Welcome to The Descartes' Quarterly Results Call. My name is Adrian and I'll be your operator for today's call. [Operator Instructions] Please note this conference is being recorded. I'll now turn the call over to Scott Pagan. Scott Pagan, you may begin.

Thanks 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 today. Portions of today's call other than historical performance include statements of forward-looking information within the meaning of applicable securities laws. These statements are made under the safe harbor provisions of those laws. These forward-looking statements include statements related to our assessment of the current and future impact of the COVID-19 pandemic on our business and financial condition, Descartes' operating performance, financial results, and condition; Descartes' gross margins and any growth on 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. These forward-looking statements involve known and unknown risks, uncertainties, assumptions and other factors that may cause the actual results, performance or achievements of Descartes to differ materially from the anticipated results, performance or achievements implied by such forward-looking statements. These factors are outlined in the press release and in the section entitled Certain Factors That May Affect Future Results in documents filed and furnished with the Securities and Exchange Commission, the Ontario Securities Commission and other securities commissions across Canada, including our Management's Discussion and Analysis filed today. We provide forward-looking statements solely for the purpose of providing information about management's current expectations and plans relating to the future. You're 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 except as is required by law. And with that, let me turn the call over to Ed.

Hey. Thanks, Scott. And welcome everyone to the call. We had an excellent second quarter financial results and we have had a strong first half of the fiscal year. We'll walk you through those shortly however. First, let me give you a road map for this call. I'll start with a summary of the financial results and some factors contributing to our performance. I'll then hand it over to Allan, who will go over Q2 financial results in detail. I'll come back and update on how our business is calibrated. And we'll then open it up to the operator to coordinate the Q&A portion of the call. So let's get right to it. In Q2, we had record revenues of $104.6 million, ahead of our plans for the quarter and year-to-date. We had record income from our operations of $26.1 million. We had net income of $23.2 million. We had adjusted EBITDA of $45.9 million, again, well ahead of our plan for the quarter and year-to-date. Adjusted EBITDA margin as a percentage of revenue was 44%. Cash provided by operating activities was $46.4 million or 101% of our adjusted EBITDA for the quarter. These are the financial numbers that we track for our business. They were all very good for Q2. They were ahead of all of our plans. There are some Descartes-specific reasons why we performed well in Q2. We've continued to see some strength in our business helping our customers with Brexit. Travel and marketing expenses have stayed low as pandemic recovery. To attend in-person events has been slower than we originally planned. We've even had some expense recovery, some events that were cancelled. And to the comparable quarter from a year ago, it was right in the middle of the pandemic when we were restructuring the business…

Thanks, Ed. As indicated, I'm going to walk you through our financial highlights for our second quarter, which ended on July 31st. We are pleased to report record quarterly revenue of $104.6 million this quarter, an increase of 25% from revenue of $84.0 million in Q2 last year. While revenue from new acquisitions contributed nicely to this growth, similar to the first quarter, growth in revenue from new and existing customers, including from Brexit-related customer filings in the UK, were the main drivers in growth this quarter when compared to last year. We should also note, as Ed indicated earlier, that the second quarter last year was a weaker comparable period as we had a negative impact from lower transaction volumes early last year with the onset of the pandemic. In addition, we should be clear that there is a benefit to revenue from foreign exchange of just over $3 million as compared to Q2 last year as the US dollar was weaker to each of the euro, the Canadian dollar and the British pound compared to the same period last year. Looking further at revenue, our mix in the quarter continue to be very stable with services revenue increasing 24% to $93.5 million or 89% of total revenue compared to $75.3 million in the same period last year. Service revenue was also up nicely sequentially increasing 6% from the first quarter of this year. License revenue came in at $1.2 million or just over 1% of revenue in the quarter, fairly consistent with the second quarter last year while professional services and other revenue came in at $9.9 million or 10% of revenue, up 34% from $7.4 million or 9% of total revenue in the same quarter last year. Revenue for the first half of the year was $203.4…

Hey. Great, Allan, thanks. Our business is designed to be predictable and consistent. We believe that promotes stability and reliability. Things that we know are valuable to our customers, employees and our broader stakeholders. We continue to operate from consistent business principles. We plan for our business to grow adjusted EBITDA 10% to 15% annually. We plan to grow through a combination of organic growth and acquisitions. We build and operate solutions on our global logistics network for all supply chain participants connecting shippers, carriers, logistics service providers and customs authorities. When we overperform, we expect 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. As I mentioned off the top, we performed ahead of our plans in Q2. Consistent with those business principles, when we overperform, we look at opportunities to reinvest to make the future of our business more predictable and sustainable. Again, for us overperformance is an opportunity to invest and make ourselves stronger, not an opportunity to celebrate. There are several areas of investment that we're focused on right now, but let me speak to 3 specific ones. The first is front-end distribution. One of our fundamental tenets about growth is to not just grow but to grow profitably. For us that has always meant a very cautious approach to expanding our distribution capabilities. We don't want to add business that's either not good for Descartes or not good for our customers. We're looking to enhance our distribution capabilities with people who could help understand the complex environment that our customers are in, the complex supply chain and logistics challenges that they face and how our…

[Operator Instructions] And our first question comes from Matt Pfau from William Blair.

First, I just wanted to follow-up on that comment about the Delta variant. So, just to be clear, in your business, have you seen any change in customer behavior or anything else as the Delta variant has started to impact the US?

A-Ed: I mean, not really. It's probably same things you see in the news. I think a lot of them are planning to open up offices and things of that nature and they probably stop those plans like a lot of the big businesses you've seen and we're planning on opening September 1st, right, as the school you got underway here in the US and a lot of them probably dashed those plans and delayed those plans. But otherwise, their businesses continue to keep moving strong. You can see that in some of the capacity crunches here in the various modes of transportation.

And then, one to follow-up on the comments around investment and customer success. Correct me if I'm wrong, but selling back to your customer base has always been a very big portion of your revenue growth. So what's changing now? What's different? What's sort of driving the investments that you're making there?

I think some of the things -- some of the things we mentioned in the beginning of the call. Our customers are doing better than ever. They're looking for more technology to solve those problems and if you think about some of the stuff I've mentioned on the last call. The whole world just figured out over the last 18 months during this pandemic that logistics and supply chain was a whole lot more important than they thought it was. And that puts demands from the consumers and companies on our customer's logistic service providers. And they turn to technology providers to help them solve that problem. And fortunately for us, we're one of the main people that they turn to.

And does that also then correlate with the sales force changes you're making in terms of ability to sell more to existing customers?

I mean, when we're thinking about it, we're thinking where is their high customer demand right now and where our sales people being overwhelmed by the number of leads coming in and trying to get more people in place to continue to meet the demands of our customers.

And our next question comes from Justin Long from Stephens.

I wanted to ask about organic growth. Just curious how organic growth trended in the quarter relative to your expectations. It seems like there continues to be some outperformance there. And if that's the case, Ed, I'd love to get your thoughts on how much of this outperformance is coming from cyclical tailwinds and this stronger for longer freight cycle versus secular tailwinds? And I know that's something that might be hard to quantify but would love to just get your take anecdotally.

It's a bit of guess. I think we're seeing it in both areas and maybe to the point where we've been surprised by a little bit. We thought it was going to be good or maybe even a little better than we thought. I don't really know how long it's going to continue for. But as I mentioned the beginning of the call, a lot of our customers are doing well. A lot of our customers are facing challenges and they're using us to meet those challenges. And at the same time, they're getting a lot of shipments and they've got a manager or in the shipper's case making a lot of shipments that need to be managed. And that's how we make money. So more shipments in the supply chain, the more shipments are being processed by our global logistics network and all those things have been pretty good for us and maybe even a little better than we expected.

And based on your calculation, what was organic growth in the quarter?

I don't know that I have an exact number. Allan, I don't know if you want to take a stab at it. As I've mentioned even in the past it's a tough number for us to get perfect. But...

As Ed mentioned, we run the business, pulling in the acquisitions, integrating them very, very quickly. But roughly speaking, when you look at Note 3 in the financial statements for pro forma note, roughly in the neighborhood of 15% to 16% if you exclude FX impacts on acquisitions. It's a rough number.

Thanks and understand that the complications around calculating that for sure. Maybe just secondly, before I pass it on, I wanted to follow-up on EBITDA margin. They've clearly outperformed, and we were above the range that you've said you're targeting. As we think about the rest of the year, is there any kind of headwind that we should be mindful of on a sequential basis? I'm just trying to understand what would prevent EBITDA margins from staying around the level we saw this quarter in the next couple of quarters ahead?

I don't see tailwinds, but that doesn't mean that they won't exist. I mean, FX, as you know, can always be a tailwind to it and it can also be a headwind to it. We try to call it out either way just so people understand what component that was. The travel being out of our veins right now is helping that a little bit as well. I suspect that we won't be traveling a ton just given what's going on with the [ variance ] right now. So I don't know if that's going to come into play the rest of the year. But maybe in the long run, we could get back to travel and then that might have us incur a little bit more of expense, but probably not massive. Then otherwise, just the overall strength of our network and how well does the network perform? You'll always hear me tell the story of that last bill of lading at the end of the month at a cost the dollar to process the bill of lading. And I don't have a lot of cost to process. It's very contributive to our EBITDA margins. So assuming our networks continue at the pace they are, we expect that number to stay strong. Obviously, if something happened in the economy, we would feel that as well. And it would directly hit our EBITDA and our EBITDA margins.

And the next question comes from Paul Steep from Scotia Capital.

Just on the sales reorg, can you give us a sense of how significant this reorg is in terms of disruption? Obviously, the calibration lines up as if there should be minimal disruption. And then, maybe just putting the comments into context, if I look back, you've kept sales historically at about 12% to 12.5% of total headcount and you haven't really outgrown it materially. Should we be thinking of your comments of just investing and you're not pushing extra hard on the accelerator or is this -- no, this is something different. This is the sort of step up we saw in the 16% and 17% in sales.

So I was going to object to your word reorg because that was a strong word. We're supplementing the sales force to maybe changing the way that it goes to market a little bit, but it's -- I would hardly call it a reorganization, probably more supplementing some of the things that we do with additional talent to help us understand markets better and make sure we really -- what we're really focused on is when our guys walk into customers, we want them to really understand what those customers do for a living so that they could diagnose and prescribe solutions to the customers. And we're looking for people with strong logistics and supply chain backgrounds that can help us do that. 12% is probably a halfway decent number for the time being. We're growing. So I think you'd see growth in a bunch of areas. I don't think you're going to see a massive change in the headcount. I think it's probably more some strategic stuff that helps us round out our sales force. We're pretty happy with our performance at the moment. And we're just looking to do things to help them.

The only other thing I wanted to trace through tonight as well was just on recovery in T&E. I was looking back through comments made over now, I guess, it's been over a year we've been in this. Just in terms of how much permanent removal of T&E we should think about, obviously you just tempered it and said, hey, nobody's on the road really in a big way. But I'm thinking out a couple of years, how much do you think you've maybe altered the model to a new normal?

I don't know the answer to that question. I have a guess. So my suspicion is, it will eventually come back as the pandemic wanes. I don't know the answer to that question, either is exactly how is this pandemic going to go away. I thought I did 6 months ago, I thought the vaccines were going to kind of kill it off and we'd be kind of home free at some point right around now. That's obviously not the case. So I'm not exactly sure how it ends. And maybe as a result, I'm not exactly sure how travel is going to come back. For a year, we had almost no travel. Now we have some, but only minor, very few customers want to do it. And I think customers have been pleasantly surprised that they're able to buy stuff effectively using video conference calls and phone calls and things of that nature. So my guess is that it will come back to some extent. It probably won't ever come back to the same percentages that it was. The whole world just figured out that they can operate more efficiently. And that could be one of the blessings coming out of this pandemic if we look back at it 10 years from now.

Just -- sorry, one last clarification that sort of ties to that as well along the same topic. Maybe you or Allan could talk to how much office space have you maybe permanently exited? Or is it just sort of planned runoff that we should think that there's a benefit there where you've maybe shifted some of the smaller offices out of the mix?

I don't think there's a ton of office space that's come out yet. I think you will see us over time start to look at the office space as leases renew and say, hey, do we need that much space there? Maybe if all of our employees aren't coming in every day, maybe we change the dynamic of the office and have more meeting rooms and more hotel type office space and less situation where everyone has a desk that in the future might not be used every day and it could be kind of a waste of space. So it remains to be seen. I think our business was a lot more prepared to go into this than most and that 30%, 40% of our employees even before the pandemic worked from home frequently. And I think that number is going to go up considerably. And when it does, our office costs are going to go down. Not a whole lot of that's hit our books yet though.

And our next question comes from Raimo Lenschow from Barclays.

This is Frank on for Raimo. I had one on profitability. So just given that you executed so well against the new raised EBITDA range and actually beat the top end of that. What was the main driver of the outperformance this quarter? Was it more of a surprise in the top line or was it the continued cost efficiencies?

A little of both, but probably more driven by our revenue being higher than we anticipated, which is great. I think we have always been conservative on the cost line and just conservative operators in the business and not looking to spend ahead of revenue. And that creates opportunities like the one we're seeing here, where you get a little more revenue than you anticipated in the quarter. And it all dropped right to the bottom line.

And then, maybe if I could just check in on M&A. Just given the cash balance and the cash generation this quarter, can you give us some more color there? Are there any areas that you think are maybe more or less attractive post-pandemic than they were before?

I mean, I think you're going to see us continue to be acquisitive. We're always looking at a lot of acquisitions. And you've heard us talk about some of the areas that we're interested in the past. A lot of it just depends on who comes up for sale. I can say I want to buy in a particular area, but that doesn't matter unless I can find a company that's willing to sell to us in that particular area. What I think is some of the things they're seeing, you saw us make a bunch of moves in the e-commerce or e-commerce-related space over the last 6 or 7 years, these things turned out to be great for us. At the same time, the pandemic highlighted the strength in e-commerce and a lot of the acquisitions that we would have looked at over the last 18 months went up considerably in value, making them a little less interesting to us. That gives you a little color on some of the types of things that we consider as we're doing it, right? I love to buy a bunch of e-commerce companies right now, but not at the multiples they're talking about. And we do well because we buy companies at multiples that allow us to make more money on them over time. And if someone is charging too high multiple, that's not an opportunity for us anymore. And as a result, it becomes less attractive to us. At the same time, you can see over the course of the pandemic, we've been able to find acquisitions that meet our hurdle rates and look like good strategic fits with our business and we're able to get them closed. So I think you'll see that continue into the future.

Our next question comes from Paul Treiber from RBC.

Just a high-level question on the customer demand that you've been seeing. I mean, obviously, has been significant in light of all the industry challenges, but it's also somewhat surprising because you think that customers would have solutions already in place. So the question is, how penetrated do you think your customer base is or more broadly globally, how penetrated do you think logistics automation, technology and software are here?

I think we're still in the early innings. And one set of technological advances begets the next, right? I mean, I think of the investment we made in MacroPoint, a bunch of was 4 years ago or so now, that technology didn't exist 12 or 13 years ago, right? Just wasn't a possibility. And then, all of a sudden, everyone has mobile smartphones in their hands and ideas like MacroPoint can exist. I see the same thing going on right now with IoT with everyone putting sensors in everything right now. We're in the very early innings of that, of people saying, if I can track where different things that are going on with this truck or different things that are going on with this pallet or different things that are going on with this container, what other decisions can I make? And all those decisions involve people making software to do stuff in about it, and that's what we do for a living. And one, I think this is a never-ending game. And 2, I think we're in the very early innings of it. We keep coming up with new good ideas. Acquisition targets of ours keep coming up with new good ideas. And our job is to figure out how to put all these pieces together and make sure we build the winning team and we're trying to do that.

And then a follow-up question, but just on distribution. And is it possible to -- or how have you been pivoting your products to be more self-service as opposed to going through the traditional enterprise sales process of RFP and whatnot. Is it possible to drive higher attach rates in cross-selling but was more of a hands-off sales effort if it's embedded into your products in terms of additional features, in terms of just driving higher attach rates?

It may not be obvious on the outside, but it's certainly working inside here. It's obvious. We're already doing a ton of that. Customers who are now -- in the last 5 years, customers have gone from having to -- I'll just take a simple process right in the beginning, having to call us to buy something and now able to just buy it bother in our products online, sign up for it, install it, get it running without any intervention from Descartes. And we think that's a big part of running a high-quality network and continue to look for and build new solutions that allow our customers to do that. I think you're going to see us do more and more of that. Now, listen, that having been said, some of the stuff we do is highly complex, involves a lot of integration with our customers. And we always want to be there for them if they need help getting the stuff done. One, for their benefit because we want them to be happy and get it running as fast as possible; and 2, for our own benefit because we want them to start getting value from it and paying us as fast as possible. And both of those things are important to us.

Our next question comes from Scott Group from Wolfe Research.

So Ed, the -- as you mentioned, ocean and their carriers and forwarders just have tremendous pricing power right now. Do you see opportunities to generate additional pricing for your business?

No. We don't think of it that way. I mean, I never like when a partner of ours is reaching their hand into our pocket and I'm not trying not to do the same with our customers. Look, I mentioned customers for life on here. We want these guys do like us and we want them to keep doing business with us forever. And if that means they -- when they're doing well, that I keep doing the same thing for them at the same reasonable prices. I think that makes me a long-term strategic partner of theirs that's going to do business with them for a long time. Same when things aren't going well, I kind of expect the same back from them. We might suffer with them as their transaction volumes go down, but I don't expect them to come back and ask for additional discounts, I'm suffering right along with them. And so, we take a long-term view to these things. Maybe if we were not a standalone company or if we were own by private equity firms, some kind of outside investor with a shorter-term horizon, we think of it differently, but we are public and we do have a long-term horizon on this. Most of us have worked here our entire lives and plan on working here the rest of our lives. And we'd like to have a happy customer base that thinks we're good guys to deal with the whole way through in raising our prices because they're in a good position is -- in my mind, not a good way to do that.

And then, with Green Mile, you mentioned South America as an opportunity. Can you just maybe big picture, how big is South America for you guys today? And what is the growth opportunity you see in the region?

It's relatively small for us. And I think there'll be some good growth opportunities there with Green Mile and some of the other acquisitions that we've done over the last couple of years. At the same time, that's not the only reason we bought Green Mile. We think Green Mile solutions are applicable all over the world. And they were focused on South America and maybe a little bit on North America and we thought -- we know a lot more customers all over the world that could use that solution and that's part of why we thought it was a good acquisition opportunity for us. Partially to expand in South America, but also to really grow our business and take their business around the world and make that a much bigger company than it was before we bought it.

Just taking a step back, maybe which regions do you feel like you're the least penetrated in where you've got the biggest opportunity for either organic or inorganic growth?

South America, Australia, maybe subcontinent are areas where we think we see a lot of potential growth. Southeast Asia, I see that happening right now, manufacturing is moving out of China and moving to Southeast Asia. We're going right along with it. I think you're going to see us continue to expand in that part of the world as well. So we say global logistics network, we think it is. And as the world kind of becomes one logistics and supply chain entity, we think that's what's going to happen to us as well.

And our next question comes from Robert Young from Canaccord.

An update on Brexit would be helpful. It was a driver in the quarter. Is there any cadence for the rest of the year? I think you said before that there was some phased rollout and maybe some -- it wasn't mandatory until the year-end, which might create some last minute. Just maybe an update on it [indiscernible].

We absolutely think we're going to see more from it. We think we have the bulk of the recurring revenue now. We'll certainly see some more implementations and some stragglers coming at the end. But we're very pleased with how it's gone so far. And we think it's going to expand a little bit more and turn into a real nice business for us. Really kudos to our team that worked on that. We thought we were in a good position going into it. And we were in a fortunate position that we were very prepared for and I think a couple of our competitors didn't take it seriously and weren't as prepared as we were, and we ended up really doing very, very well as a result. So I appreciate all the hard work that our team put in to making sure we had the best solution in the market. And I think the results are showing in our numbers now.

And then second one, just a little bit higher level around new customers and expansion. A lot of things you're talking about through the call seem to be drivers of new customer adds might be more than previous years. And so, if you could talk about the size of the customer base, you're over 20,000. And the last question was about there's still a lot of room for penetration. Maybe just talk about the trend in new customer adds over the last year and where you think that's going to go?

I think we've always been pretty good at getting new customers. If I think back 10, 15 years ago, the knock-on us is, we didn't do a good enough job of cross-selling. And I think that's now become our strength over the last 10 years, we really focused on it. We got good at it. And I think we're very good at it. And we've maintained our ability to get new customers in. 15 years ago, we probably had 4,000, 5,000 customers. Now we have 20-some thousand customers. We keep getting better at cross-selling though, which is helpful because we're acquisitive company. So yes, we have to be good across selling, right? I buy some company with 500 freight forwarders customers. And I have 5,000. And we're going to be the best we can be, we have to be able to go around to the other 4,500 customers and get a bunch of them to sign up for the new service that we just bought. And I think over the last 5 to 10 years, we've gotten pretty darn good at that. At the same time, I don't think we've given up anything in the new customer sales area where we were always kind of strong going out and getting new names into the business. And it shows in some of the numbers that you see, not only the revenue numbers, but the new customer numbers as we've expanded and our ability to cross-sell to them and to go find new ones that we can start off as new members of the global logistics network to get more stuff sold to them in the future.

And what you said about changing the sales force to focus more on solution sales from, I guess, account sales, that's correct. Does that change the cross-sell, the difficulty or the ability to cross-sell? Is there a challenge there?

I think it's done specifically to -- it's done specifically to improve it, right? You're -- what we're talking about there, specifically our ability to understand better and better -- what our customers do for a living and how to then diagnose and prescribe new solutions to them, right? It's the ability to understand their business as well as they do. So that when we walk in the door, we're coming up with ideas for them that really work. And we think we're pretty good at that. We want to get better at it. And we think that's going to be a long-term driver of our success.

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

So you mentioned there are capacity constraints in the logistics networks. Just wondering whether we should expect the congestion to put a cap on the network traffic going over the GLN, offset by higher customer wins given the congestion. So any color on how you think those factors will interplay as it relates to your top line growth opportunity would be helpful.

I mean, there's always a cap on it, but I think it's probably good news for us in the long run that there's capacity crunch right now. I think that's going to drive people to get more capacity in the future. And also, it's one of the things I described in the beginning of the call is to come up with more creative ways to better utilize that capacity. Both of those things play into our hands. One, the latter here in the short-term and the former over the long run, right? As carriers say, let me get more ships, as planes -- or as airlines -- let me get more planes and ULDs and things of that nature, that creates an opportunity for us to have more shipments over the long run, which is great.

And given the strong demand environment, any change to the size of the deals you're winning with customers now?

Yes, I've noticed over the past couple of years, our deal sizes continue to go up as we have an expanded footprint to sell to them, right? We used to be able to go in and solve a certain size problem. And as the breadth of our organization gets bigger, as the breadth of our solution sets get bigger, we can go in and sell bigger problems for customers, right? We have more people, we have more products. We have more domain expertise and a bigger company with a bigger set of problems can use us to solve those problems. And that's been great for us in the last couple of years. I've definitely noticed our deal size is going up. When I just look at the weekly reports and then the monthly reports and the quarterly reports, you see bigger and bigger deal sizes on there. And I think that's a testament to the strategy that we've been deploying here over the last 10 years to buy and build. And that's what you're talking about as the build part of that equation. And I think we're doing pretty well. Operator, I think that was it for Dan's question.

Okay. We have no further questions. I'll turn the call back over for final remarks.

Great. Thanks, guys. Appreciate your time today and we look forward to reporting back to you on Q3's results in a few months. Have a great day.

Thank you, ladies and gentlemen, that concludes today's conference call. Thank you for participating. You may now disconnect.