific good business most of them or.

Business as usual and frankly, but those are some of the ones that I might highlight as being a little.

Different than normal.

Okay. Thanks, that's all for me.

Andrew Thanks for question.

Constant detect cash flow from Stifel. Your line is open.

Hey, guys. Good evening, Thanks for taking my question.

Jeremy.

Yes, I do hope.

Thanks can you guys you recruit period you can.

Got it here so yeah, a couple of follow up.

On the M&A side had with valuation expectations getting higher for some of the quality asset.

Change the way you look to deploy capital you think you might lean on a bit more debt or you use your own valuable paper to make acquisitions is going to cash than any shifts.

Yes.

No nothing nothing seems in our money, we would prefer to use our own cash from operations to buy companies and only when we need more than that would we look to finance and some other way our first choice with interest rates, where they are would be to use our debt facility.

And and after that.

Distant third would be.

An equity offering to pay for it but that all depends on the size of the deals random if we buy something very large.

Ill changes because we can only use our cash flow and can only use debt to do it but for our normal deals you know our first second third choices as cash from operations.

And Ah you know with interest rates, where they are right now debt as a a.

Clear second choice doesn't equity offerings, a distant third.

And then you mentioned that you're seeing some high quality assets for sale is there something new here that that's come out of the delta or or is it just the general because valuations are going up.

Thanks, so much as well.

I think theres been a rush to technology because people think technology companies are businesses are going to benefit from this some more than others right here in ecommerce business right. Now you are rushing out and trying to sell your company right now we're a little wary of that right. We see in our own business that you know there was a massive jump in April and May.

Maybe may but that's come up a bit it's still still a step function up from from normal but.

It's come up as as other stores have opened up those businesses are trying to sell as fast as they can and for more money than people might think their work you know.

We try to bring the same logic to the table that we've always had which as you know how are we going to get our money back from our shareholders. On this deal. If you want more money from your for your company you know we need to how we're going to get more money back.

Quickly.

And so you know that's the argument we're looking for when someone says they want a lot of money for their business will.

Certainly what I'm missing here is there some way that I'm going to get the money back even faster now that could happen. If that's the case you know we're interested if it's not the case, we took can say sell to somebody else.

Got it has not putting a new piece of the puzzle on the table that.

That wasn't necessarily there before that becomes the new opportunity for you guys to grab that Pete.

No I don't think that's not normally we're looking forward if something comes across the table that we think is interesting I mean ecommerce came across like that five years ago that's right.

Started looking at it we saw a couple of business for sale. We thought we think we can mixed up into this and we added it.

I don't know that were out looking for that so much from route looking for good businesses that we think will be good fits with our business and you know in the process. If we see something that's.

No.

Close to what we do and maybe a little different you know obviously consider as as we always have you see us expand the number of pillars that we have been arm.

Arsenal over the years and that's kind of how happens I don't know that were out looking for that so much route looking for good businesses and then when ideas come up we start thinking about it and seeing if we should.

Take the next step.

So for us it's kinda.

Business as usual, even though sometimes people are asking us to.

To change our mindset because they want you know banker once more money for his asset just trying to get us to think of it differently, but well listen to it but not necessarily going to.

Change our way of thinking.

So shocking a banker once more money [laughter] [laughter].

So.

[laughter] I did have a question about about your data content business, particularly data mine I know that you made an announcement of a deal recently, if I'm not mistaken.

Given that there has been such a demand for greater visibility with all the moving parts coded how's that business progressing are you seeing a pickup on the content side.

Generally from your existing customers and even new customer basis, yes, although data content businesses are really doing well right now data mines no exception.

As as as people source goods from different places because of this pandemic they need access to that information information to make good decisions.

They do that they needed then move it across borders that they're not used to moving it across and they need or.

Our content to figure out what the tariffs and duties are on that.

As they're shipping numerous new suppliers they might not have done in the pandemic they need to be more restricted party screening and so that that data content business. All three aspects of it has been performing quite well in this pandemic.

Okay excellent well, that's again for taking my questions offline I'm getting.

Hey, Thanks have a good day.

Next question comes as Scott Group from Wolfe Research Your line is open.

Hey, Thanks afternoon, guys. So just to follow ups here I'm not that the calibration as of August Onest is it fair to assume that you've seen some further improvement in trends throughout August and in early September Justice has freight broadly as improved.

Uh huh.

That calibration is done as of August Onest and all the knowledge, we had as of August 1st.

We definitely saw June and July a slight upticks and we kind of.

To per to provide that calibration, we took everything we knew through the end of July.

Okay, but did but do you think where are we missing something with an assumption that.

Things and as of September one in theory or better than they were as of August one.

Oh, that's the calibration is not intended to be commentary on it that thats why we pick the data.

And.

Okay.

And then on the the 35% to 40% EBITDA margins, a target and I understand we're a little bit above that now so maybe some caution on spending but do you think there should be some operating leverage is as revenue improves.

That should give you some confidence in insys and sustaining 40% plus outside of a large.

Acquisition.

I look a it's I think I've said in the prepared comments why we think it's there right now already we cut costs to deal with the pandemic and then revenue improved and then were.

Being very prudent about adding incremental costs, not knowing what's going to happen in the future.

I think you'll see us continue with that thought process right. We do we do we will continue to add costs to grow our business when we're comfortable that the revenue.

And is growing adhered and the growth is here to stay and there's a lot on loans right now.

You know if you followed us for a while you know that we perceive pretty cautiously compared to most tech.

Companies and that's why we kind of have the profit margins that we have.

And.

If if we.

See this continue yeah, I think you you'd see our margins continuing approval, we've always said.

Thought this this number could improve over time just weren't sure exactly when it's going to happen maybe some of the things that happened to pandemic caused this gross.

In EBITDA margin.

To accelerate a little faster than normal, but I think you're going to see us continue to be cautious about adding cost back into the business until we have more certainty about what's going to happen in the revenue side.

I mean.

The concept of bringing everything back in United States seems a little farfetched to me I see stuff moving around right now, but it's really moving from China Southeast Asia.

And so expect that will continue, especially in southeast Asia pits more sophisticated in their manufacturing processes.

You know from our perspective, and we get paid transaction fees to help people move stuff all around the world and we do better when they keep changing where the to the places are right because they have to use our services to figure out how to best do that had to.

To deal with the change that's been created has panned out pandemic accelerated some of that change you see that in some of our results and I think in a long run a you know that Oh, if people keep moving manufacturing sites around on I think the will probably benefits us.

You know if they're talking about moving it back to the states I I'm, not saying no one's going to move back in United States, but I.

Suspect if you're making your goes and you can make them for 20 cents in Vietnam, and you have to make them for $1.50 United States, you're probably not moving it back in United States.

It's acute story on CNN, but it's not really a sub plastics going to have a massive impact in our industry.

Okay. Thank you for the thoughts I appreciate it thanks Scott.

Your next question comes to Steven Lyman from Raymond James Your line is open.

Hey, guys a couple questions I haven't how much was the FX headwind this quarter.

Yes, it's fairly minor Steven there was a small negative from FX compared to Q2 of last year, but yet, but very minor in around the half a million range.

But yes rate spray tour, we're off a little bit most are starting to see I think here if we look at Q3.

Little bit strengthened the Canadian dollar well, let's call that weakness in the U.S. dollar so that.

It's a tough it a bit but a minor negative headwind.

Compared to Q2.

Okay got it and then just based on you and be any I haven't looked like there wasn't much organic growth and Ed I know you mentioned weaker coughlin deployed to any other segments Triborough award the cargo that major factor.

Air cargo certainly you know that by far the largest factoring this a retail sales a week early on in the quarter, but started to come back.

But when I when I look at what was the big headwind that we are facing Andrews air cargo for sure.

Okay.

Hi, Stephen just given to the question.

Yeah. They can you hear me.

Yes, good to hear you yeah, Okay. No I was asking so how about the visual compliance how would they be it.

Oh I don't know about I don't know the specific year over year numbers, you may be on can comment on that but.

In general so very well on that business is.

Then everything we hoped for and more that's been growing and it was a great fit with our existing.

And K denial business.

And yeah, we're making more money than than it ever made before and it was pretty darn profitable will begin with so we've been.

Very happy.

Yeah, and now that it's a great performing business for us Steven and both on the revenue side as well as Ed mentioned sort of on the cost side as we put that business together with that product line together, but yes, he MK data product line offer.

Okay got it thanks guys.

Hey, Thank you Steve.

Yes.

And your next question comes to navigate from Canaccord. Your line is open.

Hey, two questions legs, the a the person.

Sorry, I missed something at the beginning I joined late but the I think you reiterated the 10% to 15% EBITDA growth target and give some information around valuations on M&A.

So I guess the first question would be as you look at the.

The opportunities out there for M&A are you seeing good opportunities that lower valuation or would you say that it's just the higher valuation everywhere I'm, assuming trade content duty tariff and duty 18 E. Commerce is all going to be high valuation, but there are likely some other areas. So are there opportunities for M&A.

And then you're there are a.

Listen or was it a couple of things one yeah, there is opportunities or theyre smaller tuck in businesses and maybe some of the stuff is not booming right now.

But you know Moreover, given some of the stuff that is booming is asking for higher valuations. You know, we we try to look at each of them and say hey, It is there something we could do with this business that would.

Improve the business and improve its valuation.

Became part of the Descartes ecosystem and so we'll look at them like that I mean, we're looking for with somebody asking for us to what we think of as overpaying her mind.

We're we're looking at going all right well, we'll consider that.

Does one plus one equal three or four here because if it does.

Maybe I'm wrong about it being overpaying for right I mean look at some of the ones that we've done where we've paid higher multiples a visual compliance macro point.

You know.

We were pretty confident going into them that that while everyone thought this was a really high price that we were going to be able to make this look like a low price later and that's certainly happened in those two cases and that was our thesis going in and we got comfortable enough. During the acquisition process to say, yes, Okay, we'll we'll pay something or valuation for <unk>.

And that's why we pulled the trigger now if we go and look you walk in your banker you walk in and say Hey, I've got this great business and I'm charging you know on armor like for it and we don't see that one plus one equals three or four we're not we're going to walk away.

And nothing's changed about that.

Okay, and then I guess.

Relative to that tend to 50% EBITDA growth target range I mean, if if you are looking into a better environment and organic growth can return.

That's one driver there a second driver would be M&A, but if you find yourself in a situation where valuations are high and where organic growth is constrained like where do you start to look at its handicapping that 10% to 15% EBITDA growth target or is it something you can still drive towards then I'll pass the line.

Well thanks.

Listen we reiterated today, so I don't I'm, not going to sit here and guesses and circumstances to why I might not feel that way in the future, but but we feel that way now we think we're in a position where we can continue to do it thats why we talked about it.

And.

If that changes, we'll let you know.

Okay. Thanks.

Thanks, Rob.

And this concludes the question answer session.

Ill now turn the call back over to add value chain finally Max.

Okay. Great. Thanks, everyone. We look forward to reporting back to you on our Q3 results in November and have a great. Appreciate your time.

Thank you ladies and gentlemen. This concludes today's conference call. Thank you participating you may now disconnect.

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