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.

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 today. Portions of today's call, other than historical performance, include statements of forward-looking information within the meaning of applicable securities laws, and 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 condition; Descartes' gross margin and any growth in those gross margins; cash flow and use of cash; business outlook; baseline revenues, baseline operating expenses and baseline calibration; anticipated potential revenue losses and gains; anticipated recognition and accounting 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 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 are cautioned that such information may not be appropriate for other purposes. We don't undertake or accept any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements to reflect any change in our expectations or any change in events, conditions, assumptions or circumstances on which any such statement is based, except as is required by law. And with that, let me turn the call over to Ed.

Thanks, Scott, and welcome, everyone to the call. We had an excellent third quarter and first 9 months 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. 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 Q3 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 we'll then open it up to the operator to coordinate the Q&A portion of the call. So with that, let's get started by looking at Q3. As it has been for years, our principal target each quarter is to grow adjusted EBITDA 10% to 15% a year regardless of market conditions, and this quarter was no exception. We achieved this goal once more. We had record adjusted EBITDA of $54.5 million, up 13% from a year ago, driven by double-digit organic growth in our recurring revenue -- recurring services business. We had record high services revenues that were up 13% and total revenues that were up 12% from a year ago. We generated $50.9 million in cash from operations or 93% of our adjusted EBITDA. Our adjusted EBITDA as a percentage of revenues was 45%. All of these metrics were consistent with our plans, so a very strong financial quarter for us. These results happened in a very challenging FX environment. Our revenues would have been $5 million higher if we used last year's FX rates, up 16%…

Sure. Thanks, Ed. As indicated, I'm going to take you through the financial highlights of our third quarter, which ended on October 31. We are pleased to report quarterly revenue of $121.5 million this quarter, an increase of 12% from revenue of $108.9 million in Q3 last year. The impact of a stronger U.S. dollar compared to the other currencies that we operate in, mainly the euro, the British pound and the Canadian dollar has had a significant negative impact on our revenue again this quarter. As Ed mentioned earlier, excluding the impact of FX changes, our revenue would have been approximately $5 million higher, and our growth rate on an FX-neutral basis would have been closer to 16% over the same period last year. Sequentially, the impact was also quite large from FX with almost a $2 million negative impact from foreign exchange from the second quarter to the third quarter this year, which is the largest sequential impact that we've seen in our business. While revenue from new acquisitions, including a full quarter from the XPS acquisition completed earlier in Q2, contributed nicely to this growth, similar to the past few quarters, our growth in revenue from new and existing customers were the main drivers of growth again this quarter when compared to last year. Looking at our revenue details further. Our revenue mix in the quarter continued to be very strong, with services revenue increasing 13% to $110.1 million compared to $97.2 million in the same quarter last year, increasing to 91% of total revenue in the quarter compared to 89% of revenue in Q3 last year. Again, looking at FX, on a constant currency basis, we would estimate that our growth in services revenue from new and existing customers would have been just over 11% this…

Great. Thanks, Allan. We're about a month into our next quarter and in the throes of the busy holiday shopping periods, but it seems like it's far from a business-as-usual environment right now. I wanted to share some things that we're hearing from our customers and seeing ourselves. The first is high inventory levels. For the first time in a few years, retailers have full shelves as they entered the holiday season. Because of the challenges with supply chains during the pandemic, retailers were nervous and ordered goods well in advance of the holiday peak period. The challenge for retailers this season is not whether they have inventory but whether they have the right inventory. The early ordering cycles caused lots of predictions and assumptions to be made about what consumers will want. We'll be watching with interest to see what the next replenishment cycles look like in terms of timing, content and size. The second is there's still strong consumer demand. For North America, our customers have not seen a pullback in consumers' willingness to spend money. Rather, they've indicated consumers are still flush with cash and willing to spend if the right good is available. The early returns reported by others from a strong Black Friday sales period in North America are consistent with that. We think this will continue to drive strong last mile delivery volumes as at-home delivery is even a preferable option for those making purchases in store. For Europe, we're hearing some pullback in consumer spending through the late fall. We understand there's lots of incremental pressures on consumers from the increased energy costs, in part resulting from the war in Ukraine. The third is replenishment lead times remain unpredictable. As we come through the holiday period, we're hearing there's still nervousness about the…

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

Ed, wanted to ask on your comments around customers being cautious with their own business. Is that driving any impact in terms of sales cycles or demand for your products or perhaps what products they're purchasing?

No, it's more stuff that we're hearing them talk about. In fact, you probably heard me say this over the past year that supply chain and logistics has become a whole lot more important to everyone, really. And that trickles down to our customers and oftentimes ends up in technology investments as technology tends to have the best ROI. What we're seeing is while our customers are being cautious and they may be covering the break on some other projects, that they continue in the logistics and supply chain space to make investments and continue the investments that they're already making. Our projects are rolling out. We continue to see a strong pipeline. And we think we may be unique in that regard in the business that we're in, right? That may be one of the few areas that they're continuing to have their foot on the gas, in other words. And that's what we're seeing right now.

Got it. And then just last one for me on acquisitions. Maybe just some comments on what you're seeing in the market in terms of, are there more deals coming into play, valuation expectations and then competition for those deals?

I think on the medium, smaller ones are kind of our bread and butter, the tuck-ins that we normally do. We're seeing similar to what we have over the last couple of years, we're doing well in that area. We're able to find acquisitions and bring them in, in a timely fashion and without a ton of competition. On the larger stuff, we're starting to see a little bit of softening. I think there's private equity firms that are out there that are a little concerned about overpaying for stuff, and we're starting to see maybe more of those deals coming out, and we'll see what happens whether we jump into them or not. But we're starting to see that market kind of loosen up a little bit if it was tight for the last 6 months.

And our next question comes from Justin Long from Stephens.

Allan, I think you said organic growth was around 11% in the quarter when excluding FX, but I wanted to make sure that I heard that correctly. And is there anything you can share on the trend that you saw in transactional volumes in the quarter?

So yes, I did say that on a currency-neutral basis, services revenue growth was around 11%, and that's the most important thing that we look at. That's the recurring part of our business. From a transactional perspective, I think Ed hit it in his comments. I mean, we're seeing continued activity in the marketplace and a continued need for our services. So goods are flowing and no appreciable change there in the trends that we've seen coming into the quarter.

Okay, got it. And to follow up on the EBITDA margin outlook that you mentioned at the 40% to 45% range for the fourth quarter and the next fiscal year. As you think about fiscal 2024, what level of organic growth is needed to support that margin outlook? And are you assuming any pullback in transactional volumes versus where we are today?

Yes. I mean, the main thing we focus on is 10% to 15% EBITDA growth. We think we're going to be able to hit those numbers in the future as well. That's certainly what we try to -- the way we try to run our business. And we believe we'll have the organic growth in our business to support that.

And our next question comes from Scott Group from Wolfe Research.

Just to follow up, that 11% ex currency in services, is that inclusive of acquisitions or not? I'm just trying to get a sense of the real underlying organic.

No, that's our -- again, just to keep in mind and just to repeat what Ed said, I mean, we run this business to grow EBITDA and that's our primary focus. So that incorporates everything we do. We fully integrate the acquisitions. What I'm giving you there is our best guess, and it's just a best guess, given the way we run the business on the organic growth. So the growth with new -- from new and existing customers with our traditional services, our existing services, and that's around 11%.

And specifically, Scott, not including acquisitions.

Perfect, okay. I thought so, I just wanted to confirm, okay. And then, Ed, when you guys have given us the EBITDA guidance over -- margin guidance over time, you typically have sort of raised it in bigger chunks. I guess you didn't this time. Any thoughts on why not?

I think the way we raised it this time was pretty consistent with how we've done it in the past. We might have been a little slow to raise it over the last 6 to 8 months because there was a lot of uncertainty. I think I was trying to call that out as we were doing that. We were saying 38% to 43% and we beat it the last 2 quarters with 44%. So we may have been a little slow to do that probably just because we're conservative operators, and there's a lot of balls in the air. With FX moving around the way it is, we were wondering what was going to happen next, that certainly impact those margins. But no, we think we're trying to be accurate when we give you that range of 40% to 45%. We know that we could have FX changing environments that could lower it quickly. We could have -- we're a very profitable company. We could have an acquisition or 2 come in that would lower it and I want to be accurate with how we're projecting it to you. So that's why you're getting the 40% to 45% and I think that's a pretty good number.

Okay. And then ultimately, freight environment slowing but you still feel -- it sounds like you still feel quite good about the double-digit EBITDA growth again for next year.

Yes. I mean, we run our business with a very strong focus on 10% to 15% EBITDA growth and doing our best to get it to 15%. Lots of things that can impact that. We can see what FX is doing to it right now. But we feel like we're making that promise to our shareholders and we want to make sure that we get there.

Our next question comes from Raimo Lenschow.

This is Jeremy on for Raimo. I just wanted to ask on the sanctions business line, if you can speak a bit to what led to outperformance in the quarter there and maybe just like some of the different factors in the macro that you're seeing impact that segment of the business.

Thanks, Jeremy. Yes, you can just pick up the paper, you can kind of see what's causing it, right? Wars, threats of wars. You see trouble brewing in Iran. You see trouble brewing in China. You see an all-out war with Russia and Ukraine. And those things tend to drag more people getting put on the sanctions list. And the more people that are on the sanction list, the more companies have to pay attention to that and end up needing to buy a service to make sure that they can do it. It gets very complicated to -- these lists change every day, and there's 140 countries that are making changes every day. And if you ship to someone you're not allowed to ship to, you can get an awful big fine. And I didn't know it was not a good answer for the government. And as companies become more and more aware of that and are worried about running afoul of those things, they have to do something about it. We're the leading solution provider in the world to provide that database. Because we have more countries than anybody else, that we have more accurate data than anyone else.

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

Great, everyone. Thanks very much for your time, and we look forward to reporting back to you on Q4 in a few months. Have a great day.

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