Q2 2024 The Descartes Systems Group Inc Earnings Call

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Good afternoon, ladies and gentlemen, and welcome to the Descartes system Group quarterly results Conference call. At this time all lines are in a listen only mode. Following the presentation. We will conduct a question and answer session you may have.

Starwood now to queue up for your questions.

Any time during this call you required immediate assistance. Please press star zero for operator. This call is being recorded on Wednesday September six 2023, I would now like to turn the conference over to Scott Pagan. Please go ahead.

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

Portions of today's call other than historical performance include statements of forward looking information within the meaning of 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 geopolitical and economic uncertainty on our business and financial condition Descartes.

<unk> operating performance financial results and condition Descartes 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.

<unk> 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 in the section entitled certain factors that may affect future results in documents filed and furnished with the Securities and Exchange Commission, The Ontario Securities Commission and other securities commissions across Canada, including our management's discussion and analysis filed today.

We provide forward looking statements solely for the purpose of providing information about management's current expectations and plans relating to the future. 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.

With that let me turn the call over to Ed Hey, Thanks, Scott and welcome everyone to the call. We had an excellent first half of the year with record financial results. This past quarter. We're excited to go over those with you and give you some perspective about the business environment, We see right now, but first let me give you a roadmap for this call I'll start by hitting some highlights of last quarter on some aspects.

And how our business performed I'll, then hand, it over to Alan who will go over the Q2 financial results in more detail I will then come back and provide an update on how we see the current business environment and how our business is calibrated as we enter Q3.

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

So lets get started by looking at the quarter that just ended July 31 <unk>.

Key metrics. We monitor include revenues profits cash flow from operations and returns on our investments.

For this past quarter, we again had record performance in each of those areas total revenues were up 17% from a year ago with service revenues up almost 20% net income and EPS were up 23, and 19% respectively income from operations was up 17%, while adjusted EBIT was up 12%.

And we generated $52 million of cash from operations, representing 86% of adjusted EBITDA.

At the end of the quarter, we had $227 million of cash and we were 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. We believe a company like ours is well positioned to continue to thrive in market conditions like these because we've got good organic growth plus the experience in capital capacity to execute on acquisitions.

We had a good quarter of organic growth in our core services revenues. So I wanted to highlight some of the drivers of that.

The first is just real time visibility just a refresher on this a large part of shipping is people moving goods on other people's assets, whether they'd be planes trucks rail where boats. There may also be intermediaries involved in the range of the shipments are making required filings and Korean including freight brokers third party logistics providers.

And customs brokers with all those assets most of the transportation data sources location and parties involved it can be challenging to know where shipment is knowing the location of a shipment and when that is going to arrive as critical to serving the customer and running your business, our visibility and transportation management solutions, which include macro point alright.

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These solutions contributed to solid growth in the quarter for reasons, including.

First our solutions are better attracting loads customers pay based on the number of loads that are tracked by our solutions. So we're aligned with our customers on doing what we can to connect as many carriers and intermediaries as possible to get location information on loans, we've launched a new carrier self connect tools that have helped our customers get even more locations coverage across.

Their network of carriers. We've also made investments in customer success personnel to help maximize the number of loads with full visibility.

The outcome has been a greater percentage of loads tracked better data happier customers and strong growth.

Second issue is we're winning more deals we're seeing strong demand for visibility real time visibility market is not without competitors. However, we're having good success, securing new customers and welcoming back some old ones because our commitment to tracking the success, we have a broader network that's across more modes of transportation and our competitors and that's been recognized.

That is by customers as they choose their visibility solutions for the future. Our customers also take comfort in our reliability and there we're operating a business they know will be around to serve them for the long term.

And the third issue of visibility is embedded in more Descartes solutions, some customers come to us just for visibility, but others are using the card solutions and are looking to have visibility as an add on to what they're already doing each time, we expand our solution set including by way of acquisition. We look for how we can best visibility into the new solutions to providing them.

As your mechanism for our customers to track their lows, we believe that our best source of business is often our existing expansion and support customer base. So we are making dedicated efforts to make visibility easier for those customers.

Second Big issue is our routing scheduling mobile solutions.

That contributed to our revenue success this quarter.

Solutions are principally kind of for when you're managing your own fleet of vehicles, rather than hiring space on other People's vehicles. We believe were the most experienced company in.

This market and have the premier routing and scheduling solutions to offer.

Our customers in this area of phase III challenges, including rising labor cost challenging.

Challenges in securing data rising fuel prices and customer demands for accurate delivery windows. This is contributing to strong demand with new customer projects and existing customers returning.

Returning their solutions with <unk>.

Also been innovative in this market, which has contributed to our market leadership. We recently launched a new generation route planning solution that has been the outflow of customers and we've made investments in our solutions through acquisitions with safety solutions for ground cloud and final mile delivery tracking from locals all factors that contributed to good growth in.

This area.

The third area is global trade intelligence 11, again, we saw good growth in the global trade intelligence solutions and our business those solutions generally fall into three buckets. The first bucket is competitive intelligence or data mining solutions provides information on trade flows historical classification with goods and other logistics and supply chain Intel.

This information can be used to help make decisions about your own supply chain, but also to see how competitive you are with other company's supply chains recent attention on the efficiency of supply chain has helped drive demand in this area. In addition, our data is front and center in many leading business publications as a source for data about logistics and supply chain.

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The second bucket is tariff.

And duty data to make intelligent shipping decisions.

Right up to date data about tariff and duty rates and rules around the world, which can be used by leading global trade management systems to help run international supply chains.

And an increased level of changes in tariffs and duties principally as a consequence of geopolitical tensions and trade disputes. This has changed the design of many supply chains and has increased the importance of having accurate and timely information like ours.

The third bucket is compliance these solutions help our customers make sure. They are not shipping things to people is should it be maybe just specific people to specific countries to specific geographies or in some cases specific goods being shipped these restrictions have expanded and increased in complexity as the geopolitical tensions have increased and <unk>.

Views have emerged in addition governance and the larger economies like United States have increased the resources dedicated to insurance.

During compliance and as loving substantial financial penalties on firms not taking compliance seriously.

We've continued to see good demand for these compliance solutions as a result.

The next area is ecommerce and this continues to be a growing market and part of our business. We've made investments into these solutions with additional leadership and also by way of acquisition with our purchase of Xps within the past year.

The parcel market has seen some recent challenges with labor channels at UBS changing service preferences at the U S Postal service and Fedex restructuring. However, our share of the market continues to increase as we work with partners to find the most efficient way for our customers to get their deliveries made so good acquisition inorganic.

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We're very happy with how the business performed in the quarter and in particular with the organic growth. The business was able to produce a few comments on our two most recent acquisitions additions.

First of all in Roswell.

Combined with granted clouded February ground cloud was particularly strong in safety and compliance solutions to help identify safety incidents based by drivers and provide responsive and targeted video training on challenges driver space.

They also help companies manage delivery obligations as they have as they have as subcontractors to other delivery brands such as Fedex. This was one of our larger acquisitions and when we first combined we indicated we anticipated some impact overall.

On our adjusted EBIT margin, which we saw in Q1.

We've made good progress on integration and actually saw a slight uptick in aggregate adjusted EBIT margin. This quarter. So we are hoping that bodes well for the future. Finally, Fedex has recently announced that it may increase the number of shipments that will move to the independent contractor network. So we saw some good initial improved demand for that.

Second the acquisition of locals. This business provides final mile visibility on deliveries. So we used to watch and your driver for delivery vehicles come down the street to your house locals technology replicate that experience for delivery of other goods. This was a key investment in our routing and scheduling mobile space something our own customers need is a ctrip.

A better delivery experience for their own customers. This investment was critical to some of our new customers trusting their fleet.

Management to Descartes.

So let me just summarize as I hand, it over to Alan to give a full financial details on the quarter. We had record financial results. The business performed well and we believe that's a good reflection of the value that our customers continue to get from our solutions and the hard work that our team continues to put in for our customers. We ended the quarter with 220.

$7 million in cash $350 million in available credit and a market opportunity, where we continue to grow the business for our customers both organically and through acquisition. We remain focused on profitable growth. So that we continue to ensure our customers have a secure stable and growing technology partner that can help them.

What their challenges well into the future.

Many thanks to all of the Descartes team members for everything they've done to contribute to a great quarter and continue to have our business in an enviable position for future success.

With that I'll turn the call over to Alan to go through our Q2 financial results in more detail.

Hey, Thanks, Ed as indicated I'm going to walk you through our financial highlights for our second quarter, which ended on July 31.

We are pleased to report record quarterly revenue of $143 $4 million. This quarter, an increase of 17% from revenue of 123.0 million in Q2 last year.

While revenue from new acquisitions, including the ground cloud acquisition completed earlier in the year is that just mentioned contribute nicely to this growth similar to the first quarter and really the last several years growth in revenue from new and existing customers from our existing solutions with the main driver in growth this quarter when compared to last year.

Looking further at our numbers our revenue mix in the quarter continued to be very strong with services revenue, increasing 19% to $130 7 million or <unk>, 91% of total revenue compared.

Compared to $109 4 million or 89% of total revenue in the same quarter last year.

Services revenue was also up nicely sequentially, increasing just over 5% from the first quarter. This year as we continue to help our customers expand with new services and additional volumes.

Removing the impact of recent acquisitions on a like for like basis, we would estimate that our growth in services revenue from new and existing customers would have been just over 9% for the quarter when compared to the same quarter last year similar to the results. We saw in Q1 this year.

License revenue came in at $1 4 million or just 1% of revenue in the quarter down from license revenue of $3 3 million in the second quarter last year as we had a couple of larger than normal license deals close in the second quarter last year, while professional services and other revenue came in at $11 3 million or 8% of revenue.

Up approximately 10% from revenue of $10 3 million in Q2 last year, mainly this was mainly as a result of recent acquisitions, including ground cloud.

Gross margin for the second quarter was 76% of revenue for the quarter pretty consistent with gross margins, we realized both in the first quarter of this year and the second quarter last year.

Operating expenses increased by approximately 19% in the second quarter over the same period last year and this was primarily related to the impact of recent acquisitions, including ground cloud, but also from additional labor related costs as we continue to invest in various areas of our business to prepare for future growth.

So as a result of both revenue growth offset slightly by our planned cost increases in the business. We continue to see strong adjusted EBITDA growth of 12% to a record $66 million up from 54.0 million in Q2 last year.

Operator: Good afternoon, ladies and gentlemen and welcome to the Descartes System Group's quarterly results conference call. At this time, all lines are now listened on the emode. Following the presentation, we will conduct a question and answer session. You may press start one now to queue up for questions. If at any time during this call, you require immediate assistance please press star zero for the operator. This call is being recorded on Westay September 6th, 2023.

As a percentage of revenue adjusted EBITDA came in at 42, 3% of revenue down from 30, 30 43, 9% of revenue in Q2 last year and as mentioned in Q1. This is 11 again, primarily related to the acquisition of ground cloud earlier in the year as it came into Descartes with much lower EBITDA ratios in the rest of our biz.

Scott Pagan: I would now like to turn the conference over to Scott Pagan. Please go ahead. Thanks and good afternoon everyone. Joining me in the call today are Ed Ryan, CEO and Allan Brett, CFO. I trust that everyone has received a copy of our financial results press release that was issued earlier today.

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We should note that our adjusted EBITDA ratio as a percentage of revenue did increase slightly in Q2, when compared to Q1 of this year as we've already started to work at improving the profitability on the ground club business consistent with our plans as Ed mentioned earlier.

Scott Pagan: The portions of today's call of an 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 geopolitical and economic uncertainty on our business and financial conditions. Descartes operating performance, financial results and conditions, Descartes 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 acquisitions and acquisition strategy, cost reduction and integration initiatives and other matters that may constitute forward looking statements.

As a result of the above the above net income under GAAP came in at $28 1 million or <unk> 32 per diluted common share in the second quarter, an increase of 23% from net income of $22 9 million or <unk> 27 per diluted common share in the second quarter last year.

If we look at our operating results for the first half of the year. The trends stay the same revenue came in at $280.0 million, an increase of 17% from revenue of $239 4 million in the first six months last year.

For the six months year to date adjusted EBITDA came in at $118 3 million or <unk> 42, 3% of revenue up just over 12% from $105 2 million or 43, 9% of revenue last year.

Scott Pagan: 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 and different materially from the anticipated results, performance for achievements implied by such forward looking statements. These factors are outlined in the press release and in the section entitled certain factors that may affect future results and documents filed and furnished with the Securities and Exchange Commission. The Ontario Securities Commission and other Securities Commission across Canada including our management discussion and analysis filed today.

Net income for the six month year to date period increased 25% coming in at $57 5 million or <unk> 66 per diluted common share compared to 46.0 million or <unk> 53 per diluted common share in the first half of last year again with higher with higher operating profits being partially offset by.

Higher tax expense.

With these strong operating results and continued strong accounts receivable collections cash flow generated from operations came in at 52.0 million or 86% of adjusted EBITDA in the second quarter, an increase of 12% from operating cash flow of $46 4 million or also 86% of adjusted EBITDA.

Scott Pagan: We provide forward looking statements solely for the purpose of providing information about management's current expectations and plans relating to the future. Your caution that such information may not be appropriate for other purposes. We don't undertake or accept any obligation or undertaking to release publicly any updates or revisions to any forward looking statements to reflect any change in our expectations or any change in events, conditions, assumptions or circumstances on which any such statement is based, except as required by law.

In the same quarter last year.

For the six months year to date operating cash flow has been $109 million or <unk>, 85% of our adjusted EBITDA up 11% from $98 million in the first half of last year, and we Shouldnt mentioned as always going forward. We expect to continue to see strong cash flow conversion and generally expect cash from operations.

Scott Pagan: And with that, let me turn the call over to Ed.

Ed Ryan: Ed, thanks to God and welcome everyone to the call. We had an excellent first half of the year with record financial results this past quarter. We're excited to go over those with you and give you some perspective about the business environment we see right now.

To be between 98% to 90% of our adjusted EBITDA in the periods ahead subject to any unusual fluctuations fluctuations or future changes in contingent consideration payments that we'll discuss later as I comment on our outlook for the second half of the year.

Ed Ryan: First, let me give you a roadmap for this call. I'll start by hitting some highlights of last quarter and some aspects of how our business performed. I'll then hand it over to Alan who will go over the Q2 financial results in order to tell. I'll then come back and provide an update on how we see the current business environment and how our business is calculated as we enter Q3.

So overall, we're 11 again pleased with our operating results in the quarter as strong organic growth and solid performance from our recent acquisitions resulted in 17% growth in revenue and a 12% increase in adjusted EBITDA for the quarter.

Ed Ryan: And then we'll open it up to the operator to coordinate the Q&A portion of the call. So let's get started by looking at the quarter that just ended July 31st. He met her to be a monitor and through revenues, profits, cash flow from operations, and returns on our investments. For this past quarter, we again had record performance in each of those areas. Total revenues were up 17% from a year ago with service revenues up almost 20%.

If we turn our attention to the balance sheet, our cash balances totaled $227 million at the end of July an increase of approximately $45 million from the end of the first quarter in April .

While we generated $52 million in cash flow from operations. We also used $6 million of our existing cash balances to complete and earn outs or contingent consideration payment on a past acquisition, while also adding $2 million in capital additions during the quarter.

Ed Ryan: Net income and EPS were up 23% and 19% respectively. Income from operations was up 17% while adjusted EBIT that was up 12%. And we generated 52 million dollars of cash from operations representing 86% of adjusted EBIT. At the end of the quarter, we had 227 million dollars of cash, and we were debt-free with an undrone 350 million dollar on a credit. We remained well capitalized, cash-generating, debt-free, and ready to continue to invest in our business. We believe a company like ours is well positioned to continue to thrive in market conditions like these because we've got good organic growth, plus the experience and capital capacity to execute on acquisitions.

As a result, we currently have our 227 million of cash as well as a $350 million line of credit available under our credit facility available to deploy towards future acquisitions.

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

As we turn our attention to the second half of fiscal 2024, we should note the following.

After incurring approximately $3 4 million in capital additions in the first half of the year, we expect to incur approximately $2 million to $3 million additional capex capital additions for the balance of the year.

Ed Ryan: We had a good quarter of organic growth in our core services revenues, so I wanted to highlight some of the drivers of that. The first issue is real-time visibility. Just a refresher on this, a large part of shipping is people moving goods on other people's assets, whether they be planes, trucks, rail, or boats. There may also be intermediaries involved in arranging the shipments or making required filings, including freight workers, third party logistics providers, and customs workers.

At this point, we currently expect the second half of the year, we will use approximately $22 $8 million of our cash to pay additional contingent contingent consideration payments on two acquisitions.

While the entire $22 8 million.

Estimated contingent consideration to be paid is now accrued for on our balance sheet $12 $7 million of this balance relates to the portion of the earn out arrangements that were accrued for at the time of the acquisition and will be reflected in cash flow from financing activities.

Ed Ryan: With all those assets, modes of transportation, data sources, locations, and parties involved, it can be challenging to know where a shipment is, and knowing the location of a shipment, and when that's going to arrive, it's critical to serving your customer and running your business. Our visibility and transportation management solutions, which include macropoint, are increasingly important for our customers in this area. These solutions contribute to solid growth in the quarter for reasons including, first, our solutions are better at tracking loads, customers pay based on the number of loads that are tracked by our solutions, so we're aligned with our customers on doing what we can to connect as many carriers and intermediaries as possible to get location information on loads.

While the remaining balance of approximately $10 million will be reflected in cash flow from operating activities. When paid as a result of these acquisitions have been better than our initial expectations.

After incurring amortization costs of $32 million in the first half of the year, we expect amortization expense will be approximately $29 8 million for the second half of the year with this figure being subject to adjustment for foreign exchange changes and future acquisitions.

Our income tax rate for the second quarter came in at approximately 27% of pretax income, which is right around our blended statutory tax rate.

Looking into the second half of the year. We currently expect our tax rate will continue to be in the range of 25% to 30% of our pre tax income or somewhere either side of our statutory blended rate.

Ed Ryan: We've launched new carrier self-connectables that have helped our customers get even more location coverage across their network of carriers. We've also made investments in customer success personnel to help maximize the number of loads with full visibility. The outcome has been a greater percentage of loads tracked, better data, happier customers and strong growth.

However, as always we should state that our tax rate may fluctuate quarter to quarter from onetime items that may arise as we operate internationally across multiple countries and finally after incurring stock based compensation expense of $7 4 million in the first half of this year. We currently expect stock compensation will be approximately $9 3 million for the balance of the year.

Ed Ryan: Second issue is we're winning more deals and seeing strong demand for visibility. The real-time visibility market is not without competitors. However, we're having good success at securing new customers and welcoming back some old ones because our commitment to tracking the success. We have a broader network that's across more modes of transportation than our competitors, and that's being recognized by customers as they choose their visibility solution for the future. Our customers also take comfort in our reliability and they're operating a business that they know will be around certain for a long time.

Subject to any forfeitures of stock options or share units and with that I will turn it back over to Ed to wrap up with some closing comments as well as our baseline calibration for Q3, Hey, great. Thanks Alan.

Q3, a month and we remain confident in our business, but cautious about the broader economic circumstances in various statistics and commentary relating to the supply chain and logistics markets.

On the broader economic progress continued high interest rates pervasive conflict in the Ukraine labor availability challenges in various recessionary pressures and economic discussion.

Ed Ryan: The third issue is visibility is embedded in more decarct solutions. Some customers come to us just for visibility, but others are using decarct solutions and our looking at visibility as an add-on to what they're already doing. Each time we expand our solution set, including by way of acquisition, we look for how we can embed visibility into the new solutions to providing easier mechanism for our customers to track their loads. We believe that our best source of business is often our existing expansive and supportive customers, for the customer base, so we're making dedicated efforts to make visibility easier for those customers.

And the supply chain and logistics market, Here's a few things worth noting.

First is shipping volumes shipping volumes across the various modes of transportation are below their pandemic highs and more closely tracking pre pandemic trends. In addition, there are some current challenges such as the reduced flow through the Panama canal caused by low water levels that could impact shipping alternatives.

The second is a retailer inventories there's high levels of retailer inventories potentially impacting fall replenishment cycles inventories aren't decreasing imply and retailers are matching demand with replenishment and potentially carrying more safety stock.

Ed Ryan: Second big issue is routing the scheduling mobile solutions and it's a big contributor to our revenue success this quarter. These solutions are principally kind of for when you're managing your own fleet of vehicles rather than hiring space on other people's vehicles. You believe we're the most experienced company in this market and have to premiere routing the scheduling solutions to offer. Our customers in this area have faced recent challenges including rising labor costs, challenging challenges in secured data, rising fuel prices, and customer demands for accurate delivery windows.

The third is consumer demand there is uncertain consumer demand coming into this peak buying season in particular, it's uncertain, how spending habits will split between durable goods and services and experiences overall U S. Consumer spending is still high but theres caution as we approach the holiday season.

The forces some capacity has left the market. The U S truck market has seen some capacity come out of the market with the recent bankruptcy of yellow.

Ed Ryan: This is contributed to strong demand with new customer projects and existing customers returning retuning their solutions. We've also been innovative in this market which is contributed to our market leadership. We recently launched a new generation route planning solution that is being built on Apple customers. And we've made investments in our solutions through acquisitions, safety solutions from ground cloud, and final model delivery tracking from locals, all factors that contributed to good growth in this area.

Market continues to adjust the post pandemic volumes and it's possible more capacity will leave and are we seeing capacity adjustments with less reliance on pure air freighters.

With additional trade restrictions there continue to be new restrictions announced principally relating to the war in Ukraine and in connection with burgeoning trade tensions between the U S and China.

Ed Ryan: The third area is global trade intelligence. Once again we saw good growth in the global trade intelligence solutions in our business. The solutions generally fall into three buckets. The first bucket is competitive intelligence. Our data mine solutions provide information on trade flows, historical classification of goods, and other logistics and supply chain intelligence. This information can be used to help make decisions about your own supply chain, but also to see how competitive you are with other company supply chains.

Some new restrictions have been announced with respect to investment and trade and chip manufacturing.

And quantum technologies. These restrictions can be positive for our global trade intelligence intelligence business, but can also impact freight volumes.

There is also the labor challenges labor negotiations have created challenges for UBS West coast ports, and yellow and May impact other unionized supply chain players.

Next theres some logistics participants planning for a multiple a muted peak season general commentary from logistics participants is bracing for lower volumes in the second half of the year with some companies taking proactive cost reduction activities. This is illustrative of the pervasive sentiment of caution.

Ed Ryan: Recent attention on the efficiency of supply chains is helped to our demand in this area. In addition, our data is front and center and many leading business publications as a source for data about logistics and supply chain, which has also been a good demand driver for us. The second bucket is tariff and duty data to make intelligent shipping decisions. We provide up to date data about tariff and duty rates and rules around the world, which can be used by leading global trade management systems to help run international supply chains.

And then finally distribution of parcel volumes among larger players is uncertain.

As I mentioned earlier Ups's, some labor challenges, which May result in some parcel volume cautiously being redirected to other players Fedex has publicly indicated it will be moving more pastoral parcel volume to its ground division with independent contractors and away from its express division using employees.

Ed Ryan: We've seen an increased level of change in tariff and duties, principally as a consequence of geopolitical tensions and trade disputes. This has changed the design of many supply chains and has increased the importance of having accurate and timely information like ours. The third bucket is compliance. These solutions help our customers make sure they're not shipping things to people they shouldn't be. This may be to specific people, to specific countries, to specific geographies, or in some cases specific goods being shipped.

U S. Postal service has implemented various new service adjustments as it seeks to compete and Amazon has announced the three entering the parcel delivery business. All of this combined to provide a very competitive environment with uncertainty as to how the volumes will shake out among the various providers.

So those are some of the things we're hearing from our customers and seen in our business things that also on former calibration for the quarter. Our business is designed to be predictable and consistent we believe the 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.

Ed Ryan: These restrictions have expanded and increased in complexity as the geopolitical tensions have increased and trade disputes have emerged. In addition, governments in the larger economies like the United States have increased the resources dedicated to ensuring compliance and have levies substantial financial penalties and firms not taken compliance seriously. We've continued to see good demand for these compliance solutions as a result.

Our long term plan is for our business to grow adjusted EBITDA, 10% to 15% annually, we grow through a combination of organic growth and acquisitions.

Ed Ryan: The next area is e-commerce. This continues to be a growing market and part of our business. We've made investments into these solutions with additional leadership and also by way of acquisition with our purchase of XPS within the past year. The parcel market has seen some recent challenges with labor challenges that UPS changing service preferences at the U.S. Postal Service and FedEx restructuring. However, our share in the market continues to increase as we work with partners to find the most efficient way for our customers to get their deliveries made. So good acquisition and organic contribution in the quarter.

Pick 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 and customs authorities. When we over perform we try to invest that over performance back into our business, we focus on <unk>.

<unk> revenues in establishing relationships with customers for life.

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

In our Q2 report we provided a comprehensive description of baseline revenues baseline calibration and their limitations.

Ed Ryan: We're very happy with how the business performed on the quarter, and in particular with the U.S. Canada growth, the business was able to produce a few comments on our two most recent acquisition additions.

As of August one 2023, using a foreign exchange rates of 75 to the Canadian dollar.

Ed Ryan: The first is on ground cloud. We combine with ground cloud in February, ground cloud is particularly strong in safety and compliance solutions. They help identify safety incidents based by drivers and provide responsive and targeted video training on challenges drivers' space. They also help companies manage delivery obligations as they have as subcontractors to other delivery brands such as FedEx. This was one of our larger acquisitions and when we first combined we indicated we anticipated some impact overall on our adjusted EBITDA margin, which we saw in Q1. We made good progress on integration and actually saw a slight uptick in aggregate adjusted EBITDA margin in this quarter.

$1 10 to the euro and $1 28.

Great Britain pound, we estimate that our baseline revenues for the third quarter of 2024 or approximately $124 million and our baseline operating expenses are approximately $78 million.

We consider this to be our baseline adjusted EBIT calibration of approximately $46 million for the third quarter of 2024 or approximately 37% of our baseline revenues as at August one 2023.

We continue to expect to operate in an adjusted EBITDA operating margin range of 40% to 45% our margin we're very in that range, given such things as foreign exchange movements and the impact of acquisitions as we integrate them into our business last quarter ground ground cloud impacted our margin. While we started the integration work to bring it up to our desired.

Ed Ryan: So we're going to start off with the future. Finally FedEx has recently announced that it may increase the number of shipments that will move to the independent contractor network. So we saw some good initials and improved demand for that.

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Ed Ryan: Second, acquisition is locals. This business provides final mile visibility on deliveries. So if you're used to watching your Uber driver or food delivery vehicle come down the street to your house, locals technology replicates that experience for delivery of other goods. This was a key investment in around in scheduling mobile space. Something our own customers need is to seek to provide a better delivery experience for their own customers. This investment was critical to some of our new customers trusting their fleet management to their car.

Integration activities are going well, we've already seen some margin improvement in Q2, and we're planning for some additional margin improvement going forward absent any other acquisition activity.

Got lots of exciting things planned in our business and remains uncertain broader economic and supply chain environment. What we believe our proven track record of execution solid capital structure and customer focus will serve us well 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.

Ed Ryan: So let me just summarize the danger over to Allen to give a full financial details on the quarter. We have record financial results, the business performed well and we believe that's a good reflection of the value that our customers continue to get from our solutions and the hard work that our team continues to put in for our customers. We ended the quarter with $227 million in cash, $350 million in available credit, and a market opportunity where we continue to grow the business for our customers both organically and through acquisition.

Operator, I'll turn it over to you for questions.

Thank you, ladies and gentlemen, we will now conduct the question and answer session. If you have a question. Please press star followed by the number one on your Touchtone phone.

You will hear at the <unk> prompt acknowledging your request.

If you would like to cancel your request please press star two.

Please ensure you look you had said that youre seeing us carefully before pressing any key.

First question comes from the line of Matt Pfau from William Blair. Your line is now open.

Ed Ryan: We remain focused on profitable growth so that we continue to ensure our customers have secure stable and growing technology partner that can help them with their challenges well in the future. Many thanks to all the Descartes team members for everything they've done to contribute to a great quarter and continue to have our business in an enviable position for future success.

Yes.

Hey, great. Thanks, guys.

I wanted to follow up on some of the comments you made about potential headwinds in the back half of the year here.

How should we think about those in terms of the potential impact on your business part of your business is transaction based but it's not as simple as just being tied to shipping volume. So how do we think through the potential puts and takes there in terms of the impact on your revenues.

Allan Brett: That will turn the call over to Allen to go through our Q2 financial results in more detail.

Allan Brett: Hey, thanks Ed. As indicated, I'm going to walk you through our financial highlights for our second quarter, which ended on July 31st. We are pleased to report record quarterly revenue of $143.4 million this quarter and increase of 17% from revenue of $123.0 million in Q2 last year. While revenue from new acquisitions, including the ground cloud acquisition completed earlier in the year as Ed just mentioned, contribute nicely to this growth. Similar to the first quarter and really the last several years, growth and revenue from new and existing customers from our existing solutions with the main driver and growth this quarter when compared to last year.

As we've been talking about it for a year or two now we have a lot of things going very well in our business.

Maybe it will be going better.

At some point in the future.

Transportation transactions went down we don't know what the future's going to Brian We're just running the business.

<unk>.

Looking at what's going on in the market and go Hey, there's some uncertainty out there so we'll see what happens.

As you've seen in the past tariff transportation transactions have gone down and we still performed very well.

We do that because we sell a lot of software outside of that 60% of our recurring revenues outside of transaction base volume and even in the transaction space, we tend to be.

Allan Brett: Looking further at our numbers, our revenue mix in the quarter continued to be very strong with services revenue increasing 19% to 130.7 million or 91% of total revenue compared to 109.4 million or 89% of total revenue in the same quarter last year. Service's revenue was also up nicely sequentially, increasing just over 5% from the first quarter of this year as we continue to help our customers expand with new services and additional volumes.

Picking up more volume over the course of a quarter or a year because our customer.

Customers are doing more business with us and as a result.

We ended up doing pretty well even in the face of the industry having.

Having a lackluster time, so we'll see what happens I don't know whats going happen in the rest of the year.

We've heard different things safety.

Same stuff, you're probably reading the paper, we'll see what happens, but we like our chances either way.

Allan Brett: Removing the impact of recent acquisitions on a like-for-like basis we would estimate that our growth in services revenue from new and existing customers would have been just over 9% for the quarter when compared to the same quarter last year, similar to the results we saw at Q1 this year. License revenue came in 1% 1.4 million or just 1% of revenue in the quarter down from license revenue of 3.3 million in the second quarter last year as we had a couple of larger than normal license deals close in the second quarter last year.

Great and just wanted to follow up on the macro point you called out that that's been an area of strength and performing well.

In a trucking environment that was oversupplied.

As trucking capacity coming out of the system potentially impact that is that anything material to think about.

Well it's interesting.

Actually one of the areas I think about when I made the comment a minute ago macro point.

<unk> to grow in a.

In a relatively flat.

Allan Brett: While professional services and other revenue came in 11.3 million or 8% of revenue, up approximately 10% from revenue of 10.3 million in Q2 last year, this was mainly a result of recent acquisitions including ground cloud. Growth margin for the second quarter was 76% of revenue for the quarter, pretty consistently growth margins we realized both in the first quarter this year and the second quarter last year. Operating expenses increased by approximately 19% in the second quarter over the same period last year and this was primarily related to the impact of recent acquisitions including ground cloud but also from additional labor related costs as we continue to invest in various areas of our business to prepare for future growth.

Truck environment.

Because it continues to pick up more and more customers or more volume from our competitors I went over that and some of the prepared comments on the call today, but.

Macro points, a big beneficiary of that is as people realize the importance of having a network and the value that over a flashy application because we can track more loads more and more customers are.

Are settling with the car because they are saying hey, that's what's most important.

My ability to put in 100 loads will be able to track.

<unk> low nineties.

Tonnage of those loans is much more important than that.

The visibility application amusing myself most of the time, they're not even using an application and look at these things.

Allan Brett: So, as a result of both revenue growth off-slet slightly by our planned cost increases in the business, we continue to see strong adjusted EBITDA growth of 12% to a record 60.6 million up from 54.0 million in Q2 last year. As a percentage of revenue, adjusted EBITDA came in at 42.3% of revenue down from 43.9% of revenue in Q2 last year and as mentioned in Q1, this is once again primarily related to the acquisition of ground cloud earlier in the year as it came into day card with much lower EBITDA ratios than the rest of our business.

Great. Thanks, guys for taking my questions I appreciate it.

Hey, Thanks, Matt.

Your next question comes from the line of Paul paper from RBC. Your line is now open.

Alright, thanks, so much good afternoon.

On the earn outs.

Paul in the past you, having a degree of earn out whats changed now with lots of several acquisitions that are leading to these earn outs versus acquisition.

Yes.

Yes, Thanks for the question Andrew Youre right.

Several of the deals we've done in the past couple of years have done that I think it's.

Allan Brett: We should note that our adjusted EBITDA ratio as a percentage of revenue did increase slightly in Q2 when compared to Q1 of this year as we've already started to work at improving the profitability on the ground cloud business consistent with our plans as Ed mentioned earlier. As a result of the above net income under gap came in at 28.1 million or 32 cents per diluted common share in the second quarter, an increase of 23% from net income of 22.9 million or 27 cents per diluted common share in the second quarter last year.

There was a.

You probably heard me talk about it in the past calls a rebalancing going on where everything was selling for high dollar volumes as everyone was booming coming out of the pandemic and when that started to slow down.

Companies were finding it hard to get people to pay up for acquisitions in an earn out is one way to bridge that gap. We've used it effectively a few other times its not our really our first choice would rather just pay cash for something and own the asset outright but.

When there is.

Let's say dispute about what the fair prices for something.

Allan Brett: If we look at our operating results for the first half of the year, the trends stayed the same. Revenue came in at 280.0 million an increase of 17% from revenue of 239.4 million in the first six months last year. For the six months year to date, adjusted EBITDA came in at 18.3 million or 42.3% of revenue up just over 12% from 105.2 million or 43.9% of revenue last year. Net income for the six month year to date period increased 25% coming in at 57.5 million or 66 cents per diluted common share compared to 46.0 million or 53 cents per diluted common share.

We've used them to get over that hurdle and quite effectively most of the time or in fact every time.

We have an earn out in a process.

We're very happy for that for that acquisition to get the earn out because that.

That usually means where we bought a business is doing very well and probably going to do very well for us in the future. So.

We've used it it's Brian our first choice, but certainly something we've done when we pick it as appropriate.

And then shifting to one of your more recent acquisitions.

Around cloud.

Mentioned that Youre seeing.

The integration go well on margin expansion.

Do we think about the long term margin profile at that business. I mean, you can get it up to the company operating margin profile.

Allan Brett: Again, with higher operating profits being partially offset by higher taxes. With these strong operating results and continued strong accounts receivable collections, cash flow generated from operations came in at 52.0 million, or 86% of adjusted EBITDA in the second quarter, an increase of 12% from operating cash flow of 46.4 million, or also 86% of adjusted EBITDA in the same quarter last year. For the six months year-to-date operating cash flow has been 100.9 million, or 85% of our adjusted EBITDA, up 11% from 90.8 million in the first half of last year.

We will see our hope is to.

We bought at much much lower than that and our hope is to get it up.

As close as we can do that I don't know for sure.

We have our sights set on the company average margin profile right now, but certainly we'd like to get it up 10 to 12 points, which you'll get it close.

And that would be great.

Good.

Just the last question just on the M&A environment in general.

Your comments about the macro environment expressed a lot of caution are you seeing that cost and fill in the M&A environment in regards to the evaluations.

I think we're starting to see there any compressing some of the deals we've been doing we're getting more deals done now than we were six to eight months ago.

Allan Brett: And we should mention as always going forward, we expect to continue to see strong cash flow conversion and generally expect cash from operations to be between 90 to 90% of our adjusted EBITDA in the periods ahead, subject any unusual fluctuations or future changes in contingent consideration payments that we'll discuss later as I comment on our outlook for the second half of the year.

It's starting to settle itself out right now and we will see what happens to the economy. The economy gets worse is probably going to get easier for us to get stuff done.

If it gets better people might start, saying, hey, I want more money for the for the companies themselves, so well have to see what happens but.

We like what we like what we see right now are having being able to get what we think are very high quality acquisitions done at a price. We think we can make money for our shareholders.

Allan Brett: So overall, we're once again pleased with our operating results in the quarter as strong organic growth and solid performance from our recent acquisitions resulted in 17% growth in revenue at a 12% increase in adjusted EBITDA for the quarter. If we turn our attention to the balance sheet, our cash balance is totaled 227 million at the end of July, an increase of approximately 45 million from the end of the first quarter in April.

Alright, thanks for taking my questions.

Hey, Thank you Paul.

Your next question comes from the line of Justin Long from Stephens. Your line is now open.

Thanks, and I guess to start building on that last question it sounds like valuations on acquisition.

Allan Brett: While we generated 52 million in cash flow from operations, we also used 6 million of our existing cash balances to complete an earnout or contingent consideration payment on a past acquisition, while also adding 2 million in capital additions during the quarter. As a result, we currently have our 227 million of cash, as well as a $350 million line of credit available under our credit facility, available to deploy towards future acquisitions. So we continue to be well capitalized to allow us to consider all opportunities in our market consistent with our business plans.

Started to come down and you've talked about that in the last couple of quarters or so in terms of just deal activity have you seen things pick up and maybe could you talk about your confidence in deploying capital in the back half of the year I know there werent any acquisitions in this most recent quarter.

Yes, I think Thats right I think we're starting to see prices come into what we think is a reasonable range thats where were able to get acquisitions done and I think we're starting to see more stuff for sale.

Allan Brett: As we turn our attention to the second half of the physical 2024, we should note the following. After incurring approximately 3.4 million in capital additions in the first half of the year, we expect to incur approximately 2 to 3 million additional capital additions for the balance of the year. At this point, we currently expect the second half of the year will use approximately 22.8 million of our cash to pay additional contingent consideration payments on two acquisitions.

Again, if there was a kind of a lag there for six months or so and no one knew what to do with the guest starting to open up and now we're starting to see.

Type of quality assets that we wanted at prices that we think are fair prices for them and I.

Let's see what happens, but hopefully that translate to the ability to get more deals done in the future.

Allan Brett: While the entire 22.8 million estimated contingent consideration to be paid is now accrued for on our balance sheet. 12.7 million of this balance relates to the portion of the earnout arrangements that were accrued for at the time of the acquisition and will reflect it in cash flow from financing activities, while the remaining balance of approximately 10 million will be reflected in cash flow from offering activities when paid as a result of these acquisitions had been better than our initial expectations.

Got it and I know organic growth in the services business is what's most important but Allen could you share your estimate for all in organic growth in the quarter.

Maybe just going forward and how.

How do you feel about the sustainability of the organic growth we've seen in that services business. Its held up really well despite a weak freight market. So just wanted to get a sense for your confidence in that continuing.

Yes, so I'll take the first part of it.

Overall growth was less.

Less than that would be just over 9% that we saw on services. We certainly saw lower license quarter as I mentioned earlier, we had larger licenses in Q2 last year, we were back to the more basic sort of $1 4 million. This quarter professional services and other revenue was also flattish down slightly so in around <unk>.

Allan Brett: After incurring amortization costs of 30.2 million in the first half of the year, we expect amortization expenses will be approximately 29.8 million for the second half of the year with this figure being subject to adjustment for foreign exchange changes and future acquisitions. Our income tax rate for the second quarter came in as approximately 27% of pre-tax income, which is right around our blended statutory tax. We're looking into the second half of the year.

6% or so currency neutral for the entire business compared to just over 9% on services and Ed.

Yeah. Thanks Alan.

With regard to sustainability.

Allan Brett: We currently expect our tax rate will continue to be in the range of 25 to 30% of our pre-tax income or somewhere either side of our statutory funded rate. However, as always, we should state that our tax rate may fluctuate quarter to quarter from one time items that may arise as we operate internationally across multiple countries. And finally, after incurring stock case compensation expense of $7.4 million in the first half of this year, we currently expect stock compensation will be approximately $9.3 million for the balance of the year, subject to any forfeitures of stock options or share gains.

See what happened in the long run but in the.

In the quarters coming up here.

We think we're in pretty good shape right. We think we're in a strong business. Some of the things I went over on the in the prepared remarks in the beginning of the call I think we think that puts us in a position to to continue to have good organic growth in the business.

You know I, probably mentioned this on past calls, but over the past seven or eight years, we've tended towards buying higher quality assets as we've been forced to pay a little more than we used to for stuff, we tended to pick higher quality assets with higher rates of growth and that translated into us moving from the.

Ed Ryan: And with that, I'll turn it back over to Ed to wrap up with some closing comments as well as our baseline calibration for Q3. Hey, great. Thanks, Allan.

Mid single digits before the pandemic to after the pandemic coming out in the high single digits.

Ed Ryan: With a Q3 a month in, we remain confident in our business. The cost is about the broader economic circumstances in various statistics and commentary relating to the supply chain and logistics markets. On the broader economic front was continued high interest rates, a pervasive conflict in Ukraine, labor availability challenges and various recessionary pressures and economic discussions.

We're going to do our best to stick in that range and you know obviously economy has some effect on that but at.

At the moment, we like what we see.

Great. Thanks for the time and congrats on the quarter.

Hey, Thank you very much Jeff.

Your next question comes from the line of Scott Group Wolfe Research. Your line is now open.

Ed Ryan: In the supply chain and logistics market, here's a few things we're noting. First is shipping volumes. Shipping volumes across various modes of transportation are below their pandemic highs and more closely tracking Greek pandemic trends. In addition, there are some current challenges such as the reduced flow through the Panama Canal, caused by low water levels that could impact shipping alternatives.

Hey, Thanks afternoon, guys. So.

And I think last quarter, you were talking about ocean volumes starting to improve.

Customers, telling you may be a little bit more normal inventory replenishment trends coming are you are they now saying something different I, just want to understand sort of what youre, saying on the macro.

Ed Ryan: The second is retailer inventory. There's high levels of retailer inventories potentially impacting fall replenishment cycles. Inventories aren't decreasing and applying retailers are matching demand with replenishment and potentially carrying more safety stock.

More and more broadly just your views around like peak season, if you have any.

Well, yes, I don't know yet.

I've heard rumors that it's going to be maybe a muted peak season I also see you have stuff going on with the.

Panama Canal.

Ed Ryan: The third is consumer demand. There's uncertain consumer demand coming into this peak buying season in particular. It's uncertain how spending habits will split between durable goods and services and experiences. Overall, US consumer spending is still high, but there's caution as we approach the holiday season.

You know probably for us it probably doesn't matter very much people tend to find other ways to move the cargo which results in other shipments on our network. So it ends up being fine for us but.

For our customers if that's what you're asking I think disruptions like that tend to cause them. Some troubles I don't have a crystal ball, what's going to happen and Christmas seasonal.

Ed Ryan: The fourth is some capacities left the market. The US truck market has seen some capacity come out of the market with the recent bankruptcy of yellow. The market continues to adjust the post-pandemic volumes and its possible more capacity will leave. In error, we've seen capacity adjustments with less reliance on pure air freighters.

Probably tell you all know for sure at the end of next quarter, but.

The rumors I heard as it might be a little muted but.

I don't think its something Thats significant.

And certainly not something that's probably going to impact our numbers as much maybe you might impact some of the ocean carriers numbers, a bit, but I don't hear anything horrific going on and I don't hear anything spectacular going around either so.

Ed Ryan: This additional trade restrictions are continuing to be new restrictions announced principally relating to the war in Ukraine and in connection with burgeoning trade tensions between the US and China. Some new restrictions have been announced with respect to investment in and trade in ship manufacturing, AI and quantum technologies. These restrictions can be positive for our global trade intelligence business, but can also impact free bias.

And it looks at the scene.

Okay, and then you spent some time talking about the parcel carriers and volume shifts with UBS and Fedex in the post up does that matter to you are you agnostic towards the volume goes I just to understand you.

I just wonder if any of the mines.

Yes, we were trying to describe.

What's going on in the market for US a year right, we're probably a little more agnostic to it.

Ed Ryan: There's also labor challenges. Labor negotiations have created challenges for UPS, West Coast ports and yellow and may impact other United supply chain players.

Two it we do business with all of them, we like all of them, we have good relationships with all of them.

We're not trying to pick winners in this we just help services each of them and.

Ed Ryan: Next, there's some logistics participants planning for a muted peak season. General commentary from logistics participants is bracing for lower volumes in the second half of the year with some companies taking proactive cost reduction activities. This is illustrative of the pervasive sentiment of caution.

There are times, when some do better than others, sometimes one.

Ed Ryan: And then finally, distribution of parcel volumes among larger players is uncertain. As I mentioned earlier, UPS has some labor challenges which may have resulted in some parcel volume cautiously being redirected to other players. FedEx has publicly indicated it will be moving more parcel volume to its ground division with independent contractors and a way from its express division using employees. UPS Services implemented various new service adjustments as it seeks to compete and Amazon has announced its re-entering the parcel delivery business. All of this combines the provider very competitive environment with uncertainty as to how the volumes will shake out among the various providers.

Some are more freight to us than others, but.

In general it works out tends to balance out across all of those the larger carriers that you mentioned.

Okay, and then just just lastly, when I think about the step up in organic growth now versus.

Pre COVID-19.

Just price how much was price, helping now even if it's not like real price just nominal price to keep pace with more inflation is that a meaningful contributor now to organic that maybe you didn't have in the past.

<unk>.

I'll, let Alan comment a little bit on this but I wouldn't call it meaningful but it is there were certainly we raised prices last year because of the high inflation, but Alan can comment on.

Yes, we're raising prices.

Across the business across our product lines.

Despite that the overwhelming majority of our growth is still going to be volume related.

Ed Ryan: So these are some of the things we're hearing from our customers and seeing in our business, things that also inform our calibrations to the quarter. Our business is designed to be predictable and consistent. We believe that stability and reliability are valuable to our customers and employees and our broader stakeholders.

That's gonna be consistent so we are using price to offset the cost pressures. We have we should be doing that as a business, but for the most part of our growth is going to be heavily focused on volume doing work with new and existing customers.

Thank you guys.

Ed Ryan: To deliver this consistency, we continue to operate from the following principles. Our long-term plan is for our business to grow just a bit to 10 to 15 percent annually. We grow through a combination of organic growth and acquisitions. We take 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 and customs authorities.

Hey, Thanks Scott.

Your next question comes from the line of Robert Young from Canaccord Genuity. Your line is now open.

Just wanted to add to the very first question around transaction revenue and not be as simple as just tight shipping volumes I think theres some transaction minimums on some of the contracts.

If you could refresh that and how much protection that provide some weaker volumes.

Most of our most of our contracts and the transaction space are done at a minimum of 85% to 90% of normal volume in a customer has.

Ed Ryan: When we over perform, we try to invest that over performance back into our business. We focus on recurring revenues and establishing relationships with customers for life and we thrive on operating a predictable business that allows us forward visibility to our revenues and investment paybacks.

That plays a role from time to time with individual customers I think more importantly, when we watch the transportation volumes.

Our business continues to grow and in tougher economic times, we tend to have more companies had our direction because of.

Ed Ryan: In our Q2 report, we provided a comprehensive description of baseline revenues, baseline calibrations and their limitations. As of August 1st, 2023, using a foreign exchange rate of 75 cents to the Canadian dollar, $1.10 to the euro, and $1.28 to the Great Britain Pound. We estimate that our baseline revenues for the third quarter of 2024 are approximately $124 million and our baseline operating expenses are approximately $78 million. We consider this to be our baseline adjusted EBITDA calibration of approximately $46 million for the third quarter of 2024 or approximately 37 percent of our baseline revenues as at August 1st, 2023.

Yes.

Tend to shy away from the smaller guys when they get worried about.

People in the space struggling so we've tended to pick up more volume than when customers start hurting they start asking everyone for discounts because we provide 10 or 15 different services to them and we have a lot to negotiate with and the potential to pick up more business from our smaller competitors.

That are not in as strong a position as us so.

As it happened in OA and independent dynamic in a couple of other times when we've had.

Weaker economic times and again I don't know that that's what we're looking at right now we're probably looking at more of a muddle economic scenario right now, but and weaker economic times, we've tended to pick up volume in the face of our customers, having less volume and we come out of that stronger than ever and we tend to not have the same lows and maybe some of our competitor.

Ed Ryan: We continue to expect it will operate in the adjusted EBITDA operating margin range of 40 to 45 percent. Our margin will vary in that range given such things as foreign exchange movements and the impact of acquisitions as we integrate them into our business. Last quarter ground cloud impacted our margin while we started the integration work to bring it up to our desired to cart contribution levels. The integration activities have gone well. We've already seen some margin improvement in Q2 and we're planning for some additional margin improvement going forward asking any other acquisition activity.

<unk> would have in transaction volumes, which is why when these things happen to us.

If you look at our numbers and say why didn't you go now and.

It's that plus the combination of other strengths.

The subscription part of our business that are that continue.

Continue to do well to this day.

Ed Ryan: We've got lots of exciting things planned in our business. It remains uncertain for our economic and supply chain environment, but we believe our proven track record of execution, solid capital structure and customer focus will serve us well.

Alright, and then second one for me Youre talking about the impact of Union agreements and a lot of change there.

That have an impact on your customers' willingness to invest in technology.

Ed Ryan: Thanks 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, alternative Thank you.

To improve the visibility on price.

Some of.

Of the delivery itself goes up.

You would assume that technology becomes a better way to seek efficiency is that something you're seeing or is it just the pressure volumes.

Operator: Ladies and gentlemen, we will now conduct the question and answer session. If you have a question, please press par followed by the number one on your touch tone phone. You will hear a three-tone prompt acknowledging your request.

I mean, the short term.

Compression volumes that can do things start to our to our customer is probably a lot more than it would to us.

In the longer term, though youre, absolutely right, you've heard us say a number of times change.

Operator: If you would like to cancel your request, please press par two. Please ensure you lift the handshake if you're using a smartphone before pressing any keys.

And our business.

Our customers business drives more success for Descartes, and I think thats absolutely true in situations like this the more of the supply chain disruptions and strikes at ports are certainly one of them.

Matthew Pfau: Your first question comes from the line of Matt Pfau, from William Bear. Their line is now open. Big, great. Thanks guys. I wanted to follow up on some of the comments you made about potential headwinds in the back half of the year here. How should we think about those in terms of the potential impact on your business? Part of your business is transaction-based, but it's not as simple as just being tied to shipping volumes.

You have people, saying I need more information and I need more technology. So that I can do something about that next time, it happens and that plays right into our hand.

And you saw it in spades in the pandemic it was probably 10 other <unk>.

Scenarios that could walk you through in the past, where that's really helped us to tariffs with Trump and the et cetera things like that.

Matthew Pfau: So how do we think through the potential puts and takes there in terms of the impact on your revenue? Well, as we've been talking about it for a year or two now, we have a lot of things going very well in our business. Maybe it will be going better if at some point in the future, transportation transactions went down. We don't know what the future is going to bring. We're just running the business.

And we're.

We're not looking forward to those changes, but when they occur they tend to be a tailwind for us.

Alright, thanks, Thanks for taking the question.

Thank you Robert.

Yeah.

Your next question comes from the line of Raimo <unk> from Barclays. Your line is now open.

Great. Thank you this is Jeremy on for Raimo.

Matthew Pfau: Looking at what's going on in the market and going, hey, there's some uncertainty out there, so we'll see what happens. As you've seen in the past, transportation transactions have gone down and we've still performed very well. We do that because we sell a lot of software outside of that 60% of our current revenues, outside of transaction-based volume. And even in the transaction space, we tend to be picking up more volume over the course of a quarter or a year because our customers are doing more business with us than as a result.

I was just wondering if you could give a bit more color on how the trade intelligence segment performed in the quarter.

And then just broadly your outlook there in terms of.

Both organic investment and M&A around that business line. Thank you.

Thanks, Jeremy.

Trade intelligence has been doing very well for for several years now.

Starting with the.

The tariff stuff when Trump came president the nationalistic tendencies you saw around the world.

Matthew Pfau: We end up doing pretty well even in the face of the industry having a lackluster time. So we'll see what happens. I don't know what's going to happen in the rest of the year. We've heard different things in same stuff you probably read in the paper.

That caused maybe people to pay more attention to it.

When youre, creating even more.

Ukraine Russian War is also added to it if we see sanctions getting put on a number of parties and a big part of our databases their sanctions and right through just today I mean, this business has been doing very well.

Ed Ryan: We'll see what happens, but we like our chances either way. Great, and just want to follow up on macro point. You called out that that's been an area of strength and performing well in a trucking environment that was oversupplied. How does trucking capacity coming out of the system potentially impact that? Is that anything material to think about? That's interesting. That's actually one of the areas I think about when I made the comment a minute ago in a macro point continues to grow in a relatively flat truck environment because it continues to pick up more and more customers and more volume from our competitors.

And.

I think you asked.

Continue to be bullish about it we absolutely do with one of our best performing businesses as one of our most profitable businesses one of the businesses, where we think we help the customers the most.

And in a very simple way.

And.

Of course, if there were acquisition opportunities there we would be excited about that because we love the business.

Got it thank you.

Hey, Thank you.

Yes.

Your next question comes from the line of Kevin Christian or Anthony <unk> from Scotia Bank. Your line is now open.

Ed Ryan: I want to remember that in some of the prepared comments on the call today, but macro points, you know, a big beneficiary that as people realize the importance of having to network and value that over a flashy application because we can track more loads, more and more customers are settling with the car because they're saying, hey, that's what's most important. My ability to put in 100 loads will be able to track high 80s, low 90s percentage of those loads is much more important than the visibility application that I'm using myself. Most of the time they're not even using an application.

Hey, Good evening, you talked about some of the brands.

That youre seeing.

Visibility you've talked about winning new customers, but also bringing bringing back back in I'm curious if you can remind us what <unk>.

Why it might need why they're coming back.

You mentioned, some new products that self service tool just curious to know your thoughts there.

Yes.

Yeah Yeah.

Yeah.

So over the past seven or eight years since we bought macro point there were a number of other players in that space.

That we're spending a ton of money advertising getting their name out there.

Matthew Pfau: Thank you guys for taking my questions. Appreciate it. Hey, thanks Matt.

And.

Launching themselves towards the moon, losing a ton of money, while they are doing it without would seem to us like without a whole lot of regard to that.

Paul Treiber: Your next question comes from the line of Paul Treiber from RBC.

Paul Treiber: Your line is not open. Yeah, I just think question. And you're right that several deals we've done in the past couple of years have done that. I think it's, you know, there was a, you probably heard me talk about it on the past call. It's a rebalancing going on where, you know, everything was selling for high dollar volumes as everyone was booming coming out of the pandemic. And when that started to slow down, you know, companies were finding it hard to get people to pay up for acquisitions.

I think over time that helps them pick up some customers ready to make enough noise you spend enough money you'd probably pick up some some customers, but in the long run those customers start looking and saying Hey, who is the best provider here and maybe it's not the guy with the name of the newspaper maybe it's it's the guy that contract the most loads for me and overtime.

We have been.

As a network operator, you would expect us to focus on that.

Those guys focused on things like I, just mentioned, we focused on getting more connections on the network and as a result, we track more loads by by a lot than our competitors do and I think over time the customers realize that's what's most important and that has helped us get some.

Paul Treiber: And I never had one way to bridge that gap. You know, we've used it effectively a few of the times. It's not really our first choice, rather just to pay cash for something and then the asset out right. But when there's, you know, let's say, dispute about what the pair price is for something. And we've used them to get over that hurdle and quite effectively most of the time or like every time we have an hour now in a process.

Competitive wins in that space.

Okay got it thanks for that.

Question E Commerce growing market, you made a bunch of acquisitions during the pandemic.

Remind us.

How do you guys think about that business in terms of.

Size preventive revenue and maybe if you can give us some thoughts on the growth profile there e-commerce that industry wide since Tc trending back up.

Paul Treiber: You know, we're very happy for that for that acquisition to get here now because that usually means we're we bought a business is doing very well and probably going to do very well for us in the future.

After normalizing.

A year ago comment on the E Commerce business.

Yes, Rick.

Ed Ryan: So we've used it as Friday our first choice, but, but certainly something we've done when we think it's appropriate. And then shifting to one of your more recent acquisition ground clouds, you mentioned using the integration go well on some margin expansion. And how do we think about the long term margin profile at that business? I mean, do you think you can get it up to the, the, the cupping average margin profile?

Fans of the ecommerce business, we got it in seven eight years ago nine years ago now and.

Continue to buy any asset in that space that we think could be a good fit for what we already do and.

And with an ability to help us grow our network, it's about 10% of our business today.

It's one of our faster growing businesses and yes, we absolutely continue to like that business and think that as more and more people order stuff online and that business is going to continue to do well for us for the foreseeable future.

Ed Ryan: We'll see. I mean, our hope is to, you know, we bought it much, much lower than that. And our hope is to get it up as close as we can to that. I don't know if we have our site set on the company average margin profile right now. But certainly, we'd like to get it up to 12 points, which will get a close.

Got it just last one any local sounds it's doing well.

No that was more of an APAC business are you starting to sell that product into other other geos and customers.

We are.

We've always provided that service through third parties and when we had a chance to buy a locals.

Ed Ryan: And that would be great to see the, just a lot of questions just on the MNA environment in general. You know, your comments about the macro environment express lot of caution. Are you seeing that caution still in the, in the MNA environment in regards to evaluation? I think we're starting to see any pressing in some of the deals we've been doing now. We're getting more deal done now than we were six, eight months ago.

We thought that was a great opportunity for us to be able to do that ourselves without paying a third party to do it. So so that's what we did and we're bringing it to all the jurisdictions that we operate in right now.

It's a simple service or if it's.

Your order something and you want us to do the truck driver to your house and you can go on an App and you can see where the driver is.

That having been said to someone who's trying to deliver furniture or something of that nature. It's very important that you that you are there when they come in to make the delivery and mobile functionality like that really helps make sure that customers know when the trucks coming so that they are there to get their furniture or whatever it is that they ordered from you. So.

Ed Ryan: So I think it's starting to settle itself out right now. We will see what happens in the economy. The economy gets worse. It's probably going to get easier for us to get up done. I think it's better. You know, people might start saying I want more money for the company themselves. So we'll have to see what happens. But we like what we, we like what we see right now. We're happy to be able to get, you know, what we think are very high quality acquisitions down at a price we think we can, you know, make money for shareholders on.

Paul Treiber: Alright, thanks for taking the questions.

We want to make sure we're able to bring that experience to all of our customers and now we're doing it in a way where we own the entire solution. So we're happy about that.

Got it appreciate the color.

Hey, Thanks, Kevin.

Ed Ryan: Hey, thank you both.

Yeah.

There are no further questions at this time please continue.

Justin Long: Your next question comes from the line of just in long. They're line of snow.

All right great. Thanks, everyone. I appreciate your time today, and we look forward to reporting back to you next quarter have a great day.

Justin Long: Thanks, and I guess to start building on that last question, it sounds like valuations on acquisition have started to come down and you talked about that the last couple of quarters are so in terms of just deal activity, have you seen things pick up and maybe could you talk about your confidence and deploying capital in the back half of the year? I know there weren't any acquisitions in this most recent quarter.

Okay.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

Justin Long: Yeah, I think that's right. I think we're starting to see prices come into what we think is a reasonable range. That's where we're able to get acquisitions done. And I think we're starting to see more stuff for sale. Again, you know, if there was a kind of a lag there for six months or so, no one would know what to do. I think it's starting to open up now. We're starting to see, you know, the type of quality assets that we wanted at prices that we think are fair prices for them and let's see what happens. But hopefully that translates to the ability to get more deals. Got it.

Allan Brett: And I know organic growth in the services business is what's most important. But Alan, could you share your estimate for all in organic growth in the quarter? And maybe just going forward Ed, how do you feel about the sustainability of the organic growth we've seen in that services business? It tells up really well despite a weak freight market. So just wanted to get a sense for your confidence in that continuing. Yeah, so I'll take the first part of it.

Allan Brett: Overall growth was less than the just over 9% that we saw in services. We certainly saw lower license quarter. As I mentioned earlier, we had larger licenses in Q2 last year. We're back to the more basic sort of 1.4 million this quarter professional services and other revenue was also flatish down slightly. So in around the 6% or so currency neutral for the entire business, compared to just over 9% on services and Ed.

Allan Brett: Yeah, thanks Alan. With regard to sustainability, I mean, we'll see what happens in the long run. But, you know, in the quarter is coming up here, you know, we think we're in pretty good shape right? We think we're running a strong business. Some of the things I want to run in the prepared remarks in the beginning of the call. I think that puts us in a position to continue to have good organic growth in the business.

Allan Brett: You know, I've probably mentioned this on past calls, but over the past seven or eight years, we've headed towards buying higher quality assets. As we've been forced to pay a little more than we used to for stuff, we tended to pick higher quality assets with higher rates of growth. And that translate into us, you know, moving from the, you know, mid single digits before the pandemic to after the pandemic coming out in the high single digits. And, you know, we're going to do our best to stick in that range. And, you know, obviously economy has some effect on that, but at the moment, we like what we see.

Ed Ryan: Great. Thanks for the time and congrats on the quarter. Hey, thank you very much.

Scott Group: Your next question comes from the line of Scott Group from World Food Research.

Scott Group: Your line is not open. Hey, thanks afternoon, guys. So, and I think last quarter, you were talking about ocean volume starting to improve and customers telling you maybe a little bit more normal inventory replenishment trends coming. Are you, are they now saying something different? I just want to understand sort of what you're saying on the map. More broadly, just your views around like peak season if you haven't.

Ed Ryan: Well, yeah, I don't know yet. I've heard rumors, it's going to be maybe a muted peak season. I also see stuff going on with Panama Canal. You know, probably for us, it probably doesn't matter very much. People tend to find other ways to move the cargo, which results in other shipments on our network. So it ends up being fine for us. But for our customers, that's what you're asking. I think that disruptions like that tend to cause them some trouble.

Ed Ryan: I don't have, you know, a crystal ball, what's going to happen in Christmas season. I'll probably tell you. I'll know for sure at the end of next order. But, you know, the rumors I've heard is it might be a little muted. But, you know, I don't think it's something that's significant, you know. And certainly not something that's probably going to impact our numbers as much. Maybe you might have packed some of the ocean carries numbers a bit. But I don't hear anything horrific going on. I don't hear anything spectacular going on either.

Ed Ryan: So we'll set the scene. Okay.

Ed Ryan: And then you spend some just time talking about the parcel carriers and volume shifts with UPS and FedEx and the post ups. Does that matter to you? Are you agnostic to where the volume goes? I just understand you've seen this in time. I just want to explain the lines. Yeah. We were trying to describe what's going on in the market for us. So you're right. We're probably a little more agnostic to it.

Ed Ryan: We do business with all of them. We like all of them. We have good relationships with all of them. We're not trying to help pick winners in this. We just help service each of them. And, you know, there are times when something better than others. Sometimes when some more afraid to us than others. But, you know, in general, it works out tends to bounce out across all this larger carrier.

Ed Ryan: Okay.

Allan Brett: And then just just lastly, when I think about the step up in organic growth now versus free COVID, how much is price? How much is price helping now, even if it's not like real price, just nominal price to just keep pace with more inflation? Is that a meaningful contributor now to organic that maybe you didn't have in the past? I'll let Alan comment a little bit on this, but I wouldn't call it meaningful, but it's there.

Allan Brett: We're certainly raised prices last year because of the high inflation, but Alan can comment on. Yeah. We're raising prices across the business, across our product lines. Despite that, the overwhelming majority of our growth is still going to be volume related. That's going to be consistent deep. So we're using price offs at the cost pressures we have. We should be doing that as a business. But, for the most part, our growth is going to be heavily focused on volume. Doing more with new and existing customers.

Scott Group: Thank you, guys.

Scott Group: Thanks, Scott.

Robert Young: Your next question comes from the line of Robert Young from Canada Community. Your line is now open. Hi. I just wanted to add to the very first question around transaction revenue. Not being as simple as just tied to shipping volumes. I think there's some transaction minimums on some of the contracts. Just maybe you could refresh that and how much protection that provides in weaker volumes. Most of our contracts in the transaction space are done at a minimum of 85% to 90% of the normal volume that a customer has.

Robert Young: That plays a role from time to time with individual customers. I think more importantly, when we watch the transportation volumes, our business continues to grow. And in tougher economic times, we tend to have more companies head our direction because of, you know, they tend to shy away from the smaller guys when they get worried about people in the space struggling. So we've tended to pick up more volume than when customers start hurting.

Robert Young: They start asking everyone for discounts because we provide 10 to 15 different services to them. We have a lot to negotiate with and the potential to pick up more business from our smaller competitors that are not in a stronger position as us. So as it happened in08 and, you know, in the pandemic and a couple other times when we've had, you know, weaker economic times. And again, I don't know that that's what we're looking at right now.

Robert Young: We're probably looking at more of a muddled economic scenario right now. But in weaker economic times, we've tended to pick up volume in the face of our customers having less volume. And we come out of that stronger than ever. And we tend to not have the same lows that maybe some of our competitors would have in transaction volumes. Which is why one of these things happen is, you know, you look at our numbers and say, why didn't they go down?

Ed Ryan: And, you know, it's that plus the combination of other strengths, and in the subscription part of our business that continues to do well with this day.

Ed Ryan: All right, and then second one for me that you're talking about the impact of union agreements, a lot of change there. Does that have an impact on your customers willingness to invest in technology to improve the visibility? I mean, a price of the delivery itself goes up, then you would assume that technology becomes a better way to seek efficiency. Is that some of your speed or is it just pressure volumes? I mean, this short term, it can pressure volumes, it can do things to our customers, probably a lot more than it would to us.

Ed Ryan: In the longer term, though, you're absolutely right. You've heard us say a number of times change in our business or in our customers' business drives, you know, more success for the carton. I think that's absolutely true in situations like this. The more you have supply chain disruptions and stripes at ports or certain certainly one of them, the more you have people saying, I need more information and I need more technology so that I can do something about that next time it happens and that place right into our hand.

Ed Ryan: And you solve and space in the pandemic, you know, it's probably ten other scenarios I could walk you through in the past where that's really helped us to tire us with Trump and then et cetera, things like that. And, you know, we're not looking forward to those changes, but when they occur, they tend to be a tailwind for us. All right. Thanks. Thanks for your question. Thank you.

Raimo Lenschow: Your next question comes from the line of Rimo Lenschau from Barclays. Your line is now open. Great. Thank you. This is Jeremy on Furimo.

Ed Ryan: I was just wondering if you could give a bit more color on how the trade intelligence segment performed in a quarter and then just broadly your outlook there in terms of both organic investment and M&A around that business line. Thank you. Hey, thanks Jeremy. Trade intelligence has been doing very well for several years now. You know, starting with the tariff stuff when Trump came president and the nationalistic tendency she saw around the world that caused maybe people to pay more attention to it.

Ed Ryan: You creating more, you creating Russian war has also added to it as we see sanctions getting put on a number of parties in a big part of our databases there are sanctions. And right through it's up today. I mean, this business has been doing very well. And, you know, I think you asked, you know, where we continue to be bullish about it. We actually deal with one of our best performing businesses is one of our most profitable businesses.

Ed Ryan: One of the business where we think we help the customers the most in a very simple way. And, you know, of course, if there were acquisition opportunities there, we would be excited about that because we love the business. God, thank you. Hey, thank you.

Ed Ryan: Your next question comes from the line of interest there at me from school Shabank. Your legs now open. Hey, they're good evening. You talked about some of the strengths and success you're seeing in invisibility. You talked about winning new customers, but also bringing, bringing guys back in. I'm curious, you can remind us, you know, why, why customer might might leave? Why they're coming back, you mentioned to be products like self-service tools.

Ed Ryan: Just curious to know your thought there. Yeah, yeah, I mean, you saw, it was a past seven or eight years since we bought macro point, there were a number of other players in that space that were spending a ton of money advertising getting their name out there and, you know, launching themselves towards the moon, losing a ton of money while they're doing it without what seemed up like without a lot of regard to that, I think over time, you know, that helped them pick up some customers ready to make enough noise, you spend enough money, you probably pick up some customers but in the long run those customers start looking and saying, hey, who's the best provider here?

Ed Ryan: And maybe it's not the guy with his name in this paper, maybe it's the guy that contract the most loads for me and over time, I think we've been, as a network operator, you expect us to focus on this, you know, those guys focused on things, like I just mentioned, we focused on getting more connections on the network and as a result, we track more loads by a lot that our competitors do and over time, the customers realize that's what's most important and that's helped us get some competitive wins in that space.

Ed Ryan: Okay, got it, thanks for that. Second question, e-commerce, a growing market, you made a bunch of acquisitions during the pandemic. Your mind is how to tell you guys think about that business, maybe in terms of the size, you know, percentage of revenue and maybe if you can give us some thoughts on the growth profile there. E-commerce, you know, industry-wide, some things to be trending back up after, you know, rumbling, you know, year ago, comments on the e-commerce business.

Ed Ryan: Yeah, well, big fans of e-commerce business, we got it at seven, eight years ago, nine years ago now and continues to buy any assets in that space that we think would be a good fit for what we already do and with an ability to help us grow our network, it's about 10% of our business today. It's one of our faster growing businesses and yeah, we absolutely continue to like that business and think that as more and more people or stuff online, that business is going to continue to do well for us for the foreseeable future.

Ed Ryan: Got it. Just the last one for any locals, sounds it's doing well. I know that was more of an APAC focus business, are you starting to sell that product into other CEOs and customers? We are, you know, we've always provided that service through third parties and when we had a chance to buy locals, we thought that was a great opportunity for us to be able to do that ourselves without paying a third party to do it.

Ed Ryan: So that's what we did and we're bringing it to all the jurisdictions that we operate in right now. It's a simple service, right? It's, you know, you order something and you want to see the truck driving to your house and you can go on an app and you can see where the driver is. That having been said, if someone is trying to deliver furniture or something to that nature, it's very important that you're there when they come to make the delivery and a mobile functionality like that really helps make sure that customers know when the truck's coming so that they're there to get the furniture or whatever it is that they ordered from you.

Ed Ryan: So we want to make sure we're able to bring that experience to all of our customers and now we're doing it in a way where we own the entire solution. Scott, I appreciate the color, I'll pass the line. Thanks. Hey, thanks, Scott.

Operator: There are no further questions at this time. Please continue. All right, great. Thanks everyone. Appreciate your time today, and we look forward to reporting back to you next quarter. Have a great day.

Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.