Q2 2022 Descartes Systems Group Inc Earnings Call
[music].
Welcome to the Descartes quarterly results call. My name is Adrian and I'll be your operator for today's call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session.
During the question and answer session.
I would like to ask a question. Please press Star then one on you touched on phone. Please note. This conference call is being recorded I'll now turn the call over to Scott Pagan Scott Pagan you may begin.
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.
Okay.
Portions of today's call all of the historical performance include statements of forward looking information within the meaning of applicable securities laws.
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 COVID-19 pandemic on our business and financial condition Descartes operating performance financial results and condition.
<unk> gross margin growth in those gross margins cash flow and use of cash business outlook baseline revenue baseline operating expenses and baseline calibration anticipated and potential revenue losses and gains anticipated recognition and expensing of specific revenue and expenses.
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 when we think out 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 in the section entitled certain factors that may affect future results in documents filed and furnished with the Securities and Exchange Commission impaired Securities Commission and other securities commissions across Canada, including our management's discussion and analysis filed today.
We provide forward looking statements solely for the purpose of providing information about management's current expectations and plans relating to the future.
Cautioned that such information may not be appropriate for other purposes.
We don't undertake or accept any obligation or undertaking was released publicly any updates or revisions 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 required by law with that let me turn the call over to Ed.
Hey, Thanks, Scott and welcome everyone to the call we had an excellent second quarter financial results and we have had a strong first half of the fiscal year will walk you through those shortly however, first let me give you a roadmap for this call.
Start with a summary of the financial results and some factors contributing to our performance I'll then hand, it over to Alan who will go over Q2 financial results in detail I'll come back and update on how our business is calibrated and we will then open it up to the operator to coordinate the Q&A portion of the call. So let's get right to it in Q2, we had <unk>.
Revenues of $110.0 million ahead of our plans for the quarter and year to date we.
We had record income from our operations of $27.0 million.
Net income of $25.0 million, we had adjusted EBITDA of $45.9 million again, well ahead of our plan for the quarter and year to date.
Adjusted EBITDA margin as a percentage of revenue was 44% cash provided by operating activities was $50.0 million or 101% of our adjusted EBITDA for the quarter.
These are the financial numbers that we track for our business. They were all very good for Q2. They were ahead of our of all of our plants.
There is some descartes specific reasons why we performed well in Q2, we've continued to see some strengthening our business, helping our customers with Brexit travel and marketing expenses have stayed low as pandemic recovery to attend in person events has been slower than we originally planned.
Even had some expense recoveries from events that were canceled and to the comparable quarter from a year ago was right in the middle of the pandemic. When we were restructuring the business to address revenue uncertainty. So we're comparing this year's results to a challenging quarter a year ago.
We've also completed three acquisitions in the first half of the year that have contributed well.
But theres three other areas that contributed to our over performance that I wanted to highlight many of our logistics service provider customers are doing very well right now.
Many of our shipper customers manufacturers retailers and distributors are facing extreme supply chain challenges wisdom, which are most efficiently manage with logistics and supply chain technology solutions and third our employees continue to work very hard in trying and remote conditions to ensure that our customers continue to get the high quality service.
They expect.
So let me provide some color on each of these areas.
A good portion of our client base, our logistics service providers. These are mostly vessel owner operators ships planes trucks et cetera, and intermediaries that help people make bookings on vessels freight borders through pls and Vlccs et cetera.
They buy services from us like shipment tracking customs and security filings booking assistance electronic messaging and rate management.
Many of these services are priced on a transactional basis generally the stronger their businesses are doing meaning the more shipments that are moving into more vessels that are moving the better our business does.
Right now logistics service providers are doing very well and pretty well every mode of transport.
The ocean industry, Theres very little capacity on vessels or container shortages and space shortages. This is cost pricing for ocean moves to be extremely high dependent on commodities and timing up to seven times higher than we typically see.
This is a very profitable time for ocean carriers and intermediaries.
And air capacity has increased greatly from a year ago air carriers have seen the return of some passenger traffic, resulting in additional capacity for cargo in the belly of planes. This capacity is in addition to capacity created over the past 18 months as carriers retrofit passenger planes into cargo freighters.
Add on top of that the air cargo has become a viable mode for high velocity E Commerce shipments and it is a time, where air carriers have seen strong demand and are catching up with the capacity to meet it.
Truck movements, particularly in the U S are strong as well.
Competitive market with particular pressure for carriers because of driver shortages. However for carriers with scale, who can compete for drivers and meet the massive e-commerce and last mile delivery demand. These are very good business conditions. This is particularly so for those specializing in small packaged goods and otherwise last mile delivery.
Railroads become more competitive as well as truck sees additional regulations on the horizon, including state by state regulations relating to fuel use drivers' hours of service and the move to electronic trucks rail may become more and more a viable alternative for cross state moves that were traditionally exclusively serviced by <unk>.
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These are the favorable business conditions that a good chunk of our customers find themselves in they rely on us to help them process additional transactions and enhance the service they can deliver to their own customers, particularly on the shipment visibility side.
In Ocean, our customers look to our recent combinations with portrait and containers to see how we are committed to helping their business modernized and are using their own current over performance as an ideal time to invest in technology and are are booking messaging and tracking services, including for small package and postal tracking using velocity mail and container track.
And using our core services are relied on is mission critical.
For truck, we have a vast menu of services that we offer including our macro point tracking the capacity matching solutions to help with the ever increasing truck shipment volumes were seeing in.
In rail our customers are relying on us for intermodal visibility and asset tracking are.
Our carrier and logistics intermediary customers have been through some tough times over the pandemic, particularly in the air cargo World.
However business conditions appear to be bouncing back in most of our customers on this side of the shipment ledger appear to be seeing strong tailwind to their businesses.
So while these may be good times for carriers. This is a time of extreme supply chain challenges for our shipper customers. These are generally manufacturers retailers and distributors. They use us for a variety of solutions, including global trade management Transportation management fleet management, and customs and security filings.
Generally shippers are dealing with shortages, there's a shortage in vessel capacity, there's a shortage in shipment containers theres a shortage in port availability. There is a shortage of drivers for private fleets. There's a shortage of key supply components such as chips for many electronics, that's impacting industries from technology to appliance to auto manufacturers. There's also.
With shortage of warehouses suitable for high velocity E Commerce moves.
Extreme times often call for extreme measures you've seen shippers trying forward book as much shipment capacity as they can get their hands on.
Seen shippers like home depot by their own ships, just to get that capacity and we've seen other companies doing the same in error.
<unk> is finding its own shipping containers and chartering ships to help with their shipments we've seen manufacturers hoard components in anticipation of shortages.
And we've seen importers in anticipation of shortages start their lead times for shipments for the end of holiday period as early as spring.
Often extreme conditions can be a catalyst for larger investments in technology to help meet those challenges we've seen strong demand, particularly for our solutions that help with global trade and transportation management as you probably heard me say in the past our strength is in helping customers navigate supply chain and logistics connect complexity.
Well this is a very complex time.
Right now our shipper customers are looking for technology help existing customers are using our solutions more than ever to examine alternatives that managed shipments. They can secure new customers are looking at technology investment at a time, where supply chain and logistics technology is no longer needed for their business to be ready for the future, but as needed for their business to be able to compete and survive right now.
So to sum up we benefited in Q2 from seeing good technology demand from the shipper community and are seeing this continue so far in Q3.
There isn't a business out there that hasn't had to adapt during the pandemic and I don't think those changes will be temporary I think all businesses will operate differently based on the lessons learned during the pandemic for us we've always been very fortunate to have passionate hardworking team that cares about helping our customers. We're also a business where it wasn't unusual to be worth.
We look remotely much of what we do is helping customers move goods from one remote location to another and we provide technology solutions that help our customers manage those shipments remotely.
Our team interacts with people all over the world and all types of different businesses being remote is nothing new for us here at Descartes.
As the pandemic started our team shifted to non office work fairly seamlessly if we were going to help our customers manage shipments from remote locations when you need to be ready to do the same.
Our results this quarter are a good reflection of how effective our team has been during this process.
That's not to say, it's been easy our team has dealt with similar challenges. Many workplaces caused by 18 plus months of health and business uncertainty, but I'm very proud of how the Descartes team has pulled together and albeit cartsville stakeholders should be equally proud of the job done.
Our Descartes team has also done a great job of welcoming new team members to our business, even when there arent opportunities to meet in person for example, near the end of the quarter. We brought on several new team members as part of our acquisition of Green miles.
<unk> specializes in mobile route execution solutions with particular historical strength in real time visibility for the final mile of deliveries for food and beverage distribution companies.
This is an important combination for us because it complements our existing routing solutions enhances our mobile last mile visibility capabilities and solidifies our position.
As one of the leading global routing and scheduling technology providers for private fleets. In addition, green mile has a strong presence in Brazil, and Florida, helping us expand our team and strengthen our operations for the Latin American markets Special welcome to all of our new Descartes team members from Green mile and thanks to the job that all Descartes team members have done in helping <unk>.
Myles with their remote integration into our company.
So those were some key contributors to our success in Q2 strong and resilient Descartes team that is eager to help our customers and new deep Descartes team members strong business environment for our logistics service provider customers and in an environment right for technology investment from our shipper customers. All of this has contributed to US being ahead of our financial plans for the first half of the fifth.
Full year I'll now turn the call over to Alan to go through our Q2 results in more detail.
Thanks, Ed as indicated I'm going to walk you through our financial highlights for our second quarter, which ended on July 31.
We are pleased to report record quarterly revenue of $110.0 million this quarter, an increase of 25% from revenue of 84.0 in Q2 last year.
While revenue from new acquisitions contributed nicely to this growth similar to the first quarter growth in revenue from new and existing customers, including some Brexit related customs filings in the U K, where the main drivers of growth this quarter when compared to last year.
We should also note had.
I had indicated earlier that the second quarter last year was a weaker comparable period had a negative impact from lower transactional volumes early last year with the onset of the pandemic.
In addition, we should be clear that there is a benefit to revenue from foreign exchange of just over $3 million.
As compared to Q2 last year as the U S. Dollar was weaker to each of the euro the Canadian dollar and the British pound compared to the same period last year.
Looking further at revenue our mix in the quarter continued to be very stable with services revenue, increasing 24% to $98.0 million or 89% of total revenue.
Compared to $2 $78.0 million in the same period last year.
Service revenue was also up nicely sequentially, increasing 6% from the first quarter of this year.
License revenue came in at $3.0 million or just over 1% of revenue in the quarter fairly consistent with the second quarter last year, while professional services and other revenue came in at $18.0 million or 10% of revenue up 34% from $11.0 million or 9% of total revenue in the same quarter last.
Last year.
Revenue for the first half of the year was $207.0 million an increase of 21% from revenue of $174.0 million in the first six months last year.
Gross margin for the second quarter was 76% of revenue for the quarter consistent with the first quarter of this year and up from gross margin of 73% in Q2 last year.
Gross margin continued to increase with a strong incremental growth from new and existing customers that we experienced this quarter.
Operating expenses increased by approximately 22% in the second quarter over the same period last year and this was primarily related to the impact of recent acquisitions, but also from additional labor costs as we continue to invest in our business.
These cost increases were partially offset from some savings that we continue to see in our business.
Is the continued lower travel expenses marketing and facility costs related to the pandemic.
As a result of both strong revenue growth and strong cost control net income came in at $25.0 million or 27 per diluted common share up 121% from net income of $15.0 million or <unk> 12 per diluted common share in the second quarter last year.
If we look at adjusted EBITDA in the quarter, we experienced growth of 35% to a record $54.0 million or <unk> 43, 9% of revenue in the quarter up from 34.0 million or 45% of revenue in the second quarter last year.
As a reminder, while we had a positive impact from revenue on FX the impact of foreign exchange on our adjusted EBITDA was once again quite minor as we remain fairly naturally hedged on a both an EBITDA and cash flow basis.
For the six months year to date adjusted EBITDA came in at $91.0 million or 43% of revenue up 30% from 67.0 million or.
Or 40% of revenue last year.
With these strong operating results and strong AR collections cash flow generated from operations came in at $50.0 million or just over 100% of adjusted EBITDA in the second quarter up 36% from operating cash flow of $35.0 million in Q2 last year.
For the six months year to date operating cash flow has been $90.0 million or right at 100% of adjusted EBITDA.
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, and 95% of our adjusted EBITDA in the periods ahead.
So overall, we are once again pleased with these quarterly operating results in the quarter as strong organic growth and solid performance from our acquisitions resulted in a 25% growth in revenue and more importantly, a 35% growth in adjusted EBITDA for the quarter.
If we look at the balance sheet, our cash balances totaled $128 million at the end of July down approximately $10 million from the end of the first quarter in April.
While we generated 46 million in cash flow from operations as I mentioned, we also used approximately $55 million of our cash balances in the second quarter to complete the acquisitions of both <unk> and Green Michael.
As a result, we still have almost 130 million in cash as well as $315 million available to us to draw under our credit facility. 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 incurring approximately $7.0 million in capital additions in the first half of the year, we expect to incur approximately $3 million to $4 million of additional cap expenditures for the balance of the year.
After incurring amortization costs of $36.0 million in the first half of the year, we expect amortization expense will be approximately $37.0 million for the second half of the year with this figure being subject to adjustment for foreign exchange changes as well as future acquisitions.
Our income tax rate in Q2 came in at approximately 11% of pre tax income lower than our stock.
<unk> tax rate and this was mainly result of recognizing certain benefits from previously unrecognized losses tax losses carryforward.
As a result, our tax rate for the first half of the year came in at approximately 15% of pretax income.
Looking into the second half of the year. We currently expect that our tax rate will continue to be in the 15% to 20% of pre tax income range. As a result of the expected reversal of valuation allowances on certain additional tax losses carryforward as well as the reversal of some uncertain tax positions taken in previous years.
We should note however that in future years. We currently expect our tax rate will return to a more typical range of 25% to 30% of pretax income and as always we should state.
Our tax rate may fluctuate quarter to quarter from onetime tax items that may arise as we operate internationally across multiple countries.
And finally after incurring stock based compensation expense of $7.0 million in the first half of the year. We currently expect stock based comp will be approximately $6 million for the balance of the year.
Any forfeitures of stock options or share units and with that I'll turn it back over to advocate will wrap up with closing comments on our baseline calibration for Q3.
Hey, great Alan Thanks, our business is designed to be predictable and consistent we believe that promotes stability and reliability things that we know are valuable to our customers employees and our broader stakeholders.
Continue to operate from consistent business principles.
Plan for our business to grow adjusted EBITDA, 10% to 15% annually, we plan to grow through a combination of organic growth and acquisitions, we build and operate solutions on our global logistics network for all supply chain participants connecting shippers carriers logistics service providers and customs authorities.
When we over perform we expect to reinvest that over performance back into our business, we focus on recurring revenues and establishing relationships with customers for life and we thrive on operating a predictable.
Business that allows us forward visibility to our revenues and investment paybacks.
As I mentioned off the top we performed ahead of our plans in Q2 <unk>.
Consistent with those business principles when we over perform we look at opportunities to reinvest to make the future of our business more predictable and sustainable.
Again for us over performance as an opportunity to invest and make ourselves stronger not an opportunity to celebrate.
Several areas of investment that we're focused on right now, but let me speak to three specific ones.
The first is front ended distribution one of our fundamental tenants about growth as to not just grow but to grow profitably.
For us that has always meant a very cautious approach to expanding our distribution capabilities. We don't want to add business. That's either not good for Descartes were not good for our customers. We're looking to enhance our distribution capabilities with people who could help understand the complex environment that our customers are in the complex supply chain and logistics challenges that they face and how.
Our solutions can help with these challenges. So that's an area we're investing in our sales and distribution organization with the goal of continuing to drive organic growth in the future.
We're already in the process of restructuring our sales organization to be less geographic focused and more solution and customer focus we expect to continue to add resources to this organization over the coming year and at a faster pace than we have in the past.
The second is customer implementation and success as we look to organic growth for the future. Some of our best opportunities are with businesses that we already have relationships with we have over 22000 customers and a broad portfolio of solutions, we have great opportunities to help our customers be successful with the help of our solutions, we continue to invest.
In our solutions and will also be looking to invest in customer success resources that can work with customers about effective use of our solutions with the result that additional transactions can flow over our network and we can strengthen our relationships with customers to reduce attrition.
Also we'll be looking at adding implementation resources to accelerate the time to get our customers active with our solutions and help us grow.
And the third is acquisitions and integration.
We intend to continue to be acquisitive for us the quicker, we're able to get deals done in the products integrated the sooner we can help our customers leverage multiple descartes solutions to help their business with that in mind, we're going to look at investments in corporate development and more broadly within our organization to help us combined teams faster and accelerate product integration into the global logistics network.
We considered these investment goals as we set our calibration for Q3 and our quarterly report we provided a comprehensive description of baseline revenues baseline calibration and their limitations.
As of August 1st and using foreign exchange rates.
Since to the Canadian dollar or $20.0 to the euro and $40.0 to the Great Britain pound, we estimate that our baseline revenues for the third quarter of 2022 or approximately $95 million in our baseline operating expenses are approximately $64.0 million.
We consider this to be our baseline calibration of approximately $40.0 million for the third quarter of 2022 or approximately 37% of our baseline revenues as at August one 2021.
Last quarter, we indicated that the targeted adjusted EBIT to operating margin range for our business is 38% to 43% for fiscal 2022 in Q2, we were at 44% we're not looking at changing their targeted range, but we will revisit that in future quarters or next fiscal year. If we continue to over perform.
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.
Completed three acquisitions this fiscal year and expect to continue to be active in the acquisition market. We still believe there are acquisitions that meet our financial and strategic criteria.
In past calls Ive talked about market tailwind, helping us our results this quarter reflect those tailwind we don't have a good idea as to how those long those tailwind will continue.
Earlier this summer we thought the business was trending towards getting back to normal times as we saw successes.
With vaccination efforts. However, the late summer in North America has seen setbacks and recovery at the Delta variant of the coronavirus has proliferated.
Given that we think our continued cautious and prudent approach to investment and calibration is the best thing for all of our stakeholders.
This is an exciting time for Descartes, our business is performing very well and this gives us lots of opportunities opportunities to invest in our business make it stronger for our customers employees and other stakeholders.
<unk> to take what we've worked hard to build and help customers with supply chain challenges that are major impediments to their business opportunities to help our customers to deal with unprecedented demand for their services and opportunities to combine with businesses that share our vision to create a business with customers for life.
Thanks to everyone for joining us on the call today as always we're available to talk to you about our business by phone or virtual meeting and we hope sometime sooner than later and person and with that I'll turn the.
Call over to the operator for the Q&A portion of operator.
Thank you we will now begin the question and answer session.
I have a question. Please press Star then one on your Touchtone phone.
This should be a lift in the queue. Please press the pound sign or are they asking.
Speakerphone, you may need to pick up the handset first before pressing the numbers.
And our first question comes from Matt Pfau from William Blair. Your line is open.
Hey, guys. Thanks for taking my questions and great results.
First I just wanted to follow up on that comment about the delta variance. So just to be clear in your business have you seen any change in customer behavior or anything else as the Delta variance has started to impact the U S.
I mean, not really probably same things you've seen in the news.
I think a lot of them are planning to open up offices and things of that nature.
Yeah.
Probably stop those plans like a lot of a lot of the big businesses. As you can see we're planning on opening September one or where it is at school you're got underway here in the U S and a lot of them are probably dash those pointed to delay those plants, but.
Otherwise their businesses.
Two two.
Keep moving strong you can see that in some of the capacity crunches here.
And the various modes of transportation.
Yeah.
Got it and then wanted to follow up on the comments around investment in customer success.
Correct me, if I'm wrong, but selling back to your customer base has always been a very big portion of your revenue growth. So what's changing now what's what's different and what's sort of driving the investments that youre, making there.
I think some of the things.
Some of the things we mentioned in the beginning of the call you know our customers are doing better than ever. They are looking for more technology to solve those problems and if you think about some of the stuff I've mentioned on the last call.
The whole world just figure it out over the last 18 months. During this pandemic that logistics and supply chain was a whole lot more important than they thought it was and that puts demands from the consumers and companies on our customers' logistics service providers and.
They turned to technology providers to help them solve that problem. Unfortunately for US. We're one of the one of the main people that they turn to.
Yeah.
Okay got it and does that also then correlate with the sales force changes, you're making in terms of our ability to sell more to existing customers.
For sure I mean, that's when we're thinking about it we're thinking when you know where is their high customer demand right now and where.
Our salespeople being overwhelmed by the number of leads coming in and trying to get.
Get more people in place to continue.
Continue to meet the demands of our customers.
Okay.
Got it.
Thanks, guys I appreciate it I'll pass along.
Great. Thanks, Matt.
And your next question comes from Justin Long with Stephens. Your line is open.
Thanks, and congrats on the quarter.
I wanted to ask about organic growth just curious how organic growth trended in the quarter relative to your expectations. It seems like there continues to be some outperformance there and if thats the case and I'd love to get your thoughts on how much of this outperformance is coming from cyclical tailwind.
And then there is stronger for longer freight cycle versus secular tailwind and I know, that's something that might be hard to quantify but would love to just get your take anecdotally.
So I think we're seeing it in both areas and.
Maybe to the point, where we've been surprised by it a little bit.
We thought it was going to be good and maybe even a little better than we thought.
I don't really know how long, it's going to continue for but.
As I mentioned at the beginning of the call a lot of our customers are doing well a lot of our customers are facing challenges in.
They are using us to meet those challenges and at the same time.
No.
They're getting a lot of shipments that they've got a manager or the shippers case, making a lot of shipments that need to be managed and you know that's how we make money so more shipments in the supply chain. The more shipments are being processed by our global logistics network and all of those things have been pretty good for us in <unk>.
Maybe even a little better than we expected.
Okay and based on your calculation what was organic growth in the quarter.
I don't know that I have an exact number I don't I don't I don't know if you want to take a stab at it as I've mentioned to you in the past its a tough number for us to get perfect but.
Yes, as Ed mentioned, we run the business pulling any acquisitions integrating them very very quickly, but roughly speaking when you look at three of the financial statements for pro forma note revenue.
In the neighborhood of 15%.
15%, 16% if you exclude that if you exclude FX impacts on acquisitions.
Okay.
GAAP number.
Thanks Anna.
Understand that the complications around calculating that for sure maybe.
Maybe just secondly, before I pass it on I wanted to follow up on EBITDA margin.
Nearly outperformed and we were above that the range that you said, you're targeting and as we think about the rest of the year is there any kind of headwind that we should be mindful of on a sequential basis and I'm just trying to understand what would prevent EBITDA margins from staying around the level. We saw this.
Quarter end and that the next couple of quarters ahead.
Wow.
I don't I don't see tailwind, but that doesn't mean that they won't they won't exist in FX as you know it can always be a tailwind to it I could also be a headwind to it we tried to call it out either way.
Just so people understand what component of it that was.
Travel being out of our of our range right now is helping that a little bit as well I suspect that we won't be traveling a ton just given what's going on with the variance right now so I don't know if that's going to come into play.
The rest of the year, but maybe in the long run we could get back to traveling and that might.
However, incur a little bit more of expense, but probably not massive.
But otherwise just the overall strength of our network and how well does the network performance.
Youll always hear me tell the story of that last bill of Lading and at the end of a month or a cost a dollar to process. The bill of lading and I don't have a lot of cost to process. It.
It's.
A contributor to our.
So our EBIT margins. So you know assuming our networks continue at the pace. They are we expect that number to stay strong.
Obviously, if something happened to the economy, we would feel that as well I know what it would directly at our EBITDA and our EBITDA margins.
Understood I'll leave it at that I appreciate the time thanks.
Hey, Thanks, Thanks, Josh I appreciate it.
Yeah.
And your next question comes from Paul steep from Scotia capital.
Paul if you're on mute could you mute your phone.
Sorry about that hey, it.
Just on the sales re org can you give us a sense of.
How significant this re org is in terms of disruption obviously, the calibration lines up as if there should be minimal disruption and then maybe just.
Just putting the condensate into context.
Look back you've kept sales historically at about 12 to 12, 5% of total head count and you haven't really outgrown it materially should we be thinking of your comments of just investing in you're not pushing extra hard on the accelerator or is this no. This is something different this is like the sort of step.
We saw in 16, and 17 and sales.
So I was going to object to your word reorder kit.
That was a strong word.
We are supplementing our Salesforce has maybe changed in the way that it goes to market a little bit but it's hardly.
Hardly call it a reorganization.
Probably more supplementing some of the things that we do with additional talent to help us understand markets better and make sure we really.
Well, we're really focused on is when our guys walk into customers, we want them to really understand what those customers do for a living so that they can diagnose and prescribe solutions to the customers.
And we're looking for people with strong logistics and supply chain backgrounds, who can help us do that.
12%.
It is probably a halfway decent number for for the time being we're growing so.
I think you'd see growth on a bunch of areas I don't think you're going to see a massive change in the head count I think it's probably more some strategic stuff that helps us helps.
Helps us round out our sales force, we're pretty happy with their performance.
At the moment and and I.
We're just looking to do things to help them.
Absolutely that makes sense and puts better context on it. Thanks.
Only other thing I want to trace through Tonight, as well was just on recovery and peony I was looking back through the comments you made over now I guess, it's been over a year we've been in this.
Just in terms of how much permanent removal of TD, we should think about obviously just tempered it and said Hey, Nobody's on the road really in a big way.
Thinking out a couple of years, how much do you think you've.
Maybe altered the model to a new normal.
Thanks.
Yes, Thanks, Paul I appreciate it.
Don't know the answer to that question, Mike I have a gas at my suspicion is.
It will eventually come back as the pandemic.
Wayne.
Don't know the answer to that question either as exactly how as this pandemic going to go away I thought I did six months ago I thought the vaccines were going to kind of give us I'll kill it off and we'd be.
Humphrey at some point right around now Thats, obviously, not the case, so I'm not exactly sure how it ends.
And maybe as a result of not exactly sure how travel is going to come back.
For a year, we had almost no travel now we have some but but but only minor very few customers.
Want to do it and I think customers have been pleasantly surprised that they are able to buy stuff effectively.
Using video conference calls and phone calls and things of that nature. So.
My guess is that it will come back to some extent it probably won't ever come back to the same percentages that it was that the whole world just figured out that they can operate more efficiently and.
That could be one of the blessings coming out of this pandemic. If we look back at 10 years from now.
Just sorry, one last clarification that sort of ties to that as well along the same topic, maybe you could talk to how much office space have you may be permanently exited or is it just sort of planned run off that we should think that there's a benefit there where you maybe shifted some of the smaller offices out of the out of the box.
Thanks, guys I don't think I don't think there is a ton of office space Thats come out yet I think you will see us over time.
Start to look at the office space as leases renew and say hey, do we need that much space there maybe.
Are all of our employees aren't coming in every day, maybe we changed the dynamic of the office would have more meeting rooms, and more hotel type office space and less.
Situation, where everyone has a desk.
That in the future might not be used every day and it could be kind of a waste of space. So remains to be seen.
I think our business was a lot more prepared to go into this the most and that <unk>.
40% of our employees, even before the pandemic worked from home frequently and I think that number is going to go up considerably and when it does our office costs are going to go down.
Not a whole lot of that hit our books yet though.
Makes sense. Thanks.
Thanks, Bob.
And your next question comes from Ryan Lynch Barclays.
Hey, guys. This is Brian on for Raimo I had one on profitability.
So just given that you're executing well against the new rate EBIT range would actually be at the top end of that but what was the main driver of the outperformance. This quarter was it more of a surprise on the top line or was it the continued cost efficiencies.
A little of both but probably more driven by.
Our revenue being higher than we anticipated which is great.
I think we have always been conservative on the cost line and just you know and.
Conservative operating as a business and not looking to spend ahead of revenue.
And that creates opportunities like the one we're seeing here, where you get a little more revenue than you anticipated in the quarter and it all drops right to the bottom line.
Yeah.
Great and then maybe if I can just check in on M&A.
Just given the cash balance and the cash generation. This quarter can you give us some more color. There are there any areas that you think are maybe more or less attractive post pandemic than they were before.
Well I mean, I think youre going to see us continue to be acquisitive, we're always looking at it.
A lot of acquisitions in.
You've heard us talk about some of the areas that we're interested in the past a lot of it just depends on who comes up for sale.
I can say I want to buy in a particular area, but that doesn't matter unless I can find a company that is willing to sell at a loss in that particular area.
When I think of some of the things I've seen you saw us make a bunch of moves in the e-commerce or e-commerce related space over the last six or seven years.
Things turned out to be great for us at the same time, the pandemic highlighted the strength in e-commerce and a lot of the acquisitions that we would've looked at over the last 18 months.
Went up considerably in value, making them a little less interesting to us.
That gives you a little color on some of the types of things that we consider as we're doing it right you know I'd love to buy a bunch of ecommerce companies right now but not.
Not at the multiples they're talking about you know we are we do well because we buy companies that had multiples that allow us to make more money on them over time and.
If someone's charge at too high a multiple that's that's not an opportunity for us anymore and as a result becomes less attractive to us at the same time you can see over the course of the pandemic, we've been able to find.
Acquisitions that meet our hurdle rates and look like good strategic fits with our business and we're able to get them closed.
I think you'll see that continue into the future.
Really helpful. Thanks, Ed.
Hey, Thank you Frank.
And your next question comes from Paul Treiber from RBC.
Thanks, very much and good afternoon.
A high level question on the customer demand that you've been seeing I mean, all of this has been significant in light of all the industry challenges, but it's also somewhat surprising because you think that customers want solutions already in place. So the question is how penetrated do you think your customer bases or more broadly globally.
I'm trying to think logistics automation technology and software are yeah.
Oh, I think we're still in the early innings and one set of technological advances begets the next right.
I think it was an investment we made in macro point a bunch of you know it was four four years ago or so now.
You know that technology didn't exist.
In 2014 years ago, and it just wasn't a possibility and then all of a sudden everyone has mobile smartphones and their hands on and ideas like macro point.
Can exist.
The same thing going on right now with Iot with everyone's putting sensors and everything right now we're in the very early innings of that but people say you know if I can track where different things that are going on with this truck or different things that are going on with this pallet or different things that are going on with this container.
What else what other decisions can I make and <unk>.
All of those decisions involved people, making software to do something about it and that's what we do for a living.
And.
One I think this is a never ending game and two I think we're in the in the very early innings of it.
We keep coming up with new good ideas acquisition targets of ours keep coming up with new good ideas and our job is to figure out how to put all these pieces together and make sure we.
We build the winning team when we're trying to do that.
And then as a follow up question, but just on distribution and.
Is it possible to.
Or how do you think having your product products to be more self service as opposed to going through the traditional enterprise sales process of RFP and whatnot.
Is it possible to drive higher attach rates and cross selling but was more of a hands off sales effort.
Embedded into your products.
Yeah.
In terms of additional features in terms of driving a higher attach rate.
Oh for sure I mean.
It may not be obvious on the outside but it's certainly working inside here. It's obvious we're already doing a ton of that.
Customers are now in the last five years customers have gone from having to and I'll just take a simple process right in the beginning having to call us to buy something and now able to just buy it while they are in our products online sign up for it.
Install it and get it running without any intervention from Descartes, and we think Thats, a big part of running a high quality network and continue to look for and build new solutions that allow our customers to do that I think you're going to see us do more and more of that it wasn't that having been said some of the stuff. We do is highly complex involves a lot of integration with <unk> with our.
<unk>, we we always want to be there for them if they need help getting the stuff.
Done one for their benefit because we want them to be happy and get it running as fast as possible and two for our own benefit because we want them to start getting value from it and paying us as fast as possible in both of those things are important to us.
Okay. Thanks, that's very helpful. Thanks for taking my questions.
Hey, Thanks, Paul.
And our next question comes from Scott Group from Wolfe Research.
Hey, Thanks afternoon, guys, So Ed D.
As you mentioned ocean and air carriers, and forwarders have tremendous pricing power right now do you see opportunities to generate additional pricing.
For your business.
No we don't think of it that way.
I never like when a when a.
When a partner of ours is reaching their hand into her pocket and I try not to do the same with our customers.
<unk> customers for life out here, we want these guys like us where we want them to keep doing business with us forever.
And if that means they are you know when theyre doing well, but you know I keep doing the same thing for them at the same reasonable prices I think that that makes me a long term strategic partner of theirs that that's going to do business with them for a long time.
You know assuming that things arent going well I kind of expect assumed back from them.
You know we might suffer with them as their transaction volumes go down, but I don't expect them to come back in and ask for additional additional discounts I'm suffering right along with them and so you know we take a long term view to these things.
Maybe if we were not a standalone company or if we run by private equity firms some kind of outside investor with a shorter term horizon I would think of it differently, but you know we are public and we do have a long term horizon on this most of US have worked here our entire lives and plan on working here the rest of our lives and we'd like to have a happy customer base that things were good guys to deal with the whole way through it.
You know raising our prices because they're in a good position is in my mind not a good way to do that.
Okay got it and then with <unk>.
Green mile You mentioned South America as an opportunity can you just maybe big picture, how big It South America for you guys today and what is the growth opportunity you see in the region.
It's relatively small for us and I think there'll be some good growth opportunities there with green mile and.
Some of the other acquisitions that we've done over the last couple of years. It's.
At the same time, it's that's not the only reason we bought Greenlight, we think greenhouse solutions are applicable all over the world and they were focused on South America, and maybe a little bit on North America than we thought.
We know a lot more customers all over the world that could use that solution and that's part of why we thought it was a good acquisition opportunity for us.
Partially expand in South America, but also too.
Just to really grow our business and take their business around the world and make that a much bigger company than it was before we bought it.
Just taking a step back maybe which regions do you feel like you are the least penetrated in where you've got the biggest opportunity for either organic or inorganic growth.
Our South America, Australia.
You know maybe Africa sub continent.
There are areas, where we see a lot of potential growth.
South East Asia.
I see that happening right now and stuffs manufacturing is moving out of China and move into Southeast Asia, We're going right along with it.
I think youre going to see us continue to expand in that in that part of the world as well so.
We say global logistics network, we think it is and as the world kind of becomes one logistics and supply chain entity. We think you know that.
That's what's going to happen to us as well.
Okay. Thank you guys.
Hey, Thanks Scott.
And your next question comes from Robert Young from Canaccord.
Hi, good evening.
An update on Brexit would be helpful.
It was a driver in the quarter.
The rest of the year I think you've said before that there was some phased rollout maybe some.
It wasn't mandatory until the year end, which might create some last minute maybe update.
Yeah sure. Thanks, Robert we.
Absolutely think we're going to see more from it we think we have the bulk of the recurring revenue now, we'll certainly see some more implementation.
Stragglers coming at the end, but.
We're very pleased with how it's gone so far and we think it's going to expand a little bit more.
And it's turned into a real nice business for us.
Really kudos to our team that worked on that.
We thought we were in a good position going into it and.
We were in a fortunate position that we were very prepared for it and I think a couple of our competitors didn't taken seriously and more as prepared as we were and we ended up.
Really doing very very well as a result so.
I appreciate all the hard work that our team put into making sure we have the best solution in the market.
And I think that the results are showing up in our numbers now.
Okay, and then second one just a little bit higher level of around.
New customers and expansion.
Talking about the cost drivers.
<unk> might be more than.
Previous years and so.
But maybe you can talk about the size of the customer base you are over 20000 and the last question was about there's still a lot of room for penetration, maybe just talk about that.
Trend in new customer adds over the last year, and where you think that's going to go.
I think we've always been pretty good at getting new customers.
If I think back 10, 15 years ago, the knock on us as we didn't do it.
Good enough job of cross selling and I think that's now become our strength over the last.
10 years, we've really focused on it and we get good at it.
And I think we're very good at it and we've maintained our ability to get new customers and you know 15.
15 years ago, we probably had 45000 customers now we have 20 some thousand customers.
We keep getting better at.
At cross selling though which is helpful. Because we're acquisitive companies. So we have to be good across selling right now by some company with 500 freight forwarders customers and I have 5000 ni.
We're gonna be the best we can be we have to be able to go around to the other 4500 customers, who can get a bunch of them to sign up for the new service to be spot and I think over the last five to 10 years, we've gotten pretty darn good at that.
At the same time I don't think.
I don't think we've given up anything in the new customer sales area, where we were always kind of strong and going out and getting new names into the business and it shows in some of the numbers that you see not only the revenue numbers, but the new customer numbers as we've expanded and our ability to cross sell to them and to go find new ones that we can start off as new members of the global logistics.
Network to get more.
Stuff sold to them in the future.
Okay, and then what you said about.
<unk>.
The salesforce to focus more on solution sale from.
That's correct does that changed.
The cross sell.
The difficulty.
Cross sell is there a challenge there.
It's done specifically, it's done specifically to improve it right you're.
What we're talking about there specifically our ability to understand better and better.
Our customers do for a living and how to then diagnosed and prescribed new solutions to them right. It's the ability to to understand their businesses as well as they do so that when we walk in the door, we're coming up with ideas for them that really work and.
We think we're pretty good at that we want to get better at it and.
So we think that's going to be a long term driver of our success.
Okay. Thanks for taking the questions.
Okay. Thanks Robert.
And our next question comes from Daniel Chan from TD Securities.
Hi, guys. So you mentioned there are capacity constraints in the logistics networks, just wondering whether we should expect the congestion to put a cap on the network traffic going over the GL and offset by higher customer wins, given the congestion. So any color on how you think those factors will interplay as it relates to your top line growth opportunity would be helpful.
Well sure I mean, there's always there's always a cap on it but I think it's.
That's probably good news for us in the long run that there's a capacity crunch right now I think that's going to drive people to get more capacity in the future.
And also too it's one of the things I described at the beginning of the calls too is to come up with more creative ways to better utilize that capacity at both of those things play into our hands.
One the ladder here in the short term.
And in the former over the long run rate as carriers say, let me get more ships as planes are as airlines. So let me get more planes.
And you all diesel and things of that nature that creates an opportunity for us to have more shipments over the long run which is which is great.
Okay, Thanks, and given the strong demand environment any change to the size of the deals youre winning with customers now thank you.
Sure. Thanks, Dan.
Yeah.
I've noticed over the past couple of years, our deal sizes continue to go up as we have expanded footprint to sell to them or will.
We used to be able to go in and solve a certain size problem in us.
As the breadth of our organization gets bigger as the breadth of our solution sets get bigger we can go in and solve bigger problems for customers right now.
We have more people, we have more products, we have a more domain expertise in.
A bigger company with a bigger set of problems can use us to solve those problems.
That's been great for us.
Yeah.
In the last couple of years I've definitely noticed our deal size has gone up we don't want to just look at the weekly reports and they have their monthly reports quarterly reports you see bigger and bigger deal sizes on there and I think that's testament to the strategy that we've been deploying here over the last 10 years.
Buy and build them if that's what you're talking about is the build part of that equation and I think we're doing pretty well.
Operator, I think that was it for Dan's question. Okay. Thank you we have no further questions I will turn the call back off from her final remarks.
Great. Thanks, guys I appreciate your time today, and we look forward to reporting back to you on Q3's results in a few months have a great day.
Thank you ladies and gentlemen that concludes today's conference call. Thank you for participating you may now disconnect.
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