Q1 2023 Descartes Systems Group Inc Earnings Call
Good afternoon, and welcome to the Descartes quarterly results call. My name is Brandon and I'll be your operator for today at this time all participants are in a listen only mode. Later, we will conduct a question and answer session during which you'd be Dallas zero. One if you ask a question. Please note. It is zero one not start one.
As a reminder, this conference is being recorded I will now turn the call over to Scott Pagan you may begin Sir.
Yeah.
Thanks, and good afternoon, everyone. Joining me 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.
Portions of today's call other than historical performance include statements of forward looking information within the meaning of applicable securities laws. These statements are made under the safe Harbor provisions of those laws.
These forward looking statements include statements related to our assessment of the current and future impact of the COVID-19 pandemic in Russia, Ukraine conflict on our business and financial condition in terms of operating performance financial results and condition <unk> gross margins and any growth in those gross margins cash flow and use of cash our application to commence in normal course.
<unk> potential purchases pursuant to such bad business outlook. When you find revenues baseline operating expenses and baseline calibration anticipated and potential revenue losses and gains anticipated recognition and expensing of specific revenues and expenses potential acquisitions and acquisition strategy cost reduction and integration initiatives and other matters.
That may constitute forward looking statements.
These forward looking statements involve known and unknown risks uncertainties assumptions and other factors that may cause the actual results performance or achievement 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 in the section entitled certain factors that may affect future results in documents filed and furnished with the Securities and Exchange Commission.
And obviously you made some machines 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.
Such information may not be appropriate for other purposes.
Don't undertake or accept any obligation or undertaking to release publicly any updates or revisions to any forward looking statements to reflect any change in our expectations or any change in events conditions assumptions or circumstances on which any such statements except as required.
Required by law.
With that let me turn the call over to Ed.
Okay, great. Thanks, Scott and welcome everyone to the call we kicked off the new fiscal year right with record financial results.
These were our best results ever across a host of different metrics ill hit some highlights for you, but first let me give you a roadmap for this call.
I'll start with highlighting some aspects of our financial results speak to current business conditions, and identify where we're making investments to grow our business.
I'll, then hand, it over to Alan who will go over the Q1 financial results and some corporate finance matters in more detail.
I'll, then come back and provide an update on some corporate matters and how our business is calibrated.
We will then open it up to the operator to coordinate the Q&A portion of the call.
Let's get started by looking at Q1, we.
We had record high revenues of $116 $4 million up 18% from a year ago net.
Net income was $23 $1 million up 26% from a year ago. Adjusted EBITDA was a record high of $51 2 million up 23% from a year ago and this was with a 500000 dollar drag compared to FX rates from a year ago or $300000 from FX rates last quarter.
We generated $44 million in cash from operations or <unk>, 87% of our adjusted EBITDA or adjusted EBITDA as a percentage of revenue was 44%. All of these metrics were ahead of our plans so a very strong financial quarter for us.
At the end of the quarter, we had $211 million in cash and with debt free with an undrawn $350 million line of credit.
Well capitalized cash generating that free and ready to continue to invest in our business.
So I'd like to address three areas.
One why we did well this past quarter to what the market conditions are there we're operating in right now and three where we're making investments.
On the first point our focus at the card has been on building a consistent predictable and sustainable business that is resilient to changes in the market conditions. So as I describe some key contributors to our performance last quarter, you're going to hear some common themes from past conference calls and our previous successes and that's by design key things that helped us grow last quarter include.
Yes.
Past investments are paying off.
Or what's the sustained organic growth.
Continue to see good organic growth in our business year over year, we see this as a pay off from the targeted investments we've made in sales and marketing over past quarters. Our biggest change in sales and marketing was growing the group is now aligned by different pillars of our business and geographically.
In the past were purely organized.
And engaging with customers by geography, but as we've grown and matured we've moved to a further two further solution specification to be able to focus on customer centric engagement that helps customers draw.
Drive more value from our solutions.
Second as real time visibility contribution.
We've been in the visit visibility business for a long time, it's one of the foundations of the global Logistics network. When we started we will providing purchase order line item visibility from Edr status messages, we've grown with the market to move to real time visibility leveraging GPS and other technologies.
A few years ago joined with macro point to become a leader in the space are real time visibility business continues to grow we're receiving and tracking more shipments than ever and our capabilities are expanding across all modes of transportation, including identifying available shipment capacity.
The third is strong demand for denied party sanction party screening and tariff changes.
Foreshadowed this last quarter and it happened as expected with geopolitical conflicts escalating in particular with the war in the Ukraine governments around the world have imposed sanctions on particular countries parties in commodities, there are enormous financial and economic consequences of violating these sanctions.
Does need to be more diligent than ever and who they're doing business with.
Do they are employing and who they are importing.
From or exporting to a good portion of our content business is specifically focused on this helping businesses stay in full compliance with the various sanction list around the world also with all of the challenges in tariffs because of these geopolitical events, our databases of tariffs and duties have become even more vital for our customers.
And the fourth is past acquisitions have contributed well boosted.
Those who followed us for some time now that we've taken a consistent measured approach to adding to our business by way of acquisitions.
We generally are buying houses that are right in our neighborhood and complement our existing business combined with a business that is not yet at our desired profit level.
Very quick steps to get it there using descartes's resources and experience to help the business thrive.
So it's no surprise that the business positively contributes to our growth post acquisition, that's our plan.
This past quarter was our first quarter with net CHP and our business. Our company I described to you in detail on our last call. We are a very good complement to our existing solutions for freight forwarder and customs brokers.
The business has really hit the ground running and we've already had some combined successes that we're happy to see their contribution in the quarter.
So that's how last quarter went it went very well, we performed well and bought some businesses things continue to change quickly and the global market, though we built a resilient business that in the past has grown through some very challenging business environments. However, we need to be prudent and cautious when things are changing.
Generally the things impacting the supply chain and logistics markets right now fall into two categories. The first is conflict and geopolitical issues and the second is economic issues on the conflict and geopolitical fronts.
There are three main things, we're monitoring for their impact on logistics and supply chain one of the war in Ukraine to Brexit and three China Covid Lockdowns.
The war in Ukraine has caused sanctions and mortality reactions from countries around the world, even though is not directly involved in the conflict as I mentioned businesses in our space or having to be extra diligent to screen all relationship and shipments will compliance with a myriad of sanctions and restrictions out there also changes in tariffs and duties have made sourcing from or shipping to Russia.
<unk> <unk> prohibited.
Businesses have had to restructure critical supply relationships to continue operations shipments to and from ports in Ukraine, and Russia have become very dangerous or blockade, causing virtually all major carriers in all modes of transportation travel alternative routes that are sometimes lengthier and more expensive and.
And recently, we are seeing Russia shut them off supply and energy commodities to neighboring countries, causing disruptions in their supply chains.
<unk> had a wide ranging impact on virtually everyone's supply chain.
The biggest overall impact has been on energy and commodity markets. These are generally supplied by cables pipelines or bulk commodity carriers, usually ocean vessels not much of a big cards businesses in this supply and logistics space. So.
So we haven't seen a big impact on shipment volumes in our business. However, we have seen an impact from our customers' increasing screening for sanctions and we're using technology to look at alternative supply and logistics strategies with bypass the region.
At our own company, we have a limited number of individual contractors in the region, helping us we're fortunate that they're all safe and we've been trying to do what we can to support them and their families.
Second geopolitical item I flagged was Brexit.
Specifically excuse me relating to Ireland the.
The island of Ireland is divided into the South which is part of the EU and the north which is part of the U K and therefore, not a part of the year.
A key part of the UK Brexit separation from the EU was established in the protocol that would avoid having to put an enforced land border between Northern Ireland and Ireland.
As that type of separation has been a source of prior treble in conflict for many years, so rather than have checks on goods going from Northern Ireland to Ireland, The Northern Ireland protocol established filings declarations tariffs duties and checks on goods entering in Northern Island from Great Britain in accordance with EU standards, we've been helping many businesses with their filings and Deca.
Declarations for goods going into northern Ireland.
<unk> been a good business for us over the past year or so.
Certainly elections were held in Northern Ireland, where for the first time in history, but political party with a focus on re unify north and South of Ireland won the most seats in the northern government.
It was part of your supportive of the existing Northern Ireland protocol. However, some of their other political parties needed to form a government are not as supportive.
All that's to say, we will be continuing to monitor for our customers. The continued viability of the protocol and whether additional filing and documentation changes will be required by our customers as they continue to adapt to Brexit.
The third geopolitical item, we're monitoring the Covid lockdowns in China.
China has taken an aggressive zero cobot approach, which has resulted in many businesses in China being shut down while they deal with the outbreaks.
This includes manufacturers distributors ports and logistics operations, the China being a major source of manufactured goods and components. This has had a big impact on the supply chains of western companies.
Parts and component shortages in many industries, including the auto and electronics industry, resulting in manufacturing slowdown.
Over the past years Western companies I've had to be very agile in meat supply chain challenges in response to these China Covid Lockdowns, many have sought alternative suppliers and neighboring countries or in parts of China not impacted by the Lockdowns, we've seen it to be a challenge for businesses, but not a fatal checkpoint.
Although logistics front prior to the Lockdown supports and carriers, we are dealing with backlogs. It's part of the capacity to move goods with these China Covid Lockdowns were seeing many of the clogs the logistics infrastructure work themselves out with wait times at USC ports coming way down and prices starting to come down with increased capacity to date, we've continued to see steady.
Volumes from Asia Pacific.
Things seems to now be opening back up right.
Right now in China and in the meantime, we will continue to monitor the situation for any potential impact on future shipment volumes.
So those are some of the major conflict the geopolitical issues impacting supply chain and logistics, but there are also some economic issues impacting our space many of which are connected in some ways to these events.
Inflation, we've seen very high inflation rates in various economies. This is cost price increases.
Which then has businesses looking at alternative sourcing within their supply chains that to manage this in our own business by adjusting pricing to reflect supply chart costs that have been passed on to us.
Second interest rates higher interest rates put additional pressure on businesses with leverage in particular logistics businesses with hard assets were also aware of technology peers and creditors with highly leveraged businesses as I mentioned earlier Descartes is debt free. So this is of limited challenge to US right now and it's potentially an opportunity is highly levered.
Aged private tech businesses.
Good have depressed valuations in the future.
The third is currency movements global economic and political conflict has caused many currencies to move for our customers. This can also be driving force to looking for alternative sourcing strategies as low cost offshore jurisdictions suddenly become much more expensive.
I detailed earlier, our own business faced some FX currency headwinds this quarter compared to a year ago. However, we have some natural hedges in our business, but it doesn't really have us too exposed to any one particular currency movement.
The fourth is fuel costs.
Fuel costs are rising diesel costs in particular are impacting the trucking industry, which puts pressure on companies to more efficiently use their vehicles and sometimes contributes to broader inflation as fuel costs are passed on for our business, our routing and scheduling business in transportation management business, specifically designed to reduce miles driven so fuel costs.
<unk> often also increased demand for our solutions in this space.
Fifth is labor availability competition for logistics and supply chain workers remains fierce with many companies exploring alternative sources for workers, where specifically is still ongoing negotiations for the west coast Port workers contract and while.
Both sides seem committed to a resolution there the labor disruption there could also contribute to more logistics backlogs and alternative logistics strategies and.
And the sixth is returns to stores and office workplaces as the world begins to leave Lockdowns. It remains to be seen whether the buying patterns of consumers will return to in store versus the boom that e-commerce purchases I've seen over the pandemic.
Surely believe that ecommerce remains a growth area for the future, we're probably with more subdued growth rates. We've seen over the recent past we continue to see e-commerce as an area of investment for us and even more so if valuations for companies in this space come down.
So that's the broader market environment. We're in right now that's certainly a lot going on that impact supply chain and logistics as I've said in the past our business generally does well where things are changing when our customers are changing sourcing and logistics strategies. They are generally benefiting from our test technology to do so.
But we like every business out there you need to keep an eye on the broader market impact.
Global trade for the rest of the year. It's one thing if businesses are finding different ways and strategies to still do what they did before it's entirely and other if the world starts doing less overall.
For us, especially coming off of our financial performance in recent quarters, we remain committed to profitable growth in our business our strategy remains to grow our existing business and look for businesses to combine with so let me speak to each of those.
We've got good recent success with organic growth driven by past investments in sales and marketing, we anticipate continuing and those types of investments specifically, we will be continuing investments in the following areas.
First is investing in our customer success group or.
Our specific goals for this group are to increase customer satisfaction decrease churn and expand product adoption and our existing customer base. We have a very large customer base of over 20000 customers. We think we can do great things for our business by serving them better two years ago, we didn't even have a dedicated customer success group. So we anticipate this group is something we'll continue to.
Rollout given our early successes.
Second is investing in our marketing technology or <unk>.
Marketing activities used to be primarily advance and trade shows we've invested in various technologies to improve our search engine optimization enable account based marketing and otherwise provide customers and prospects with useful information that let them know how we can help them with their specific challenges.
We've also moved away from one big global in person user group and have moved to several virtual innovation forms that are focused on a particular descartes solution sets.
The third is invest in and build out of our European team. Historically. This team is exclusively geographically structured we moved to a structure thats, both geographic and solution purpose, we've expanded the team and brought in broader solution.
Experts, enabling customer centric engagement across our various solution pillars.
On the acquisition front you can see that we remain active we've completed two acquisition acquisitions already this fiscal year earlier in the year, we combined with Mitsui, HB, which I mentioned earlier.
And went through in detail at our last results call more recently, we've also combined with foxtrot.
<unk> is an investment that complements our existing routing scheduling technologies, specifically foxtrot has strength with machine learning capabilities that will help our customers with iterative improvements to their delivery route plan.
This was a particular interest to us given fox trying to cart and have some common customers also fox trups strength in retail food and beverage complements our other previous investments such as green mile.
In our mind, the premier solution provider in the food and beverage distribution industry.
Welcome to everyone for box drop and we are excited to be working with you.
We're committed to continuing to grow Descartes. These sales and marketing acquisition investments are designed to keep us on that path. We're very excited about where we are now in our future path.
To wrap up we had great Q1 financial results that was in part because of the past sales and marketing investments paying off our solution leadership in certain markets and the contribution of past acquisitions in the current quarter, they're a challenging and changing business conditions caused by geopolitical conflict and economic changes, while we're cautious about how these business.
Conditions will impact the global economy and shipment volumes for the rest of the year, we remain committed to investing in profitable growth for our business through continued sales and marketing investments and business combinations.
Once again, thanks to the entire Descartes team for their efforts this past quarter and for the work they're doing right now to help our customers deal with all the change and complexity in the world right now.
I'll turn the call over to Alan to go through our Q1 financial results in more detail.
Thanks, Ed as indicated I'm going to walk you through our financial highlights for our first quarter, which ended on April 30th.
As Ed mentioned, we're pleased to report record quarterly revenues of $116 $4 million. This quarter, an increase of 18% from revenues of $98 8 million in Q1 last year.
While revenues from our recent acquisition acquisitions, including net CHP and Fox Trot contributed nicely to this growth.
Growth in revenue from new and existing customers was once again the main driver of growth this quarter when compared to the same quarter last year.
In addition, we should mentioned that there was a decrease in revenues from FX. This quarter as the US dollar was stronger compared to the Euro Canadian dollar and British pound.
Compared to the same period last year.
This resulted in almost a $2 million negative impact on revenue from Q1, when compared to Q1 of last year excluding.
Excluding FX revenue growth would have been closer to 20% in Q1 over Q1 last year.
Consistent.
With past quarters, our revenue mix in the quarter continued to be very strong with services revenue, increasing 16% to $102 8 million or 88% of total revenue.
Third to $88 3 million in the same quarter last year.
Service revenue was also up nicely sequentially, increasing over 3% from Q4 last year.
License revenues came in at $2 3 million or 2% of revenue in the quarter up from license revenues of $1 3 million in the first quarter last year.
While professional services and other revenue came in at $11 3 million or 10% of revenue up 23% from $9 2 million in the same period last year as a result of increased professional service engagements.
Gross margin for the first quarter was 76% of revenue consistent with the first quarter of last year.
Operating expenses increased in the first quarter. This was primarily related to the impact of recent acquisitions, but also from additional labor related costs, primarily in our sales and marketing areas as we continue to invest in our business in those areas.
As a result, we continue to see strong adjusted EBITDA growth of 23% to a record of $51 2 million or <unk>, 44.0% of revenue for the quarter.
From $41 5 million or 42.0% of revenue in the first quarter last year.
From a GAAP earnings perspective, net income came in at $23 1 million up 26% from net income of $18 4 million in the first quarter last year.
With these strong operating results cash flow generated from operations came in at $44 4 million or approximately 87% of adjusted EBITDA in the first quarter up 9% from operating cash flow of $40 9 million in Q1 last year.
As Ed mentioned, we are pleased with these operating results in the first quarter as continued organic growth and solid performance from recent acquisitions resulted in an 18% growth in revenue and more importantly, a 23% growth in adjusted EBITDA for the quarter.
We turn our attention to the balance sheet, our cash balances totaled approximately $212 million at the end of April almost identical to the cash balances of $213 million. We had at the end of January as we used our cash flow from operations to complete both the net CHP and Fox trot acquisitions.
As a result, we still have over $200 million of cash available as well as our $350 million operating loss credit facility.
Deploy towards future acquisitions, so we continue to be well capitalized to allow us to consider all acquisition opportunities in our market consistent with our business plan.
As part of our press release today, we announced that we have filed with the Toronto stock exchange or Tia sex, a notice of our intention to commit to commence a normal course issuer bid or NCI.
Details of the application, which is subject to approval by the T. S. X are included in today's financial results press release.
The N CIB application is accepted by the T. S X, we expect to be permitted to repurchase for cancellation at our discretion. During the next 12 months up to 10% of the public float of day cards issued and outstanding common shares.
If the NCI applications accepted by the PSX any purchases under the NCI will be conducted in the open market or as otherwise permitted subject to the terms and limitations applicable to such normal course issuer bid.
And they will be made through the facilities of a T. S X the NASDAQ other designated exchanges or alternative trading systems.
If we do make any purchases under the N CIB, we don't know at which prices and what quantities. Dolby. However, given the recent volatility that existed in the public technology company valuations, we thought it prudent to have this type of option available to us. If it was an effective use of capital at the time as it did it did used at.
At the same time, we should be very clear that we are still very committed to the deployment of capital towards completing acquisitions that will enhance our business, we simply want to have it.
And cib's structure in place to also be able to explore the use of this capital as appropriate.
So we should note the following as we look towards the balance of our fiscal 2023 years.
After spending approximately $1 6 million in capital additions in the first quarter. We expect we expect to incur approximately $3 million to $4 million in additional capital expenditures for the balance of this year.
After incurring amortization expense cost of $15.0 million in Q1, we expect amortization expense will be approximately $42 2 million for the balance of the year with this figure being subject to adjustment for FX changes and future acquisitions.
Our tax rate came in Q1 at 24, 1% of pretax income slightly lower than our statutory tax rate and this was mainly as a result of a recovery of certain benefits in the United States.
Looking to the balance of this year. We currently expect that our tax rate will trend closer to our statutory tax rate. So in the range of 25% to 30% of pretax income for the next three quarters.
However, as always we should add that our tax rate may fluctuate from quarter to quarter from onetime tax items that may arise as we operate internationally across multiple countries.
Next after incurring stock based compensation expense of $2 8 million in the past quarter. We currently expect stock based compensation will be approximately $10 9 million for the balance of fiscal 2023 subject to any forfeitures of stock options or share units.
And finally going forward subject to unusual events and quarterly fluctuations, we expect to continue to see strong cash flow conversion and generally expect cash flow from operations to be between 85% to 95% of our adjusted EBITA adjusted EBITA in the quarters ahead.
And with that I'll now turn it over to Ed who will wrap up with some closing comments and our baseline calibration.
Okay, great. Thanks, Alan before he'd calibration I just want to hit on some other areas of corporate development for Descartes.
We were very pleased to release, our first ever ESG report in early May.
Posted on our website and I encourage you all to read it and provide us with feedback as we look at our continued progress on ESG matters.
Report identifies many areas, where we've progressed, so far such as a positive environmental impact, including helping customers reduce reduce carbon emissions pay per use and fuel consumption.
Our role in helping customers meeting their own social and governance initiatives, including compliance with economic and trade sanctions, our commitment and investments in data privacy and security.
Our efforts in developing a diverse capable employee team working in a healthy and rewarding work environment.
And our commitment to add mobile business conduct and ethics.
In addition, we will be hosting our virtual annual general meeting of shareholders on June 16th at 10 a M.
<unk> for the meeting are available on our website and have otherwise been provided to shareholders.
The matters being considered we've nominated two additional directors for election at the AGM, bringing the board to 10 directors. If all nominated directors are elected our board will have diverse representation with 60% of the directors identifying as female or visible minority and 40% of the board being female directors.
So now onto calibration.
Business is designed to be predictable and consistent we believe that stability and reliability are valuable to our customers employees and our broader stakeholders to deliver this consistency we continue to operate from the following principles.
Our long term plan is for our business to grow adjusted EBITDA, 10% to 15% annually the.
We grow through a combination of organic growth and acquisitions, we've taken a neutral party approach to building and operating solutions on our global Logistics network, we don't favor any particular party, we run our business for all supply chain participants connecting shippers carriers logistics service providers from customs authorities.
When we over performed we try to reinvest that over performance back in our business.
Focus on recurring revenues and establish a relationship with customers for life, we thrive on operating a predictable business that allows us for visibility to our revenues and investment payback nothing that's happened in Q1 or that we're seeing right. Now has had us change our financial and investment plans for this fiscal year, but we're going to be cautious and executing on.
Those plans, while we continue to monitor and evaluate the impact on our business and our customers' businesses from a market items identified earlier.
That same caution was kept in mind as we calibrated our business for Q2.
In our annual report, we provided a comprehensive description of baseline revenues baseline calibration and their limitations.
As of May one 2022, using foreign exchange rates of 78 cents to the Canadian dollar or dollar.
$1 five to the euro and $1 26 to the pound we estimate that our baseline revenues for the second quarter of 2023 are approximately $103 million and our baseline operating expenses are approximately $64 million.
We consider this to be our baseline calibration of approximately $39 million for the second quarter of 2023 or approximately 38% of our baseline revenues as at May one 2022.
Our targeted adjusted EBIT to operating range for our business remains at 38% to 43% for fiscal 2023.
One we were at 44% above this range. However in light of the broader uncertainty in the markets, including in the foreign exchange markets, we're not looking at changing our targeted range, but we'll revisit that in future quarters. If we continue to over perform and if the market stabilizes.
We're already very hard at work on helping our customers deal with these very complex times, we believe that if we focus on making our customers successful, it's our own best chance at achieving our own goal of being a strong and trusted business delivering superior results for customers and shareholders. Thanks to everyone for joining us on the call today as always we're available to talk to.
You about our business and whatever matter is most convenient for you and with that operator, I'll now turn it over to you for the Q&A portion of the call.
Thank you Sir we will now begin the question and answer session.
You have a question please down zero one on your phone keypad, if you'd like to be removed from the queue. Please Dallas zero too if you're on a speakerphone. Please pick up your handset first before you tightly.
Once again, if you have a question please tell us zero one on your phone keypad.
And from William Blair, We have Matt <unk>. Please go ahead.
Hey, guys. Thanks for taking my questions and great quarter.
Ed wanted to first ask on the acquisition strategy. So when you look at potential targets in your pipeline have valuation expectations changed at all and are you seeing a more of a willingness to sell within those targets.
I think with with with our smaller tuck ins that it's business as usual I don't think there are as are impacted by the by the public markets as maybe the larger acquisition candidates that are maybe deals run by bankers with private equity firms involved.
So business as usual for us for the normal course acquisitions that we that we're literally doing.
And some of the larger ones what we've seen so far is what I would expect to see when the when the public markets turn down which is.
If those deals get stalled.
They come up with every excuse in the world as to why Theyre stalling the dealer or delaying or you know I'm not getting the book out or whatever they want to say, but I.
I think at the end of the day it boils down to they see what's going on in the public markets and they're afraid if they go out there right now that there are.
That they're going to get a much lower valuation than they initially told their clients. So I think that's why they are in a bit of a whole pattern. This is what we saw in the past tech downturns as well, we'll see what happens in the coming months. If it continues for any length of time I would expect that some of those deals will come out and will come out at a much lower valuation, but theres a little bit of a game.
One on writing off our people to try and figure out what's going to happen in strategy as to whether they go out an hour or weight depends on how desperate they are yourself.
Got it and then just maybe it'd be helpful. If you could.
Sort of frame, how you would think about the impact of a potential recession on non Descartes business. If we go back to the great recession. Your business has evolved quite a bit since then and then during COVID-19. There was obviously a drop off in volumes, which had some impact but if we were to enter.
After macro here, how do you think about the impact on your business and your ability to manage through that.
So I think we're pretty well positioned for that and first of all we're coming into it with it with a lot of tailwind right now.
The.
Supply chains are still clogged up China's just in the past couple of days that they are opening back up that's going to put more shipments back into the pipeline and.
I think we're seeing that on our on our networks, which is which is good news.
If the world turns into a longer global economy global of.
Downturn.
Probably start to see it at some point in the future and shipment volumes as well we don't see it.
Today, but maybe maybe if it continued for a long time or happened and then continued for a long time, because we'd certainly start to see with everything else at the same time you know.
Last recession are in big reception I know eight we probably fared a lot better than most.
And I would expect that might might happen.
Even more so this time, because we're a much more diverse company now a lot more.
Products and a lot of different reasons that people buy those products and all driven by individual shipments. So you know, we'll see what happens I don't I don't know any better than anyone else, what's going to happen with the world's economy, but but I like our chances compared to our competitors and a lot of other companies out there and maybe.
Most important.
You know if if if the world takes a downturn at every company's valuation gets it you know we're not acquirers so.
Look back at our weight in an overnight and I think you know.
How does that look for us to go what was painful when we're in it but.
End of the day, we picked up some of the best acquisitions, we've ever gotten it at some of the best valuations we've ever gotten.
During that couple of years, you know while that recession was taking hold and people were coming out of it so.
Yeah in a certain sense, we'd look forward to that environment.
Great. Thanks, a lot guys I appreciate it.
Thank you Matt.
From Stephens, we have Justin long. Please go ahead.
Thanks, I wanted to start with a question on organic growth Alan any best estimate you can share on organic growth in the quarter.
When you adjust for acquisitions, and maybe FX as well and Ed I think on the last call you talked about the budget baking in 4% to 6% organic growth for the full year is that still your expectation after what you've seen fiscal year to date.
I'll take the first part then let Ed talk to the.
The way, we built our business plan.
Organic growth as you know we.
We consolidate the operations the operations of the acquisitions, we make so we don't have a specific number a detailed number but roughly speaking if you look to note three in our financials with the pro forma disclosure with the acquisitions. If you take that note. If you consider the factors that a currency headwind of just under $2 million or organic.
I'd estimate that somewhere between 12 and 13% in Q1 over Q1 last year.
So double digit organic growth is what we're seeing to your point on the 4% to 6% the way we built our business plan do you want to comment there yeah sure. Thanks, Jeff.
We always we always say around here, we we plan for the worst and hope for the best and when.
When we say, 4% to 6% that's how we plan to operate our business and would it higher than that lumpy. It is right now.
We're happy about that and you know the other thing that was years that we're going to work.
Take the excess above the 10% to 15% growth in EBIT every year and plow it back into our business to try and help growth future results. So.
You know I recognize right now, we're well above that and that May continue but if it does you're going to see us continue to do the same thing which is to to plow it back into our business and try and make it a better place for the long run for our customers and our shareholders.
Okay, Great and I guess building on that you have over $200 million.
Cash net cash today.
Can you talk about your target for the balance sheet over the next few quarters, let's call. It over the remainder of the fiscal year and especially in the context of.
The potential for share buybacks, how are you thinking about targeted leverage.
By year end.
Well well have to see what happens right. When we're acquisitive. We buy companies you know you never know what we're gonna be able to get and will operate as such right. I mean, we plan on making a lot of money every quarter and continuing to grow the amount of money that we make every quarter and put it in the bank and use it to make investments now.
In most cases, I think that investment is going to be to buy to buy companies. As we always have done I would just have to see what what happens what companies come along.
You never know how big they are going to be and how much they're going to charge or whether we're going to think that's a good deal, but we are evaluating every one of the best of our ability and trying to make the best decision we can.
Think that the.
The same thing applies for the normal course issuer bid right, we see what's going on in the tech market.
Wanted to open up that option for ourselves.
And in case, the market took a downturn than we ever think that that's the best place to put our money.
Not to say that we're doing it or not doing it just to say that we have an option to move quickly if we want to.
Understood I'll leave it there thanks for the time.
Thank you Justin.
From Wolfe Research, we have Scott group. Please go ahead.
Hey, Thanks, good afternoon, so maybe for Ed Ed.
We're talking about maybe a little bit more of a conservative approach with the calibration. It felt like a pretty sort of normal sequential improvement in the calibration.
The organic growth is so strong so I'm just trying to make sure im understanding them, then sort of what youre seeing or are things actually starting to slow as you see it in your business or is it something that you think may happen.
And if it's going to happen, which of the products. You think are most likely to see it.
No I see nothing in our business right now, it's slowing down and I read the newspapers and see what people are saying about what might happen in the economy, but I, we don't have any.
<unk> of that in our business at the moment so.
Okay.
And I don't know what the if you're just going to bring but I think.
We're pretty well positioned if things do take a downturn in and probably in a good position given our cash and in our ability to generate income going forward to take advantage of it if things do turn down right to pick up assets at lower prices than we've been asked to pay over the last five or six years and we think.
Lot of these private companies are selling for more than they're worth and that's been frustrating to us.
Economy takes a downturn, we're looking forward to that opportunity.
And at the same time I don't see that right now in our in our business at all.
Okay.
You guys are helpful. There.
Currency headwind to revenue is there a way to think about the currency impact to the bottom line to adjusted EBITDA.
Yeah sure Scott its Alan here.
I had mentioned in his in his notes that we are fairly naturally hedged in that area, we operate in multiple currencies.
When when the U S. Dollar is strong to the Canadian dollar rate.
It actually benefits us it hurts us against the euro and the pound those things when I say that I at the EBITDA level. So those things tend to offset each other a little bit that said, we do watch currency, we had just under $2 million impact on the topline a minor impact on EBITDA was a small negative.
So we just continue to watch it and make sure that we are we don't go off that natural hedge too far so think of it as a fairly muted at the EBITDA level not immune to it but fairly muted.
Okay, and then and I know, there's already been a couple of questions about M&A, but like as you as it stands today with where the stock is what do you think is more likely.
Executing on the buyback or doing M&A.
Arthur.
We're always going to be acquisitive or at least for the foreseeable future, where we believe the winner in our space is going to.
Consolidate the space and put the assets together in the best way and we plan on being that Guy and.
I don't have any.
What's it all but it will be a trade off of one versus the other we're going to keep acquiring companies and.
We will keep the <unk> out there if we can if we see an opportunity to use some of that as well and.
Like what that that investment will be back to you.
Makes sense. Thank you guys.
Thank you.
From Barclays, We have Raimo, let Joe. Please go ahead.
Great. Thank you this is Jeremy on for Raimo So.
I wanted to ask about next CHP and you know as you mentioned, it's the first quarter of contribution could could you just speak a bit to.
Like how the integration is going overall and maybe some color on how the cost some business is trending thank you.
Thanks, Jeremy Yeah, no. It's great. It was in it and it's easier than most for us because they are in the exact same business, where we're in with the tape 86 filings and you know were one and two in the market and we just came together and.
It's been great for US we were able to go out and pick up even more customers are just in a very short period of time here and we have made.
Maybe medium term plans to to be able to consolidate.
Some of the data processing tools around type 86 filing and save ourselves some money in the long run.
So we're real pleased with the acquisition, we thought we were going to be real pleased with it like a lot of acquisitions, we're pretty sure it's going to work.
We were with this one for sure that it's going to work well.
Before we pull the trigger on them and so.
So far it's proven out to be that and then maybe even a little more so we're happy about it.
Awesome. Thank you.
Thank you.
From Laurentian Bank, we have Nick Agostino. Please go ahead.
Yes agreed.
I guess, just one quick comment which is to say add prints for the prepared remarks to sort of provide a lot of color on the business. So.
I appreciate that so my one question is just there's lots of talk about onshoring production as a result of the pandemic and just wondering if that situation were to happen should we see I guess a change in the mix of how product is transported maybe say more rail and <unk>.
Trucking versus.
Shipping our ocean and air if that were happening how does that impact your business with visa.
Just maybe the different pricing for each motive transportation would it be positive negative neutral any color there would be appreciated. Thanks.
Thanks, Nick.
First I don't know that I completely buy the yeah I understand it might happen in a few industries and I understand it's a it's a it's an interesting thing to talk about on the news.
Right.
Impaired to the to the to the world's shipping volume I stick to.
The products that are going to be near short so to so to speak.
Our.
A relatively small portion of that.
At the same time, just understand that most products get shipped around the world the parts get shipped around the world multiple times to ultimately get manufactured somewhere.
And so there's a lot of shipping that goes into making just about everything that we are looking at right now I'm looking at a bunch of desk chairs with computers and stuff like that.
You're probably looking at similar stuff, there's a lot of manufacturing a lot of shipping that goes into that and once it's made it has to get shipped all over the world. So when I hear that concept of we're gonna make stuff locally you'd build okay. First of all I don't buy that that that's going to be the bulk of the world.
Production I think it's going to be a relatively small fraction of it.
I think there's still going to be a ton of shipping all over the world to do that and if you move the location of where its made youre going to still have to ship. It all over the world just from a different location.
Certainly when stuff's made closer to the ultimate customer.
Customer of theirs, the shipping changes for it there's more truck and there's less ocean and air.
But most products are made that way, they're they're made somewhere then they're shipped all over the world what I do see happening more and more and I think it's probably going to happen with a lot more of the worlds.
Products is that.
They are going to be.
Produced in different locations around the world are not because they are trying to get into closer to the customers, but because they are trying to find cheaper.
Locations to do manufacturing in China is becoming more expensive right now.
And maybe more importantly, we're going to have a try to have a more diverse production capability.
Capability, if you have six plants in China, right now and that's where you produce everything.
A bunch of them are shut down because of COVID-19 restrictions.
Where do you think you're building the next plan, it's probably not going to be in China.
And you know, maybe you're going to the Philippines, Vietnam or somewhere else some other low cost jurisdiction not because.
You want to get closer to the consumer because you're probably still not going to get closer to the consumer he may want to find at a lower cost jurisdiction to producing and maybe even more importantly, you want to find a more diverse location of producing so that if theres a problem in one part of the world or in one country, you're not stuck with your entire production.
Shut down so I think that's maybe a a.
Maybe something that people would put focus on more and I think something that's a little closer to reality of what we see in our customer base.
Okay. I appreciate that color I will say back to your commentary I think we saw today Apple announcing production I think out of Vietnam trying to move away a little bit from China. So I think they're already equity your views. So I appreciate that and I'll pass the line.
Yeah, My pleasure and in fact, let me just comment on that because that's the start of this right and now it used to be or in fact, if you listened to past calls him when I talk about Yoyos just to pick up just to pick a silver product example.
That's what started in China, you know 2025 years ago right. You started the manufacturing that we went there first was the simple stuff and then people started to get more sophisticated and production in China and they started to move more and more sophisticated stuff over here to the point, where they were manufacturing iphones there.
Computer chips and things of that nature and now you are.
You know that Apple move you're starting to see you know, they're doing that in Vietnam and are in there.
Are we going to start to do it in other jurisdictions as well as China becomes more expensive and they try to diversify their production capabilities.
I'm, sorry, I've just added to that operator I can take the next question.
Thank you from Canaccord.
Accord Genuity, we have Robert Young please go ahead.
Hi, good evening.
Okay.
The China shutdown for them there.
A couple of big ones in Shenzhen, and Shanghai kind of.
Across the.
For two quarters now.
I am sure you are considering part of it in the calibration, but I was wondering if you can just maybe summarize the positive and negative puts and takes around that type of.
Im sure Theres a lot of companies and your customers are looking at alternate strategies, but then theres volume impact I'm, just trying to get a sense of.
How does that progressive how does it impact you guys.
It impacted our customers because they some of the products that they wanted to produce or you know I've got shut down in China.
Notice in the paper and then the last day or two they are opening back up right now so I think.
Theres still go into a zero COVID-19 approach, but they are opening the opening things back up and I think you're going to start to see in the coming days and weeks as clients start to open back up.
We did not see it in our network and you can see the results that we just turned in there there are excellent.
As good as we could have hoped for.
And I think Ah Ah.
We didn't see the impact of China, having some problems with some shutdowns one because it didn't go on for that long.
And two maybe more importantly, there was such a backlog coming into it that you know that.
Carriers.
We get paid by the shipment for stuff carriers Terry.
And they were already full so you know what it did was probably helped by down some of that backlog.
That we had out there for months, but I think youre going to see it go right back up right now and that's what I like this there's going to be the backlogs will increase if what I'm reading the newspapers true with China opening up.
Uh huh.
So there's still a backlog right now and what those plants open back up to give you a lot more orders going into to fulfill shipments that didnt get ordered three or four or five weeks ago, because the plants were shut down.
You mentioned the dynamic I don't know exactly whats going to happen, but you just heard my guests and a little its efficacy.
Okay. That's really helpful. And then just maybe a quick summary of what Youre seeing out there in the pricing environment.
Logistics customers have you said in the past.
They're doing really well the pricing environment's very strong for them or are you still.
They still enjoying that environment is it changing.
I think though I mean the days you were hearing are what was it like November December last year, you're hearing in our four times the ocean for it I think it's come down from there.
But it's still elevated for sure in all modes are certainly Arab Aricent truck, we don't charge based on their prices. So it doesn't matter to us. So much it's helpful for us when they run a healthy and profitable businesses and I think they continue to do that right now.
They're all having a pretty good time of it at the moment because there's only so much capacity in.
That lets them raise their prices up and when they're in a good position that usually is helpful to us.
Great.
Got you.
I think so I think what people will people get more money in their pockets. They go what should I do with that and.
One of the things you hear us talking about it in our business.
One of the things you do with that and say, let me invest it to make this a better business in the long run and one of the main places people make investments in technology and I you know, there's not a there's not a head of supply chain in the world right now.
Not able to walk into a CEO and say I want to spend more money to improve our supply chain.
That question used to.
Was answered with or get out of my office and here. We are five years later and it's it's a short whatever you want to spend it.
It's a it's a huge problem when we need to do something about it.
And so that really helps guys like us that cell technology to them, which is seen as one of the most cost effective ways to make an investment in your supply chain.
Alright, well, thanks for taking the questions.
Thank you Robert.
And we have no further questions at this time.
Great. Thanks, operator, and thanks, everyone. We look forward to reporting back to you on Q2 in September and otherwise have a great night.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for joining you may now disconnect.
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Yes.
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