Welcome to the Descartes Systems Group quarterly results call. My name is Darryl, and I'll be your operator for today's call. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the call over to Scott Pagan. Scott, you may begin.

Thanks, and good afternoon, everyone. Joining me on the call today are Ed Ryan, CEO; and Allan Brett, CFO. I trust that everyone has received a copy of our financial results press release that was issued earlier today. Portions of today's call, other than historical performance, include statements of forward-looking information within the meaning of applicable securities laws. These statements are made under the safe harbor provisions of those laws. These forward-looking statements include statements related to our assessment of the current and future impact of geopolitical and economic uncertainty on our business and financial condition; Descartes' operating performance, financial results and conditions; Descartes' gross margins and any growth in those gross margins, cash flow and use of cash, business outlook, baseline revenues, baseline operating expenses and baseline calibration; anticipated and potential revenue losses and gains; anticipated recognition and expensing of specific revenues and expenses; potential acquisitions and acquisition strategy; cost reduction and integration initiatives and other matters that may constitute forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties, assumptions and other factors that may cause the actual results, performance or achievement of Descartes to differ materially from the anticipated results, performance or achievements implied by such forward-looking statements. These factors are outlined in the press release and in the section entitled Certain Factors that May Affect Future Results in documents filed and furnished with the SEC, the OSC and other securities commissions across Canada, including our management's discussion and analysis filed today. 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 required by law. And with that, let me turn the call over to Ed.

Great. Thanks, Scott, and welcome, everyone to the call. We had an excellent second quarter and first half of the year with record financial results. We're excited to go over those with you and give you some perspective about the business environment we see right now. But first, let me give you a road map for this call. First, I'll start with highlighting some aspects of our financial results and speak to how our business performed in the last quarter. I'll then hand it over to Allan, who will go over the Q2 financial results and some corporate finance matters in more detail. I'll then come back and provide an update on the current business environment and how our business is calibrated. And finally, we'll open it up to the operator to coordinate the Q&A portion of the call. So let's get started by looking at Q2. We had record high revenues of $123 million, up 18% from a year ago. Net income was $22.9 million. Adjusted EBITDA was a record high of $54 million, up 18% from a year ago. We generated $46.4 million in cash from operations or 86% of our adjusted EBITDA. And this number could have been higher but was reduced since $5.3 million in earn-out consideration from past acquisitions was classified as cash used in operations. Our adjusted EBITDA as a percentage of revenue was up 44% -- was at 44%, excuse me. All of these metrics were ahead of our plan so a very strong financial quarter for us. And these results happened in a very challenging FX environment. Our revenues would have been $3.9 million higher if we'd used last year's FX rates or $1.7 million higher if we'd used last quarter's FX rates. Allan will go into this in more detail later.…

Thanks, Ed. As indicated, I'm going to take you through our financial highlights for our second quarter, which ended on July 31. We are pleased to report record quarterly revenue of $123.0 million this quarter, an increase of 18% from revenue of $104.6 million in Q2 last year. As Ed mentioned, the impact of a stronger U.S. dollar compared to all other currencies that we operate in, namely the euro, the British pound and Canadian dollar, had a negative impact on our revenue this quarter. Excluding the impact of FX changes, our revenue would have been almost $4 million higher and our growth rate would have been closer to 21% over the same period last year. While revenue from new acquisitions, including the recently completed XPS acquisition, contributed nicely to this growth, similar to the first quarter, growth in revenue from new and existing customers from our existing solution set were the main drivers for growth this quarter when compared to last year. Looking at the numbers further, our revenue mix in the quarter continued to be very strong, with services revenue increasing 70% to $109.4 million compared to $93.5 million in the same quarter last year and consistent at 89% of revenue in both periods. Service revenue was also up nicely sequentially, increasing just over 6% from Q1 this year despite the FX changes. License revenue came in at $3.3 million or just under 3% of revenue in the quarter, up from license revenues of $1.2 million in the second quarter last year, as we had a couple of larger license deals closed during the quarter. Professional services and other revenue came in at $10.3 million or 8% of revenue in the second quarter. And so for the first half of this year, revenue came in at $239.4 million,…

Great. Thanks, Allan. While we had a great financial quarter that ended in July, we're already more than a month into our quarter that will end at the end of October. We're operating in an interesting and unpredictable business environment that I'd like to provide some more context on. First, we're seeing strong volumes. In Q2, we continued to see strong shipping volumes across our Global Logistics Network in all modes of transportation. In July, public information shows that there were again record ocean imports into the United States when compared to a year-ago statistics. So while there are many concerns about the global economy, it doesn't appear to be making its way into shipment volumes yet. Second, there's some shipping capacity coming back. For last year and the first quarter of this year, shippers experienced tight capacity to book transportation, usually resulting in much higher freight rates in both contract and spot markets. There appears to be more capacity available now and we're hearing some of the softening of freight rates. As a reminder, for Descartes, rises and falls in freight rates don't impact us financially. We have a portion of our revenues tied to the number of shipping transactions but not the price that those transactions are completed at. However, more affordable shipping benefits our many shipper customers and their ability and willingness to contract for logistics services. But there's still backlogs. While additional vehicle capacity would seem to indicate that goods would flow more smoothly, that does not appear to be the case. Unfortunately, logistics infrastructure is just not able to efficiently handle the volume of shipments that are moving right now. In the United States, we're used to vessel backlogs in the West Coast ports, but those backlogs have now also moved to East Coast ports…

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

Nice quarter, guys. Wanted to ask in terms of the demand that you're seeing. The context on shipping volumes was really helpful. But in terms of selling products and demand, has there been any change there? How have discussions with customers been at any lengthening of sales cycles that you're seeing?

No, we still continue to see strong support from our customer base. We see lots of sales processes in place. You can see that in the numbers that we just put up. And I think our customers see some of the uncertainty out there, but they also recognize, as I probably mentioned in the past, that supply chain and logistics is crucial for their business and they need to make investments to be better and better at that in the future. And I think those investments continue to this day.

Great. And then on the shipping volumes within being at record levels or at least in terms of imports into the U.S., how do you view the sustainability of that add? And how does that impact your business?

Well, I mean, 40% of our recurring revenue is related to those transportation transactions and we're still continuing to see strong demand out there. I mentioned that in the beginning of the call. That continues. We'll see what happens in the future and we're reading the same newspaper you are. With the global economy, it seems there's a lot of uncertainty out there. There's a big debate about whether we're in a recession or if we are, how much of one it is. But from what I'm reading, I don't see terrible times at the moment. It seems maybe it's just a little trepidation in people's decision-making process to buying goods and services. But at the same time, there's a big backlog in most of the world's supply chain, which is forcing big retailers and manufacturers to continue to ship goods around the world as they have in the past. And I think you saw that in the numbers we put up this past quarter.

And our next question comes from Raimo Lenschow from Barclays.

This is Jeremy on for Raimo. So I just wanted to ask about also on shipment volumes across the different transportation modes. So between ocean, air and rail, is there anything to kind of call out? Or was it pretty consistent from last quarter?

Yes. No, the shipping volumes in all 4 modes of transport: ocean, air, truck, rail continue to be fairly strong. I think there's backlogs in various areas where I've mentioned here. Maybe some of the backlogs of what we're reading in the newspapers and some of the trade reports have -- there's a little less congestion out there. But in terms of shipping volumes we're seeing on our network in the past quarter, they were still going strong as ever.

Our next question comes from Justin Long from Stephens.

I wanted to start with a question on organic growth. I was wondering if you could share your estimate for that number in the quarter. And then following up on transaction volumes, is there a way to think about a stress test of the model, taking those transaction volumes to recessionary levels and what that would mean for organic growth relative to where you are today?

Sure. It's Allan here. So on the first part of the question, organic growth, we don't break it out completely. We don't have -- we integrate the businesses we buy, as you know. But our best estimate would be in the 12% to 13% range, pretty consistent with last quarter. So that's the first part of the question. Ed, you want to take the second?

You wanted me to relate that to a stress test of what would happen if the world went to a recession? Is that what you're asking?

Correct. So if we just took transaction volumes back down to where they were in prior recessions, what kind of impact that would have.

Yes. I mean I don't know numerically what kind of impact it would have. It would obviously impact us, as we probably told you in the past. About 40% of our business is transaction volumes. And certainly, if the world's shipping volumes went down, we'd be impacted by that. In terms of putting numbers behind it, I'm not going to do that because I don't know where -- I don't know how bad a recession we're talking about or whatever. I can tell you in '08, and I probably told you and most of the people on the calls in the past, we were down about 8% in transaction volume, so which is interesting to me because if you think about it, that was a pretty bad recession and still, most of the world's goods were still moving around the world. And we saw some degradation on our network and it impacted us and, obviously, it would impact our growth rates at that point. But even in that worst case scenario, which I don't feel like we're anywhere near that kind of scenario right now or looking at that kind of scenario in the future, we were still able to grow in a small way but still able to grow through it. So we'll see what happens. I'm not sure if we're even headed into a recession or if we are, what it looks like. But I think our business is well positioned to do well even in a down environment.

Okay, helpful. And secondly on acquisitions, just curious in the pipeline if you've seen a change in the number of deals or valuation multiples over the last few months?

We continue to see a lot of deals out there. A lot of companies we're interested in buying as always. I think there's a little settling out that's probably going on in the larger deals more than the midsize and smaller deals. We're trying -- people are trying to figure out what the right price for some of these things are. You've seen on some of the larger deals, deals get stalled or held. But on our normal tuck-in type of business, we still see a nice pipeline as we have for the past several years.

Okay, great. Congrats on the quarter.

Our next question comes from Scott Group from Wolfe Research.

Can you talk about the revenue and margin run rates for XPS? And then just more broadly on the acquisition environment, it feels like earnouts have become a bigger part of the approach to acquisitions. I guess the earnouts are just getting a little bit bigger relative to initial purchase price. Do you think that's a new trend, new normal, Ed?

Want to take the first one?

Yes. So I'll answer your second one first. So earnouts, we typically use earnouts, and this has been consistent in our past, to bridge the gap between price differences, obviously. And so I think what we're seeing here, a couple of larger earnouts are unique. It maybe is a symbol of the time that we're in here, the uncertainties that Ed has talked about. We don't think that's the norm. But we will continue to use those earnouts to bridge a gap between what a seller thinks their business is worth and what we think it's worth. Our approach is whether we pay 0 on the earnout or we pay 100% of the earnout, we're happy. The business will meet our financial metrics either way. So whether -- again, whether it's 0, 50%, 100%, it will meet our financial metrics and we design the deals that way. To your first question on XPS, we don't break out details on the various acquisitions. But suffice to say, the multiples paid on XPS were pretty consistent with what we've been paying historically, so pretty much down the middle of a typical type of deal that Ed just described, the tuck-in type of deals that we see.

Okay. I think this was the first time in like 4 years where EBITDA margins didn't improve year-over-year. Just any thoughts there and where we go from here on margin.

Yes. I think as I said in the prepared comments, we grew nicely from a revenue perspective. Acquisitions contributed but the organic growth continue to be very solid. So that helped us. However, we are also making investments in our business. We've talked about this over the last 5 or 6 quarters that we would invest in the business. And certainly, that would be something that where the cost structure would go up. So there's also an impact of FX that's happened here in the numbers. Put all that together, we're still operating at very, very strong EBITDA margins of 43.9%. So that's really what's happened, a combination of the organic growth, investments in the business and an FX change leading to consistent margins.

I'm not going to explain about 44% of EBITDA margin, either, Scott. So we're happy with that.

Okay. And if I can just clarify one last thing. Your comment, Ed, about not seeing any slowdown in volume, I think you talked about July imports being at a record level. Is that a real-time comment through August, beginning of September? Just like when we look at the ocean rates, it feels like they've really taken a big step-down over the last month. I know you don't care about the rate but I'm guessing that's indicative of the demand environment. Are you not seeing any drop-off in transactional?

I'm commenting on our numbers from last quarter. I'm not really able to comment on our networks from this quarter, but I'm commenting on things I'm reading in the paper and talking to customers about how they're doing. And yes, the rates are coming down. I think it's partially because there's more capacity coming in. But I think the shipping volumes [ only not ] externally are saying that they're still doing pretty well.

Would your baseline, though, for Q3 reflect your view of transactional?

Yes, it's what we think. Yes, that's certainly part of calibration for sure.

And our next question comes from Nick Agostino.

Ed, I think in the past, you guys, I guess, did a little bit of a shift on your sales strategy going from -- or going towards more customer-centric as opposed to an account and geography approach. And on the call, you highlighted that you're obviously focusing more on customer retention, customer success and just overall increasing your customer count and having those customers stay with you longer. Are there other metrics that you guys are looking at? And specifically, how are you guys measuring the financial impact from that shift in strategy? And maybe if there's a way to quantify what that strategy has meant for this quarter just in terms of top line dollars, if that's something you guys are looking at.

Well, first, let me just correct one thing you said. It was in -- the customer-centric focus was an addition to the structure that we already have in place, not a replacement of it or not a revamping. We were adding customer-focused people to our existing sales structure. The cost was minor. You probably wouldn't have noticed it if we didn't call it out in terms of our actual costs. But I think the thing we're trying to do is keep our customers doing more stuff with us for longer. And I think the thing that we look at is our organic growth rates and doing that. How much our customers spending with us every month and are we able to get them to buy more stuff from us because they think our stuff is useful for them and their business and trying to help improve their businesses, we can look at our -- you can look at the uptick over the past years. We've been making these investments in our growth rates, our organic growth rates, I think that's somewhat telling. It's probably also partially due to the strong economy. But certainly, we're very happy and pleased with the investments we made and how our sales force has responded since then. And hopefully, we continue to make these investments and we see more of that in the future.

We have no more questions at this time. I'll turn it back to the speakers for closing comments.

Great. Thanks, everyone. We appreciate your time today and look forward to reporting back to you next quarter.

And thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.