Q3 2025 The Descartes Systems Group Inc Earnings Call

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Speaker Change: Good afternoon, ladies and gentlemen, and welcome to the Descartes Systems Group Quarterly Results Conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session.

Speaker Change: If at any time during the presentation you require immediate assistance, please press star zero for the operator This call is being recorded on the Tuesday December 3rd 2024. I would now like to turn the conference over to Mr. Scott Pagan. Please go ahead

Speaker Change: Thank you and good afternoon everyone. Joining me remotely on the call today are Ed Ryan, CEO, and Allan Brett, CFO, and I trust that everyone has received a copy of our financial results press release that was issued earlier this afternoon.

Speaker Change: 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.

Speaker Change: 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.

Speaker Change: Descartes 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.

Speaker Change: 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.

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 Securities and Exchange Commission, the Ontario Securities Commission, 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're cautioned that such information may not be appropriate for other purposes.

Speaker Change: 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.

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

A great Scott, thanks and welcome everyone to the call.

Speaker Change: Today, we're reporting record third quarter results, continued strong revenue and adjusted EBITDA growth, and two new businesses that have joined the Descartes team.

Speaker Change: 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 word, Matt, for the call.

Matt: 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 Allan who will go over the Q3 financial results in more detail

Matt: 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 fourth quarter and we'll then open it up to the operator to coordinate the Q&A portion of the call.

Speaker Change: So let's start with a quarter that ended on October 31st. Key metrics we monitor include revenues, profits, cash flow from operations, operating margins, and returns on our investments.

Speaker Change: For this past quarter, we again had very good performance in each of those areas.

Speaker Change: Total revenues were up 17% from a year ago, with services up 15% from a year ago.

Speaker Change: The organic growth in our total revenues in this quarter is about 10%. Net income was up 38% from a year ago, with adjusted EBITDA up 14% from a year ago. Our headline targets are 10-15% adjusted EBITDA growth per year, and we're at 15% over the first three quarters of this year.

Speaker Change: Adjusted EBITDA margin held at the same rates as last quarter at 43%. However, as we talked about last quarter, Q2 and Q3 had unique items that impacted this margin. Our ground cloud business entered an accelerated hardware replacement cycle with our customers in Q2 to get AI-enabled cameras in place.

Speaker Change: This resulted in more low-margin hardware sales to customers in Q2 and Q3, changing the revenue mix and impacting the margin.

Speaker Change: The hardware replacement cycle is now done, so we anticipate this drag on margin won't be there in Q4. The core Descartes business and margin is otherwise performing as we'd expect. Allan will speak to this in more detail later on the call.

Speaker Change: We also generated over 60 million dollars in cash from operations in Q3 or 83% of adjusted EBITDA in line with how we would expect the business to perform.

Speaker Change: At the end of the quarter, we had over $180 million in cash, and we were debt-free with an undrawn $350 million line of credit.

Speaker Change: This is after we used about $22.5 million to acquire MyCarrierPortal and paid $110 million to acquire SellerCloud.

Speaker Change: We remain well-capitalized, cash-generating, growing, and ready to continue to invest in our business.

Speaker Change: Our growth strategy remains one of total growth. We've designed our business to be a profitable business that generates cash and can otherwise be reinvested to improve the business for our customers and stakeholders.

Speaker Change: We consider where to invest based, in part, on the returns we can generate in our invested capital. Our plans for our year are based on growing our business 10-15% a year through a combination of organic and acquisition activities.

Speaker Change: Speaking of acquisitions, we've completed five so far this year. We bought OCR and ASD in Q1 and bought BoxTop in Q2. We then combined with MyCarrierPortal and SellerCloud in Q3. I just wanted to comment on how these acquisitions have fit in and are contributing.

Speaker Change: So first, we combine with OCR in March of this year.

Speaker Change: OCR are experts in sanctioned party screening and export compliance, a key part of our global trade intelligence offerings.

Speaker Change: For clarity, sanctions are when a government puts a restriction on doing business with a particular party, jurisdiction, or country, while broader export compliance includes securing the necessary licenses and other permissions to export a particular controlled item to a person or country.

Speaker Change: OCR complements our existing strong screening solutions, but makes us even stronger by adding advanced export compliance technology that can serve some of the biggest companies in the world.

Speaker Change: OCR has hit the ground running for us and is ahead of our integration plans. We've added a broad base of industry knowledge in India that is already contributing to our broader global intelligence solutions.

Speaker Change: We've had some sizable joint wins in each quarter since the acquisition.

Speaker Change: and market conditions are such that it's even more challenging environment for our customers to comply with the current situation and plan for future warmer restrictions on global trade, in part driven by statements made by the new incoming Trump administration in the United States.

Speaker Change: For the time ASD deal will be completed in Q1, their business is focused on European customs and security filings with particular strength in Ireland. They also do asset tracking for airlines. This business is also performing ahead of our plans with deliberate work done on integration.

Speaker Change: We think there are some good potential tailwinds for this business with potential increased scrutiny from Europe on cargo security on airlines, something that may be addressed through an additional data and filing requirements and asset tracking.

Speaker Change: In Q2, we combined with BoxTop, a business we had a track record of working with as a partner long before the acquisition.

Speaker Change: Box Top has shipment management solutions for small and mid-sized logistics service providers.

Speaker Change: the same customer base that makes up a large percentage of our customers for our forwarder and broker solutions.

Speaker Change: Foxtop's integration and contribution is ahead of plan. It's also well placed to help this customer base as the cross-border trade environment threatens to become more complex.

Speaker Change: In Q3, we bought two new businesses. The first was our combination with MyCarrierPortal in September. MyCarrierPortal helps U.S. freight brokers with risk management of the thousands of truck carriers that they deal with.

Speaker Change: Their platform also allows the brokers to evaluate the risk of working with a carrier based on a number of factors including licensing, past service record, safety, potential fraud risk, and insurance compliance.

Speaker Change: This is a natural fit with our macro point business where we're helping freight workers track loads and identify potential available capacity.

Speaker Change: I think this is a natural fit for our business with our vast experience with screening and compliance solutions combined with our market-leading domestic truck business.

Speaker Change: We only had a partial quarter with MyCarrierPortal so far, but already have a profit contribution ahead of our expectations due to the hard work of the teams to rapidly get our businesses working together.

Speaker Change: We were able to get the combination completed before our innovation forum slash user group That we held for this customer base in Chicago And it was great to hear the endorsement of the broker community for this solution becoming part of the global logistics network portfolio Welcome to everyone from the MyCarrier portal team

Speaker Change: In October, SellerCloud joined the Descartes family. This is a great addition to our e-commerce solutions, essentially filling a hole that we had in our solution set.

Speaker Change: Sellercloud focuses on inventory and order management for e-commerce sellers who are using multiple channels to sell with particular strength with small and mid market e-tailers.

Speaker Change: Our existing solutions have focused on the warehousing, shipping of e-commerce orders, but by adding inventory and order management, we can offer a more comprehensive suite to our customers that's flexible as they grow and add new sales channels.

Speaker Change: We've already seen great post-deal success in getting customers signed up for a combined Descartes Solar Cloud solution, so we're optimistic of achieving our growth plans for this business.

Speaker Change: As with MyThyria Portal, it's encouraging to hear the industry and customer community confirm the sensibility of our business coming together with SellerCloud, and it's also an endorsement of the strong work that our entire organization puts into our corporate development efforts.

Speaker Change: Welcome to the Wholesaler Cloud team. We look forward to achieving great things with you together.

Thank you. Thank you. Thank you.

Speaker Change: I mentioned that our customers are facing some big challenges in managing global trade and are facing heightened uncertainty for what the future global trade landscape will be. Let me just hit a few of the items shaping the market environment right now.

Speaker Change: The biggest source of uncertainty has been the comments from the incoming Trump administration about the potential for the imposition of tariffs by the U.S. on imports from China, Canada, and Mexico, as well as other broad-based sanctions.

Speaker Change: These tariffs and sanctions may force U.S. businesses to restructure their supply chains and logistics operations.

with the potential for movement of manufacturing and sourcing facilities.

Speaker Change: changes in trading partners, heightened scrutiny and sanctions on particular goods in countries, and the potential for retaliatory sanctions and tariffs by other countries.

Speaker Change: We're already helping our customers with information and planning, and we expect that our global trade intelligence businesses will be very busy over the coming months.

We've seen good volumes in air and ocean.

but have seen fairly flat volumes in U.S. trucking.

Speaker Change: Ocean in particular has seen very high levels with larger amounts of imports into the U.S. and Mexico from China.

Speaker Change: There's a couple things we're monitoring for volumes as we enter Q4. First, the seasonal impact of peak holiday buying periods, which we expect will be more visible in air and truck because of their shorter transit times. Second, with the potential for new tariffs, we've heard commentary from many U.S. businesses that they're bringing inventory in early to get ahead of the potential new U.S. tariffs.

Speaker Change: Cargo security issues are front and center particularly with parcel air cargo in Europe. Earlier this year there were incidents with explosive devices and parcels that made their way on to European carriers. Some carriers responded by refusing to ship certain parcels containing electronics.

Speaker Change: Regulators have also intervened requiring more information about cargo shipments on a plane before the plane takes off, including the new requirement of an identification of the underlying shipper of the package rather than just the intermediary shipping the package.

Speaker Change: Our customers are committed to helping ensure that there is cargo security to minimize the chances of catastrophic events But there's also a burden that our customers are having to bear right now as they re-engineer their processes and information gathering practices to help comply with the new regime

Speaker Change: Labor uncertainty continues to impact our customers' ability to plan. U.S. East Coast and Gulf ports have had a labor contract that expires again in January.

Speaker Change: Canadian ports have just dealt with strikes where the government legislated people back to work and Canada Post is currently on strike impacting many e-commerce deliveries into Canada. All just examples of how our customers have to plan for the reality of labor unrest that will impact their fulfillment operations.

Speaker Change: I've mentioned this in past quarters, but we're a business designed to meet challenging business conditions and thrive in periods of change. We focus on total growth and try to diversify our business. We grow organically and by way of acquisition.

were diversified across all modes of transportation.

We provide business value across seven solution pillars.

We have over 26,000 customers with low customer concentration.

Speaker Change: We serve all parties to supply chain and logistics transactions, carriers, logistics service providers, ports, governments, and shippers. We serve customers on a global basis with a global workforce. We believe that all of these levers to our business provide us with many opportunities to help manage our business through prosperous and challenging times.

Speaker Change: Descartes is a business our customers rely on, that our team can be proud of, and that our stakeholders have relied on consistently to deliver. Descartes has done that again this quarter.

Speaker Change: I'll just finish up my comments by referencing some of our recent marketing activities. A few months ago we held some Descartes innovation forums. These are essentially user groups that are focused on particular solution pillars. The recent innovation forums focused on private and for higher transportation management.

Speaker Change: and serving the logistics provider community. These innovation forums for SelectPillars have greater participation than our pre-pandemic user groups that we held for our entire business as a whole. We've also hosted some recent online events relating to global trade intelligence, trade compliance, and tariffs and duties.

He's also had record attendance.

Speaker Change: While the increased attendance can partially be explained from our growth as a company, I think the interest we've seen in these events reflects the extreme need for help and information that our customers have right now. Nothing is constant for our customers and they're having to be very dynamic and radical in meeting the challenges facing their supply chain and logistics operations.

Speaker Change: supply chain and logistics roles at our customers business continue to have heightened importance and the potential upcoming changes to global trade are unlikely to change that.

Speaker Change: Our mission is to help our customers manage this complexity, and I believe we have a track record of people and solutions and expertise to help them not just survive, but to thrive.

The

Speaker Change: So let me just summarize the handover at Allen to give the full financial details in the quarter and year to date.

Speaker Change: 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, the quality and contribution of acquisitions we've added to our business, and the hard work that our team continues to put in for our customers.

Speaker Change: We ended the quarter with more than $180 million 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.

Speaker Change: We remain 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 challenges well into the future.

Speaker Change: My thanks to all Descartes team members for everything they've done to contribute to a great quarter and a great business.

Speaker Change: With that, I'll turn the call over to Allan to go through our Q3 financial results in more detail. Allan?

Allan Brett: Hey, thanks Ed. As indicated, I'm going to walk you through our financial highlights for our third quarter, which ended on October 31st.

Allan Brett: We are pleased to report record quarterly revenue of $168.8 million this quarter, an increase of 17% from revenue of $144.7 million in Q3 last year.

Allan Brett: While revenue from acquisitions completed in the past 12 months, including the acquisitions of both MCP and Seller Clause completed during the third quarter, contributed nicely to this growth,

Allan Brett: Similar to the past several years, our growth in revenue from new and existing customers from our existing solutions also helped drive growth again this quarter when compared to the same period last year.

Allan Brett: Looking at our revenue details further, our revenue mix in the quarter continued to be strong, with services revenue increasing 15% to $149.7 million, compared to $130.4 million in the same period last year, representing approximately 89% of total revenues in the third quarter.

Allan Brett: License revenue came in at $3.5 million, or 2% of revenue in the quarter, up nicely from license revenue of $1.5 million recorded last year in Q3. While professional services and other revenue came in at $15.6 million, up 22%, or coming in at 9% of total revenue, compared to $12.8 million in the third quarter last year.

Speaker Change: As Ed mentioned, similar to last quarter, we had some additional hardware revenue this quarter from our ground cloud business as we continued the rollout of AI-enabled cameras as part of a specific mandate that FedEx gave to their independent contractors.

Speaker Change: In Q3, this added approximately $3.5 million of very low-margin hardware revenue, while also at the same time expanding our base of subscription customers in GroundCloud, which should benefit our subscription revenue from this part of the business in the quarters and years ahead.

Speaker Change: We should also highlight that, after recording unusually high hardware sales in Q2 and Q3, we would expect that hardware sales in GroundCloud, and our business in total, will return to a nominal amount in Q4 and remain at those lower levels going forward.

Speaker Change: Based on the above, we would estimate that our total organic growth for the business came in around 10% per Q3, while organic growth and just services revenue came in around 7%, pretty consistent with the second quarter of this year.

Speaker Change: For the first nine months of this year, revenue came in at $484 million, an increase of 14% from revenue of $425 million in the same period last year. Again, with revenue from acquisitions completed this year, as well as organic growth in our existing solutions, both thriving this 14% growth.

Speaker Change: Gross margin came in at 74.4% of revenue for the third quarter, down from gross margin of 76.3% in the third quarter last year. And this temporary decrease in margins is due to the impact of the very low margin hardware revenues that were recorded in the ground cloud business that I just mentioned earlier. Excluding these hardware revenues, our gross margin percentage would have been very similar to the third quarter last year.

Speaker Change: Operating expenses increased by approximately 14% in the third quarter over the same period last year and this was heavily related to the cost impact of the five acquisitions completed this year.

Speaker Change: But operating costs also increased some from some headcount additions that we completed, as well as some higher marketing costs, including the cost from our successful innovation forums, customer events that were held earlier in Q3, as Ed referenced earlier.

Speaker Change: So, as a result of both revenue growth offset with some unusually higher cost increases this quarter, we've recorded adjusted EBITDA growth of 14% to a record $72.1 million, or 42.7% of revenue.

Speaker Change: up from $63.5 million or 43.9% of revenue in Q3 last year.

Speaker Change: We should also mention as a reminder that, similar to Q2, our adjusted EBITDA margins are down slightly from Q3 last year due to the impact of the low margin hardware revenue recorded in the quarter, but also partly due to the impact of lower margins from some of our recent acquisitions.

Speaker Change: excluding the impact of the hardware revenue in ground cloud as well as these acquisitions adjusted EBITDA margins would have been right around 44% of revenue or just slightly ahead of where we were in Q3 last year

Speaker Change: For the first three quarters of the year, Adjusted EBITDA has increased by just over 15% to $210 million from $182 million in the same period last year, with Adjusted EBITDA ratios increasing to 43.4% from 42.8% last year.

Speaker Change: Looking at the other GAAP line items on our income statement this quarter, other charges decreased to $1.8 million from $9.7 million in Q3 last year, as last year we included an accrual of $7.8 million in other charges related to higher-than-expected earn-out payments on past acquisitions.

Speaker Change: As a result of the increased operating profits and growth from the business

Speaker Change: and this decrease in other charges. Net income came in at $36.6 million or $0.42 per diluted common share in the third quarter, up nicely from net income of $26.6 million or $0.31 per diluted common share in the third quarter of last year.

Speaker Change: We should also note that the income tax expense for the third quarter came in at $11.9 million, or 24.5% of pre-tax income.

Speaker Change: of 26.5, mainly as a result of the recognition of certain unrecorded tax benefits from past periods.

Speaker Change: Net income for the nine-month year-to-date period was $105.9 million, or $1.21 per diluted common share, compared to $84.1 million, or $0.97 per diluted common share, last year in the first nine months. Again, as a result of the Higher Operating Report, profits from our growing business.

Speaker Change: With these operating results, strong AR collections offset partially by higher cash tax payments in the quarter. Cash flow generated from operations came in at $60.1 million or 83% of adjusted EBITDA in the third quarter, up from $56.1 million in the third quarter last year.

For the nine months year-to-date, after adjusting for the higher earn-out payments made in Q2 that went through cash flow from operations,

Speaker Change: Our operating cash flow has increased 17% to approximately $184 million or 88% of adjusted EBITDA from $157 million or 86% of adjusted EBITDA in the same period last year.

Speaker Change: And we should mention that 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% and 90% of our adjusted EBITDA in the quarters ahead.

Speaker Change: Overall, we're once again pleased with our quarterly offering results as the addition of our recent acquisitions combined with continued organic growth and services and license revenue resulted in strong adjusted EBITDA growth in Q3.

Speaker Change: If we turn our attention to the balance sheet, our cash balance was totaled $181 million at the end of October.

down slightly from down from approximately 253 million.

Speaker Change: from the end of Q2 in July. The decrease in cash is primarily related to the $133 million in cash that we used to complete the MCP and Seller Cloud acquisitions this quarter.

Speaker Change: with that partially being offset by $60 million of cash flow generated from operations that I referenced earlier.

Speaker Change: As a result of the above, we currently have $181 million in cash, as I mentioned, as well as our unused $350 million credit facility available to deploy towards future acquisitions consistent with our business plan.

Speaker Change: As we look to the final quarter of 2025, our physical 2025, we should note the following. After incurring approximately $4.7 million in capital additions for the first nine months of the year, we expect to incur approximately $1 to $2 million of additional capital additions for the fourth quarter.

Speaker Change: We should also mention that we don't expect to make any payments in the fourth quarter on any earn-out arrangements that we currently have in place.

Speaker Change: After incurring amortization costs of $50 million in the first nine months of the year, we expect the amortization expense will be approximately $18.1 million for the fourth quarter, with this figure being subject to adjustment for foreign exchange changes and future acquisitions.

Speaker Change: Our income tax rate for the first nine months of the year came in at approximately 25.9% of free tax income, which is just below our blended statutory tax rate of approximately 26.5%.

Speaker Change: For the fourth quarter, we currently expect that our tax rate will once again come in very close to our blended statutory tax rate. And as a result, we should experience a tax rate in the range of 24% to 27% of pre-tax income.

Speaker Change: However, as always, we should state that our tax rate may fluctuate quarter to quarter from one-time tax items that may arise as we operate internationally across multiple countries.

Speaker Change: And finally, after incurring stock-based compensation expense of $14.6 million in the first nine months of the year, we currently expect stock compensation to be approximately $5.4 million in Q4, subject to any forfeitures of stock options or share units.

Speaker Change: And with that, I'll now turn it back over to Ed, who will wrap up with some closing comments and our baseline calibration for Q4.

Ed Ryan: Hey great, thanks Allan. We've done five acquisitions so far this year and two since our last call. We believe these acquisitions will contribute more to our calibration over time as we become more experienced in operating them together. As we look at our calibration we're mindful of some weakness in U.S. domestic truck volumes but also mindful of factors that may contribute to a recovery of volumes including shipping in advance of the imposition of new tariffs.

Ed Ryan: We're also mindful that the accelerated hardware replacement cycle at ground cloud is complete and we don't anticipate any incremental hardware volumes above the ordinary course.

Ed Ryan: Our business is designed to be predictable and consistent. We believe 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: Our long-term plan is for our business to grow adjusted EBITDA 10 to 15% annually.

Ed Ryan: 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.

Ed Ryan: When we overperform, we try to reinvest that overperformance 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.

Ed Ryan: As of November 1st, 2024, using foreign exchange rates of $0.72 to the Canadian dollar.

$1.09 to the euro.

and one

Ed Ryan: 29 to the pound, we estimate that our baseline revenues for the fourth quarter of fiscal 25 are approximately $144.5 million and our baseline operating expenses are approximately $89.5 million. We consider this to be our baseline adjusted EBITDA calibration of approximately $55 million for the fourth quarter of fiscal 2025 or approximately 38% of our baseline revenues as at November 1st, 2024.

Ed Ryan: We continue to expect that we'll operate in an adjusted EBITDA margin range of 40 to 45 percent. Our margin can vary in that range given such things as revenue mix, like we saw with hardware these past two quarters, foreign exchange movements, and the impact of acquisitions as we integrate them into our business.

Ed Ryan: We believe the ground cloud hardware replacement cycle has completed, so we'll see some relief to adjust the debit to margins coming out of that.

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

Speaker Change: I want to thank everyone for joining us on the call today. As always, we're available to talk to you about our business in whatever manner is most convenient for you. And with that, operator, I will now turn it over to you to handle the Q&A portion of the call.

Thank you.

Speaker Change: Ladies and gentlemen, we will now begin the question and answer session.

Speaker Change: Should you have a question, please press star followed by the number one on your touchtone phone. You will hear a prompt that your hand has been raised.

Speaker Change: Should you wish to decline from the polling process, please press star followed by the number 2.

Speaker Change: If you are using a speakerphone, please make sure to lift your handset before pressing any keys.

Speaker Change: Your first question comes from the line of Faith Brunner from William Blair. Please go ahead.

Faith Brunner: Hey guys, thanks for taking my question. I guess you guys talked on the call and also in your recent white paper, there's a lot of uncertainty going on with this new administration on top of an already complex environment. And you talked about some customers maybe trying to get inventory in ahead of time. So I guess what are you hearing maybe more broadly from customers on how they're trying to navigate this situation and what tools are they looking for and maybe how are they looking to you guys to kind of help them navigate this?

Speaker Change: Thanks Faith. Yeah, so a lot of discussion about this you can see it in the papers and certainly we're having a lot of discussions with our customers on these subjects. I mean first and foremost there's there's a lot of use of our global trade intelligence solution right now to try and figure out what

the

Speaker Change: potential impacts would be for changes in tariffs that no one really knows what those are going to be. They know what's being threatened, and they've also seen maybe

Speaker Change: in Trump's last term where there were threats that kind of, you know, were used as a negotiating point. So no one's really sure what's going to happen there.

but it is causing increased use of our system which...

Speaker Change: is helpful for us and helpful for our customers as they're trying to figure these things out.

Speaker Change: Otherwise, the other thing you might see in the papers is people talking about shipping things in advance. We haven't seen that happen yet so clearly, but, you know, we'll see.

Speaker Change: hearing our customers talk about it, and certainly seems like it's something that might be a possibility over the coming months, so we'll just continue to monitor the situation. In that case, they'd be using our network as they always do to ship goods.

Speaker Change: Okay, cool. And then maybe one other quick one for me.

Speaker Change: I'm just looking at SellerCloud. You talked about you're already seeing some encouraging customer adoption of this and you're optimistic about the growth plan. So can you maybe talk about like what the potential is here now that there's a more comprehensive solution? How can this like slowly fold into the financial profile and help expand your wallet share with customers?

Speaker Change: Yeah, and, you know, as we put this e-commerce solution set together, you know, we started to realize that it would be very helpful for the customers if we could add the order entry functionality and some of the other things that SolveCloud does.

Speaker Change: to the solutions that some of the customers don't have any of those solutions and would like them all to work together.

Speaker Change: Just in the couple months that we've owned them, we've already had a number of sales where we sold the complete solution set theirs and ours.

Speaker Change: in one package, and that's exciting to us because we think there's a lot of opportunity to do that going forward. It makes us

Speaker Change: more attractive to a broader customer base as a result of doing that. Just other commentary we've heard in the industry when we're out talking to others is that SellerCloud was a great company and very interesting that Descartes and SellerCloud are coming together and people were excited about it.

We're excited as well.

Speaker Change: All right, awesome. Thanks for the color and for correcting it on the color.

Thanks, Keith.

Speaker Change: Your next question comes from the line of Paul Treber from RBC Capital Markets. Your line is now open.

No, thanks very much and good afternoon.

Speaker Change: Just a question on tariffs and in regards to your global trade intelligence solutions.

Speaker Change: Just what's the penetration across your customer base of global trade intelligence?

Speaker Change: And then, you know, what do you see as the longer-term opportunity? Like I mentioned, you're trying to drive it more into your customer base. Is there a structural tap, or do you think every customer should have those solutions?

Speaker Change: Every customer that moves multiple products to multiple countries is a potential target for this. If you have one product, one SKU, that you only move to one country, you're probably gonna be able to monitor the tariff rates yourself, as that comes into thousands of SKUs, and as most companies do, and tens or even,

Speaker Change: upwards of a hundred or more countries that you might ship these things to. You have to know this information and there's lots of ways to do it and there's lots of places in your organization that you need it access to it in the beginning before you know starting before you build a factory all the way to I'm doing this live every day and shipping stuff I want to make sure I'm paying the right rates.

Speaker Change: That's what's created a massive opportunity for us here. And the fact that we've put all these solutions together in one accessible data set that we can

Speaker Change: give you access to an application that we provide or download it into your Oracle or SAP or NetSuite applications.

Speaker Change: so that you can use it there and embed it in it and we provide it in those formats for people to try to make it very easy for them to make all the countries look the same and all be delivered to your SAP Oracle system in a format that that's usable or digestible by those systems.

Speaker Change: and that's that's what distinguished us from our competitors and love taking a leading position in the market and there's a lot more companies that that need to do it that don't do it right now there's a lot more company coming up

Speaker Change: You can see what's going on with e-commerce right now. There's a lot of mid-sized and smaller guys that didn't used to think they needed stuff like this and all of a sudden they do.

Thank you. Thank you.

Speaker Change: Thank you parties. It's you know, not not not the same thing, but but but it's the next-door neighbor for tariffs and duties You're shipping at the same time and you want to make sure you're able to ship that to those people

Speaker Change: companies tend, mid-sized and smaller companies, large companies have already gotten into this, but mid-sized and smaller companies

Speaker Change: tend to get into it when they get in trouble. They ship to someone they weren't supposed to or ship to a country they weren't supposed to and they find out that they need to start doing this and it's a way that they mitigate their fines by telling the government, hey, I just bought a solution from Descartes. It's going to make sure I don't make this mistake anymore and you know, that's what creates the opportunity for us there, so.

Speaker Change: It's a great business. I think we've bought a bunch of good companies in this space and ended up in a strong leadership position and we're excited about

Speaker Change: And then, you know, shifting gears, you mentioned e-commerce, you know, with SellerCloud, your e-commerce business is getting, you know, quite, quite large. The, you know, can you speak to the go-to-market strategy for e-commerce in particular and, you know, how that may differ versus, you know, your more sort of traditional market of, you know, logistic service providers?

Speaker Change: Well, in the case of our e-commerce solutions, we're going after small and medium-sized e-tailers, primarily. And there's lots of them, and they keep coming, and there's new ones forming all the time.

Speaker Change: And as they get bigger, they need shipping solutions, they need warehouse management solutions, they need order entry solutions. And, you know, we're trying to provide an all-in-one package that helps them solve that problem, make sure they, you know, look like the big guys when they're shipping stuff to their customers.

Speaker Change: our sales forces you know finding ways to contact those people and then and then you know making calls on them and most in most cases you know not in person calls they're talking to them over the phone and showing them our solutions and showing how they would solve their problems and

Speaker Change: to try and bring them to a point where they're operating more efficiently and they're saving money on transportation costs because they're using our systems.

Thanks for taking my questions.

Hey, thanks, Paul.

Speaker Change: Your next question comes from the line of Stephanie Price from CIBC. Please go ahead.

Hi, good evening.

Speaker Change: Maybe Allan, this one I think is for you. Just in terms of all the M&A that Descartes has done so far this year, how should we kind of think about the timeline to integration for these acquisition and and margins kind of trending back towards the the typical level here?

Allan Brett: yeah every every acquisition is different obviously part of we're pretty experienced at doing this part of our approach is going to be to look for

Allan Brett: Both cost synergies, revenue synergies take a little bit longer typically, although as Ed said, we're starting to see some good success early on some of the deals.

So each field takes its time, but...

Allan Brett: You know, every deal has a model where we think we can get it back to usually improve the margins, either through growth and most likely through combination of growth and cost control.

Allan Brett: to improve the margins back towards our company average. So it's pretty common that we'll buy businesses, they may not be at the margin that we think we can get, that we are at right now, and we will work to get them there. Some will take a couple quarters, some may take a couple of years. It's just a journey based on the individual deal.

Speaker Change: Okay, thanks. And then just on MCP, it sounds like the opportunity with MyCarrier Portal is to cross sell into MacroPoint's customer base. Ed, can you kind of expand on that a little bit and just curious if it's going to be offered as a global trade intelligence solution as well?

Speaker Change: Probably more something that's in our transportation management vertical focused on helping brokers and 3PLs identify which carriers are

Speaker Change: you know of financial status and you know maybe just what carrier is doing a good job of making deliveries so they can evaluate that before they select a new carrier.

Speaker Change: It's combined with the MacroPoint solution because MacroPoint sells to almost all of those brokers, and so it's a convenient thing to sell right next door to it. Also, if you're using our capacity management.

Speaker Change: Solutions, where you're actually making shipping decisions. It's nice to know, hey I'm selecting a new carrier here and that carrier's kind of got a good rating in the MyCarrierPorter solution. So that's the mindset of it.

Speaker Change: I don't know that it would go into the global trade intelligence solutions, although I guess I can see why you ask that. But it's probably more likely to be used alongside of our macro point solutions.

Great, thank you very much.

Hey, thanks, Seppi.

Speaker Change: Next question comes from the line of Lachlan Brown from Redburn Atlantic. Please go ahead.

Lachlan Brown: If we look at your North American trucking volume, are you able to provide any color on your exposure to shipment volumes between Canada and the U.S., Mexico and the U.S.?

Lachlan Brown: And given the prospect of 25% tariffs that's been raised, what have your conversations been like to the customers that provide cross-border movement of goods between the US and these countries? Thanks.

Speaker Change: Thanks a lot. Off the top of my head, I don't know the exact volumes, but it's substantial. You know, we have a number of carriers that we do a lot of business with in either Canada.

Speaker Change: United States or Mexico or in a lot of cases all three And they have to go do cross-border shipments which result in custom signs and things of that nature You know, I don't know what's going to happen if I've heard lots of different theories about what's going to happen if

Speaker Change: if 25% tariffs go into place. My gut is that that it's not going to be quite that simple. It's probably going to be negotiated to certain commodities and things of that nature.

Speaker Change: I don't know what it'll be to the truck line. It could increase it. I could see a world where people ship stuff into one place and then try to get it into the United States some other way to avoid China. I could also see these tariffs slowing it down because maybe people would not ship as much stuff that way so

Let's put it this way.

Speaker Change: When I think of it at a higher level, there's a whole bunch of consumers out there that want stuff, and there's manufacturing facilities that need stuff to produce their goods. Those goods are going to have to still get there, and I don't know how they're going to get there, but I do know that we're going to probably help our customers do it whenever these rules come into effect.

change or come down and you've heard us say that...

Speaker Change: In the past that we help our customers deal with complexity. And this is exactly what we're talking about. There's a lot of changes being discussed right now. People have to think quickly about what they're going to do when these new changes come in.

Speaker Change: come into place and you know we provide a lot of the tools that help them figure that out and then a lot of the tools that would help them actually execute on it when they do so

Yeah

Speaker Change: our customers are not thrilled about this tiny stretch but they have to deal with it and when they do you know we hope to be there to help them figure out how to do it as efficiently as possible

Speaker Change: That's very clear, thanks. And whilst CEQC had its investigate overnight and it recently released a solution compliance flyer with a bit of a focus. I know you don't necessarily overlap with them too much given their focus on straightforwarding but I'm just wondering within your customs and regulatory compliance solutions, do you come up against them too often? Sorry, I didn't catch the name of who you're talking about.

Speaker Change: Why is that? Do you come up against them in Customs and Compliance? No, not usually. I mean, we come up against them in our forwarder, Customs Broker back office systems.

you know, our

our strength there is in selling data to other

global trade software providers.

Speaker Change: more like SAP and Oracle, a broad customer basis. If you look at what WiseTech does, they compete against us, but it's in the brokerage space, it's to sell back office systems to brokers. So they don't buy our data, they get their own data, but they sell it in a limited use case to their

to potential.

typically combined straightforwarders and

Speaker Change: and Customs House Brokers and we do the same it's about 5% of our business so it's not a gigantic business for us I think it's a much larger business for them but that's where we compete against them and otherwise we know them well from that area but we don't run into them at all in our global trade intelligence business because they don't sell their data that way

That's great. Thanks.

Thank you.

Speaker Change: Next question comes from the line of Raymond Lenshaw from Barclays. Please go ahead.

Speaker Change: Hey, perfect. Thanks for screening in. Ed, like if you think about, you mentioned trucking is kind of the one that is still not quite there yet. Can you just remind us like how the value chain works? Is that like, is that just a waiting game or kind of what are the things that kind of are driving that versus the other areas?

Speaker Change: I mean there's a whole bunch of things that drive truck. One of the things you've heard us mention in the past calls is when ocean and air start to move up they end up resulting in truck moves and you know

Speaker Change: at the origin and at the destination. That's one of the issues. And there's other just some, you know, local demand in whatever country we're talking about. And, you know,

Speaker Change: If I just look back, 22 and 23 were really tough years for truck. It's starting to come back now, but still not back to, you know, anywhere near where it was prior to that.

Speaker Change: and I'm hearing things from the trucking companies and it's starting to tick up a little bit but it's not, you know, it's by no means back.

Speaker Change: if more international shipments start coming in like I kind of mentioned.

Speaker Change: could happen at the beginning of the call, we could see increased truck volumes as a result of that. Just other things in the economy that tend to help it. High interest rates were not helping truck volumes, I believe, and as they start to trickle back down, maybe people buy more products and those products end up in truck places.

And the trucking volumes come back

Speaker Change: Net right now, they're doing a little better than they were, but they're still not. I'm talking about trucking companies and freight brokers, they're not thrilled right now, they're surviving.

Speaker Change: Yeah, okay, perfect. Okay, makes sense. And then, on the increased, you know, regulation, or is it regulation, like with the tariffs coming in, like how quickly, how are customers reacting in terms of getting ready for that? Do you think there's a, like, do you see that as a big bunch of pre-investing, or is it more like a reactive approach? How do you think this will translate into kind of opportunities for you? Thanks, and congratulations.

Yeah, thanks very much. I appreciate it.

Speaker Change: You know, our customers are right now looking to see what their tariffs are. I think they don't necessarily talk directly to us about this, but I think you'd see in some...

Speaker Change: circumstances, they're starting to get lobbyists to try and get their tariffs excluded from whatever changes are going to occur as a result of any of these trade negotiations.

Speaker Change: and as we get closer to it you know they start to hear what people are going to do and then start to think about whether that is going to impact them or how much it's going to impact them.

Speaker Change: And is there any other way to ship the goods around the world so that they don't have to have these tariffs? I think some of them are going to think about shipping stuff in advance to make sure that they have more product in the country so that they have an advantage over the competitors for some period of time because they get products in before the tariffs change.

Speaker Change: so I think all kinds of things like that and you know our systems help with some of that.

Speaker Change: Not all of it, but some of it, and obviously if the rates change, you know, the real thing they're going to do with us is use our systems and our databases to rate these shipments as the new rates change quickly, and they want to make sure they get their rates right.

Trump.

Yeah, okay. Thanks.

Thanks, everyone.

Speaker Change: Your next question comes from the line of John Hsiao from National Bank. Please go ahead.

John Hsiao: Hey guys, thanks for taking my question. So it looks like 2025 physical has been a big year in terms of your M&A with a record amount of capital deployment. So do you think that's going to be a new normal going forward? And maybe could you also comment on the pace of acquisition in the future?

I'll give it a look.

Speaker Change: Yeah, I mean, I don't want to say too much because we never know what's going to happen.

Speaker Change: A year ago we didn't do any deals because we didn't like the prices on any deals.

Speaker Change: They put and then it's as things started to loosen up and we start to be able to reach agreement more Potential acquisitions, you know, you see it's getting more acquisitions done right now

Speaker Change: It feels like a pretty good environment right now for these types of things. I don't know what's going to happen in the future. We don't try to...

Speaker Change: You know, when people ask us, you know, what's your normal pace of acquisitions? Our answer would be, we don't have a normal pace of acquisitions. We buy companies when we think they're good deals and we don't when we don't.

and I don't think we're going to change that philosophy.

Speaker Change: If we see good acquisitions out there to do, we want to be prepared to do them both financially and also from an integration perspective.

Speaker Change: We spend a lot of time making sure we're streamlined and good at those things, and if we don't see anything we like, then we think the best decision is to not buy anything. We'll see how it goes in the future. We're optimistic about what we've seen so far this year. That's why we've gotten five acquisitions done.

Speaker Change: We'll see if that continues. If it does, great. And if it doesn't, we'll keep running our business the way we have.

Speaker Change: Okay, thanks for the colors. And just a modeling question. It looks like the Seller Cloud is a high-growing business. Is there any way you can help us to quantify that organic growth and maybe the contribution to your overall target?

Speaker Change: I don't think we've broken that out yet and it's probably a little too soon even if we did break it out to say for sure. I can tell you this, we're real happy with the solutions we've got. We've got a lot of compliments.

Speaker Change: from customers about putting these things together and we're starting to sell these things together. So as I think I mentioned the prepared comments, we're excited about it and specifically excited that we that we see customers that are looking to buy all these things together and we think we can as a result drive revenue growth.

Speaker Change: at SolarCloud in the future and if we're able to do that that's going to be a great acquisition for us so we're happy about it.

Thank you for popping by.

Thanks very much.

Speaker Change: Your next question comes from the line of Dan Chan from TD Cowen. Please go ahead.

Speaker Change: Hi, thanks. This is Justin on for Dan. Thanks for taking my question. Just one on organic growth. It came in really strong this quarter at 10%. Anything specific to call out that's driving the acceleration over the past few quarters? And is this a good kind of run rate that you feel comfortable with going forward?

Speaker Change: You know, we never know exactly what's going to happen in the future. We try to run our business as best we can to prepare for, you know, when times are good and also times are not as good. We think we benefit even in a down market from, you know, running our company financially better than our competitors so that we are in a better position to make acquisitions when things turn tough.

Thank you. Bye.

Speaker Change: I don't know what's going to happen in the future with the economy.

Speaker Change: Our numbers accelerate from here, and if it's flat, it'll probably be around here.

Speaker Change: If it's a down market, my hope is that we still perform pretty well, but obviously our revenue growth numbers would be lower than they are today.

Speaker Change: And I don't know what's going to happen, you know, going forward, if anyone does, give me a call. But I think we're going to try and run our company, you know, to be a consistent performer and still make money every quarter, a little more than we did the last.

Speaker Change: No matter what the general economic circumstances are in the world. Right now, it feels to us like, you know, things are...

Speaker Change: You know Doing okay, but you know there's a lot of talk in the world about a lot of things changing right now So we just have to see what the impact of that is and in the meantime We're going to try and run our business to keep making more money every day

Speaker Change: The recent acquisitions in OCR and ASD, you mentioned that they are ahead of integration plans. Do you provide any colour on the margins of these businesses and where do you think you can take it in the future?

Speaker Change: Yeah, I mean, it's yours, the big one. You know, that's a business that we've done very well and we've had,

Speaker Change: been able to get out of the other businesses that we bought in that global trade intelligence business, very high margins over time. We bought OCR at a lower margin than normal and maybe even a little lower than ours.

Speaker Change: normal Descartes margins and we're optimistic that we can we can move them higher. ASD is a smaller company and will fold into our

Speaker Change: you know, customs filing, security filing businesses, and I expect over time it'll get the margins that we get out of that business as well, but it's a smaller, smaller business than OCR.

Awesome, thanks. That's all past the line.

Thank you.

Speaker Change: Next question comes from the line of Scott Group from Wolf Research. Please go ahead.

Speaker Change: Hey, thanks, afternoon. So I know you talked already, Ed, about tariff potential. But what are you hearing from customers about East and Gulf Coast port?

Speaker Change: strike in in January and is it since you set the calibration in November like is any sort of tariff pull forward strike pull forward would that be in the calibration or not?

Speaker Change: No, probably not. We don't know what's going to happen there.

Speaker Change: Yeah, I'm not hearing too much about that strike, other than I know they got a 60% raise over five years, so I suspect the money's fine. I think the comment I've heard...

Speaker Change: And you probably could read this in the paper too, but I've heard them saying that this is, the last little issue here is around technology and whether it's allowed to implement technology. So, that gave me a little chuckle when I read that.

Speaker Change: I think from what I've heard and a few comments I've heard from from our customers that are somewhat involved in this is that the money's probably fine some other issues around the fringes

I'm somewhat optimistic that they won't go on strike again.

Speaker Change: And no, I would probably, I would say we did not factor those things into the calibration.

Speaker Change: And then can you just say how much of the how much did cellar cloud help the calibration for for q4?

Speaker Change: I couldn't say with any specificity. I don't know if you have any comments on that.

I know.

Speaker Change: Yeah, we typically don't break that out. What I can say is that when we run these businesses, when we first acquire them, we get comfortable with their revenue streams over time and the contracts they have, and so we start off sort of softly integrating these acquisitions into the calibration, just the known, the absolutely known revenues. We'll fine-tune that number over time, but part of the seller cloud acquisition revenues are in that calibration, and we'll just improve that and perfect that over time.

Speaker Change: I'm sure it'll help our EBITDA margins you know yeah we're buying companies that we think are growing pretty fast and we think we can do things to help them grow faster both from a revenue perspective and an EBITDA margin perspective so that's why we do them and yeah I'm hopeful that that will help us in the future you know but bear in mind that's standard operating procedures for us we're always doing this

Thank you. Bye.

Speaker Change: I could probably say the same for every year. Yeah, the things I bought this year are definitely going to help us next year. Or at least, that's why we bought them. So, I don't know that I'm saying that. No, I get that.

Speaker Change: Okay, I get that. It's been a more active year than we've seen at least in recent years. For sure. I mean, but, you know, just from our perspective, we're buying these companies and we think they're good deals and we're not when we're not. We're very proud to say we've never had a gun held, successfully held to our head like, you've got to buy this thing. We're not.

That's not us.

Speaker Change: I don't think we have to buy anything. We'll buy it if we think it's a good deal. We're going to be able to make money for our shareholders and get a good ROIC, and we won't if we don't.

OK.

Thank you, guys. Appreciate it. Thank you.

Speaker Change: Next question comes from the line of Kevin Krishnaranty from Scotiabank, please go ahead.

Speaker Change: Hey good evening, thanks for squeezing me in. I had a question as well on Seller Cloud. It looks like it is a really good asset, fast growing. I'm wondering what was the motivation behind them selling and was it a competitive process?

Speaker Change: It was a competitive process, there's bankers involved, as you would almost always have when it gets to that level. We knew them for a while. We wanted a solution like this. We've heard in the industry they were one of the best and thought they would be a good fit with us. We got to know them over time.

and eventually became pretty friendly with them.

Speaker Change: Yeah, we're able to get a deal done. They're pretty cooperative guys in doing that and they've been very cooperative since since the acquisition Which is all great for us Nothing terribly contentious in it And we're excited about having it because the customers are excited about us having it. So that's that's you know That's the kind of stuff that gets us excited

Speaker Change: Got it. Maybe one for Allan. You guys do run very lean operations, but I'm wondering about your thoughts on use of AI and automation in your cost space, whether that's R&D, GNA, any thoughts you can, you know, talk about there, maybe squeezing out an extra point or two, timelines, anything, you know, everyone's talking about the use of AI in the cost space, just wondering what your thoughts are there.

Speaker Change: Yeah, for sure. Ed commented, and obviously there's a revenue or product side of that. We'll be looking at how we can improve things within development, within support.

Speaker Change: even within the finance function, there'll be opportunities over time. Those will just be things that we do. We constantly look at how we're using technology internally ourselves to try to improve our business and this will be a...

Speaker Change: This will be another area that we look at and probably already finding some level of cost improvements as we think about how to reduce manual processes in some of the product areas. So more to come on that.

Thanks a lot, Tasha.

Speaker Change: Your next question is from the line of Robert Young from Canada Card Genuity. Your line is now open.

Speaker Change: Hi, I'll ask two at the same time for time here. The license that was up quite a bit, is that a one-time item? Should we model that at that sort of pace based on recent M&A? And then second question would be, the Trump administration, the other big thing is the lower level of regulation, maybe lower environmental regulation. In fact, the last time they weakened admission standards. Is there any kind of second derivative impact that you think will impact your business? And then I'll pass it on.

Speaker Change: Yeah, so Ed, maybe I'll just take the first one on licenses. You should always factor in that licenses are not recurring, that they'll happen when they happen. 3.5 million in a quarter was high. We don't want to sell licenses. We'd rather sell a subscription, and most likely you'll see the numbers come back down to more trending to where they've been the last number of quarters. And then, Ed, over to you on the second question.

Ed Ryan: I think it was, do I see any changes coming from the Trump administration that are put in the calibration of the answers? No, I mean we we don't know what's going to happen yet.

Ed Ryan: I think our customers are going to need help dealing with some of these things and we want to be there to help them. There's all kinds of possibilities of what customers may do from here, and I don't know what those are yet. So, we haven't really modeled it in.

When I listen to some of these things, I'm thinking...

Ed Ryan: probably gonna need to help our customers do more stuff than they were dealing with three months ago so that's probably gonna help us but probably more focused on on making sure we do a good job for them and the money comes from that great

Okay, thanks.

Speaker Change: Your last question is from the line of Stephen Lee from Raymond James.

Please go ahead

Speaker Change: Thank you. Hey guys. Hey Ed, as you continue to fill out your portfolio, is there a metric that you track, like what is the average number of software modules your customers are buying from you?

When we tracked the cross-sell percentages, we're like...

Speaker Change: You know, each acquisition is different. It's a different hypothesis about what's going to happen, but usually it does involve us.

Speaker Change: selling more stuff to existing customers. But, you know, some of the stuff sells a lot real fast. Some of the stuff is a different kind of, you know, larger sale that, you know, we don't sell as many deals, but they're for more money. And, you know, some of the companies are very big and therefore driving a lot more revenue, and some of the companies are smaller in size. And, you know, even though they're showing us great growth, they're starting from a small place. So

Speaker Change: Yeah, we just basically look at each company that we buy, the hypothesis that we have going in, the ROIC that we're expecting to get, and we go, did we get there? And did something else happen out of it? And if it does, we...

Speaker Change: try to adapt and take advantage of some of the opportunities we see over time. We've had a lot of those happen in the last 10 years where we bought something and we thought it was pretty good and then we thought we're hitting a single or a double and all of a sudden it turns into a triple or home run. So we try to be nimble when we see those things so we can take advantage of them and

Speaker Change: otherwise stick to the hypothesis we had when we went in and make sure we get the ROIC that we expected to get out of the company regardless of what happened.

Speaker Change: and that gives you some sense of how we think about that.

Speaker Change: Got it. Very helpful. And then maybe a question for Allan. On that 10% organic growth, was there an FX headwind or tailwind year-over-year? Thanks, Allan.

Allan Brett: Yeah, a small tailwind on revenue, just very slight. Virtually nothing, very, very neutral when it comes to adjusted EBITDA. As you'd expect from our business, we're fairly naturally hedged at that cash flow or profit level, but a slight positive from FX, but doesn't really change the percentages, still 7% on services and 10% overall. Okay, perfect. Thanks.

Thank you, Stephen.

Speaker Change: I'd like to call over to Ed Ryan for closing remarks. Sorry sir, please go ahead.

Ed Ryan: Hey, thanks everyone. Appreciate your time this afternoon and we look forward to reporting back to you on Q4 in March. Talk to you all soon.

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Speaker Change: Good afternoon ladies and gentlemen and welcome to the Descartes Systems Group quarterly results conference call. At this time all lines are in listen-only mode. Following the presentation we will conduct a question and answer session.

Speaker Change: If at any time during the presentation you require immediate assistance, please press star zero for the operator.

This call is being recorded on Tuesday, December 3rd, 2024.

Speaker Change: I would now like to turn the conference over to Mr. Scott Pagan. Please go ahead.

Scott Pagan: Thank you and good afternoon everyone. Joining me remotely on the call today are Ed Ryan, CEO, and Allan Brett, CFO, and I trust that everyone has received a copy of our financial results press release that was issued earlier this afternoon.

Scott Pagan: 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.

Scott Pagan: 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, 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?

Scott Pagan: anticipated recognition and expensing of specific revenues and expenses potential acquisitions and acquisition strategy

Scott Pagan: Cost Reduction and Integration Initiatives, and other matters that may constitute forward-looking statements.

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 to differ materially from the anticipated results, performance, or achievements implied by such forward-looking statements.

Scott Pagan: 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.

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. You're cautioned that such information may not be appropriate for other purposes.

Scott Pagan: 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.

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

Ed Ryan: A great Scott, thanks and welcome everyone to the call. Today we're reporting record third quarter results, continued strong revenue and adjusted EBITDA growth, and two new businesses that have joined the Descartes team. 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 word Matt for the call.

Matt: I'll start by hitting some highlights of last quarter and some aspects of how our business performed.

Matt: I'll then hand it over to Allan, who will go over the Q3 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 fourth quarter. And we'll then open it up to the operator to coordinate the Q&A portion of the call.

Allan Brett: So let's start with the quarter that ended on October 31st. Key metrics we monitor include revenues, profits, cash flow from operations, operating margins, and returns on our investments.

Allan Brett: For this past quarter we again had very good performance in each of those areas. Total revenues were up 17% from a year ago with services up 15% from a year ago.

Allan Brett: The organic growth in our total revenues in this quarter is about 10%. Net income was up 38% from a year ago, with adjusted EBITDA up 14% from a year ago.

Allan Brett: Our headline targets are 10 to 15% adjusted even to growth per year and we're at 15% over the first three quarters of this year

Allan Brett: Adjusted EBITDA margin held at the same rates as last quarter at 43%. However, as we talked about last quarter, Q2 and Q3 had unique items that impacted this margin.

Allan Brett: Our ground cloud business entered an accelerated hardware replacement cycle with our customers in Q2 to get AI-enabled cameras in place. This resulted in more low-margin hardware sales to customers in Q2 and Q3, changing the revenue mix and impacting the margin.

Allan Brett: The hardware replacement cycle is now done, so we anticipate this drag-on margin won't be there in Q4.

Allan Brett: The core Descartes business and margin is otherwise performing as we expect. Allan will speak to this in more detail later on the call.

Allan Brett: We also generated over 60 million dollars in cash from operations in Q3 or 83% of adjusted EBITDA in line with how we would expect the business to perform.

Allan Brett: At the end of the quarter, we had over $180 million in cash, and we were debt-free with an undrawn $350 million line of credit.

Allan Brett: This is after we used about $22.5 million to acquire MyCarrierPortal and paid $110 million to acquire SellerCloud.

Allan Brett: We remain well-capitalized, cash-generating, growing, and ready to continue to invest in our business.

Allan Brett: Our growth strategy remains one of total growth. We've designed our business to be a profitable business that generates cash and can otherwise be reinvested to improve the business for our customers and stakeholders.

Allan Brett: We consider where to invest based in part on the returns we can generate in our invested capital.

Allan Brett: Our plans for our year are based on growing our business 10 to 15% a year through a combination of organic and acquisition activities.

Allan Brett: Speaking of acquisitions, we've completed five so far this year. We bought OCR and ASD in Q1 and bought BoxTop in Q2. We then combined with MyCarrierPortal and SellerCloud in Q3. I just wanted to comment on how these acquisitions have fit in and are contributing.

Allan Brett: So first, we combine with OCR in March of this year.

Allan Brett: OCR are experts in sanctioned party screening and export compliance, a key part of our global trade intelligence offerings.

Allan Brett: For clarity, sanctions are when a government puts a restriction on doing business with a particular party, jurisdiction, or country, while broader export compliance includes securing the necessary licenses and other permissions to export a particular controlled item to a person or country.

Allan Brett: OCR complements our existing strong screening solutions, but makes us even stronger by adding advanced export compliance technology that can serve some of the biggest companies in the world.

Allan Brett: OCR has hit the ground running for us and is ahead of our integration plans. We've added a broad base of industry knowledge in India that is already contributing to our broader global intelligence solutions.

Allan Brett: We've had some sizable joint wins in each quarter since the acquisition, and market conditions are such that it's even more challenging in an environment for our customers to comply with the current situation and plan for future rumored restrictions on global trade, in part driven by statements made by the new incoming Trump administration in the United States.

Allan Brett: For the time, ASD deal will be completed in Q1. Their business is focused on European customs and security filings with particular strength in Ireland. They also do asset tracking for airlines. This business is also performing ahead of our plans with deliberate work done on integration.

Allan Brett: We think there are some good potential tailwinds for this business with potential increased scrutiny from Europe on cargo security on airlines, something that may be addressed through an additional data and filing requirements and asset tracking.

Allan Brett: In Q2, we combined with BoxTop, a business we had a track record of working with as a partner long before the acquisition. BoxTop has shipment management solutions for small and mid-sized logistics service providers, the same customer base that makes up a large percentage of our customers for our forwarder and broker solutions.

Allan Brett: Box-Tops integration and contribution is ahead of plan. It's also well-placed to help this customer base as the cross-border trade environment threatens to become more complex.

Allan Brett: In Q3, we bought two new businesses. The first was our combination with MyCarrierPortal in September. MyCarrierPortal helps U.S. freight brokers with risk management of the thousands of truck carriers that they deal with.

Allan Brett: Their platform also allows the brokers to evaluate the risk of working with a carrier based on a number of factors including licensing, past service record, safety, potential fraud risk, and insurance compliance.

Allan Brett: This is a natural fit with our macro point business where we're helping freight workers track loads and identify potential available capacity

Allan Brett: I think this is a natural fit for our business with our vast experience with screening and compliance solutions combined with our market-leading domestic truck business.

Allan Brett: We only had a partial quarter with MyCarrierPortal so far, but already have a profit contribution ahead of our expectations due to the hard work of the teams to rapidly get our businesses working together.

Allan Brett: We were able to get the combination completed before our innovation forum slash user group That we held for this customer base in Chicago And it was great to hear the endorsement of the broker community for this solution becoming part of the global logistics network portfolio Welcome to everyone from the my carrier portal team

Allan Brett: In October, SellerCloud joined the Descartes family. This is a great addition to our e-commerce solutions, essentially filling a hole that we had in our solution set. SellerCloud focuses on inventory and order management for e-commerce sellers who are using multiple channels to sell with particular strength with small and mid-market e-tailers.

Allan Brett: Our existing solutions have focused on the warehousing, shipping of e-commerce orders, but by adding inventory and order management, we can offer a more comprehensive suite to our customers that's flexible as they grow and add new sales channels.

Allan Brett: We've already seen great post-deal success in getting customers signed up for a combined Descartes Seller Cloud solution, so we're optimistic of achieving our growth plans for this business.

Allan Brett: As with MyFarrier Portal, it's encouraging to hear the industry and customer community confirm the sensibility of our business coming together with SellerCloud, and it's also an endorsement of the strong work that our entire organization puts into our corporate development efforts. Welcome to the Wholesaler Cloud team. We look forward to achieving great things with you together.

Thank you. Thank you.

Speaker Change: I mentioned that our customers are facing some big challenges in managing global trade and are facing heightened uncertainty for what the future global trade landscape will be. Let me just hit a few of the items shaping the market environment right now.

Speaker Change: The biggest source of uncertainty has been the comments from the incoming Trump administration about the potential for the imposition of tariffs by the U.S. on imports from China, Canada, and Mexico, as well as other broad-based sanctions.

Speaker Change: These tariffs and sanctions may force U.S. businesses to restructure their supply chains and logistics operations with the potential for movement of manufacturing and sourcing facilities, changes in trading partners, heightened scrutiny and sanctions on particular goods in countries, and the potential for retaliatory sanctions and tariffs by other countries.

Speaker Change: We're already helping our customers with information and planning, and we expect that our global trade intelligence businesses will be very busy over the coming months.

Speaker Change: We've seen good volumes in air and ocean but have seen fairly flat volumes in U.S. trucking. Ocean in particular has seen very high levels with larger amounts of imports into the U.S. and Mexico from China. There's a couple things we're monitoring for volumes as we enter Q4. First, the seasonal impact of peak holiday buying periods which we expect will be more visible in air and truck because of their shorter transit times.

Speaker Change: Second, with the potential for new tariffs, we've heard commentary from many U.S. businesses that they're bringing inventory in early to get ahead of the potential new U.S. tariffs.

Speaker Change: Progress security issues are front and center, particularly with parcel air cargo in Europe. Earlier this year there were incidents with explosive devices and parcels that made their way on to European carriers. Some carriers responded by refusing to ship certain parcels containing electronics.

Speaker Change: Regulators have also intervened requiring more information about cargo shipments on a plane before the plane takes off, including the new requirement of an identification of the underlying shipper of the package rather than just the intermediary shipping the package.

Speaker Change: Our customers are committed to helping ensure that there is cargo security to minimize the chances of catastrophic events But there's also a burden that our customers are having to bear right now as they re-engineer their processes and information gathering practices to help comply with the new regime

Speaker Change: Labor uncertainty continues to impact our customers' ability to plan. U.S. East Coast and Gulf ports have had a labor contract that expires again in January. Canadian ports have just dealt with strikes where the government legislated people back to work. And Canada Post is currently on strike, impacting many e-commerce deliveries into Canada. All just examples of how our customers have to plan for the reality of labor unrest that will impact their fulfillment operations.

Speaker Change: We focus on total growth and try to diversify our business. We grow organically and by way of acquisition.

were diversified across all modes of transportation.

Speaker Change: We provide business value across seven solution pillars. We have over 26,000 customers with low customer concentration.

Speaker Change: We serve all parties to supply chain and logistics transactions, carriers, logistics service providers, ports, governments, and shippers. We serve customers on a global basis with a global workforce. We believe that all of these levers to our business provide us with many opportunities to help manage our business through prosperous and challenging times.

Speaker Change: Descartes is a business our customers rely on, that our team can be proud of, and that our stakeholders have relied on consistently to deliver. Descartes has done that again this quarter.

Speaker Change: I'll just finish up my comments by referencing some of our recent marketing activities. A few months ago we held some Descartes innovation forums. These are essentially user groups that are focused on particular solution pillars.

Speaker Change: The recent innovation forums focused on private and for higher transportation management.

Speaker Change: and serving the logistics provider community. These innovation forums for select pillars have greater participation than our pre-pandemic user groups that we held for our entire business as a whole. We've also hosted some recent online events relating to global trade intelligence, trade compliance, and tariffs and duties.

Speaker Change: These also had record attendance. While the increased attendance can partially be explained from our growth as a company, I think the interest we've seen in these events reflects the extreme need for help and information that our customers have right now.