Q1 2022 Descartes Systems Group Inc Earnings Call

June 2, 2021

Transportation carriers with digital platform to interact with their customers keep premise for us combining was that we believe that together, we can reach more customers and give them confidence in what we can do we're seeing that premise proved true as containers continues to see good traction.

With customers with several recurring revenue sign ups and go lives that hit the first quarter.

Okay.

In part based on the success, we saw with containers and further serving the food or logistics intermediate Muni very community. We've completed 2 deals this year that help round out our Florida solution footprint.

First was quest the web in March that we talked about on our last results call. It's a business that provides brokers and border solutions to help them manage their life cycle of shipments, including some unique foreign trade zone functionality clustered web is only part of our business for 2 months in the first quarter, but it's already having an impact the teams have integrated well and we've already worked together on various combined.

These including helping customers with joint duty drawback and duty recovery opportunities in Canada, and U S truly a great start.

And then right. After the quarter ended we completed the acquisition of portraits portrait because as a good example of where good decisions in the past help you make decisions in the future.

Purchased as a part of our partner of containers and so we're already had experience of successfully working with containers and portrait on joint opportunities with customers portraits isn't the business of multimodal transportation rate management, primarily for forwarders and logistics intermediaries portraits provides a platform that allows these intermediaries to have digital rates for all.

All of the different contract permutations that your media area.

<unk> with its transportation carriers, and then manage those rates to provide accurate and profitable quoting for complex moves that the intermarry media Aerie makes for its own customers and in particular, when combined with the container digital front end and the carts existing forward or back office solutions. It's a powerful combined platform that gives any intermediary everything there.

Need to run their business.

Welcome to hanging in the entire portraits team and we look forward to doing great things together.

So to sum up as it relates to acquisitions, we completed some acquisitions last year. They performed very well in Q1, and we added 2 businesses in the first part of the year that we're very excited about and we believe can provide very good value to our customers. Our plans are for them to profitably contribute to our business immediately just like we've planned for with previous businesses.

We've acquired because nothing has changed in our willingness to buy how we buy or how those businesses will contribute.

The third thing that can be attributed to a great Q1 operational performance was a general increase in shipping volumes that we saw on our global logistics network. The increase was driven by 2 main factors. The first was the general economic recovery, we've seen as the U S. Open backs up opens back up for business and the second factor was that.

Customers are trusting us with more and more of their business or.

Our global Logistics network is the foundation of our business that connects all the parties to logistics transactions together from transportation carriers logistics intermediaries.

The shippers and receivers of goods and the government is involved in the regulation and taxation on the movement of those goods.

We do this all over the world and for every mode of transportation, making it a truly comprehensive global logistics network.

Oftentimes big events impacting shipping will operate as a bit of a zero sum game shipman.

Shipments in 1 geography or down say due to something like prohibitive tariffs the often be up in other countries, where it's now more economical to ship to and from.

Or in other circumstances, where a shipping lane is blocked due to weather natural disaster or other circumstance, you'll likely see pickups in volumes in other shipping lanes.

Or modes of transportation. So when you have 1 of the world's largest logistics network that serves all the different modes of transportation as geographies. You are protected from any events that had shipping you often see shifts in where and how shipments are moving rather than across the board increases or decreases exceptions.

Exceptions to this are where there are global recessionary or preliminary booming times.

The proverbial rising tides, raising all boats were the opposite.

This is somewhat what we saw over the past pandemic year with decreased shipping bodies in particular decreased international shipping volumes. The initial pandemic shocks impacted both shipping supply and demand for example on the air cargo world much of the available shipping capacity was removed from the passenger planes to stop flying remember those passenger planes were carrying car.

On their bellies and demand for shipping services was also impacted as retailers didn't have in store shopping hours that required quite as much replenishment.

Through the latter half of last fiscal year, we saw some saw slow signs that shipment volume for coming back. These were in part driven by the resiliency of many of our customers when presented with obstacles about how consumers could buy and store. Many quickly shifted focus to their E. Commerce efforts as we talked about on past calls e-commerce volumes and the resulting last.

While delivery continues to drive good results for our business.

But in Q1 with the massive availability of vaccines in the U S. We've seen a push to reopening as restrictions have been lifted more passenger planes are moving cargo. In addition to the industry's move to retrofit planes for cargo only freighters also with physical stores now reopening, we're seeing warehouse and store replenishment as a legitimate factor in increasing shipment volume.

It.

To sum up we saw good volumes across our network in Q1 as things in the U S began to open up when we add this to the fact that customers continue to trust us with more and more of their business. We've seen very healthy organic growth on our network that was certainly a good sign for our business in Q1, and hopefully a vaccine rollouts advance around the world also a good thing for global shipment volumes.

So the 3 main areas that contribute to record results for us in Q1, Brexit acquisition performance in rising shipment volumes.

Things contributed to record total revenues and service revenues record income from operations net income and adjusted EBITDA above our plans with adjusted EBITDA up 26 per cent from a year ago or 42% adjusted EBITDA margin and cash from operations at almost 99% of adjusted EBITDA. Each of these things were ahead of our plans.

And I want to thank our entire Descartes team and our customer base for all their help in getting us there.

With that I'll now turn the call over to Alan to go through our Q1 results in more detail now.

Hey, Thanks debt as indicated I'm going to walk you through our financial highlights for our first quarter, which ended on April 30.

We are pleased to report record quarterly revenues of 98 million net.

This quarter, an increase of 18 per cent from revenues of $83.7 million in Q1 last year.

Revenue from new acquisitions contributed nicely to this growth as I've mentioned.

And revenue from new and existing customers, including from new Brexit related okay.

Okay. What are the main drivers of growth this quarter when compared to last year.

We should note that the first quarter last year is a bit of a weaker comparable period as it did have a negative impact from lower transactional volumes at the outset of the global pandemic last year.

In the month of April last year.

In addition, we should mention that there is a benefit to revenue from foreign exchange this quarter of approximately $3 million.

The U S dollar was weaker compare.

The Euro Canadian dollar and British pound compared to the same period last year.

As a reminder, the impact of foreign exchange on our adjusted EBITDA was once again quite a minor as we remain fairly naturally hedged to FX on our profitability or cash flow basis.

Back to revenue on a revenue mix from the quarter continued to be very strong with services revenue, increasing 19% to $88.3 million or 90 per cent of total revenue.

Per the $74.1 million or <unk> 89 per cent of revenue from the same period last year.

Services revenue was also up nicely sequentially, increasing 7% from the fourth quarter of last year.

License revenues came in at $1.3 million or just over 1 percentage of revenue in the quarter down.

Down from license revenues of $1.8 million on the first quarter last year.

While professional services and other revenue came in at $9.2 million or 9% of revenue up 18%.

From 7.8 million on the same period last year.

Gross margin for the first quarter increased to 76 per cent of revenue.

Up strongly from gross margin of 74 per cent from the first quarter last year.

Gross margins continued to increase with a strong incremental growth from new and existing customers that we experienced on the quarter.

Our operating expenses increased in the first quarter and this was primarily related to the impact on the cost base from recent acquisitions, but also from additional labor related costs as we continue to invest in our business east.

These cost increases were partially offset by savings that we continue to see in our business such as the continued lower travel marketing and facilities costs related to the ongoing pandemic.

As a result, we continue to see strong adjusted EBITDA growth of 26 per cent to a record $41.5 million or 42.0% of rapidly on the quarter.

33 zero million or $39.4 per cent of revenue in the first quarter last year.

With these exceptional operating results cash flow generated from operations came in at $49 million or approximately 99 per cent of adjusted EBITDA in the first quarter. This year up 49% from operating cash flow of $27.5.

For 83% of adjusted EBITDA in the first quarter last year.

Going forward subject to unusual events and quarterly fluctuations, we expect to continue to see strong cash flow conversion and generally expect cash from operations to between to be between 85 to 95 per cent of our adjusted EBITDA in the periods ahead.

From a GAAP earnings perspective, net income came in at $18.4 million up 67% from net income of 11.0 a million in the first quarter last year.

Overall as I've said, we're really pleased with these operating results from the first quarter as the strong organic growth and solid performance from our recent acquisitions resulted in an 18% growth on revenue and more importantly, a 26% growth in adjusted EBITDA per quarter.

If we turn our attention to the balance sheet.

Our cash balances totaled $138.1 million at the end of April.

Subsequent to year to quarter end, we announced that we have used approximately 25 million of our existing cash balances to complete the portraits acquisition, which had described in some detail on Ireland.

As a result, we still have over $110 million in cash as well as $350 million available to us to draw on under our credit facility for future acquisitions. So.

So we continue to be very well capitalized to allow us to consider all acquisition opportunities in our market consistent with our business plan.

As we look at the balance of fiscal 2022, we should note the following after.

After incurring approximately 1.6 million from capital additions in the first quarter, we expect to incur approximately $4 million to $5 million in additional capital expenditures for the balance of this year.

After incurring amortization cost of $13.8 million on Q1, we expect the MSA amortization expense will be approximately $42.5 million per the balance of the year with this figure being subject to adjustment for foreign exchange changes and future acquisitions.

Our tax rate in Q1 came in at 21, 21% of pretax income lower than our statutory tax rate of 27 per cent and this was mainly as a result of recognizing certain benefits from previously unrecognized tax losses carryforward.

Looking into Q2.

We currently expect that our tax rate would be in the range of $2.15 per cent of pretax income.

As a result of the expected reversal of valuation allowances on certain additional tax loss carry forward as well as the reversal of some uncertain tax positions.

As a result for the year. We currently expect our tax rate to be live in the area of 15 to 20 per cent of pretax income before returning to a more expected range of 25 to 30 per cent of pretax income in subsequent years.

As always we should add that our tax rate will fluctuate from 1 time items that may arise as we operate internationally across multiple countries.

And finally after incurring stock based compensation expense of $2.6 million in the past quarter. We currently expect stock stock compensation will be approximately $9 million per physical 22 subject to any forfeitures of stock options or share units.

I'll now turn it back over to adequate wrap up with some closing comments and our baseline calibration.

Hey, great. Thanks, Alan 1 of the things we strive for Descartes is consistency, we believe the consistency brings stability and reliability things that we know are valuable to our customers on our broader stakeholders to deliver this consistency we operate from consistent business principles, we plan for our business to grow adjusted EBITDA, 10% to 15% annual.

We plan to growth through a combination of organic growth and acquisitions. When we over perform we expect to reinvest that over performance back into our business and we focus on recurring revenues and establishing relationships with customers for life.

Finally, we thrive on operating predictable business that allows us forward visibility to our revenues and investment paybacks.

I just wanted to spend a minute hitting some of these principles, particularly in light of US performing ahead of our plans for Q1, we.

We believe that when we over perform we should look at investing that over performance back into our business. We believe that over performance presents an opportunity to invest to make the future of our business better more predictable and sustainable.

We can generate the forward visibility to revenues and investment paybacks that we crave and.

And we think that's the circumstance that we find ourselves in now we have an opportunity to invest in our business to drive even more consistent organic performance in the future specifically, we intend to look at opportunities to both enhance our go to market infrastructure and also customer service with the specific goals of impacting future organic revenue growth and customer <unk>.

Tension so when we looked at calibrating our business for Q2, we keep that investment opportunity in mind because for us over performance as an opportunity to get better not an opportunity to celebrate.

So on the calibration and our quarterly report that Scott mentioned, we filed today, we provided a comprehensive description of baseline revenues baseline calibration and their limitations.

Typically we calibrate as of May 1st being the beginning of our fiscal quarter. This quarter. However, we're calibrating as of May 7th being the date of the portraits acquisition.

So as of May 7 and using foreign exchange rates of 82 cents on the Canadian dollar $1.21 to the euro and $1 and $1.4 O.

Mine to GBP pound, we estimate that our baseline revenues for the second quarter of 2022 or approximately $92 million and our baseline operating expenses are approximately $59 million. We consider this to be our baseline calibration of exactly.

<unk> $33 million from the second quarter of 2022 or approximately 36% of our baseline revenues as at May 7th 2021.

We've indicated previously that the targeted adjusted EBITDA margin range for our business is 35% to 40% as mentioned our actual results for Q1 had us at about 42% and we've been above 40% per each of the past 4 quarters.

Given what we see we're raising that range and we believe will operate in the 38% to 43% adjusted EBITDA range for the balance of fiscal 2022.

Even with my comments about investing for future organic growth our focus for the balance of the year will be to growth both organically and by acquisition. We anticipate good contributions from both portraits and quest of web in Q2, and we intend to continue to be active in the acquisition market as I said last quarter. We believe there are still acquisitions that meet our financial and strategic criteria.

And that continued focused and diligent efforts will guide us on the acquisition front.

Last quarter I described a few things that I think position us well to grow as a business. They included our broad range of customers our dedication to driving success for our customers our broad partner portfolio. The positive impact on our solutions have on the environment, our ability to recruit talented people and market tailwind nothing has changed about those facts.

From what I said last quarter other than we're a bigger business with new acquisitions integrated and even better financial performance, but I do want to touch on some of the market tailwind.

As I described earlier Max vaccination efforts in the U S have enabled us to start the process of reopening similar efforts in the U K and Canada may soon put those economies in a position to begin to open up further as well.

Well that is positive news there is still a long way to go with vaccination for many parts of the world. So while we expect the reopening in the U S and some other markets to be a tailwind, it's not necessarily going to be hurricane strength. There are many large economies that are still on the grips of the pandemic and they're an important part of the global community, we need to continue to support our.

<unk> with logistics of vaccine distribution around the world. So that we can all get back to some of the pre pandemic freedoms that we were used to.

When economies do reopen things are never totally going back to the way they want to work for each of US work conditions will change how we interact with others will change and our buying habits will change we believe that some of those changes are sustainable tailwind for our business specifically the accelerated move to further automation and business and the continued move to ecommerce from.

On a buying mechanisms.

On the automation front, we believe that lockdowns on the resulting need to work remotely have convinced many that technology can have a meaningful impact on making our jobs easier to perform on a distributed on a global basis and that is especially so in supply chain and logistics, where by its nature remote people are managing remote assets moving via remote transportation, we're seeing.

This is a demand for our solutions questions from customers are no longer what if we wanted to do this remotely and more how do we do this remotely.

On the E Commerce front, we believe that theres been a permanent an accelerated shift in people's comfort and purchasing online in the future years, we'll see a shift from business to consumer further into the business to business World in short, we believe that E. Commerce will make last mile deliveries, even more important in the future and that will drive demand for our solutions.

To wrap up we're happy with how the business is performing and believe that it provides a great opportunity for us to invest and make our business even better for the future something that we know will be good for our customers on other stakeholders and otherwise we're going to stick to our business principles that I described earlier because that's how we got this great opportunity that we have in front of us now.

So thanks to everyone for joining us on our call today as always we're 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 operator, I'd like to turn it over to you for questions.

Thank you we will now begin the question and answer.

If you have a question. Please press Star then 1 on your Touchtone phone.

If you wish with either from a share.

First the Palestine are they ask me now.

They'll be delayed before the first question is announced.

Excuse me Speaker phone you may need to pick up the handset first before pressing the numbers.

Once again, if you have a question. Please press Star then 1 on you touched on the phone.

Your first question.

Your line is open.

Hey, great.

Thanks for all the details on what color can you just give us a little bit of a recap on the areas of investment I noticed you mentioned go to market and customer service and I'm, assuming you're meaning like incremental investment of the outperformance. Despite the bumped up range.

I didn't hear you call out anything around product I'm sort of curious is is there an area that we're focused on then I got 1.1 fast follow up clarification I mentioned that yes, sure I mentioned that on our last call on that that's certainly 1 of the areas as there's more.

On the products that are hot.

They were putting some more investment in as well, but I wanted to call out there.

The new investment, yes, it's we did even better this quarter.

It's I guess in terms of go to market at should we be thinking like this as you know laying the groundwork for sort of 23 and maybe into 'twenty 4 in terms of the magnitude of change that you're making here and then the clarification as well would just be could you just re hit the calibration numbers you went a little fast there.

Then I'll pass on.

Yeah.

Secondly on it.

Uh huh.

Customer are the customer facing stuffs.

Specs to be over the next couple of years.

Can you on cyclical you just go back on my notes.

The calibration.

Got it okay per calibrate on bracket Yep Yep.

With 92 zero million.

And calibrated adjusted EBITDA 33 zero.

Perfect. Thanks, good quarter guys.

Hey, Thanks, Paul.

And our next question comes from Paul Treiber from RBC Capital. Your line is open.

Got it thanks very much and good afternoon is on a follow up quickly on the last comment you had this on the products. He said that our heart, where you're putting more investment does could you elaborate on which areas are seeing the debt the greatest momentum right now.

Yes, some of the ones I mentioned actually the other thing that ecommerce businesses and there's a bunch of businesses in there that are doing well on both the ship and management and the.

And the warehouse management pieces of that business.

Global trade compliance business is doing very well you heard me mentioned Brexit.

You know some of the regulatory.

Compliance areas.

It had been doing very well lately.

We made a lot of investment for Brexit last year, you see some of that paying off right now most of that Brexit work is done.

Prior to the.

The go live for Brexit. So that's awesome now we get to kind of reap the rewards of that business.

And then maybe Moreover.

You know with all the you know the ecommerce businesses the direct beneficiary of other last mile deliveries, but but on the longer run on mobile routing.

You know tracking businesses mobile handheld businesses, all do well is less mile deliveries expand so we see that opportunity unfolding over the next 5 to 10 years.

As e-commerce volumes continue to grow.

Can you just.

At a high level the price.

Extremely disruptive to supply chain from logistics and on public culminated with.

The ship getting stuck in the Suez Canal.

How are you.

I've seen a general rise in interest for customers to want to automate more and more of their supply chain and then are you seeing that in the ability to cross sell or upsell.

And for our customers to adopt more solutions out there from him.

Yes, that's exactly what we're seeing I mean, I think as as the whole world realizes.

Logistics and supply chain is more important than they thought it wasn't I guess most of the world is coming just now to understand what that is.

That puts pressure on the companies that they're buying stuff from to give.

Give them status messages and tell them, where shipments are all along and the trucks that deliver them to the warehouses, even even kind of need to know where all these things are to orchestrate a faster and faster deliveries for the consumer and that.

We'll process puts a lot of pressure on our customers to have technology in place to deliver to those customer expectations and we're 1 of the main places that they would go to get that and I think that's why not or at least part of why you're seeing us do very well right now and perhaps for sometime to come into the future.

Alright, thanks for taking my questions.

Hey, Thanks, Bob.

And our next question comes on Reno Lunchtime from Barclays. Your line is open.

Hey, this is Frank on for Ryan and I don't want to stay on the topic of E. Commerce. If I can so it was a point of emphasis for you guys, especially around the pandemic and it did really well I wanted to ask how youre seeing the growth trending here as we continue to move into a post pandemic world can you also frame the long term potential here and growth.

We see it going back to the growth levels that were probably what we were seeing pre pandemic on what we saw was a big step function up in you know as.

As the pandemic started and started to.

The slow, but still pretty good levels I think we were in the twenties.

Since the the big.

Push that we got on the start of the pandemic, where it really shut up.

Upwards of 40% and we're seeing that now come back to a normal level of growth, but still quite good and they're probably 1 of our fastest growing businesses.

And I don't know how long that goes on in the future I suspect. It will go on for some time now.

Look around our Hercules debt.

Talking to friends or whatever it seems like people are more and more comfortable doing that.

And quickly look to order things online versus go to the store I think the pandemic probably started that process, but.

Once you're comfortable doing that it's hard to go back.

Great. That's really helpful. On 1 follow up if I can it was good to see the EBITDA target range raised could you talk a little bit about.

How much of that was scaling of the business and operational improvement over the past few quarters versus any cost discipline that you've learned it depend on macro.

I mean, it's mostly it's mostly growth on our business contributed to it in the beginning of the pandemic. There was some cost discipline as our revenue went down we cut costs in line with that I think you've heard us talk about that on past calls last.

You know may when we saw the April results down, 5%, we kind of cut cost 5 per cent, we haven't done anything like that since in fact, we've probably been growing as our business has been growing since then but.

Most of that what you're seeing now that's gotten us up into the you know Oh you know.

42 per cent range has been our.

Our business growing and in some of the.

The dynamics that have always existed on our business right. The last dollar in its almost all profit in most of our business is because of the.

The network that we operate in the current revenue model from the outbreak.

Perfect. Thanks, Ed.

Hey, Thank you Frank.

Okay.

And your next question comes from that demand from Stephens. Your line is open.

Thanks, and congrats on the quarter.

So I wanted to follow up on organic growth is there any way you could help us kind of ballpark that level of organic growth that you saw on the quarter and I know, we're comping against the initial stages of debt pandemic on a year over year basis. So maybe Ed could you speak to that sequential trends, you're seeing in organic growth as well.

Yeah, I'll have Alan jump in it's like we got the number of strength.

Yeah, so listen a strong quarter organically I think if you look into the financial statements.

Yeah, just over double digit organic growth, but you remember we run our business on a combined basis. So we're constantly integrating the business as Ed mentioned in his prepared comments. Some of those recent acquisitions are performing quite well for us is that organic growth or is that a.

Is that acquisition growth was that again the way we operate if I Miss altogether overall for the 3 reasons I mentioned.

Long acquisitions that yeah, no Brexit and then just a general recovery on trade.

The option of our products are all contributing to a true probably with the best organic growth number we've seen for a while.

Yeah.

Did I answer everything for you.

That's great and then maybe that trend sequentially from on.

Organic growth perspective as well.

Okay.

Yeah, I mean, we're up we're up 70% from.

From a.

Essentially from the business as far as as far as our adjusted EBITDA and heavily that's again, that's going to be a mix of both on organic growth.

And and moving.

The existing customers that are doing more volume with us so a.

5% revenue growth sequentially of about 7.5 per cent to EBITDA growth sequentially and those are all on mix of both of those factors that are driving it.

Great. That's helpful and just quickly to follow up on that comment around investing outperformance back into the business is there any way to put numbers around that comment as we think about that incremental investment we could see this year end and maybe you could speak to that organic growth environment that you're planning for over the balance.

For the year as you make that comment.

I don't know the exact numbers.

And we'll just have to see how we go we're going around our organization right now looking for for areas, where we are.

With the managers to run various groups on our in our business trying to define the best areas to invest where we think we can get the biggest bang for our Buck.

And I think we've put anything out specifically about how much we're going to spend but you can take us with the word that we did we mentioned that we're going to invest the over performance back into business.

And with an eye towards getting results in the coming years for that effort. So.

The guidance for the first part of your question what was it what was the second part of the question can you repeat that.

The organic growth profile that youre, assuming over the balance well, yeah, I mean, we assume 4% to 6% organic growth.

We're doing pretty well right now.

Chance, we'd beat it but we.

We.

As we've always stated we're planning on a 4% to 6% organic growth and if we beat that we'll reinvest it back in the business.

You know, it's it's been going pretty well, obviously you can see the organic growth number was great this quarter.

We hope that trend continues, but we're going to see how the economy performs in the.

In the coming months coming out of the pandemic.

Makes sense I appreciate the time.

Alright, Thanks John.

And our next question comes true.

Chris <unk> from Wolfe research.

Your line is open.

Hey, good afternoon, guys, it's Rob salmon on for Scott.

Just any rough back on.

Thanks to payback on a on a couple of questions regarding EBITDA margins and the investments as we look out to later in the year given the incremental investments you're planning on doing should we be expecting EBITDA margins to be retreating in the near term.

From the levels that we're at in the first quarter.

I mean listen we just called out the range 30, 38 to 43 per cent. We think will continue to operate on that range.

We'd like to keep that number going up.

A lot of factors that go into it some of them outside of our control.

But no we would like to to keep it in the range that we mentioned.

We plan on keeping the range you mentioned.

Got it and then Ed earlier in the call you had highlighted on that.

The Brexit tailwind that you've seen this past quarter and you expect them to continue to be tailwind for the remainder of the year. How should we think about the Brexit revenue kind of scaling up on over the course of 'twenty, 1 and will only be at full run rate do you think even at the end of the year on this continued to be a tailwind looking out into.

On fiscal 'twenty 3.

Remember, it's all recurring revenue right. So that the people pay us per shipment and they're paying us monthly minimums, and we expect that they'll do that with us forever or at least as long as they are customers of ours. So.

No.

As I mentioned in the past these.

Regulatory.

<unk> are step functions right.

Can't control demand are the government has to come in and tell our customers. They have to comply with some regulation and then we help our customers do that.

We're fortunate in the Brexit scenario that you know it was already a business that we were very.

Strong in that market.

We then came up with what we think is the best solution in the market and in the face of that a bunch of our competitors kind of free.

Well to deliver some or all or parts of Oh that.

That solution.

So.

All of that translated to us, becoming the leader in that market and.

You know you heard me on the call.

20 minutes ago, I was kind of mentioning that there's a bunch of phases to this rule and some of them are already in place and some of them are rolling out over the course of the year, it's not going to be mandatory.

In whole until the end of the year. So our customers have some ramp up period to get in we expect that's why we'll see a tailwind going over the course of the year. We think will continue to sign up some of the small and medium sized players that have yet to do this yet.

And that all other players in the market will continue to ramp up the transactions through to the end of the year when they're supposed to be lot after that theoretically.

Everyone should be live at that point, and we may see increases, but they'll probably be more modest as.

As international trade in and out of the UK growth, but otherwise we would expect that we've gotten most of the customers.

And their volumes that will get from Brexit by the end of the year because it's a recurring revenue business. I think you can expect to get those for a long time to come.

At the same time, if we're going to have another substantial increase in our regulatory business, it's going to come from in other jurisdictions.

Yeah.

Got it and in terms of just the the face adoption through year end is it really stair step at the towards the very end of the year or maybe you can kind of give us some sort of cadence that we should be thinking on maybe where we're at 5.

Whatever the number is.

I don't know yet I think we picked up a good piece of the good chunk of the business. It's.

It's not easy.

Easy for us to figure out how much everyone might do.

By the end of the year, we know theyre not doing everything that they can with us right now.

But it's hard for us to predict exactly.

What the increases are going to be over the course of the year on when they're going to occur. So we're.

Just as we always do.

Playing it conservatively.

We're prepared for it and we're prepared for whatever volume they might bring us in we do expect that it will continue to rise, we don't know to what level yet.

I appreciate it thanks for the time guys.

Hey, Thank you.

And this concludes our question and answer session. That's on the call back over to the.

Speakers for final remarks.

Yeah.

Hey, great. Thanks, everyone. We appreciate your time this afternoon and look forward to talking to you next I think it's early September for the Q2 results call I. Appreciate your time today. Thanks guys.

Thank you ladies and gentlemen, this concludes today's conference call.

Thank you for participating you may now disconnect.

Yes.

[music].

Okay.

Yeah.

Okay.

[music].

Welcome to the quarterly results call. My name is Adrian and I'll be your operator for today's call.

Time, all participants are in a listen only mode. Later, we'll conduct a question and answer session. If you'd like to ask you questions. During today's presentation. Please press Star then 1 on you touched on the phone.

Please note. This conference is being recorded and that's on the color of Scott Pagan Scott Pagan you may begin.

Okay.

Thanks, and good afternoon, everyone. Joining me remotely on the call today are Ed Ryan CEO, and Allan Brett CFO and I Trust that everyone has received a copy of our financial results press release that was issued earlier today.

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

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

These forward looking statements include statements related to our assessment of the current and future impact on the COVID-19 pandemic on our business and financial condition day cards operating performance financial results on condition.

Gross margins on any growth on those gross margins cash flow on use of cash.

The baseline revenues baseline operating expenses and baseline calibration.

Anticipated and potential revenue losses, and gains anticipated recognition and expensing of specific revenues and expenses potential acquisitions and acquisition strategy cost reduction and 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 of 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 section entitled certain factors that may affect future results in documents filed and furnished with the SEC the OSC and other securities commissions across Canada, including our management's discussion and analysis filed today.

We provide forward looking statements solely from the purpose of providing information about management's current expectations on 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 expectations or any change in events conditions assumptions or circumstances on which any such statement is based except as.

As is required by law and with that let me turn the call over to Ed.

Hey, Thanks, Scott and welcome everyone to the call. We've got some excellent first quarter results to kick off our 'twenty 'twenty 2 fiscal year and I'm excited to be able to talk with you about them here today, but first let's start with the roadmap for this call.

I'll start with some comments about our performance over the past quarter and what we think they may tell us about our business.

And then hand, it over to Alan who will go over the Q1 financial results in detail I'll come back then an update on how our business is calibrated and some things that we watching in this fiscal year.

And then we will open it up to on the operator to coordinate the Q&A portion of the call.

So with that let's get started as the headlines on the press release said these were record financial results for us that are well ahead of our plans to start off the year.

To the point of why we're ahead on plan here.

Here are a few factors. So first we had a good new additional recurring revenues and our customers' compliance pillar from a Brexit solutions second we had better than planned performance from recent acquisitions and third we've seen a good bounce back from shipping volumes on our network as the U S is starting to open up.

Back up for business.

So let me talk about each of these areas.

Just a little bit here.

Let's start with Brexit in Q1, we had a great traction and helping our customers get ready for compliance with the new UK Brexit rules, we've talked about this a bit on past calls however, with U K, leaving the EU.

You've established a brand new country for customer purposes for all trade between or passing through to and from the United Kingdom and the EU.

That means that you've now got a new UK customers rules for imports into and exports out of U K, you've got new rules for imports into in exports out of the EU and new security filings Bimodal transport for all of these shipments in.

In addition.

Each of these rules is coming in on a phased in basis somewhat grace periods on others immediately and exceptions to particular rules, such as Ireland and Northern Ireland. All in all it's been a very complex situation for our customers to learn and manage.

For Descartes and we've historically been 1 of the leading UK customs and security filers. This makes us an ideal company to help customers be ready for compliance with new rules. We've seen good early success and getting customers signed up better than we were initially planning on and we remain active in getting customers signed up in advance of the end of your Brexit deadline.

Filings will become mandatory and while we don't expect the same level of new customers that we had this quarter.

It will still be a tailwind for the rest of the year.

All in all our team has done an excellent job in making sure we were ready to help our customers with timely filings and that preparedness has been rewarded by customers choosing us with recurring revenue contracts to help them with ongoing U K customs compliance challenges.

Second factor that I mentioned above.

Above planned for performance from some of our recently completed acquisitions, those who followed our company for some time now it's no secret what we look for in buying companies, we listened to our customers about where to invest for the future and as a result of our acquisition strategy is very much very much customer driven.

From a financial perspective, we are very disciplined on our approach we value recurring revenue businesses, we value companies that have an eye to profit by other companies that are growing but also minding the bottom line.

Other companies that have a good reputation with their customers and we value companies that are distinctive and.

And have a defendable market position in their space.

We understand that others may take a different approach and looking for acquisition targets. Some acquirers on a path of growth at any cost on our less concerned if a business can and will make money.

Pay up from the pure revenue growth. Other requires are more focused on the financial engineering in contribution of a deal and less about the quality of the acquired company or how it wasn't great for the benefit of customers I'm sure. It has merit to these other approaches it's just not what we do.

For a typical day cart deal, we're establishing a conservative model for wind and acquired business comes in.

On to initially focus on getting our combined team working together and while not missing a beat on customer delivery. We also went to we are we also want to get.

2 executing on synergies quickly. So we can immediately operate profitably as a cohesive business for the benefit of customers.

Pandemic has not caused us to deviate from how we acquire or integrate businesses last year, we bought 3 businesses and this year. We've already bought to you believe there continues to be a number of good quality profitable businesses that makes sense to be a part of the global logistics network and that will be a big benefit to our customers. We believe are combining with.

Good businesses makes us a better company and it will remain a large part of our plans going forward.

Some of the businesses, we bought last year had very good performance in the first quarter last year, we combined with ship track of business with particular strength in mobile on routing solutions for last mile delivery companies I mentioned on a previous call. How we had immediate post deal success with combined Descartes ship track deals with the big increases in E Commerce and as a consequence.

Last mile deliveries through the pandemic, there's been even more demand and ship traps customer base for extended solution Rollouts. So it's a great start to the year for that business.

Also last summer, we combined with containers as you may recall, the containers business helps borders and transportation carriers with digital platform to interact with their customers keep premise for us combining was that we believe that together, we can reach more customers and give them confidence in what we can do.

Seeing that premise proved true as containers continues to see good traction with.

With customers with several recurring revenue sign ups and go lives that hit the first quarter.

Okay.

In part based on the success, we saw with containers and further serving the border logistics energy military community. We've completed 2 deals this year that help round out our <unk> solution footprint.

First with Questar web in March that we talked about on our last results call.

That provides brokers and border solutions to help them manage their life cycle of shipments, including some unique foreign trade zone functionality clustered web is only part of our business for 2 months in the first quarter, but it's already having an impact the teams are integrating well and we've already worked together on various combined opportunities, including helping customers with joint duty drawback and duty recover.

The opportunities in Canada, and U S truly a great start.

Yeah.

And then right. After the quarter ended we completed the acquisition of portraits portrait because it's a good example of where good decisions in the past hope you make decisions in the future.

Purchased as a part of our partner of containers and so we're already had experience successfully working with containers and portrait on joint opportunities with customers portraits isn't the business a multimodal transportation rate management, primarily for forwarders and logistics intermediaries portrait provides a platform that allows these intermediaries debt digital rates for all.

All of the different contract permutations that intermediary has with its transportation carriers, and then manage those rates to provide accurate and profitable quota for complex moves that the inter married media Aerie makes for its own customers in particular, when combined with the containers digital front end and the carts existing forward or back office solutions.

Powerful combined platform that gives them an intermediary everything they need to run their business.

Welcome to hanging in the entire portraits team and we look forward to doing great things together.

So to sum up as it relates to acquisitions, we completed some acquisitions last year. They performed very well in Q1, then we added 2 businesses in the first part of the year that we're very excited about and we believe can provide very good value to our customers. Our plans are for them to profitably contribute to our business immediately just like we've planned for with previous.

Since we've acquired because nothing has changed in our willingness to buy how we buy or how those businesses will contribute.

Customers are trusting us with more and more of their business a.

Our global Logistics network is the foundation of our business. It can be ex all the parties to logistics transactions together from transportation carriers logistics intermediaries.

To the shippers and receivers of goods and the government is involved in the regulation and taxation on the movement of those goods. We do this all over the world and for every mode of transportation and make it a truly comprehensive global logistics network on.

Oftentimes big events impacting shipping will operate as a bit of a zero sum game.

Shipments in 1 geography or down say due to something like prohibitive tariffs the often be up in other countries, where it's now more economical to ship to and from.

Or in other circumstances, where a shipping lane is blocked due to weather natural disaster or other circumstance, you'll likely see pickups in volumes in other shipping lanes.

Or modes of transportation. So when you have 1 of the world's largest logistics network that serves all of the different modes of transportation as geographies you're protected from any events that had shipping you often see shifts in where and how shipments are moving rather than across the board increases or decreases exceptions.

Exceptions to this are where there are global recessionary or preliminary booming times.

Proverbial rising tides, raising all boats were the opposite.

This is somewhat what we saw over the past pandemic year with decreased shipping volumes in particular decreased international shipping volumes. The initial pandemic shocks impacted both shipping supply and demand for example in the air cargo world much of the available shipping capacity was removed from passenger planes just stopped flying remember those passenger planes were carrying car.

On their bellies and demand for shipping services was also impacted as retailers didn't have in store shopping hours that required quite as much replenishment.

Through the latter half of last fiscal year, we source saw slow signs that shipment volume were coming back. These were in part driven by the resiliency of many of our customers when presented with obstacles about how consumers could it by in store. Many quickly shifted focus to their E. Commerce efforts as we talked about on past calls e-commerce volume and the resulting last.

While delivery continues to drive good results for our business.

But in Q1 with the mass availability of vaccines in the U S. We've seen a push to reopening as restrictions have been lifted more passenger planes are moving cargo. In addition to the industry's move to retrofit planes for cargo only freighters also with physical stores now reopening, we're seeing warehouse and store replenishment as a legitimate factor in increasing shipment volume.

It.

To sum up we saw good volumes across our network in Q1 as things in the U S began to open up when we add this to the fact that customers continue to trust us with more and more of their business. We've seen very healthy organic growth on our network that was certainly a good sign for our business in Q1, and hopefully as vaccine Rollouts advance around the world also a good thing for global shipment volumes.

So the 3 main areas that contribute to record results for us in Q1, Brexit acquisition performance in rising shipment volumes.

I don't want to thank our entire Descartes team and our customer base for all their help in getting us there.

With that I'll now turn the call over to Alan to go through our Q1 results in more detail now.

Hey, Thanks debt as indicated I'm going to walk you through our financial highlights for our first quarter, which ended on April 30.

We are pleased to report record quarterly revenues of 98 million net.

This quarter, an increase of 18% from revenues of $83.7 million in Q1 last year.

Revenue from new acquisitions contributed nicely to this growth as I've mentioned.

And revenue from new and existing customers, including from new Brexit related okay.

Okay. What are the main drivers of growth this quarter when compared to last year.

We should note that the first quarter last year is a bit of a weaker comparable period as it did have a negative impact from lower transactional volumes at the outset of the Covid pandemic last year.

In the month of April last year.

In addition, we should mention that there is a benefit to revenue from foreign exchange this quarter from approximately $3 million.

The U S dollar was weaker compared to the euro the Canadian dollar and British pound compared to the same period last year.

As a reminder, the impact of foreign exchange on our adjusted EBITDA was once again quite to monitor as we remain fairly naturally hedged to FX on our profitability or cash flow basis.

Back to revenue.

Next from the quarter continued to be very strong with services revenue, increasing 19% to $88.3 million or 90% of total revenue.

Per the $74.1 million or 89 per cent of revenue in the same period last year.

Services revenue was also up nicely sequentially, increasing 7% from the fourth quarter of last year.

License revenues came in at $1.3 million or just over 1 percentage of revenue in the quarter down.

Down from license revenues of $1.8 million on the first quarter last year.

While professional services and other revenue came in at $9.2 million or 9% of revenue up 18%.

From $7.8 million in the same period last year.

Gross margin for the first quarter increased to 76 per cent of revenue.

Up strongly from gross margin of 74 per cent from the first quarter last year.

Gross margins continue to increase with a strong incremental growth from new and existing customers that we experienced in the quarter.

These cost increases were partially offset by savings that we continue to see in our business such as the continued lower travel marketing and facilities costs related to the ongoing pandemic.

As a result, we continue to see strong adjusted EBIT growth of 26 per cent to a record $41.5 million or 42.0 per cent of rapidly on the quarter.

33 zero million or $39.4 per cent of revenue in the first quarter last year.

With these exceptional operating results cash flow generated from operations came in at $49 million or approximately 99 per cent of adjusted EBITDA in the first quarter of this year up 49% from operating cash flow on $27.5 or.

Or <unk> 83 per cent of adjusted EBITDA in the first quarter last year.

From a GAAP earnings perspective, net income came in at $18.4 million up 67% from net income up 11.0 a million in the first quarter last year.

Overall, our debt said, we're really pleased with these operating results from the first quarter as the strong organic growth and solid performance from our recent acquisitions resulted in an 18% growth on revenue and more importantly, a 26% growth in adjusted EBITDA per quarter.

If we turn our attention to the balance sheet.

Cash balances totaled $138.1 million at the end of April.

Subsequent to year to quarter end, we announced that we have used approximately $25 million of our existing cash balances to complete the portraits acquisition, but you had described in some detail.

As a result, we still have over $110 million in cash as well as $350 million available to us to draw on under our credit facility for future acquisitions.

So we continue to be very well capitalized to allow us to consider all acquisition opportunities in our market consistent with our business plan.

Yeah.

As we look to the balance of fiscal 2022, we should note the following.

After incurring approximately 1.6 million from capital additions in the first quarter, we expect to incur approximately $4 million to $5 million on additional capital expenditures for the balance of this year.

After incurring amortization costs of $13.8 million on Q1, we expect the MSA amortization expense will be approximately $42.5 million for the balance of the year with this figure being subject to adjustment for foreign exchange changes and future acquisitions.

Our tax rate in Q1 came in at 21 late 'twenty 1 per cent of pretax income lower than our statutory tax rate of 27 per cent and this was mainly as a result of.

Recognizing certain benefits from previously unrecognized tax losses carryforward.

Looking into Q2.

We currently expect that our tax rate will be in the range of 8 to 15 per cent of pretax income.

As a result of the expected reversal of valuation allowances on certain additional tax loss carry forward as well as the reversal of some uncertain tax positions.

As a result for the year. We currently expect our tax rate to be within the area of 15 to 20 per cent of pretax income before returning to a more expected range of 25 to 30 per cent of pretax income in subsequent years.

As always we should add that our tax rate will fluctuate from 1 time items that may arise as we operate internationally across multiple countries.

I'll now turn it back over to adequate wrap up with some closing comments and our baseline calibration.

Finally, we thrive on operating predictable business that allows us forward visibility to our revenues and investment paybacks.

I just wanted to spend a minute hitting some of these principles, particularly in light of US performing ahead of our plans for Q1.

We can generate the forward visibility to revenues and investment paybacks that crave and.

And we think that's the circumstance that we find ourselves in now we have an opportunity to invest in our business to drive even more consistent organic performance in the future specifically, we intend to look at opportunities to both enhance our go to market infrastructure and also customer service specific goals are impacting future organic revenue growth and customer <unk>.

Tension so.

So when we looked at calibrating their business for Q2, we keep that investment opportunity in mind because for us over performance as an opportunity to get better not an opportunity to celebrate.

So on the calibration and our quarterly report that Scott mentioned, we filed today, we provided a comprehensive description of baseline revenues baseline calibration and their limitations.

Typically we calibrate as of May 1st being the beginning of our fiscal quarter. This quarter. However, we're calibrating as of May 7th being the date of the portraits acquisition.

As of May 7 and using foreign exchange rates of 82 cents on the Canadian dollar $1.21 to the euro and $1 and $1.4 O 9 to GBP pound, we estimate that our baseline revenues for the second quarter of 2022 or approximately $92 million and our <unk>.

On operating expenses are approximately $59 million.

Consider this to be our baseline calibration of exactly.

<unk> $33 million from the second quarter of 2022 or approximately 36% of our baseline revenues as at May 7th 2021.

Given what we see we're raising that range and we believe will operate in the 38% to 43% adjusted EBITDA range for the balance of fiscal 2022.

Even with my comments about investing for future organic growth our focus for the balance of the year will be to grow both organically and by acquisition. We anticipate good contributions from both portraits and quest of web in Q2, and we intend to continue to be active in the acquisition market as I said last quarter. We believe there are still acquisitions that meet our financial and strategic criteria.

Korea and that continued focused and diligent efforts will guide us on the acquisition front.

Last quarter I described a few things that I think position us well to grow as a business. They included our broad range of customers our dedication to driving success for our customers our broad partner portfolio. The positive impact that our solutions have on the environment, our ability to recruit talented people and market tailwind nothing has changed about those factors from what.

I said last quarter other than we're a bigger business with new acquisitions integrated and even better financial performance, but I do want to touch on some of the market tailwind.

As I described earlier Max vaccination efforts in the U S have enabled us to start the process of reopening.

Average in the UK and Canada may soon put those economies in a position to begin to open up further as well.

There are many large economies that are still on the grips of the pandemic and they're an important part of the global community.

To continue to support our customers with logistics of vaccine distribution around the world. So that we can all get back to some of the pre pandemic freedoms that we were used to.

On a buying mechanisms.

This is a demand for our solutions questions from customers are no longer what if we wanted to do this remotely and more how do we do this remotely.

On the E Commerce front, we believe that theres been a permanent an accelerated shift in people's comfort and purchasing online in the future years, we'll see a shift from business to consumer further into the business the business World in short, we believe that E. Commerce will make last mile deliveries, even more important in the future and that will drive demand for our solutions.

That's how we got this great opportunity that we have in front of us now.

So thanks to everyone for joining us on our call today as always we're available to talk to you about our business by phone or a virtual meeting and we hope sometimes sooner rather than later in person and with that operator, I'd like to turn it over to you for questions.

Thank you we will now begin the question and answer.

If you have a question. Please press Star then 1 on your Touchtone phone.

If you wish but they've ever from a share. Please press the pound sign or they asked me to.

It will be delayed before the first question is announced.

Excuse me Speaker phone you may need to pick up the handset first before pressing the numbers.

Once again, if you have a question. Please press Star then 1 on you touched on the phone.

Your first question.

Your line is open.

Hey, great.

I didn't hear you call out anything around product I'm, just sort of curious is is there an area. There are focus on then I got 1.1 fast follow up clarification I mentioned that yes, sure I mentioned that on our last call on that that's certainly 1 of the areas as there's more.

Some products that are hot.

They were putting some more investment in as well, but I wanted to call out there.

The new investment since we did even better this quarter.

And I guess in terms of go to market at should we be thinking like this as you know laying the groundwork for sort of 23 and maybe into 'twenty 4 in terms of the magnitude of change that you're making here and then the clarification as well would just be could you just re hit the calibration numbers you went a little fast there.

Then I'll pass on.

Yeah.

Second yeah.

Uh huh.

Customer are the customer facing stuffs.

Specs to be over the next couple of years.

Can you on cyclical you just go back on my notes.

The calibration.

Got it okay per calibrate on bracket.

Yeah.

With 92 million.

And calibrated adjusted EBITDA 33 zero.

Perfect. Thanks, good quarter guys.

Hey, Thanks, Paul.

Yeah.

And our next question comes from Paul Treiber from RBC Capital. Your line is open.

Got it thanks, so much and good afternoon, there's on a follow up quickly on the last comment you had this on the products. You said that are hot where you're putting more investment just could you elaborate on which areas have seen that debt the greatest momentum right now.

Yeah, some of the ones I mentioned actually the other thing that ecommerce businesses and there's a bunch of businesses in there that are doing well on both the chip and management and the.

And the warehouse management pieces of that business.

Global trade compliance business is doing very well you heard me mention Brexit.

Some of the regulatory.

Compliance areas.

It had been doing very well lately.

We made a lot of investment for Brexit last year, you see some of that paying off right now most of that Brexit work is done.

But you know prior to the go live for Brexit. So that's awesome now we get to kind of reap the rewards of that business.

And then maybe Moreover.

With all that you know the ecommerce businesses the direct beneficiary of other last mile deliveries, but but on the longer run on mobile routing.

You know tracking businesses mobile handheld businesses, all do well is less mile deliveries expand so we see that opportunity unfolding over the next 5 to 10 years.

As as e-commerce volumes continue to grow.

Yeah at a high level.

Extremely disruptive to the supply chain from logistics, you know public culminated with.

The ship getting stuck in the Suez Canal.

How have you just seen a general rise in interest for customers to want to automate more and more of their supply chain and then are you seeing that in the ability to cross sell or upsell.

The way for customers to adopt more solutions out there from him.

Yes, that's exactly what we're seeing I mean, I think as as the whole world realizes.

Logistics and supply chain is more important than they thought it wasn't I guess most of the world is coming just now to understand what that is.

That puts pressure on the companies that they're buying stuff from to give.

Give them status messages and tell them, where shipments are all along and the trucks that deliver them to the warehouses, even even kind of on even though we're all these things are to orchestrate faster and faster deliveries for the consumer and that.

We'll process puts a lot of pressure on our customers to have technology in place to deliver to those customer expectations and we're 1 of the main places they would go to get that and I think that's why not or at least part of why you're seeing us do very well right now and perhaps for sometime to come into the future.

Alright, thanks for taking my questions.

Hey, Thanks, a lot.

And our next question comes from remodeled lunchtime from Barclays. Your line is open.

Hey, this is Frank on for Ryan and I don't want to stay on the topic of E. Commerce, if I get to the point of emphasis for you guys, especially around the pandemic and it did really well I wanted to ask how youre seeing the growth trending here as we continue to move into a post pandemic world can you also frame the long term potential here and growth.

She had gone back to growth levels that were are probably what we were seeing pre pandemic on what we saw was a big step function up in AR.

The pandemic started and it started to dip.

Slow, but still pretty good levels I think we're in the twenties.

Since the the big.

Push that we got or the start of the pandemic, where it really shut up.

Upwards of 40 per cent and we're seeing that now come back to a normal level of growth, but still quite good and they're probably 1 of our fastest growing businesses.

And I don't know how long that goes on in the future I suspect it will go on for some time.

Look around <unk>.

Talking to friends or whatever it seems like people are more and more comfortable doing that.

And quickly look to order things online versus go to the store I think the pandemic probably started that process, but.

Once you're comfortable doing that it's hard to go back.

Great. That's really helpful. On 1 follow up if I can it was good to see the EBITDA target range raised could you talk a little bit about.

How much of that was scaling of the business and operational improvement over the past few quarters versus any cost discipline that you've learned it depend on the world.

I mean, it's mostly most of the growth on our business contributed to it in the beginning of the pandemic. There was some cost discipline as our revenue went down we cut costs in line with that I think you've heard us talk about that on past calls last.

You know may when we saw the April results down, 5%, we kind of cut cost 5 per cent, we haven't done anything like that since in fact, we'd probably be growing as our business has been growing since then but.

Most of that what you're seeing now that has gotten us up into the you know Oh you know.

42 per cent range has been you know our business growing and in some of the debt.

The dynamics that have always existed on our business right. The last dollar in its almost all profit in most of our business is because of the the network that we operate in the recurrent revenue model from the outbreak.

Perfect. Thanks, Ed.

Thank you Frank.

And your next question comes from that demand from Stephens. Your line is open.

Thanks, and congrats on the quarter.

Maybe I'll I'll have Alan jump in it's like we got the number of strength.

Yeah, so listen strong quarter organically I think if you look into the financial statements.

Yes, just over double digit organic growth, but you remember we run our business on a combined basis. So we're constantly integrating the business as Ed mentioned in his prepared comments. Some of those recent acquisitions are performing quite well for us is that organic growth or is that a is that acquisition growth was that again the way we operate on this.

Altogether overall for the 3 reasons I mentioned strong acquisitions and debt.

Brexit and then just a general recovery in trade.

Option of our products are all contributing to a true probably what's the best organic growth number we've seen for a while.

Did I answer everything for you.

That's great and then maybe that trend sequentially from on an organ.

Organic growth perspective as well.

Yeah, I mean, we're up we're up 70% from.

From a.

Essentially from the business as far as as far as our.

Adjusted EBITDA and heavily that's again, it's gonna be index of both organic growth and and.

Existing customers that are doing more volume with us so.

5% revenue growth sequentially of about 7.5% EBITDA growth sequentially and those are all on mix of both of those factors that are driving it.

Great. That's helpful and just quickly to follow up on that comment around investing outperformance back in the business is there any way to put numbers around that comment as we think about that incremental investment we could see this year end and maybe you could speak to that organic growth environment that you're planning for over the balance.

For the year as you make that comment.

I don't know the exact numbers.

And we'll just have to see how we go we're going around our organization right now looking for for areas, where we think.

With the managers to run various groups on our in our business trying to define the best areas to invest where we think we can get the biggest bang for our Buck.

And I think we've put anything out specifically about how much we're going to spend but you could take us through the word that we did we mentioned that we're going to invest.

Over performance back into business.

And with an eye towards getting results in the coming years for that effort. So.

The guidance for the first part of your question what was it what was the second part of the question.

The organic growth profile that youre, assuming over the balance.

Yeah, I mean, we assume 4% to 6% organic growth.

We're doing pretty well right now you know chance we'd beat it but.

Yeah.

As we've always stated we're playing on a 4% to 6% organic growth and if we beat that we'll reinvest it back in the business.

It's been going pretty well, obviously, you can see the organic growth number was great this quarter.

We hope that trend continues but we got to see how the economy performs in the.

In the coming months coming out of the pandemic.

Makes sense I appreciate the time.

Alright, Thanks John.

And our next question comes from.

Chris <unk> from Wolfe research.

Your line is open.

Hey, good afternoon, guys, it's Rob salmon on for Scott.

Just any rough back on.

From the levels that we're at in the first quarter.

I mean listen we just called out the range 30, 38 to 43 per cent. We think will continue to operate in that range are.

We'd like to keep that number going up.

A lot of factors that go into it some of them outside of our control.

But no we would like to to keep it in the range that we mentioned.

We plan on keeping the range you mentioned.

Got it and then Ed earlier in the call you had highlighted on the.

The Brexit tailwind that that you've seen this past quarter and you expect them to continue to be challenged for the remainder of the year. How should we think about the Brexit revenue kind of scaling up on over the course of 'twenty, 1 and will only be at full run rate do you think even at the end of the year old has continued to be a channel and looking out into.

Fiscal 'twenty 3.

No.

As I mentioned in the past these.

Regulatory.

<unk> are step functions right I can't control demand the government has to come in and tell our customers. They have to comply with some regulation and then we help our customers do that.

We're fortunate in a Brexit scenario that you know it was already a business that we were very.

Strong in that market.

We then came up with what we think is the best solution in the market and in the face of that a bunch of our competitors kind of failed to deliver.

Liver, some or all or parts of that.

That solution.

So.

All of that translated to us, becoming the leader in that market and.

You know you heard me on the call.

In whole until the end of the year so.

Customers have some ramp up period to get in we expect that's why we'll see a tailwind going over the course of the year. We think will continue to sign up some of the small and medium sized players that have yet to do this yet.

And that all other players in the market will continue to ramp up their transactions through to the end of the year when they're supposed to be lot after that theoretically.

Everyone should be live at that point, and we may see increases, but they'll probably be more modest as a as.

As international trade in and out of the U K growth.

But otherwise we would expect that we've gotten most of the customers.

And their volumes that will get from Brexit by the end of the year because it's a recurring revenue business. I think you can expect to get those for a long time to come.

At the same time, if we're gonna have a another substantial increase in our regulatory business, it's going to come from in other jurisdictions.

Yeah.

Whatever the number is.

I don't know yet.

Picked up a good piece of the good chunk of the business.

It's not easy.

Easy for us to figure out how much everyone might do.

By the end of the year, we know theyre not doing everything they can with us right now.

But it's hard for us to predict exactly.

What the increases are going to be over the course of the year on when they're going to occur. So we're.

Just as we always do.

Playing it conservatively.

We're prepared for it and we're prepared for whatever volume they might bring us in we do expect that it will continue to rise, we don't know to what level yet.

I appreciate it thanks for the time guys.

Hey, Thank you Robert.

And this concludes our question and answer if that's enough on the call back over to the.

Speakers for final remarks.

Hey, great. Thanks, everyone. We appreciate your time this afternoon and look forward to talking to you next I think it's early September for the Q2 results call I. Appreciate your time thanks guys.

Thank you ladies and gentlemen, this concludes today's conference call.

You may now disconnect.

Q1 2022 Descartes Systems Group Inc Earnings Call

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