Q1 2025 The Descartes Systems Group Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the D card systems Group quarterly results Conference call. At this time all lines are in listen only mode.
Speaker Change: During the presentation, we will conduct a question and answer session. If at any time. During this call you had quite you need assistance. Please press star zero for operator. This call is being recorded on Wednesday May 29, 2024, and I would now like to turn the conference over to Mr. Scott began. Thank you. Please go ahead.
Speaker Change: Yeah.
Thanks, and good afternoon, everyone. Joining me remotely on the call today are Ed Ryan CEO, and Allan Brett CFO and trusted 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 trade and economic uncertainty on our business and financial condition Descartes operating performance financial results and condition.
Speaker Change: Parts 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.
Yeah.
Speaker Change: 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.
Speaker Change: These factors are outlined in the press release and in the section entitled certain factors that may affect future results in documents filed and furnished with the SEC the OSC and other securities commissions across Canada, including our management's discussion and analysis filed today.
Speaker Change: 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 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.
As required by law.
And with that let me turn the call over to Ed Ryan.
Thanks, Scott and welcome everyone to the call today, we're reporting record first quarter results continued the strong organic growth improvement to our operating margin from a year ago and two new businesses that have joined the Descartes team.
Edward J. Ryan: We're excited to go over these results with you and give you some perspective about the business environment, we see right now.
But first let me give you a roadmap for the 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 Q1 financial results in more detail after that I'll come back and provide an update on how we see the current business environment and how our business was calibrated as we entered our second fish.
It'll quarter, and we'll then open up to the operator to coordinate the Q&A portion of the call.
So let's start with the quarter that ended April 30.
Alan: Key metrics. We monitor include revenues profits cash flow from operations operating margins and returns on our investments for this past quarter. We again had outstanding performance in each of those areas total revenues and services revenues were both up 11% from a year ago. Adjusted EBITDA was up 16% from a year ago just to <unk>.
Alan: EBITDA margin was steady at 44% and up two points from a year ago.
And we generated $63 $7 million in cash from operating operations, representing 95% of adjusted EBITDA.
At the end of the quarter, we had almost $270 million in cash and we were debt free with an undrawn $350 million line of credit.
This is after we used about $140 million in connection with acquisitions near the end of the court.
We remain well capitalized cash generating strong organic growth and remain ready to continue to invest in our business.
Let me talk a bit about $140 million that we invested in acquisitions at the end of March OCR services joined our fitness OCR is a great business and a natural fit with our global trade intelligence team well see our strengths are and sanctioned party screen and export compliance a great complement to our existing trade compliance business.
As I've mentioned on past calls sanctioned party screening is where you review your transactions shipments to customers and our employees against list published around the world to identify people and companies who are subject to sanctions. These sanctions offer resolved for conflicts between countries such as the numerous new sanctions introduced over the past few years.
Related to the Russia and.
Can you create conflict with the number of geopolitical conflicts going on right now the importance of insurance.
Clients with the web of international sanctions is critical to many businesses. The consequences include massive fines and prohibitions on tree.
Alan: In addition, OCR has been leveraging AI solutions in the gathering calculation and presentation of trade and sanctioned party information. So there are potential efficiencies to be gained as we integrate the businesses together.
With <unk> expertise in export compliance also enhances our wider global trade management solutions portfolio.
In particular, they have great strength in export license procurement tariff classification of goods and helping companies comply with complex trade regulations, such as the international traffic in arms regulations IRR.
OCR has large multinational companies as customers that we believe are great prospects for further Descartes solutions more generally as we look at this market. We see continued opportunities with our combined solution set as the challenges with global trade compliance increased even more for example, with the recent tariffs and sanctions issued by the U S with.
Alan: Back to China.
Well see our is larger than some of our recent acquisitions. We believe 13 trade professionals in the United States in India are a great complement to our business and are motivated to show our customers. The additional value. We can add as a combined team welcomed to the entire OCR team, we're looking forward to great things.
Working with you.
And the later days for the first quarter. We also combined with AIP ASD, which who also uses the brand named <unk> T H Y N E.
ASB has two principal areas of their business first ASD is involved with customs and regulatory services for trade with a very strong presence in Ireland. This is a great complement to our existing customers business in Europe and allows us to provide our customers with an even more comprehensive solutions for customs and security filings.
The second area of their business is focused on helping the air community get visibility into assets. This is a very natural and exciting complement to our existing low energy Bluetooth solutions that help air carriers and ground cargo handlers track are perfect containers at airports around the world.
Speaker Change: We're excited that we're joined with the team at a similar mission to help the wider supply chain community of shippers carriers logistics service providers and customs authorities connect and collaborate to manage the lifecycle of shipments and welcome to the whole team and we're looking forward to getting after it with you.
As mentioned these acquisitions represent $140 million of investment on behalf of our customers into the solutions. We can offer them. This is consistent with our historical plan and what we intend to do going forward. Our business is designed to generate and have access to capital that allows us to complete acquisitions that complement our business. In addition, we make organic.
Speaker Change: Investments in our business to keep growing what we already have both are important for us as we continue building a company that our customers can rely on them to meet their supply chain and logistics technology needs over the long term.
Speaker Change: Our focus is on total growth, both organic and inorganic specifically total growth in adjusted EBITDA. This focus has served us well to build the company we have today and the company we continue to build for the future.
We've talked on past calls about the investments we've made inorganic growth in our financial results have been showing the benefits of those investments we invested in our customer success function to help our customers understand how they can make further use of our solutions and differentiate ourselves from other competitors that are out there.
We invested in geographic and product specific personnel in our commercial organization to help prospects understand the value that the card solutions can bring to their organization and we invested in our service group to help customers accelerate their ability to activate and use our solutions.
Those investments have been paying off for our customers and for Descartes, We had another solid quarter of organic growth. The four principal areas driving growth where are our global trade intelligence business, our real time visibility business, our routing and scheduling business and our ecommerce business in past calls Ive made detailed comments about those areas.
Our business and the growth drivers. So I'll just make some brief comments on each here today.
The first area of growth as global trade intelligence. This encompasses sanctioned party screening good classification and trade content.
Growth here has been influenced by the continuing importance of compliance with global sanctions that I spoke about earlier in connection with OCR continue changing landscape with tariffs and duties and a changing trade routes and most influenced by factors such as challenges with navigating through the Red Sea and panic in the Panama Canal.
Second area of growth is in real time visibility.
Speaker Change: These solutions help customers get visibility to shipments in motion across multiple modes of transportation growth year has been influenced by the strength of our existing network of carriers and our continued investment and ways to get new carriers activated on our network quickly whether by Descartes, whereby our customers using our self activation tools, we continue to be among the best if not.
The best providers in the industry and actually getting your visibility you visibility for your shipments to some of the highest tracking rates in the industry. We believe that we are the premier provider for real time visibility.
Third area of growth is routing and scheduling. This includes solutions that help customers use the vehicles in their fleet efficiently promote driver safety and improve the customer delivery experience our Grand cloud safety solutions are really providing value to customers in the market and distinguish themselves with rapid driver feedback and coaching our continued string.
And last mile delivery has also made a solution of choice for many fleet owners.
Speaker Change: Finally, our growth is in e-commerce shipping and fulfillment our solutions help customers navigate e-commerce logistics challenges as they grow and includes shipping and warehouse functionality.
Speaker Change: We saw good shipment volumes with smaller e-commerce sellers the wider parcel shipment market is really influx in the United States with the United States Postal service changing its pricing and go to market model Amazon logistics cementing itself is the second biggest player parcel shipping behind the United States Postal service <unk> recovering.
Past labor challenges and Fedex, relying more and more third party contracted delivery partners. We work with each of the states Postal service Amazon logistics, EPS and Fedex to help our customers get the most affordable and best service for their deliveries.
<unk> done a good job working with these partners to help drive growth for our business.
Speaker Change: We're pleased our business grew as it did during the quarter, where there was pressure on global shipment volumes going into the quarter. We saw caution from various logistics service provider customers about the potential for slower growth or declining volumes as the quarter progressed, we saw various logistics service providers, increasing their forecast for shipping in.
<unk> and ocean, where the rest of the challenges of fridge strong demand and increased pricing for shipping.
Speaker Change: In the past we've seen strength in ocean subsequently translates to increases in truck shipments to move those goods that originally on the ocean. So while this quarter saw slower growth in international and U S. Domestic shipping volumes logistics service providers of the signal increased optimism for their own businesses and the rest of the year.
Overall, our business grew well again, and it's showing its resiliency in a quarter with some global shipping volume challenges in short our business performed as designed.
So with that let me just summarize the hand it over to Alan to give the full financial details of the quarter and year, we had record financial results. The business performed well and we believe that it'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 almost 239.
In cash $350 million in available credit and a market opportunity, where we can continue to grow the business for our customers both organically and through acquisition.
We remained focused on profitable growth. So that we continue to ensure that our customers have a secure stable and growing technology partner that can help them with their challenge is well into the future.
Thanks to all 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.
That I will turn the call over to Alan to go through our Q1 financial results in more detail.
Hey, Thanks, Ed as indicated I'm going to walk you through our financial highlights for our first quarter, which ended on April 30th.
We are pleased to report record quarterly revenues of $153 $1 million. This quarter, an increase of approximately 11% from revenues of $136 6 million in Q1 of last year.
Speaker Change: While there were some revenue in the quarter from our recent acquisitions completed late in Q1, namely the OCR and time ASD acquisitions growth in revenue from new and existing customers was again the main driver in growth this quarter when compared to last year.
We continue to see good growth in several areas of our business, including global trade intelligence solutions as well as our macro 0.3rd party visibility solution.
While the full effect of both recent acquisitions will be more fully seen in Q2.
Consistent with past quarters, our revenues in the quarter continued to be very strong with services revenue, increasing 11% to $137 8 million compared to $124 1 million in Q1 last year consistent at 91% of revenue in each period.
License revenue came in lower at only 500000 in the first quarter down from license revenues of $1 4 million in the first quarter last year, while professional services and other revenue came in at 13.0 million or 9% of revenue up 17% from $11 1 million in the same period last year as the revenue.
From past acquisitions, and particularly ground cloud contributed nicely to our growth in professional services revenue in the quarter.
In addition, we should mention that there was also a slight decrease in revenue from FX. This quarter as the U S. Dollar continued to strengthen slightly on the euro Canadian dollar and British pound compared to the same period last year.
We would estimate that our growth in services revenue without the impact of recent acquisitions or foreign exchange changes.
Would have been nicely north of 8% in the quarter.
Gross margins for the first quarter came in at 77% of revenue this year.
Up slightly from gross margin of 76% realized in Q1 last year as operating leverage from growth in the business continued to drive a slight improvement in our gross margin ratio.
Our operating expenses increased in the first quarter. This was primarily related to the impact of adding one month of the results from the recently acquired OCR business, while labor related costs.
Were also up but only slightly when compared to Q1 last year as again, we continued to experience some really good operating leverage in our growth and services revenue.
As a result, we continue to see adjusted EBIT growth of 16% to a record 67 zero million or 44, 3% of revenue in the quarter.
Up from $57 7 million or 42, 2% of revenue in the first quarter of last year.
As we indicated last year. The addition of the ground cloud business in Q1 last year, while profitable came to us with much lower adjusted EBITDA margins out of the gate and the rest of our business.
Consistent with our plans with that acquisition, we have worked to integrate the ground cloud business into our current business and in the process if improve those ground cloud operating margins over the past year or so.
In addition, as mentioned earlier, we simply continue to benefit from operating leverage that we experienced as we grow our business organically across several different product areas.
From a GAAP earnings perspective, net income came in at $34 7 million up 18% from net income of $29 4 million in the first quarter of last year.
With these strong operating results cash flow generated from operations came in at $63 7 million or approximately 95% of adjusted EBITDA in the first quarter up a very strong 30% from operating cash flow of $48 9 million or 85% of adjusted EBITDA and <unk>.
Q1 last year.
Speaker Change: Note that Q1 is typically a seasonally lower cash flow collection quarter for us. So we are extremely pleased with the strong collections that were realized in the quarter.
Speaker Change: So as Ed mentioned earlier, we are pleased with these strong operating results in the first quarter as continued organic growth and some contribution from our recent acquisitions resulted in an 11% growth in revenue and more importantly, a 16% growth in adjusted EBITDA for the quarter.
If we look at the balance sheet, our cash balances totaled $239 million at the end of April down from cash balances of $321 million at the end of January.
As despite continued positive cash flow from operations, we used just under a $140 million of our cash balances to complete both the OCR and ASD time acquisitions.
As a result, we still have almost $240 million of cash as well as $350 million available for us to draw under our credit facility for future acquisitions.
We continue to be very well capitalized to allow us to consider all acquisition opportunities in our market consistent with our plans.
As we look forward to the balance of our fiscal 2025, we should note the following.
After spending $1 8 million on capital additions in the first quarter, we expect to incur approximately four to 5 million in additional capital expenditures for the balance of this year simply put our business will continue to be non capital intensive.
After incurring amortization costs of $15.01 million in Q1, we expect amortization expense will be approximately $51 million for the balance of this year with this figure being subject to adjustments for foreign exchange and future acquisitions.
Our tax rate in Q1 came in at 24, 9% of pretax income slightly lower than our expected range of 25% to 30% and this was mainly as a result of a few smaller tax benefits realized in the first quarter.
Looking at the balance of the year. We currently expect our tax rate will trend much closer to the to our expected range of 25% to 30% in the next few quarters, meaning that our tax rate for the year is likely to end up in a range between 23 and 28% of pretax income.
So somewhere on either side of our blended statutory tax rate of 25 two.
$26 five.
However, as always we should note we should add that our tax rate may fluctuate from quarter to quarter from onetime tax items that may arise as we operate internationally across multiple countries.
Additionally, after incurring stock based compensation expense of $4 3 million in the past quarter. We currently expect to stock stock based compensation will be approximately $16 6 million for the balance of fiscal 2025.
As well as we've mentioned in the past few quarters, we estimate the payments of contingent consideration for earn out arrangements accrued for at the end of the quarter will be approximately $35 5 million in the balance of the year subject to any necessary adjustments, resulting from the final earn out calculations.
Of the estimated $35 5 million balance to be paid $9 2 million relates to the portion of the earn out arrangements accrued for at the time of acquisition and will be reflected in the cash flow from financing activities. While the remaining balance of just over $26 million will be reflected in cash flow from operating activities most likely in Q.
Two when these balances are paid.
And finally.
Going forward subject to unusual events and quarterly fluctuations, we expect to continue to see strong cash flow conversion and generally expect cash flow from operations to be between 80% to 90% of our adjusted EBITDA in the quarters ahead.
I will now turn it over back over to Ed who will wrap up with some closing comments and our baseline calibration hey, great. Thanks, Alan So we're a month into Q2 and things are progressing as planned.
Two new acquisitions that were integrating and who we think will contribute more to our calibration as we become more experienced and operating them together, we're mindful of some weakness in U S. Domestic truck in parcel volumes, but also mindful of some logistics service providers expressing some optimism about international Ocean and air shipments we keep.
These things in mind, as we said our calibration for the quarter.
Our businesses are 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.
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, we take a neutral party approach to building and operating solutions and our global on our global Logistics network, we don't favor any particular party, we run our business for all supply chain participants.
<unk> shippers carriers logistics service providers and customs authorities.
When we ever performed we try to reinvest that over performance back into our business.
We focus on recurring revenues and establishing relationships with customers for life and we thrive on operating a predictable business that allows us forward visibility to our revenues and investment paybacks.
In our annual report, we provided a comprehensive description of baseline revenues baseline calibration and their limitations as of May one 2024, using foreign exchange rates of <unk> 70, <unk> to the Canadian dollar.
Seven to the Euro and $1 24 to the pound we estimate that our baseline revenues for the second quarter of fiscal 2025 are approximately $136 million and our baseline operating expenses are approximately $84 million.
We consider this to be our baseline adjusted EBIT calibration of approximately $52 million for the second quarter of fiscal 2025 or approximately 38% of our baseline revenues as at May <unk> 2024.
We continue to expect to operate in an adjusted EBITDA operating margin range of 40% to 45% our margin can vary in that range, given such things as foreign exchange movements and the impact of acquisitions as we integrate them into our business like we saw with Brown cloud last year.
We've got lots of exciting things planned for our business. It remains a challenging economic supply chain and compliance environment for our customers, but we believe our proven track record of execution solid capital structure and customer focus will help us serve them well. Thanks.
Thanks to everyone for joining us on the call today as always we're available to talk to you about our business in whatever manner is most convenient for you and with that operator, I'll turn it over to you for the Q&A portion of the call.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star one on your telephone keypad USG problem that you have seen today and should you wish to cancel your request. Please press star followed with you if you're using a speaker phone. Please lift the handset before pressing.
Your first question.
From the line of Justin long from Stephens. Please go ahead.
Thanks, and good afternoon.
So Alan you talked about the services growth being nicely north of 8% organically.
Slight moderation from what we saw in the prior quarter. So I'm curious if you could give a little bit more color on what drove that moderation and then as you think about the logistics customers Express.
Speaker Change: Expressing more optimism about the trends ahead would you expect organic growth to reaccelerate as we move into the second quarter.
Yeah, I'll just start Justin and then turn it over to Ed, but as far as as far as the past quarter. So.
Organic growth was very very solid.
In that mid 8% range eight and a half slightly better there is a few little adjustments in Q1 of last year, a few little extra piece of revenue that came in which would have impacted the growth rate slightly this quarter pulling it down a little bit.
So that's what we experienced as far as as far as going forward at any any comment yes sure. Thanks Justin.
So.
We're hearing and we're seeing an ocean stats at the ocean carriers are picking up.
Certainly.
The more transactions and also.
Charging more as they are trying to have to get their customers around some of the problems in the red Sea in the Panama Canal.
We've typically seen that translate into domestic volume increases in the U S and Europe.
Which we think will benefit us.
You you described this moderation, we kind of see it all in the same.
Range right now.
High eights to low nines.
Over the past several quarters and we.
That's good for our business in <unk>.
Much difference between this quarter and last quarter.
Speaker Change: And going forward.
We think our we like the environment certainly in our subscription business as we continue to sell well and I think that's going to be a tailwind for us for a long time to come with more people, putting money in to solving logistics and supply chain problems. We.
We will see what happens with the transaction volumes as it is looking at right now, but we have to see if some of these domestic truck volumes come through that would obviously be a tailwind for us if it does happen.
And.
When we look back over the.
Last 10 years, let's say.
We're pretty happy to be in the high single digits in terms of.
Organic services growth so.
See what happens.
We like what like what we see right now.
Okay. Good to hear that's helpful. One.
I guess secondly, I wanted to ask about the two acquisitions OCR NASD. It was good to see the capital deployment in the quarter anything we should be mindful of in terms of the impact. These acquisitions could have to margins similar to what we saw with ground cloud and any high level commentary on the impact to AUM.
<unk> organic growth as well based on how these businesses had been trending.
Yes, So we love these acquisitions I mean, it's.
You look at them. They are both in an area that we've done very well and in the past.
With acquisitions, they are both coming in slightly below our margin levels.
At the moment and we think we have great opportunity to raise that over time up to our margin levels on average or even better as we have performed.
In some of those areas.
Sanctioned party screens in a pretty screen and.
Some of the other businesses we've acquired over the years so are we.
We're very optimistic about that and we think they bring a lot of the table in terms of providing new solutions in those areas to our customers. So.
I think theres, a great opportunity there with those two acquisitions.
We put some of them into some of what we see from them into into calibration. So far we probably didn't put them all into the calibration yet because it's a new business for us and we want to get comfortable with where the revenue number is actually fallout as we're running them but.
We put a bunch of it and maybe not all of it and.
Hopefully the next quarter or two as we get more comfortable with the revenue production from those businesses will put it all into the calibration number.
Moving forward, but net net we are happy to have them here for our customers because we think it's some stuff that they want we've also had a lot of success running these businesses.
We've bought businesses like there was in the past so we're excited about the opportunity to.
To make these businesses, making more money over time like we have with some of the past acquisitions and the sanction party space.
Okay, Great I appreciate the time.
Hey, Thank you Justin.
Thank you and your next question comes from the line of Paul Quinn RBC capital markets. Please go ahead.
Paul Michael Treiber: Oh, thanks, very much and good afternoon.
It's a question just on.
The comment regarding a strong ocean volumes and translate into domestic.
I guess the international trucking volumes or is that primarily timing related are you referring to something else that impacted that.
No no what we're saying is we're just in the last short while here last few months, we're seeing ocean volumes pick up and over the next couple of months, we expect that to translate as it has in the past in the domestic volumes.
Increases.
Okay. That's helpful and I understand that dynamic there is that reflected into baseline or are no because baseline reflects.
Or.
I know it wouldn't be reflected in baseline good baseline reflects visible and recurring revenue at the start of the quarter.
Okay. That's helpful.
Just given the acquisition you deployed a lot of capital in two fairly large acquisition, how does that can skew your internal teams for the time being or are you still on the hunt for acquisitions with the capacity internal capacity to make acquisitions here.
Now, we really like what.
What we see ahead of us in terms of the acquisition environment.
And maybe on the last call same thing.
We see a lot of stuff for sale and a settling of the prices for for things that we've taken a look at that we think we can.
I have an opportunity to get a bunch of deals done.
Certainly it is not taken up all the time of our team were busy but.
But.
We're happy to get those two acquisitions done and look forward to having more in the future.
Okay. Thanks for taking the questions I'll pass the line.
Hey, Thank you Paul.
Thank you and your next question comes from the line of Stephen Byrd does have museum piece.
Please go ahead.
Hey, guys. Thanks for taking the question.
To continue kind of the idea of ocean recovery to a certain extent and given that you guys have been in a better position here over the last several quarters of monetizing that customers and kind of more of a challenge.
Volume environment, how do you think about your positioning here.
Maybe greater wallet share for that potential and then get a recovery from a volume perspective.
Yes, I mean, we're excited about it.
The Big news and what's been driving our growth rates over the past year.
A lackluster transportation environment as our subscription services are selling quite well and we see that strength continuing.
We're happy to hear the ocean carriers start to say things are picking up we think that will not only benefit us in the ocean space potentially.
The aerospace, which tends to follow along with it in the because of both international and the domestic space that eventually when and when the goods lands has to move that cargo so domestically so.
We see some opportunity for ourselves in that.
Okay, Great and then let me say that kind of the two acquisitions here following a common theme on content and compliant and maybe there is certainly kind of our localization component of that but also how do you think about kind of the leverage ability of those resources over time compounding value that you can deliver and maybe kind of depot deeper levels of.
Operations throughout that intelligence network.
Yes.
I'm glad you asked that thanks.
So specifically the OCR or they have some things that we didn't have before acquiring them.
Paul Michael Treiber: And.
We look forward to taking that around for the rest of our our customers. They certainly have a hazardous goods capability that we picked up in the process that we didn't have before and maybe most significantly they have a bunch of AI.
<unk> artificial intelligent processes that help them.
Collect more data and also harmonize.
Commodities within or for their customers and we think thats a set of capabilities that we can expand.
With our customer base to take advantage of.
Over the coming years, as we roll all of that functionality out to our customers. So we're excited about it.
Great. Thanks, Ed.
Okay. Thank you.
Speaker Change: Thank you and your next question comes from the line of Daniel Chan from TD Cowen. Please go ahead.
Ted in the past when you've made some acquisitions that will drive.
Daniel Chan: Operating leverage because I know you talked.
Without.
You're expanding but are there more cost synergies from the data acquisition.
Other business segments that you can extract out of these acquisitions to drive.
Even more operating EBITDA margin expansion that you typically would.
Yes.
I don't know about more there is certainly a bunch I mean.
These we have operated a lot of these businesses well north of our average EBITDA margins.
They operated both of these business operated let's say just south of those margin levels. So we see an opportunity over time to bring them up to our levels.
There's also the concept that they are collecting in a lot of cases some of the same data that we're collecting and can we consolidate some of that and create some of the opportunity that I think you are referring to and that's a possibility in some areas probably not our primary focus in buying the company, but it's certainly something we think we might be able to take advantage of over the next several years as.
As we look to improve operating margins in those businesses and bring them up to levels that were accustomed to running our businesses in and those segment same segments. So we'll see but we like what we like what we see so far we bought companies that are in some of the best business areas that we operate there are both growing at a decent clip.
We see the opportunity to make them more profitable all things, we'd like to see in an acquisition and all of those things exist in this one where it needs to.
That's helpful. Thanks.
Then maybe just more general question on the sales cycles and of course, we're still hearing about long sales cycles from a lot of years.
Really just big space, but it seems like you guys are still.
Breaking up the growth rate is suggesting those sales cycles are still holding in fine. What do you think you're seeing some of those sales cycles, whereas a lot of your peers are.
Well I think.
And I've mentioned this a bunch of time frame for the last several years that we're in a circumstance where after the pandemic.
And some of the supply chain challenges that went on in the pandemic a lot of our customers got much more focused on improving their supply chain operations and you know what.
I'm not sure what other types of companies are talking about but.
To the extent that we're very focused on areas that they think they need to improve in a lot of their investment dollars tend to go there.
<unk> regardless of.
What they are seeing on a day to day basis in their business, they're saying, hey, we need to improve our supply chain over time, and we're willing to make investments there even if we're maybe not making them and some of the other areas in our business as fast as we might when we see when a customer sees a day to day challenges in their business and they might say, hey, I'm not going to do this in a mechanism to that but that supply chain project.
Keep going with and I think that that may be the answer to your question.
Thank you.
Yeah.
Thanks, Dave.
And your next question comes from the line of Stephanie price.
Please go ahead.
Good morning, or good afternoon, I was hoping you could talk a little bit more about what you're seeing in E. Commerce I think you added to the growth sectors commentary this quarter for the first time in a few quarters, maybe touch on what changed there and maybe a bit about what you're seeing with Amazon logistics.
I mean, Amazon and some of them.
The larger providers there.
Continue to kind of switch around you've seen Amazon rise up to the number two provider for local delivery of that ecommerce business, which is fine with us I mean, the big growth that we have in the.
Bulk of our customer base in that ecommerce business is in the small and medium sized E. Tailers and we continue to do very well. There you heard me mentioned as a as a growth area for us and I think it will be for some time to come.
As we believe that e-commerce is going to be continue to grow and when it does we're going to continue to help.
Those service providers with.
The picking the packing.
Labeling and then.
The parcel manifesting so that they can actually ship the goods.
They all need help with that Theres small and medium sized E. Tailers are growing not only in number but also in size once they get into the markets.
One other.
<unk>.
Software providers and helping them solve some of the biggest challenges they have and we think that's create a great opportunity for us.
You can see it in the numbers in that business and I suspect, it's going to continue like that for some time to come.
Thanks, and then Alan maybe one for you LTM adjusted EBITDA growth.
10% to 15% growth target.
Curious about the opportunity to raise growth targets, given the solid organic growth and continued margin improvement.
Speaker Change: Yes. This has been our target for years were targeting 10% to 15% growth in adjusted EBITDA.
And I think we've over performed that I think our 10 year average is 18% I think I think you could expect more of the same we're going to set a target we're going to strive to overachieve and to do better than that target.
And we see a lot of opportunity to continue to do that.
It's guaranteed but.
But with the acquisition opportunities with solid organic growth.
That's going to continue to be the target and we do operate at the high end of our <unk>.
Of our EBITA margin range at $44 three a range being $40 to 45 that Ed mentioned earlier and same sort of theme. There we're going to continue to run our business to try to improve our EBITDA margins.
Probably have to see us operate above that 45 for a number of quarters before we would entertain any increases.
More of the same as I think we would like to see and expect to continue to see from our business.
Great. Thank you very much.
Okay. Thanks, Dave.
Thank you and your next question comes from the line of Steven Li from Raymond James. Please go ahead.
Thank you.
Scott.
And I wanted to also ask about the acquisition, so OCR and ESB.
Like what are the growth rates, let's say last year.
And I think.
Or was it double low double digit or maybe single digit.
Yes.
They are both coming in high single digits low double digits over the last couple of years, which is a key.
Speaker Change: Consistent maybe a little lower than what we're seeing in the same areas in our business, but in the same ballpark, let's say.
Okay I was going to ask you. So you said the.
<unk> is tracking a little bit slower than lets say youre on MTO visual compliance.
But close enough it's in the range, maybe a little smaller but.
But but but but close yes, okay got it got it and then the calculation we gave was 136.
Last quarter was once again you have so again I think that that Delta is the contribution from ESB and OCR.
Steven.
Ed mentioned earlier in the call we haven't run those businesses for a long time and so consistent with the way we've always done calibration on new acquisitions are part of those acquisitions and a good part of them have been reflected in our calibration thats why the numbers jumped up.
More than maybe you would expect but we do expect to fine tune that and we do see upside as we continue up well.
As we operate those businesses for a longer period of time, so partially reflected in calibration. The two acquisitions are certainly partially reflected there.
Speaker Change: Got it thanks, Thanks, guys.
Thank you.
Thank you and your next question comes from the line of Kevin <unk> from Scotiabank. Please go ahead.
Hey, there good evening, just a follow up on e-commerce, So a couple of years ago.
Net CHP, which I think had technology on expedited shipping for small packages. The pipe 86 filings. It sounds like there has been some recent changes in the U S that might more fiber more scrutiny on how quickly customers are cleared under that type of filing and seeing some brokers are seeing their ability to ship on pause. So I guess my question to you is.
How do you think about that business. It seems like it could be a short term headwind, but on the other hand, maybe it's a bit of a tailwind if that changes sort of increased demand for somebody rather customer services I'm. Just wondering if you could comment on on this relatively new.
Yes. Thanks.
Speaker Change: Kevin.
First of all we've enjoyed some great gains in those businesses over the last couple of years and in general we like our long term prospects in that business I.
I agree with you the government is starting to ask for more information from those types of providers and we think thats going to be a good thing for our business long term is where the guys that collect the information and give it to the government opportunities for us to provide a more significant service to our customers.
There are also ones that have gotten in some.
Some had some challenges, let's say with the government and either finance the stockpiling or do a better job of filing we also kind of see that as an opportunity for us one to the extent some of what's been asked to stockpiling.
Because we have the bulk of the filers in that business. We believe we're going to pick that volume up with other.
With other providers.
To the extent the government's asking for more information, we think that's an opportunity to provide a more enhanced service to our customers in the long run net net we see this because of the Instagram TIK talks of the world where a lot of these products are being sold.
The growth is coming from that hasn't slowed at all it's growing and continues to grow and as the largest file are out there for type 86, we think we're going to continue to benefit from that in the long run.
Speaker Change: Got it appreciate it that's all for me thanks.
Thanks, Kevin.
Thank you and your last question comes from the line of Scott Group from Wolfe Research. Please go ahead.
Hey, Thanks, Hey, guys I'm on the road hopefully you can hear me okay.
Yes, so and when you guys do a couple of relatively large acquisitions in the quarter is the thought that from here you pause for a little bit and see how they perform or where do you think that there is more to go in terms of M&A activity over the course of the year.
Thanks, Scott Yeah, we can hear you fine.
Speaker Change:
Pretty significant corporate development function at this point and think we have certainly the bandwidth to do more acquisitions.
We're also in a position where we see a lot coming at US right now a lot of things for sale a lot of things that we think.
Or in a price range that we think is reasonable and.
We'd like to take advantage of that so I don't think you're going to see us slow at all.
Based on based on the last two acquisitions, we did certainly.
They were significant it was one of them was significant.
That's great.
Good addition for our business, but we also have the ability to get more done and the ability to get more people working on getting more acquisitions done while we integrate the ones that we just did so.
We're taking advantage of the breadth and size of our business to do that so.
Okay. Good and then just a couple of follow ups on like some of the market color do you have.
Thoughts on like this pretty dramatic increase in ocean spot rates.
Speaker Change: Sustainable It is and then separately you made a comment about changes.
At the post office and I'm just wondering.
How that impacts you good or bad.
I mean, theres just a lot of it a lot of their price increases don't really impact us.
Other than as the sign of what's going on right. They are increasing and its a very capacity focused business right when they're when they have excess capacity there rates tend to go down when they have increased capacity sorry, when their increased capacity, there which tend to go down when they are.
Less capacity their rates tend to go up and we're seeing that I think some of the challenges I mentioned with the Red Sea in the Panama Canal are contributing to that.
Probably also just have they're doing a REIT right now so they're taking.
Taking that opportunity to raise rates it doesn't really impact us as much we see it happening.
We charge by the transactions that were not really impacted by their rates. So.
So much.
We take it as a good general sign not only for the ocean space, but air tends to follow along with the closely and as I mentioned earlier domestic trucking tends to also follow along with it.
Pretty quickly.
Thereafter.
On the U S postal service.
We think we have a lot of opportunity in that ecommerce business and some of it relates to the U S Postal service.
Several of the other providers in that business Amazon.
Yeah.
Fedex and a bunch of other guys that are that are smaller than them.
That we do a bunch of business with them as their business picks up.
We expect to benefit from that as we always have.
Okay. Thank you for the time guys I appreciate it.
Hey, Thanks, Scott appreciate it.
Thank you that concludes our question and answer session I will now hand, the call back to Mr. Andrew <unk> for any closing remarks.
Hey, great. Thanks, everyone. We appreciate your time today on the call and look forward to reporting back to you on our Q2 results in September Thanks, and have a great day.
This concludes today's call. Thank you for participating you may all disconnect.