Q3 2022 Descartes Systems Group Inc Earnings Call

December 1, 2021

Yeah.

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'll conduct a question and answer session.

The question and answer session. If you have 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 are Scott Pagan Scott you may begin.

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

Okay.

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

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

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

<unk> operating performance financial results and condition.

<unk> gross margins and any growth in those gross margins cash flow and use of cash business outlook baseline revenues baseline operating expenses and baseline calibration.

Have to paint 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 intersection Retitled certain factors that may affect future results in documents filed and furnished with the SEC <unk> 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. You are cautioned that such information may not be appropriate for other purposes. We.

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 required by law.

Let me turn the call over to Ed.

Thanks, Scott and welcome everyone to the call.

Excellent third quarter financial results, who will walk you through those shortly including some of the reasons for those results, but let me first give you a roadmap for this call.

I'll start with a summary of the financial results and some factors that we believe are impacting the supply chain logistics markets. I'll, then hand, it over to Alan who will go over the Q3 financial results in detail.

I'll, then 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 to it.

Three we had record revenues of $108 $9 million ahead of our plans for the quarter and year to date.

We had record income from our operations of $27 $8 million, we had net income of $25 $5 million, we had adjusted EBITDA of $48 $2 million again, well ahead of our plan for the quarter and year to date.

Adjusted EBIT margin as a percentage of revenues was 44%.

Cash provided by operating activities was 40 to $43 $3 million or 90% of our adjusted EBIT for the quarter.

These are the principal financial numbers that we track for our business. They were all very good for Q3. They were all well ahead of our plans.

Even though we are ahead of our plan that doesn't mean that these results are surprising to us we generally do well as our customers do well and a large portion of our customer base is continuing to do well ocean carriers trucking companies air cargo providers freight forwarders non vessel operating common carriers freight brokers customers brokers third party.

Six providers. These are Boone times for logistics service providers across the board.

As they process more transactions there.

More chargeable transactions on our global logistics network, when our customers do well they have opportunities to invest in improving their technologies and businesses for the future often choosing descartes solutions to do that.

Our business is benefiting from other things as well we continue to benefit from customers needing our help to comply with Brexit rules that are still in flux e-commerce sellers need help organizing their inventory selling across multiple channels and shipping their goods.

Many of our customers that manufacture and ship across the globe are gearing up for new tariff classification codes that become effective in the new year, and our travel and marketing expenses are still well below pre pandemic levels.

But I wanted to spend some time speaking about some of the broader issues impacting the logistics and supply chain markets and how we think they could impact our customers and our business, specifically I wanted to address supply chain and logistics streams labor issues and inventory levels.

So, let's get started first with supply chain and logistics strengths.

Browse headlines on any business news site and see the words supply chain and logistics more than you would've seen before the.

The current state of Affairs is variously described as a crisis chaos snarl mess or challenge no matter. What word you used to describe things there are real issues out there right now theyre impacting every participant of the business community and they have everyone's attention.

I'm sure there will be in depth papers written about this period in history. However at its heart production in the Asia Pacific region was severely curtailed for a period of time for issues ranging from the Covid impact on work sites to energy shortages to port capacity limits. So there was supply chain disruption.

<unk> is the principal destination for many of these goods and there was no corresponding demand disruption in fact, there was more demand than ever from the U S.

For goods, especially in light of the economic stimulus impacting consumers.

So there was a supply disruption and an increase in demand.

The market at the same time this was a recipe to create supply chain and logistics headlines.

These are predict Asia Pacific production ramped up the competition was on to source the scarce goods and to get access to the limited transportation capacity available to move these goods to their destinations.

When theres more demand than supply prices go up as we saw in previous months with record high prices for Ocean and air cargo moves.

And with these increased increased prices you see potential profits for logistics service providers and freight cost pressures for importers. If you want to find the potential weak points in our system and just put that system under some stress or pressure and that's what we've seen over the past months with logistics and supply chain.

We've seen logistics support infrastructure stressed passed its limits with vessels anchored offshore on the west coast of the United States and container yard stacked high with containers under emergency orders, we've seen extreme vessel capacity constraints with customers choosing to charter their own vessels are moving goods that they would historically move by ocean.

Via Ocean.

Or via the more expensive air mode, and we've seen vessel carriers, turning to weigh less profitable business, resulting in the elimination of some ports of call or temporary movement of less profitable commodities.

All of these challenges really show, how interconnected and interdependent to supply chain and logistics, what really is they also show how critical the sourcing and movement of goods are to business and economies of the whole supply chain and logistics is not a niche market. These are headline issues.

The supply chain and logistics challenges are complicated multi party international issues involving a myriad of people businesses technology systems and assets. These challenges are too complicated to be met without the use of technology and that's where <unk> comes in your supply chain and logistics specialist we have been for more than <unk>.

Two decades specialized and complicated multiparty international supply chain and logistics challenges our customers have relied on us to help them meet the supply chain crisis and as they succeed in doing so our business benefits.

So to sum up what you read in the news is accurate there are unprecedented supply chain and logistics challenges for businesses around the world. We believe they will carry on for some time the part for resource reasons I'll mentioned soon.

We specialize in helping our customers solve these types of complex issues, we've been successful in helping our customers.

Existing customers and this has benefited our business. We've also been successful in attracting new customers based on our track record and commitment to continue to invest in innovative technology solutions.

This has also helped our business.

The second issue is labor issues supply chain and logistics market has seen tremendous physical capacity constraint issues from port constraints to vessel constraints to container constraints and component in inventory unavailability.

But another big factor pushing the limits of our supply chain and logistics infrastructure is human resource availability.

For many years now even pre pandemic truck markets have struggled with driver shortages. There has been an ever increasing demand for more trucks to move goods and hence a need for more drivers at the same time drivers are becoming scarcer as some age out.

Out of the profession, while others, either leave or don't entered the driving workforce for issues, including pay levels or quality of life to.

So high demand for drivers and a driver supply disruption.

This phenomenon is not limited to just drivers, especially with the increase in e-commerce activity warehouse and fulfillment center workers have been more and more in demand businesses are struggling to find a balance to get affordable and capable labor, while providing competitive safe and appropriate work conditions to attract workers high demand for workers with supply channel.

Yes.

One of the working condition issues that logistics and supply chains are dealing with our vaccine mandates. This is an international issue quite apart from the health impact we've seen what a COVID-19 outbreak can do to immediately shutter manufacturing facilities supports warehouses and other key parts of the supply chain infrastructure on a country by country basis.

We see different levels of vaccine hesitancy and implementing a mandate may put limits on available workforce need needed to operate the various critical roles and facilities for supply chain. Our customers are having to manage these issues carefully while being mindful of the demands of their business and workforce.

And you had another ish issue impacting labor is the international Longshore and warehouse Union contract that expires in July 2022.

This contract impacts more than 20000 use dock workers and workers at other facilities in the past. These negotiations have been contentious and when last negotiated in 2014 at 15 resulted in labor disruption.

I mentioned these issues to point out that the current supply chain and logistics challenges that businesses are facing aren't things that are going to be quickly solved while there continue to be labor issues impacted by COVID-19 directly or indirectly we anticipate that there will continue to be challenges in the supply chain and logistics markets.

The card solution can help our customers with at least some of these issues our routing and scheduling solutions are designed to help those with their own fleets of vehicles and drivers to efficiently plan and execute routes to optimize the limited driver resources. They may have more broadly we have solutions that are designed to limit the amount of wait times drivers have for pickups and deliveries at <unk>.

Doctors, reducing wait times and further our mobile solutions help connect with drivers to efficiently communicate route instructions updates and trigger payments.

But beyond solution, specifically impacting drivers our vast network of interconnected parties is ideal for helping customers. When there may be labor disruption in the markets. We're already helping customers who are expediting 2022 sourcing in advance of potential port facility disruption from the <unk> contract in summary, while there isn't.

Hi chain and logistics crisis that has arisen as a consequence of the pandemic. We believe there are underlying labor issues in the market that will continue to present supply chain and logistics challenges.

The market through calendar 2022, as well, we don't believe it will become easier to source or move goods from point a to point B, we continue to invest in our own business to make sure we're ready to help our customers meet these challenges.

And the third issue is inventory levels.

Through the early portion of the pandemic period, we saw runs on various goods depleting inventory levels. We then saw manufacturing shutdowns in key areas of Asia Pacific that impacted key components, such as computer chips that are used them pretty well anything with an electronic pulse.

Demand for components in inventory recovered quickly much quicker than the manufacturing being the main contributor to the supply chain Crunch. The world is seeing now.

The retailers inventory levels as a percentage of revenues were at historical lows, while inventory levels are now starting to recover there's still a deficiency that needs to be filled this process has been concerning to all involved in supply chain with comments about companies moving from just in time inventory to just in case inventory, we don't know.

When or if inventory levels will return to historical norms or if they will be even higher as people look for safety stock.

In addition, it's much more common now for our business to have its inventory in multiple locations as opposed to one central facility or store inventory could be direct or drop ship from a supplier could be stored with a reseller of our sales agent it could be various warehouses dedicated to different go to market experiences such as online purchases versus in store purchase.

Or even with the customer.

In short businesses or managing not just inventory levels, but an increasingly wider array of inventory locations.

As these distribution mechanisms become more complex and involving more external parties shipment visibility becomes more important our customers rely on us to help them manage the massive amount of information relating to their businesses. So they can make their operations more efficient. This is particularly so as we see increased shipments until inventory levels normalized.

In short we had a very good financial result for Q3 ahead of our plans our customers are doing very well in a very strong market and that's contributed to our success the supply chain and logistics issues that are being highlighted in the market have shown a light on the importance of what we do for our customers and I'm thrilled that our team has this.

The opportunity to have broader recognition for the critical work that they do to help keep the economy function.

Thanks to everyday heart team member for everything they've done to help get us in this very fortunate position.

With that I'll turn the call over to Alan to go through our Q3 results in more detail.

Al.

Hey, Thanks, Ed.

As indicated I'm going to take you through our financial highlights for our third quarter, which ended on October 31.

We're pleased to report record quarterly revenue of $108 9 million this quarter, an increase of 24% from revenue of $87 5 million in Q3 last year.

While revenue from new acquisitions contributed to this growth similar to the first two quarters of this year growth in revenue from new and existing customers, including revenue from new Brexit related customs filings in the U K, where the main drivers of growth this quarter when compared to last year.

Looking at foreign exchange rates, we should point out that there was a benefit to revenue this quarter from FX of just under $1 million.

Q3, as the U S dollar was mildly weaker compared to the Euro Canadian dollar and 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 25% to $97 2 million compared to $77 6 million in the same quarter last year.

And consistent at 89% of revenue in both periods.

Service revenue was also up nice sequentially, increasing approximately 4% from the second quarter of this year.

Professional services and other revenue came in at $10 3 million or approximately 10% of revenue up almost 11% from $9 3 million or 10% of revenue in the same quarter last year.

While license revenue continues to be less than 1% of our revenue in each period.

Revenue for the nine months year to date was $312 3 million an increase of 22% from revenue of $255 3 million in the first nine months last year.

Gross margin for the third quarter.

With 76, 5% of revenue fairly consistent with the second quarter of this year and up from gross margin of 74, 3% in the third quarter last year.

Gross margin continued to benefit from a strong incremental growth in new and existing customers that we've experienced so far this year.

Operating expenses increased by approximately 24% in the third 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 various areas of our business for future growth.

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

As a result of both continued revenue growth and good cost control. We continue to see strong adjusted EBITDA growth of 32% to a record of $48 2 million or <unk> 44, 3% of revenue for the quarter.

Up from $36 4 million or 41, 6% of revenue in Q3 last year.

For the nine months year to date adjusted EBITDA came in at $135 6 million or <unk> 43, 4% of revenue up 31% from $103 4 million or 45% of revenue last year.

With these strong operating results and good customer collections cash flow generated from operations came in at $43 $3 million or right at 90% of adjusted EBITDA in the third quarter.

Up 31% from operating cash flow of $33 1 million in Q3 last year.

For the year to date, our cash flow from operations has increased 38% to $136 million or <unk>, 96% of adjusted EBITDA.

However, going forward subject to unusual events and quarterly fluctuations, we expect to continue to see strong cash flow from cash flow conversion and generally expect cash from operations will be in the area of 85% to 95% of our adjusted EBITDA for.

For the quarters ahead.

From a GAAP earnings perspective, net income came in at $25 5 million or <unk> 30 per diluted common share up 92% from net income of $13 3 million or <unk> 15 per diluted common share in the third quarter last year.

Overall as Ed said, we are quite pleased with our quarterly operating results in the quarter, a strong organic growth and solid performance from our recent acquisitions has resulted in a 24% growth in revenue and more importantly, a 32% growth in adjusted EBITDA for the quarter.

If we look at the balance sheet, our cash balances totaled $171 million at the end of October up approximately 43 million tons from the end of the second quarter.

As a result.

We will have we have $171 million of cash available to us as well as $350 million available to us under our credit facility ready for us to deploy towards future acquisitions.

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

So as we look to Q4 of fiscal 2022, we should note the following.

After incurring approximately $3 8 million in capital additions for the first nine months, we expect to incur approximately $1 million to $2 million more in additional capital expenditures for the balance of the year.

After incurring amortization costs of $44 1 million in the first nine months of the year, we expect amortization expense will be approximately $14 9 million for the fourth quarter with this figure being subject to adjustment for foreign exchange and future acquisitions.

Our income tax rate in Q3 came in at approximately 8% of pretax income much lower than our blended statutory tax rate of 27% and this was mainly as a result of recognizing certain benefits from previously unrecognized tax losses carryforward.

As a result, our tax rate for the first nine months of the year came in at approximately 13% of pretax income.

If you look at Q4 of this year and into future years. We would currently expect that our tax rate will return back to a more expected range of 25% to 30% of pretax income.

As always we should state that our tax rate may fluctuate quarter to quarter from onetime tax items that may arise as we operate internationally across multiple countries.

And finally, we.

Currently expect that our comp stock compensation expense will be in the area of $3 million for the third quarter similar to the level experienced in Q3 of this year.

So I will now turn it back over to Ed who will wrap up with some closing comments and with our baseline calibration for Q4.

Okay, great. Thanks al.

As I've said many times 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 to deliver this consistency we continue to operate from the following principles.

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

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

Build and operate solutions on our global logistics network for all supply chain participants connecting shippers carriers logistics service providers customs authorities.

When we over perform we expect to reinvest that or performance back into our business.

Focus on recurring revenues and establishing relationships with customers for life.

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

We again performed ahead of our plans for Q3 consistent with our business principles. When we over performed 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.

Last call I talked about three key areas that we had earmarked for further investments, including plans to increase investments in our frontline.

And distribution customer implementation that success and acquisition and product integration.

We've made good progress in these areas, but theres still more to come and we consider these investment goals as we set our calibration for Q4 and.

In our quarterly report, we provided a comprehensive description of baseline revenues baseline calibration and their limitations.

As of November one and using foreign exchange rates of 81 to the Canadian dollar $1 16 to the euro.

And a $1 37 to the pound, we estimate that our baseline revenues for the third quarter of 2022 or approximately $97 3 million and our baseline operating expenses are approximately $67 million. We consider this to be our baseline calibration of approximately $36 6 million for the fourth quarter.

2022, or approximately 38% of our baseline revenues as at November one 2021.

Last quarter, we indicated that the targeted adjusted EBIT operating margin range for our business would remain at 38% to 43% for fiscal 2022.

Q3, we were just north of 44%.

Not looking at changing our targeted range, but we'll 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 continues to be to grow both organically and by acquisition. We've completed three acquisitions. This fiscal year and expect to continue to be active in the acquisition market in the future. We still believe there are acquisitions that meet our financial and strategic criteria.

In past calls Ive talked about.

<unk> that have been helping us our results this quarter again reflect those tailwind we don't have a good idea as to how long. This tailwind will continue the wider economic recovery continues but it's unclear what happens next with the pandemic, including potential concerns around the world of the new omicron bearing.

Given that we think our continued cautious and prudent approach to investment and calibration is the best thing we can do for our shareholders.

This is an exciting time for gift card business is performing very well.

Gives us lots of opportunities opportunities to invest in our business and make it stronger for our customers employees and other stakeholders opportunities 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.

Is 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 in whatever manner is most convenient for you and with that operator, I will turn it over to you for questions. Thank you.

Thank you we will now begin the question and answer session.

I have a question. Please press Star then one on your Touchtone phone.

If you wish to be removed from the queue. Please press the pound spine or the hash key.

My first question is announced.

Speakerphone, you may need to pick up the handset first before pressing the numbers.

Once again, if you have a question. Please press Star then one on your Touchtone phone.

And our first question comes to Raimo <unk> from Barclays. Your line is open.

Hey, this is Frank as Ryan just one from me in the macro so as we look back at the initial outbreak and the Delta variant.

Some lessons learned that gives you confidence going forward with the uncertainty potentially coming from new variant. Thank you.

Hey, Thanks Frank.

I mean listen to you.

You can see from some of the results today and in the past quarters, we think.

Our business has done very well in the pandemic a lot of things in the pandemic. We think ended up being <unk> for our business as our customers needed help when we were there.

To help them.

That was one of the thoughts I had when I saw the new Omicron variant come out is that we may be in a position to do continue.

Continued to do very well in this scenario because of the.

Pandemic seems to put a bunch of challenges on the supply chain, just like I outlined a minute ago that.

<unk> may be uniquely positioned to handle so.

We don't know what its going to mean, we don't know any more than anybody else about how the variance and spread around the world and how transmissible. It is in.

How much.

Trouble it can cause for people when they get it but but we do think our business is well positioned to help people deal with the challenges in the supply chain and logistics world that it may create.

Very helpful. Thanks, Ed.

Thank you Frank.

And your next question comes from Matt Pfau from William Blair. Your line is open.

Hey, guys nice results and thanks for taking my questions I wanted to start out with first the outperformance in the quarter, which had decided was partly driven by your customers doing so well how do we think about the impact on your business when the supply demand balances out a bit and your customers are.

Back to sort of a more normalized environment from an operating perspective.

I think some of the things that are that are going to.

There that are hitting US right now are going to continue long after that time I think people have generally realizing I think you've heard me talk about this in previous calls that.

Why chain and logistics with a whole lot more important than they used to think it was and I don't think thats going to change just when this crisis goes away I think before that.

And that concept is here to stay.

I think that to answer your question. This.

This is not going to necessarily be a crisis at some point in the future.

But the demand still remain fairly high remember theres a lot of companies that are trying to.

To add capacity and be able to meet that some of the demand challenges.

Because our business is based on transactions in.

In large part and people.

Processing shipments on our network I think we'll be in a position where.

Even if the scenario you mentioned occurs.

Doing pretty well.

The third scenario, which is maybe more what you were getting at it.

And the downtime if this turned around a couple of years from now and it was actually in a kind of a recession mode and again I don't know whats going to happen, but if that were to happen.

We faced pressures along with everybody else regimens as the number of shipments go down.

Or maybe you don't grow as fast as they were growing in the past workspace that challenge on I do think our business is pretty well set up to handle any of these scenarios.

We're very good at making money in an up cycles as well as down cycles as you saw on our way to nine so.

There's a lot of good that comes with that for us as well right. When we tend to do bad in those situations everybody else has as well.

And that puts us in a position as an acquirer, where we can go out and get our hands on businesses for a whole heck of a lot less than.

Then we might have to pay today when things are booming.

Got it and just one more from me on specifically around the labor shortages and I guess more tied to the trucking side of the labor shortages, which is something as you alluded to is probably going to continue for quite some time and more than likely worse and now you do have solutions currently.

With routing macro point capacity matching that can can help alleviate some problems for customers, but are you seeing any additional opportunities there where either through acquisitions or organic investment where you can further.

Increase your product set in that specific area.

Well.

I can't comment too much on the future of that but let me say this.

We really like those businesses those businesses are all performing very well right now for us we see that.

A great opportunity for that to expand in the future and certainly we'd be.

Ah out there looking for businesses that might do that with those beliefs in mind right now so.

Yes.

I'll leave it there.

Fair enough I appreciate it guys. Thanks a lot.

Hey, Thanks, Matt.

And our next question comes from Justin Long with Stephens. Your line is open.

Thanks, and congrats on the quarter.

So I wanted to ask about organic growth I know, it's a bit tough to calculate but based on your math, where did that shake out for the quarter and if this level of higher organic growth is sustained going forward at what point do we need to start thinking about adding to the sales and marketing spend and maybe you can just help.

Our strength through the framework there.

Maybe I'll.

Take the first part of this year.

Yeah sure I'll give it try it and you can answer after yes. So as you know we don't operate the business in a way we aggregate all our acquisitions or integrate them right away.

But obviously.

We estimate the organic growth probably in that mid teens range this quarter.

Is that a little bit of FX benefit, but but overall that 15%, 16% range would be about the best guess, we could get give you on the organic growth.

Ed do you want to take it over from there.

Yes sure.

Your your.

Your question with regard to you know is it going to cause an increase in sales and marketing expense.

Sure we continue to be able to.

To put up numbers like this growth rates like this I think you'd see us.

Make continue to make more investment as I mentioned in the call last quarter, but.

Yeah.

With the with the increased revenue growth.

I would continue to expect us to be able to make more money because we did that so.

You've watched us operate for a while we're pretty prudent operators.

We're not going to.

Get out of ahead of our skis on issues like this.

When we see a need for more salespeople in the market will go out and invest in that but in.

In the Grand scheme of things I think.

Without us calling it out I don't think anyone would notice that in our numbers, it's not a massive expense compared to the revenue that we bring.

Okay got it and I guess, just looking at your cash balance.

<unk> nicely in the quarter cash flow is strong and on the point of investing that.

Do you feel like there is more of an opportunity to invest organically and supporting some of this this growth or is there more of an opportunity in acquisitions. Just curious how you would kind of rank order those two areas of investment right now.

No.

With every acquisition that we're looking at.

We always find ourselves thinking should we do this ourselves or should we go by this company that does that there is some advantages to both.

When you're when you're buying a company that does especially the way we buy your tended to Dubai with a big customer base already that already makes money and maybe we see an opportunity to make it added to our network and make even more money in the future.

You also get a big head start because someone else has built this business for 10 or 15 or 20 years and we could start from that point.

Obviously, if you build a product on the other side of it as we build a product organically and it ends up being hit.

And you end up winning the market forward you can do quite well.

Mike on that over time could be phenomenal.

But there's some risk in that as well and that Youre building.

Product that.

You might not end up being the leader in the market. He may not end up winning they may not do what the customers want so there's some risk in that too and you've probably seen us over time.

Take the approach that leans towards acquisitions for entirely new product segments.

With.

Incremental increases to product functionality, we tend to do that internally, we will buy a company will continue to enhance that product.

And add new buttons to with the customers may pay additional money for or clicks that hadn't been imagined in the past that.

Maybe come clicks in the future that people pay.

Click for 25 cents, a transaction or whatever it is.

And I suspect youll see us behave that way to the future.

They're still managing to get acquisitions done we may have to sort through more of them now because a lot of stuff in our estimation over priced but we still seem to be able to find good acquisitions that we think we can make money on them, but would be good investments for our shareholders in the future. So.

As I would stay with us.

On many issues.

You're probably going to see us behave in the future a whole lot like we behaved in the past.

Okay I'll leave it there and look forward to seeing you tomorrow at.

Hey, Thanks, just to talk to you soon.

And our next question comes from Paul Treiber from RBC capital.

Got it thanks, so much and good afternoon.

In regards to volumes.

Quarter end, you look at it through the holiday season.

Do you like there has been media reports at the managing pulled forward did you see that help volumes. This past quarter and then when you look forward to next quarter do you anticipate that the seasonality would perhaps reverse.

Greater than normal there.

Yes, it's a good question Paul.

I don't know I'd be guessing a little bit.

Well, what I do see is a whole bunch of ships parked off the coast of of a lot of ports around the world and those shipments are still need to be processed status messages that we're going to be getting for some good long time to come so.

I don't expect to see a slowdown in it but.

That's a bit of a guess as well it looks to me like there's a whole lot of shipments out there there's still need to be processed and people are going to be concerned about this.

Into the new year.

And while some of these ports may get a little less congested over time, it could take a while for them to clear out and then you have the issue that I mentioned at the beginning of the call with the people moving their mindset from just in time.

Inventory to just in case inventory, meaning.

I'm going to bring some extra inventory in here because I'm worried about supply chain challenges.

I think that's.

Likely to result in higher shipment volumes for the foreseeable future, but again I don't have a crystal ball.

That's my two cents on it I guess, we'll see what happens but.

I don't find myself concerned about it right now.

Okay great.

Shifting gears to the pricing pricing for your transactions I know in the past.

You've been reluctant to increase price.

And in also in the past you talked about minimums minimum commitment with volumes. So strong here are you seeing overages and effectively premium pricing or Conversely, do you typically get volume discounts to give volume discounts to your customers.

A lot of contracts with a lot of customers have volume discounts on it.

As they produce more volume they pay lower rates, but it's only on the incremental shipments. So it all ends up being extra for us.

They get a lower rate, which is great for them, but I also get more money.

Aggregate because.

I don't reduce that.

The prices for all the shipments back to zero or are we producing we reduce them for the additional shipments that you are providing them above your minimum or above your.

What you normally do so.

I think what youre going to see us maintain our approach.

Place, you've got really out of control, maybe we'd have to rethink that some point in the future, but the way it is right now.

We want to be seen as fair operators for our customers we tend to leave our prices fixed as a result.

And we raised them, where there is good reason to do that where we have labor cost directly related to what they tend to go up over time, where we have costs that that increase over time, we tend to.

Raise those rates, but some of the some of the more.

Fixed costs on our network, we tend to leave the same so that so that our customers think we're we've got to deal with.

And just lastly, I mean, you touched on labor costs.

I know, you're adding head count how about how should we think about salary or wage increases here and then bigger picture. How are you found attracting and sourcing talent in this environment.

Yes.

In the market as well you know the big switch.

I read about it a lot more into paper then we have to deal with it here deckard enough that we're completely immune to it but I think our business is set up so that.

If you think about the reasons behind some of the people were switched jobs all over the place and I go a lot of Thats because of the work from home environment people start to say, Hey, I can work from anywhere why do I have to go back into the office.

They work for a company that's trying to drag them back into the office.

Commercial here at Descartes.

We've had a pretty high rate of work from home long before the pandemic started and I suspect that number is going to go a lot higher now.

As we come out of the pandemic one day, we're not asking our employees to go back to the office. They are welcome to if they like but.

We're certainly not getting forced to do that by us.

And I think in the long run.

<unk> put us in a situation where the employees that might be looking to change jobs because of that don't don't have that problem here were kind of already set up like the workforce that everyone would like to work for right now that says hey.

As long as you can work effectively worked for.

Wherever you need to to do that.

And that's been our attitude for a long time and I think it's pay dividends to us here in this challenging environment.

So we'll see what happens, but I read about in the newspaper and I've seen a little bit of it here at Descartes, but certainly not to the extent that I've seen it or heard about it at other companies.

Okay, great. Thank you.

Thanks.

Our next question.

Comes from Paul steep Scotia capital.

Great.

Can you just maybe one macro one to start with maybe talk about what youre seeing through the air Channel. These days I know.

It seems like lots of folks on supply chain sort of backed off for foreign consumers not to expect things to be there are you seeing much through the air channel in terms of impact on that or air volumes still super strong.

Well I remember a year ago volumes were significantly depressed they are back to normal and now exceeding not only the levels pre pandemic, but they are exceeding what our expectations would have been.

If the pandemic had never occurred today.

And so that's been good for US I think I mentioned earlier on in this call that.

Some people have shifted to air in an effort to get stuff to market and said hey out.

I'm willing to pay more to get this product to market because.

I needed I needed to be there and are maybe the only way I can make that happen.

That obviously.

Helps certain types of shippers versus others right you've got to have something that is light enough to fly.

Makes economic sense to do that you just stuff that are a little higher value.

So, yes, we're seeing some of that and and certainly our air business is doing quite well right now and it's good to say that it was.

It's been about two years since I have been able to say that so you know.

I think it's in good shape and I suspect it will be for some time.

Great and then just on the customer side, maybe you can clarify.

Clarify a little bit you talked about new tariffs and classification code coming in as an opportunity can you help us size that relative like obviously, it's not the extent of Brexit, but I know most of us likely aren't up on our tariff codes.

No listen I wouldn't be going and adding to the numbers that we give you for calibration for it it's already in there.

And I think it's more like something that is going well. It's another reason for people to buy tariff data or continue to look at tier data, meaning they buy it from us.

It's probably not the reason I buy the stock, but I think it is good news.

It's continued demand for our business that is.

As one of our top performers in one of our most profitable businesses. So incremental revenue dollars there tended to follow the bottomline quickly and I think thats.

That's why we pointed it out and I think that's good news for us at the same time I don't want to.

Overblow it.

It's more like the success, we've had in that market over the past couple of years has a good reason to continue.

Got it.

The last one for me, maybe just talk about where are we at obviously holiday season is done time when retailers look to rush to add new feature operating systems, but.

How are you feeling about the ecommerce business rolling into next year people finally.

Maybe at the new point of willing to take bigger steps on some of these investments as we head into 'twenty two thanks guys.

Thanks, Paul.

No I mean that that ecommerce business was a real high flyer for us last year, it certainly still performing well this year, but.

The growth rates that we saw last year I don't think anyone was underneath illusion that they were going to continue forever.

There is a unique time in the pandemic when no. One can go to the store that cause massive growth rate this year or last year and maybe it makes them look a little more depressed this year than they were.

At the same time, I think increasingly more and more companies are realizing that E. Commerce is there business in U C.

All of these mainline retailers.

Going like Hey, my something I, probably said for years, but I think it's really now taking hold which is.

Retailers that are their own stores are going hey, I need to be just as good at my web presence as I do it by.

My footprint in the store and.

We're combining those operations more and more efficiently and when they do there's a bigger demand for our products, which is great for us.

Sure.

Fortunate enough to be able to get into these businesses six seven years ago, and they've been really great performers for us and well time just the market.

<unk> is increasingly realizing what we realized which is that.

This has to be ingrained in your business as part of the operation. It means you have a store and you need to have an ability to ship stuff that people would need to have the ability to do both in a hybrid of the two and you also need to be able to treat you your inventory.

Across all of the places that you have it.

And unfortunately for US we have solutions that do just that.

Right place at the right time, so we're happy about this.

Thank you.

Thanks for taking the next question comes from Scott Group from Wolfe Research. Your line is open.

Hey, Thanks afternoon guys.

Hey, Scott.

Ed can you give us just an update on what youre seeing in the acquisition market or are you any more or less engaged at any change in valuations that youre seeing out there.

Uh huh.

There's a lot for sale.

We think most of the stuff's over price.

We talk about it like we have to pick through more deals right now to get to get the same stuff done to try and find that the winners in this you know the banks of the world come to us and Everything's.

The greatest business, they've ever seen and it is growing.

No.

At very rapid rates.

Don't always agree with your math.

That's the pitch that we're getting and so we have to pick through a lot more stuff to get acquisitions done, but you can see we continue to do that.

And we expect the winner in this market will continue to be acquisitive and that they'll make smart decisions about what to acquire not only from a.

And a price perspective, but also from a technology perspective, right now we think that our big advantage in this and this.

Situation in particularly.

It becomes a big advantage when the prices get too high as we've been doing this people that work here have been doing this for 2030 years and really know this market like the back of their hand.

And that enables us to make better decisions about what's the right thing to buy it and the guys that have been in it for for six months or two years or whenever we're working with private equity firms or other companies that are maybe newer to the game and.

We do our best to take that advantage.

And make sure that we use it to to pick the right company.

Okay, and then I know, we still have another quarter left in this year, but I'm wondering maybe if you had some.

Preliminary thoughts about fiscal 'twenty three.

Do you think the environment remains favorable comps get tougher do you think it is.

Another year of sort of double digit top line, 15% EBITDA growth is that a realistic outcome as you think about next year.

I don't know.

I don't see an end insight to what's going on right now I don't know what's going to happen a year from now there's a lot of there's a lot of issues baked into that what's going to happen with the economy, what's going to happen with the pandemic and probably 10 others.

I don't know any more than anybody else.

I can tell you that we had big growth. This year, so it's going to be tougher next year to continue those.

Growth rates.

But we'll see.

And I think our business is going to continue to be in a good position.

What the growth rates will be we will have to see as we get there. We'll certainly let you know as soon as we do.

Okay. Thank you guys appreciate it.

Hey, Thanks Scott.

And your next question comes from Daniel Chan from TD Securities.

Hey, good evening guys I just wanted to follow on on the acquisition question you guys have been able to keep up your level of acquisitions, a lot better than some of it goes acquisitive companies out there and you did cite high higher valuations.

Do you think you're able to do more acquisitions because of the high demand environment driving higher returns. So you can justify that higher multiple or is there something different in your playbook, that's allowing you to keep those valuations in check.

Yes, no I mean, we don't think of it that way, we don't we don't think of it as though what my multiple fire. So I can spend more certainly.

We're more looking at it like a.

I want to provide.

A good ROIC for our shareholders and we're not going to do the deal. If we don't think we can get there.

But if we come through a bunch of acquisitions and they're all saying they are going to the Moon Trust me and Thats, how they all do it soon as they get a banker that's the pitch.

And it's our job to comb through them and see where we really believe that and we try to bring our.

Background and our experience in this market to bear to try and make good decisions there.

I'll go back to like the macro point of view right.

What can go by all standards.

Anyone who looked at that would've gone Wow, Descartes really paid a whole lot more than they've ever paid for anything else.

Looked at it at a time and went.

But we think there's something special about this business, we think it's going to be able to grow significantly and we think that while this price looks expensive today. If you come back a couple of years from now like we are now this price that we paid is going to look cheap.

What that enabled us to get continue to get deals done as an ability to find those needles in haystacks by picking throw a lot of hay.

And.

We continue to do that and we're being asked to pay more for something.

I'm not justifying that and were not justifying that based on our multiple were justifying that based on the return on invested capital. We think we can get from that business and if we can think if we become convinced we can hit these.

Metrics, then maybe that is a business that's worth more and maybe that is a business that we should pay more for it.

The other thing I would add to this is we spend a lot of time working with with companies and not every business is for sale to the highest bidder.

Certainly money is a factor in every deal, but there's other issues as well a lot of these small founder owned businesses.

US a long time to convince them to sell their business to us and we spent a lot of time working with them convincing them that we are the best home for their baby.

And literally sometimes their kids and their best friends all work, there and maybe they want to retire but they also don't want to put there.

They are family members or their or their.

Best friends from from over the years that they've started this business with in a bad situation.

We spend a lot of time convincing people showing people how we're good stewards for this business after you retire.

And then a lot of times that gets us.

In the driver's seat.

In the middle of these acquisitions.

So.

Those two things combined I think allows us to to continue to do acquisitions continue to find good ones and I don't see that changing right now.

Yes, it makes sense thanks for that color.

Just shifting gears a little bit you guys get some pretty good real time insight via your network just wondering if youre getting any early insights from the omicron variance.

Okay.

You mean in the last six to eight.

Yes.

Yeah.

Yes.

EBIT, if I, where we couldnt comment on it.

It's not in the quarter that we're reporting on but.

No we don't know too much from it so far and I don't I don't think youre going to the virus if you've read the stats on it it's not really spread that burden that far yet.

Our first case in California today.

I don't expect that Youre going to see anything show up in the supply chain anytime soon.

That's going to have a whole lot to do with the contrary.

Okay. Thank you.

Thanks, Tim.

And our next question comes from Robert Young from Canaccord. Your line is open.

Hi, Good evening, Alan I think you highlighted the Brexit as the key driver in the quarter, if I heard that right and so just wondering about an update there I mean, you've talked about some last minute.

Maybe some competitors.

Up to snuff compared to you our competitors catching up it can maybe just refresh us on how the Brexit.

Impact is through the end of the year and maybe into next year.

Yeah.

Yeah, maybe I'll just start with that clarifying the comment so I think what we want you to understand is it that the growth that we're seeing was more heavily focus from new and existing customers than it was from acquisitions this quarter and that varies for us.

We will grow by both means, but so new and existing customers drove growth this quarter much like it has for Q1 and Q2 Brexit is certainly part of that that is a new product offering for us and that's certainly been helpful in creating part of that growth with the with new and existing customers.

I think that's the extent of it as far as other comments that Ed made on Brexit add anything you want to clarify there on the specifics of the Brexit products themselves.

Yeah, No I mean, nothing's really changed for US I don't think the dynamic that we described last time that you brought up there Robert is going to change.

The.

The path for Brexit is largely set in stone and we think we did a very good job of getting the customers there.

It's a recurring revenue business to this.

This will be the gift that keeps on giving ranges. We got these customers are probably going to be able to keep them and continue to do business with them for a long time.

Out of the sales opportunities now are gone because most of the people who've made decisions already and so we just look forward to like the rest of our customers and compliant business is operating and maintaining it.

To continue to allow our customers to deal with the volumes that they have and have the best system out there to process transactions, which is.

Always our our mission.

Okay, and then second.

Second question would be what you'd said about.

Just in time training.

Turning into just in case, and so I guess that obviously raises the quantum the amount of goods being moved around but is there a lag factor there is that extend all of this impact on supply chain.

Volumes for your business.

Well it would if it's a if that theory is correct, we will have to see.

The theory right now.

I've been in this business a long time, that's part of why we're proposing it because we think that's a strong possibility that people change that we've heard our customers talk about changing that.

When they do that means theyre going to be shipping more stuff you know they used to think I'll just ship stuff just the time because.

There is no.

Penalty to be paid in the logistics world, but now all of a sudden there is disruption and stuff you could produce I better get.

All the hammers into my warehouses, so that I can sell them in the store three months.

I used to not worry about that until a month out and all of a sudden now I'm going you know what I want to have extra inventory there. So I don't want out of stuff.

Back in the early days of selling visibility, we would talk about just in time like this right in saying Hey, no one ever gets fired for having too much stuff into warehouse.

15 to 20 years later people did get fired for having too much stuff in the warehouse because the inventory are costs were too high.

And I think right now with what's going on.

In the supply chain and then some of the disruptions that we've had.

People are going back and reexamine, even that and go and boy I'm paying an awfully high price.

For being just in time and maybe I should.

Create a little more safety stock so that I don't run asked up because thats. The most costly thing that can happen.

And.

That switch back to that mentality will probably means more shipments in the coming months.

Okay. That's it for me thanks, guys.

Thanks Robert.

And our next question comes from Howard Lee Your line is open.

Hi, there thanks for taking my question.

I just wanted to follow up on one of the earlier discussions about the.

Transaction based revenues.

Wait when you think about the organic growth.

Maybe even quarter over quarter, you can see supply chain issues really came into effect and you think about transactions.

Transactions versus the subscription base.

Contracts, where do you see more momentum and when it came down to I mean get renegotiations with those transactions or the renewal.

Did you see any forward discussion.

Discussions there where they have customers willing to increase the transaction.

Because.

Peter kind of more of that.

And the last thing the next year or maybe looking at scaling back if that.

There are supply chain issues.

Yes, Thanks Howard.

So.

Couple of questions in there so on the transaction.

On the transaction side I mean, it's not most of our contracts don't get renegotiated all of that off so it happens but.

Especially in times when things are booming people tend to push that aside and just renewed for the next year and move on certainly if they have significantly increased volume and then maybe coming back, saying, Hey, I'd like to change my contract minimums.

And get a lower price, we always offer that to our customers if youre going to.

If youre going to do more with us.

That's how you get lower prices out of us.

Per transaction.

So we see some of that and as it gets.

A question that would always be asked.

At the same time.

The subscription business, where.

We provide people tools that help them make better supply chain decisions. So they can operate more efficiently there's been high demand for that stuff right now and those have always been a value based selling proposition, where we're showing our customers. Hey. This is how much money you will save if you use these solutions and you should buy that from us because I only charge.

To a fraction of that thing.

And you got to keep the rest.

And.

The demand for those solutions has been high for the last year.

Since the early stages of the pandemic kind of went away.

And people started to realize supply chain was a bigger deal than they thought it was and people tend to buy more supply chain solutions right now from us as a result.

And their subscription solutions that I think that is.

Go on for quite some time I think the.

The transactional stuff is obviously somewhat cyclical right, it's going to follow the economy.

And.

The subscription stuff is probably much more likely to.

Think.

Last a lot longer and.

The World is maybe seen a.

A shift in thought from supply chain.

And after thought to us to supply chain as a strategic capability for us if we need to have the right tools and technology in place to handle it as efficiently as we possibly can and that mindset shift I think is going to play well for us in the long run I think it could be a long term tailwind for us.

Right right that makes sense.

And just kind of related to that when you think about where you're going to target your.

Our investments in sales and marketing.

Is there a particular kind of segment.

Eight quarters or that car air cargo or are you kind of targeting across the board.

We're seeing demand across all of our customers.

I mean, we break our salesforce into logistics and transportation and.

Manufacturing retailers, the big shippers of the world.

And I think we're investing in both.

As I mentioned last quarter, we're putting people in place that really understands the customer basis, so that when we're in selling to them.

We can.

First diagnosed and prescribed to them to help them solve their problems as best we possibly can and we think that's a good thing for us to do in the long run, especially as we get bigger and we get more and more salespeople in.

To really understand what the customer.

Who the customer is and what they want.

The problems that they're trying to solve is the best way for us to help them and to sell efficiently.

Right right.

And then just one last one from me when you I think.

There is a there is a little disclosure in the.

In the MD&A that talks about here's our anticipation of recurring revenues lobster I guess churn.

I guess last year, given we're still in the pandemic. It was saying that this fiscal year for 'twenty two might have higher than average churn.

Given how strong the best alternative is it fair to say that churn might be even lower than what the.

Normal levels are and how do you think about churn I guess going into fiscal 'twenty three.

Yeah.

Usually when things are going well, it's not really a concern right everyone gets focused on the things that I've been talking about on this call right.

Focused on how do I.

Yes.

How do I get more stuff to help me operate efficiently in these challenging times.

And they don't spend as much time talking with us about.

Hey can you reduce my bill by 5000 dollar Stratus.

There's there's a run on everything right now, including archive so when our customers are coming in the door.

They're usually going please help me not right now Theyre going please help me because I have problems that I think you guys can help solve and I want you or help to do that.

It's probably not that productive to start that conversation off with Owen can you reduce my bill at the same time.

Uh huh.

So I don't think there's a ton of customers handle it that way I think most customers are just going can you help me. Please.

Yes.

That's helpful.

Have a go to those customers so I get that alright. Thanks. Thanks, so much I'll turn it back.

Thanks, Eric.

And that concludes our question and answer session.

On the call back over to Ed Ryan for closing remarks.

Great. Thanks, everyone. We appreciate all your time today.

Do you want to schedule meetings with US directly please reach out to us either through a bank or directly and we will be happy to spend.

To spend time with any of our existing shareholders or.

Analysts that cover us to help them better understand the story.

And we will otherwise look forward to reporting back to you next quarter have a great day.

Yeah.

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

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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.

Question and answer session. If you have a question. Please press Star then one on your Touchtone phone. Please note. This conference call is being recorded I'll now turn the call over to Scott Pagan Scott you may begin.

Thanks, Andrea 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 issued earlier today.

Unfortunately in today's call other than historical performance include statements as forward looking information within the meaning of applicable security laws. These.

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

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

<unk> operating performance financial results and condition.

<unk> gross margins and any growth in those gross margins cash flow and use of cash business outlook baseline revenues baseline operating expenses and baseline calibration.

Anticipated and potential revenue losses, and gains anticipated recognition and expensing of specific revenues and expenses potential.

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 and signed 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 SEC the OSC and other securities commissions across Canada, including our management's discussion and analysis filed today.

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

Thanks, Scott and welcome everyone to the call.

We had excellent third quarter financial results, who will walk you through those shortly including some of the reasons for those results, but let me first give you a roadmap for this call.

I'll start with a summary of the financial results and some factors that we believe are impacting the supply chain logistics markets.

Then hand, it over to Alan who will go over the Q3 financial results in detail.

I'll, then 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 to it.

Three we had record revenues of $108 $9 million ahead of our plans for the quarter and year to date, we had record income from our operations of $27 $8 million. We had net income of $25 $5 million, we had adjusted EBITDA of $48 $2 million again, well ahead of our plan for the.

Quarter and year to date adjusted.

Adjusted EBIT margin as a percentage of revenues was 44%.

Cash provided by operating activities was 40, $43 $3 million or 90% of our adjusted EBIT for the quarter.

These are the principal financial numbers that we track for our business. They were all very good for Q3. They were all well ahead of our plans.

Six providers. These are Boone times for logistics service providers across the board.

As they process more transactions there.

Our business is benefiting from other things as well we continue to benefit from customers meeting our help to comply with Brexit rules that are still in flux e-commerce sellers need help organizing their inventory selling across multiple channels and shipping their goods.

So, let's get started first with supply chain and logistics strengths.

Browse headlines on any business news site and see the words supply chain and logistics more than you would've seen before the.

The current state of Affairs is variously described as a crisis chaos snarl mess or a challenge no matter. What word you used to describe things there are real issues out there right now they're impacting every participant of the business community and they have everyone's attention.

I'm sure there will be in depth papers written about this period in history. However at its heart production in the Asia Pacific region was severely curtailed for a period of time for issues ranging from the Covid impact on workspace to energy shortages to port capacity limits. So there was supply chain disruption.

<unk> is the principal destination for many of these goods and there was no corresponding demand disruption in fact, there was more demand than ever from the U S.

For goods, especially in light of the economic stimulus impacting consumers.

So there was a supply disruption and an increase in demand hitting the market at the same time. This was a recipe to create supply chain and logistics headlines.

When there is more demand than supply prices go up as we saw in previous months with record high prices for Ocean and air cargo moves and with these increased increased prices you see potential profits for logistics service providers and freight cost pressures for importers do you want to find the potential weak points in our system than just put that system under some.

Stress or pressure and that's what we've seen over the past months with logistics and supply chain.

We've seen logistics support infrastructure stress passed its limits with vessels anchored offshore on the west coast of the United States and container yard stacked high with containers under emergency orders, we've seen extreme vessel capacity constraints with customers choosing to charter their own vessels are moving goods that they would historically move by ocean.

Our via Ocean.

All of these challenges really show, how interconnected and interdependent to supply chain and logistics World really is they also show how critical the sourcing and movement of goods are to business and economies of the whole supply chain and logistics is not a niche market. These are headline issues.

The supply chain and logistics challenges are complicated multi party international issues involving a myriad of people businesses technology systems and assets.

These challenges are too complicated to be met without the use of technology and that's where <unk> comes in your supply chain and logistics specialists, we have been for more than two decades specialized and complicated multiparty international supply chain and logistics challenges our customers have relied on us to help them meet the supply chain crisis and as they succeed.

In doing so our business benefits.

So to sum up what Youre reading in the news is accurate there are unprecedented supply chain and logistics challenges for businesses around the world. We believe they will carry on for some time the part for resource reasons I'll mentioned soon.

We specialize in helping our customers solve these types of complex issues, we've been successful in helping our customers.

Listing customers and this has benefited our business. We've also been successful in attracting new customers based on our track record and commitment to continue to invest in innovative technology solutions. This has also helped our business.

The second issue is labor issues supply chain and logistics market have seen tremendous physical capacity constraint issues from port constraints to vessel constraints to container constraints and component in inventory unavailability.

But another big factor pushing the limits of our supply chain and logistics infrastructure is human resource availability.

Out of the profession, while others, either leave or don't enter the driving workforce for issues, including pay levels or quality of life to.

So high demand for drivers and a driver supply disruption.

Yes.

One of the working condition issues that logistics and supply chains are dealing with our vaccine mandates. This is an international issue quite apart from the health impact we've seen what a COVID-19 outbreak can do to immediately shutter manufacturing facility supports warehouses and other key parts of the supply chain infrastructure on a country by country basis.

And you had another ish issue impacting labor is the international Longshore and warehouse Union contract that expires in July 2022.

This contract impacts more than 20000 U S dock workers and workers at other facilities in the past. These negotiations have been contentious and when last negotiated in 2014 at 15 resulted in labor disruption.

The card solutions can help our customers with at least some of these issues.

It's scheduling solutions are designed to help those with their own fleets of vehicles and drivers to efficiently plan and execute routes to optimize the limited driver resources. They may have more broadly we have solutions that are designed to limit the amount of wait times drivers have for pickups and deliveries at dock doors, reducing wait times and further our mobile solutions.

Help connect with drivers to efficiently communicate route instructions updates and trigger payments.

Chain in logistics crisis that has arisen as a consequence of the pandemic. We believe there are underlying labor issues in the market that will continue to present supply chain and logistics challenges to the market through calendar 2022, as well, we don't believe it will become easier to source or move goods from point a to point B, we continue to invest in our own business to make sure we're <unk>.

Ready to help our customers meet these challenges.

And the third issue is inventory levels.

Through the early portion of the pandemic period, we saw runs on various goods depleting inventory levels.

Then saw manufacturing shutdowns in key areas of Asia Pacific that impacted key components, such as computer chips that are used them pretty well anything with an electronic pulse demand for components in inventory recovered quickly much quicker than the manufacturing being the main contributor to the supply chain Crunch. The world has seen now for.

When or if inventory levels will return to historical norms or if they will be even higher as people look for safety stock.

In addition, it's much more common now for our business to have its inventory in multiple locations as opposed to one central facility or store inventory could be direct where drop ship from a supplier could be stored with a reseller of our sales agent it could be various warehouses dedicated to different go to market experiences such as online purchases versus in store purchase.

Or even with the customer.

In short businesses or managing not just inventory levels, but an increasingly wider array of inventory locations.

As these distribution mechanism has become more complex and involving more external parties shipment visibility becomes more important our customers rely on us to help them manage the massive amount of information relating to their businesses. So they can make their operations more efficient. This is particularly so as we see increased shipments until inventory levels normalized.

The opportunity to have broader recognition for the critical work that they do to help keep the economy functioning.

Thanks to everyday cart team member for everything they've done to help get us in this very fortunate position.

With that I'll turn the call over to Alan to go through our Q3 results in more detail.

Al.

Hey, Thanks, Ed.

As indicated I'm going to take you through our financial highlights for our third quarter, which ended on October 31.

We're pleased to report record quarterly revenue of $108 9 million this quarter, an increase of 24% from revenue of $87 5 million in Q3 last year.

Looking at foreign exchange rates, we should point out that there was a benefit to revenue this quarter from FX of just under $1 million.

Q3, as the U S dollar was mildly weaker compared to the Euro Canadian dollar and 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 25% to $97 2 million compared to $77 6 million in the same quarter last year.

And consistent at 89% of revenue in both periods.

Service revenue was also up nice sequentially, increasing approximately 4% from the second quarter of this year.

Professional services and other revenue came in at $10 3 million or approximately 10% of revenue up almost 11% from $9 3 million or 10% of revenue in the same quarter last year.

While license revenue continues to be less than 1% of our revenue in each period.

Revenue for the nine months year to date was $312 3 million an increase of 22% from revenue of $255 3 million in the first nine months last year.

Gross margin for the third quarter.

With 76, 5% of revenue fairly consistent with the second quarter of this year.

Up from gross margin of 74, 3% in the third quarter last year.

Gross margin continued to benefit from a strong incremental growth in new and existing customers that we've experienced so far this year.

As a result of both continued revenue growth and good cost control. We continue to see strong adjusted EBITDA growth of 32% to a record of $48 2 million or <unk> 44, 3% of revenue for the quarter.

Up from $36 4 million or 41, 6% of revenue in Q3 last year.

For the nine months year to date adjusted EBITDA came in at $135 6 million or 43, 4% of revenue up 31% from $103 4 million or 45% of revenue last year.

With these strong operating results and good customer collections cash flow generated from operations came in at $43 $3 million or right at 90% of adjusted EBITDA in the third quarter.

Up 31% from operating cash flow of $33 1 million in Q3 last year.

For the year to date, our cash flow from operations has increased 38% to $136 million or <unk>, 96% of adjusted EBITDA.

However, going forward subject to unusual events and quarterly fluctuations, we expect to continue to see strong cash flow from cash flow conversion and generally expect the cash from operations will be in the area of 85% to 95% of our adjusted EBITDA.

Quarters ahead.

Overall as Ed said, we are quite pleased with our quarterly operating results in the quarter as strong organic growth and solid performance from our recent acquisitions has resulted in a 24% growth in revenue and more importantly, a 32% growth in adjusted EBITDA for the quarter.

If we look at the balance sheet, our cash balances totaled $171 million at the end of October up approximately 43 million tons from the end of the second quarter.

As a result.

We will have which we have $171 million of cash available to us as well as $350 million available to us under our credit facility ready for us to deploy towards future acquisitions.

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

So as we look to Q4 of fiscal 2022, we should note the following.

As a result, our tax rate for the first nine months of the year came in at approximately 13% of pretax income.

If you look at Q4 of this year and into future years. We would currently expect that our tax rate will return back to a more expected range of 25% to 30% of pretax income.

As always we should state that our tax rate may fluctuate quarter to quarter from onetime tax items that may arise as we operate internationally across multiple countries.

And finally, we.

We currently expect that our comps are stock compensation expense will be in the area of $3 million for the third quarter similar to the level experienced in Q3 of this year.

So I will now turn it back over to Ed who will wrap up with some closing comments and with our baseline calibration for Q4.

Okay, great. Thanks al.

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

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 the customs authorities.

When we over perform we expect to reinvest that over performance back into our business.

Focus on recurring revenues and establishing relationships with customers for life.

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

We again performed ahead of our plans for Q3 consistent with our 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.

Last call I talked about three key areas that we had earmarked for further investments, including plans to increase investments in our frontline.

Front end distribution customer implementation that success and acquisition and product integration.

We've made good progress in these areas, but there's still more to come and we consider these investment goals as we set our calibration for Q4 and.

In our quarterly report, we provided a comprehensive description of baseline revenues baseline calibration and their limitations.

As of November one and using foreign exchange rates of 81 to the Canadian dollar $1 16 to the euro.

2022, or approximately 38% of our baseline revenues as at November one 2021.

Last quarter, we indicated that the targeted adjusted EBIT operating margin range for our business would remain at 38% to 43% for fiscal 2022.

Q3, we were just north of 44%.

Not looking at changing our targeted range, but we'll revisit that in future quarters or next fiscal year, if we continue to over perform.

In past calls Ive talked about.

Given that we think our continued cautious and prudent approach to investment and calibration is the best thing we can do for our shareholders.

This is an exciting time for gift card business is performing very well.

That share our vision to create a business with customers for life.

Thank you we will now begin the question and answer session.

You have a question. Please press Star then one on your Touchtone phone.

If you wish to listen the queue. Please press the pound sign or the hash key.

My first question is announced.

Using 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 one on your Touchtone phone.

And our first question comes from Raimo <unk> from Barclays. Your line is open.

Hey, This is Greg Ryan just one from me in the macro so as we look back at the initial outbreak and the Delta variant.

Some lessons learned that gives you confidence going forward with the uncertainty and potentially coming from new variant. Thank you.

Hey, Thanks Frank.

I mean listen.

You can see from some of the results today and in the past quarters, we think.

Our business has done very well in the pandemic a lot of things in the pandemic. We think ended up being <unk> for our businesses our customers needed help when we were there.

To help them.

That was one of the thoughts I had when I saw the new cranberry and come out of that we may be in a position to do.

To do very well.

This scenario because of the.

Pandemic seems to put a bunch of challenges on the supply chain, just like I outlined a minute ago that.

The card may be uniquely positioned to handle.

We don't know what its going to mean, we don't know any more than anybody else about how the varian can spread around the world and how it trades.

Transmissible it is in.

How much.

Trouble it can cause for people when they get it but.

We do think our business is well positioned to help people deal with the challenges in the supply chain and logistics world that it may create.

Very helpful. Thanks, Ed.

Thank you Frank.

And your next question comes from Matt Pfau from William Blair. Your line is open.

Back to sort of a more normalized environment from an operating perspective.

I think some of the things that are going to.

The that are hitting US right now are going to continue long after that time I think people have generally realizing I think you've heard me talk about this in previous calls that supply chain and logistics with a whole lot more important than they used to think it was and I don't think thats going to change just when this crisis goes away I think fluor.

That concept is here to stay.

I think that to answer your question. This.

This is not going to necessarily be a crisis at some point in the future.

But the demand still may remain fairly high remember theres a lot of companies that are trying to.

To add capacity and be able to meet that some of the demand challenges and because our business is based on transactions.

In large part and people.

Processing shipments on our network I think we'll be in a position where.

Even if the scenario you mentioned occurs.

Doing pretty well on that.

Third scenario, which is maybe more what you were getting at.

And the downtime at this turned around a couple of years from now and it was actually in a kind of a recession mode and again I don't know whats going to happen, but if that were to happen.

We faced pressures along with everybody else regimens as the number of shipments go down.

Or maybe you don't grow as fast as they were growing in the past, we'll face that challenge on I do think our business is pretty well set up to handle any of these scenarios.

We're very good at making money in an up cycles as well as down cycles as you saw on our way to nine so.

There's a lot of good that comes with that for us as well right.

We tend to do bad in those situations everybody else's as well.

And that puts us in a position as an acquirer, where we can go out and get our hands on businesses for a whole heck of a lot less than.

Then we might have to pay today when things are booming.

Got it and just one more from me on specifically around the labor shortages and I guess more tied to the trucking side of the labor shortages, which is something that as you alluded to is probably going to continue for quite some time and more than likely worse and now you do have solutions currently.

Increase your product set in that specific area.

Well.

I can't comment too much on the future of that but let me say this.

We really like those businesses those businesses are all performing very well right now for us we see that.

A great opportunity for that to expand in the future and certainly we'd be.

Ah out there looking for businesses that might do that with those beliefs in mind right now so.

Yes.

I'll leave it there.

Fair enough I appreciate it guys. Thanks a lot.

Hey, Thanks, Matt.

And our next question comes from Justin Long with Stephens. Your line is open.

Thanks, and congrats on the quarter.

Third the framework there.

Maybe I'll take the first part of this year.

Yes, sure I'll get a tri Ed and you can answer after yes. So as you know we don't operate the business in a way we aggregate all our acquisitions or integrate them right away.

But obviously if we.

We estimate the organic growth probably in that mid teens range this quarter.

Is that a little bit of FX benefits, but overall that 15%, 16% range would be about the best guess, we could get give you on the organic growth.

Ed you want to take it over from there.

Yes sure.

Your your.

Your question with regard to you know is it going to cause an increase in sales and marketing expense.

Sure we continue to be able to.

To put up numbers like this growth rates like this I think you'd see us.

Make continue to make more investment as I mentioned in the call last quarter, but.

Yeah.

With the increased revenue growth.

Would continue to expect us to be able to make more and more money because we did that so.

You've watched us operate for a while we're pretty prudent operators.

We're not going to do.

Get out of ahead of our skis on issues like this.

When we see a need for more salespeople in the market will go out and invest in that but.

In the Grand scheme of things I think.

Without us calling it out I don't think anyone would notice that in our numbers, it's not a massive expense compared to the revenue that we bring in.

Okay got it and I guess, just looking at your cash balance.

Built nicely in the quarter cash flow is strong and on the point of investing that.

Well I mean with every acquisition that we're looking at.

You always find ourselves thinking should we do this ourselves or should we go by this company that does that there is some advantages to both.

So get a big head start because someone else has built this business for 10 or 15 or 20 years, and we get to start from that point.

Obviously, if you build a product on the other side of it as we build a product organically and it ends up being hit.

End up winning the market forward you can do quite well the ROIC on that over time could be phenomenal.

But there's some risk in that as well and that you are building.

Product that.

You might not end up being the leader in the market you may not end up winning they may not do what the customers want so there's some risk in that too and you've probably seen us over time.

Take the approach that leans towards acquisitions for entirely new product segments.

With.

Incremental increases to product functionality, we tend to do that internally, we'll buy a company will continue to enhance that product.

And add new buttons to with the customers may pay additional money for or clicks that hadn't been imagined in the past that.

Maybe come clicks in the future that people pay.

Click for 25 cents, a transaction or whatever it is.

And I suspect youll see us behave that way to the future.

They're still managing to get acquisitions done we may have to sort through more of them now because a lot of stuff in our estimation over priced but you still seem to be able to find good acquisitions that we think we can make money on them, but would be good investments for our shareholders in the future. So.

As I would stay with us.

On many issues.

You're probably going to see us behave in the future a whole lot like we behaved in the past.

Okay I'll leave it there and look forward to seeing you tomorrow.

Hey, Thanks, just to talk to you soon.

And our next question comes from Paul Treiber from RBC capital.

Hello, Thanks, very much and good afternoon.

In regards to volumes.

This quarter and you look at it through the holiday season.

Do you like there has been media reports that the managing pulled forward did you see that help volumes. This past quarter and then when you look forward to next quarter do you anticipate that the seasonality would perhaps reverse.

Greater than normal there.

Yes, it's a good question, Paul I don't know I'd be guessing a little bit.

I don't expect to see a slowdown in it but.

That's a bit of a guess as well it looks to me like there's a whole lot of shipments out there there's still need to be processed and people are going to be concerned about this.

Into the new year.

And while some of these ports may get a little less congested over time, it can take a while for them to clear out and then you have the issue that I mentioned at the beginning of the call with the people moving their mindset from just in time.

Inventory to just in case inventory, meaning.

I'm going to bring some extra inventory in here because I'm worried about supply chain challenges.

I think that's.

Likely to result in high shipment volumes for the foreseeable future, but again I don't have a crystal ball.

My two cents on it I guess, we'll see what happens but.

I don't find myself concerned about it right now.

Okay great.

Shifting gears to the pricing pricing for your transactions I know in the past.

Ive been reluctant to increase price.

A lot of contracts with a lot of customers have volume discounts on it.

As they produce more volume they pay lower rates, but it's only on the incremental shipments. So it all ends up being extra for us.

They get a lower rate, which is great for them, but I also get more money.

Aggregate because.

On a reduced.

<unk> b prices for all the shipments back to zero or are we producing we reduce it for the additional shipments that you are providing above your minimum or above your.

What you normally do so.

I think what youre going to see us maintain our approach.

Place, you've got really out of control, maybe we'd have to rethink that some point in the future, but the way it is right now.

We want to be seen as fair operators for our customers we tend to leave our prices fixed as a result.

And we raised them, where there is good reason to do that where we have labor cost directly related to what they tend to go up over time, where we have costs that.

That increase over time, we tend to.

Raise those rates, but some of the some of the more fixed cost on our network. We tend to leave the same so that so that our customers think.

We've got to deal with.

And then just lastly, I mean, you touched on labor costs.

I know youre, adding head count how about how should we think about salary or wage increases here and then bigger picture. How are you found attracting and sourcing talent in this environment.

Yes, I mean, we you know we're in the market as well you know the big switch.

I read about it a lot more into paper then.

We have to deal with it here at Descartes and not that we're completely immune to it but I think our business is set up so that.

If you think about the reasons behind some of the people were switched jobs all over the place and I go a lot of that is because of the work from home environment people start to say, Hey, I can work from anywhere why do I have to go back into the office.

They work for a company that's trying to drag them back into the office.

Conversely here at Descartes.

We've had a pretty high rate of work from home long before the pandemic started and I suspect that number is going to go a lot higher now.

As we come out of the pandemic one day, we're not asking our employees to go back to the office, they're welcome to if they like but.

We're certainly not getting forced to do that by us.

And I think in the long run.

As long as you can work effectively worked for.

Wherever you need to do that.

And that's been our attitude for a long time and if it gets paid dividends to us here in this challenging environment.

So we'll see what happens, but I read about in the newspaper and I've seen a little bit of it here at the carpet certainly not to the extent that I've seen it or heard about it at other companies.

Okay, great. Thank you.

Thanks.

Our next question.

Comes from Paul steep Scotia capital.

Great Ed.

Can you just maybe one macro one to start with maybe talk about what youre seeing through the air Channel. These days I know.

It seems like lots of folks on supply chain sort of backed off for important consumers not to expect things to be there.

Are you seeing much through the air channel in terms of impact on that or air volumes still super strong.

Well I remember a year ago ore volumes were significantly depressed they are back to normal now exceeding not only the levels pre pandemic, but theyre exceeding what our expectations would have been.

If the pandemic had never occurred today.

And so that's been good for US I think I mentioned earlier on in this call that.

Some people have shifted to air in an effort to get stuff to market said hey out.

I'm willing to pay more to get this product to market because.

I needed I needed to be there and are maybe the only way I can make that happen.

That obviously.

Helps certain types of shippers versus others right you've got to have something that's quite enough to fly.

Makes economic sense to do that use of something of a little higher value.

So yes, we're seeing some of that in.

Certainly our air business is doing quite well right now and it's good to say that it was.

It's been about two years since I've been able to say that so you know.

I think it's in good shape and I suspect it will be for some time.

Great and then just on the customer side, maybe get you to.

No listen I wouldn't be going and adding to the numbers that we gave you for calibration for it it's already in there.

And I think it's more like something its going well its another reason for people to buy tariff data or continue to look at <unk> data, meaning they buy it from us.

It's probably not the reason I buy the stock, but I think it's good news.

It's continued demand for our business that is it.

As one of our top performers in one of our most profitable businesses. So incremental revenue dollars there tended to fall to the Bottomline quickly and I think thats.

That's why we pointed it out and I think that's good news for us at the same time I don't want to.

Overblow it it's.

It's more like the success, we've had in that market over the past couple of years has a good reason to continue.

Got it.

The last one for me, maybe just talk about where are we at obviously holiday season is done time when retailers look to rush to add new feature operating systems, but.

How are you feeling about the ecommerce business rolling into next year people finally.

Maybe at the new point of willing to take bigger steps on some of these investments as we head into 'twenty two thanks guys.

Thanks, Paul.

No I mean that that ecommerce business was a real high flyer for us last year, it certainly still performing well this year, but.

The growth rates that we saw last year I don't think anyone was underneath illusion that they were going to continue forever.

They are at the time of the pandemic when no one could go to the store that caused massive growth rate this year or last year and maybe it makes them look a little more depressed this year than they were.

At the same time, I think increasingly more and more companies are realizing that E. Commerce is there business in U C.

All of these mainline retailers.

<unk> like Hey, my something I, probably said for years, but I think it's really now taking hold which is.

Retailers that are that owned stores are going hey, I need to be just as good at my web presence as I do it.

Our footprint in the store and they're combining those operations more and more efficiently and when they do there's a bigger demand for our products, which is great for us.

We were.

Fortunate enough to be able to get into these businesses six seven years ago, and they've been really great performers for us and well time, just the market I think is increasingly realizing what we realized which is that.

This has to be ingrained in your business as part of the operation and needing to have a store and you need to have an ability to ship stuff that people would need to have the ability to do both in a hybrid of the two and you also need to be able to treat you your inventory.

Cross all of the places that you have it in there.

Fortunately for US we have solutions that do just that as you know we're in the.

The right place at the right time, so we're happy about that.

Thank you.

Thanks for taking the next question comes to Scott Group from Wolfe Research. Your line is open.

Hey, Thanks afternoon guys.

Hey, Scott.

Ed can you give us just an update on what youre seeing in the acquisition market or are you any more or less engaged at any change in valuations that youre seeing out there.

Ah.

There's a lot for sale.

We think most of the stuff's over price.

The greatest business, they've ever seen and it is growing.

<unk>.

At very rapid rates, we don't we don't always agree with your math.

That's the pitch that we're getting and so we have to pick through a lot more stuff to get acquisitions done, but you can see we continue to do that.

And we expect the winner in this market will continue to be acquisitive and that they'll make smart decisions about what to acquire not only from a price.

Price perspective, but also from a technology perspective, right now we think that our big advantage in this in this.

Situation in particularly.

The big advantage when the prices get too high as we've been doing this people that work here have been doing this for 2030 years and really know this market like the back of their hand.

And that enables us to make better decisions about what's the right thing to buy it and the guys that have been in it for for six months or two years or whatever we're working with private equity firms or other companies that are maybe newer to the game and.

We do our best to take that advantage.

And make sure that we use it to to pick the right companies.

Okay, and then I know, we still have another quarter left in this year, but I'm wondering maybe if you had some.

Preliminary thoughts about fiscal 'twenty, three and it sounds like you think the environment remained favorable comps get tougher do you think it is.

Their year of sort of double digit top line, 15% EBITDA growth is that a realistic outcome as you think about next year.

I don't know.

10, others.

I don't know any more than anybody else.

I can tell you that we had big growth. This year, so it's going to be tougher next year to continue those.

Growth rates.

But we'll see.

And I think our business is going to continue to be in a good position.

What the growth rates will be we will have to see as we get there. We'll certainly let you know as soon as we do.

Okay. Thank you guys appreciate it.

Hey, Thanks Scott.

And your next question comes from Daniel Chan from TD Securities.

Hi, Good evening guys I just wanted to follow on on that acquisitions question, you guys have been able to keep up your level of acquisitions, a lot better than some of the other acquisitive companies out there and you did cite high higher valuations.

Yes, no I mean, we don't think of it that way, we don't we don't think of it as though my multiple buyers. So I can spend more certainly.

We're more looking at it like a.

I want to provide.

A good ROIC for our shareholders and we're not going to do the deal. If we don't think we can get there.

But if we come through a bunch of acquisitions and they're all saying theyre going to the Moon Trust me, that's how they all do it soon as they get a banker that's the pitch.

And it's our job to comb through them and see where we really believe that and we tried to bring our.

Background and our experience in this market to bear to try and make good decisions there.

I'll go back to like the macro point of view right.

What can go by all standards.

Anyone who looked at that would've gone Wow Big heart really paid a whole lot more than they've ever paid for anything else.

Looked at it at a time and went.

Well, we think there's something special about this business, we think it's going to be able to grow significantly and we think that while this price looks expensive today. If you come back a couple of years from now like we are now this price that we paid is going to look cheap.

And whats that enabled us to get continue to get deals done as an ability to find those needles Nasdaq by picking through a lot of hay.

And.

We continue to do that and we're being asked to pay more for something.

Im not justifying that and were not justifying that based on our multiple were justifying that based on the return on invested capital. We think we can get from that business and if we can think if we become convinced we can hit these.

Ah metrics, then maybe that is a business that's worth more and maybe that is a business that we should pay more for it.

The other thing I would add to this is we spend a lot of time working with with companies and you know not every business is for sale to the highest bidder.

Certainly money is a factor in every deal, but there's other issues as well a lot of these small founder owned businesses.

US a long time to convince them to sell their business to us and we spent a lot of time working with them convincing them that we are the best home for their baby.

And literally sometimes their kids and their best friends all work, there and maybe they want to retire but they also don't want to put there.

They are family members or their or their.

Best friends from over the years that they've started this business with in a bad situation.

And we spend a lot of times convincing people showing people how we're good stewards for this business after you retire.

And in a lot of times that gets us.

In the driver's seat.

In the middle of these acquisitions.

So.

Those two things combined I think allows us to continue to do acquisitions continue to find good ones and I don't see.

You see that changing right now.

Yes, it makes sense thanks for that color.

Just shifting gears a little bit you guys get some pretty good real time insight via your networks, just wondering if youre getting any early insights from the omicron variance.

You mean in the last six to eight.

Yes.

[laughter] EBIT.

EBIT, if I, where we couldnt comment on it.

It's not in the quarter that we're reporting on but.

No we don't know too much from it so far and I don't I don't think youre going to the virus. If you read the stats on it it's not really spread that burden that far yet.

Our first case in California today.

I don't expect that Youre going to see anything show up in the supply chain anytime soon.

That's going to have a whole lot to do with the primary.

Okay. Thank you.

Thanks, Dan.

And our next question comes from Robert Young from Canaccord. Your line is open.

Maybe some competitors.

Up to snuff compared to you our competitors catching up but can maybe just refresh us on how the Brexit.

Impact is through the end of the year and maybe into next year.

Yeah.

Yeah, maybe I'll just start with that clarifying the comment so I think that what we want you to understand is that the growth that we're seeing was more heavily focus from new and existing customers than it was from acquisitions this quarter and that varies for us.

We will grow by both means but.

So new and existing customers drove growth this quarter much like it has for Q1 and Q2 Brexit is certainly part of that that is a new product offering for us and it's certainly been helpful in creating part of that growth with the with new and existing customers.

I think that's the extent of it as far as other comments that Ed made on Brexit add anything you want to clarify there on the specifics of the breakfast products themselves.

Yes, no no no.

Nothing's really changed for US I don't think the dynamics. We described last time that you brought up there Robert is going to change.

The.

The path for Brexit is largely set in stone and we think we did a very good job of getting the customers there.

It's a recurring revenue business.

This will be the gift that keeps on giving ranges. We got these customers are probably going to be able to keep them and continue to do business with them for a long time.

The sales opportunities now are gone because most of the people who've made decisions already and so we just look forward to like the rest of our customers and compliant business is operating and maintaining it.

To continue to allow our customers to deal with the volumes that they have and have the best system out there to process transactions, which is.

Always our our mission.

Yeah.

Okay, and then second.

Second question would be what you'd said about.

Just in time.

Turning into adjusting case, and so I guess that obviously raising that that the amount of goods being moved around but is there a lag factor. There is that extend all of this impact on supply chain.

Volumes for your business.

Well it would if it's if that theory is correct. We will have to see the theory right now.

I've been in this business a long time, that's part of why we're proposing it because we think that's a strong possibility that people change that we've heard our customers talk about changing that.

When they do that means they're going to be shipping more stuff. They used to think I'll just ship stuff just the time because there's no.

Penalty to be paid in the in the logistics world, but now all of a sudden there is disruption and stuff you've got piece I better get.

All the hammers into my warehouses, so that I can sell them in the store three months.

I used to not worry about that till a month out and all of a sudden now I'm going you know what I want to have extra inventory there. So I don't want out of stuff.

Back in the early days of selling visibility, we would talk about just in time like this right, it's saying hey, no one ever gets fired for having too much stuff into warehouse.

Well 15 years 20 years later people did get fired for having too much stuff in the warehouse because the inventory are costs were too high.

And I think right now with what's going on.

In the supply chain and then some of the disruptions that we've had.

People are going back and reexamine, even that in going boy I'm paying an awfully high price.

For being just in time and maybe I should.

Create a little more safety stock so that I don't run asked up because that's the most costly thing that can happen.

And.

That switch back to that mentality will probably means more shipments in the coming months.

Okay. That's it for me thanks, guys.

Thanks Robert.

And our next question comes from Howard Lee Your line is open.

Hi, there thanks for taking my question.

I just wanted to follow up on one of the earlier discussions about the.

Transaction based revenues.

Wait when you think about the organic growth.

Maybe even quarter by quarter, you can see supply chain issues really came into effect and you think about transactions.

Transactions versus the subscription base.

Contracts, where do you see more momentum and when it came down from India renegotiations with those transactions or the renewal.

Did you see any forward discussion, there where they have customers willing to increase the transaction.

Because.

Peter kind of more.

And the last thing in the next year or maybe looking at scaling back if there are supply chain issues.

Yes, Thanks Howard.

So.

Couple of questions in there so on the transaction.

On the transaction side I mean, it's not most of our contracts don't get renegotiated all of that off so it happens but.

Especially in times when things are booming people tend to push that aside and just renew for the next year and move on certainly if they have significantly increased volume and then maybe coming back, saying, Hey, I'd like to change my contract minimums.

And get a lower price, we always offer that to our customers if youre going to.

If youre going to do more with us.

How you get lower prices out of us.

Core transaction.

So we see some of that and as it gets.

A question that would always be asked.

At the same time.

The subscription business, where.

You're a fraction of that statement.

And you get to keep the rest.

And.

The demand for those solutions has been high for the last year.

Since the early stages of the pandemic kind of went away.

And people started to realize supply chain was a bigger deal than they thought it was and people tend to buy more supply chain solutions right now from us as a result.

And their subscription solutions that I think that is.

Go on for quite some time I think the.

The transactional stuff is obviously somewhat cyclical right. It is going to follow the economy.

And.

The subscription stuff is probably much more likely to.

Think.

Last a lot longer and.

The World is maybe seen a.

A shift in thought from supply chains.

And after thought to us to supply chain as a strategic capability for us if we need to have the right tools and technology in place to handle it as efficiently as we possibly can and that mindset shift I think it is going to play well for us in the long run I think it could be a long term tailwind for us.

Right right that makes sense.

And just kind of related to that when you think about where you're going to target.

Our investments in sales and marketing.

Is there a particular kind of segment.

What areas are that car air cargo or are you kind of targeting across the board.

We're seeing demand across all our customers.

I mean, we break our salesforce into logistics and transportation and.

Manufacturing retailers, the big shippers of the world.

And I think we're investing in both.

As I mentioned last quarter, we're putting people in place that really understands the customer basis, so that when we're in selling to them.

We can.

To really understand what the customer.

Who the customer is and what they want.

The problems that they're trying to solve is the best way for us to help them and to sell efficiently.

Right right.

And then just one last one from me when you I think.

There is a there is a little disclosure in the.

In the MD&A that talks about here's our anticipation of.

Recurring revenues loft or I guess churn.

I guess last year, given the pandemic it was saying that this fiscal year for 'twenty two might have higher than average churn I guess, given how strong the best alternative is it fair to say that churn might be even lower than what the.

Normal levels are and how do you think about churn I guess going into fiscal 'twenty three.

Yeah.

Usually when things are going well, it's not really a concern right everyone gets focused on the things that I've been talking about on this call right.

Focused on how do I.

Yes.

How do I get more stuff to help me operate efficiently in these challenging times.

And they don't spend as much time talking with us about.

Hey can you reduce my bill by $5000 right.

There's there's a run on everything right now, including our time, so when our customers are coming in the door.

They're usually going please help me not right now Theyre going please help me because I have problems that I think you guys can help solve and I. Once you helped to do that.

It's probably not that productive to start that conversation off with Owen can you reduce my bill at the same time.

Uh huh.

So I don't think there's a ton of customers handle on it that way I think most customers are just going can you help me. Please.

Yes.

That type of an advocate to those customers. So I get that alright. Thanks. Thanks, So much I'll turn it back.

Thanks, Eric.

And that concludes our question and answer session.

On the call back over to Ed Ryan for closing remarks.

Great. Thanks, everyone. We appreciate all your time today.

Do you want to schedule meetings with US directly please reach out to us either through a bank or directly and we will be happy to spend.

To spend time with any of our existing shareholders or.

Analysts that cover us to help them better understand the story.

And we will otherwise look forward to reporting back to you next quarter have a great day.

Yeah.

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

Q3 2022 Descartes Systems Group Inc Earnings Call

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