Good afternoon, ladies and gentlemen, and welcome to The Descartes Systems Group quarterly results conference call. [Operator Instructions] This call is being recorded on Wednesday, May 31, 2023. I would now like to turn the conference over to Scott Pagan. Please go ahead.

Thanks very much, 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 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; 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 LSE 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.

Thanks, Scott. Welcome, everyone, to the call. We had a very strong first quarter to start 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 the call. I'll start with highlighting some aspects of how our business performed in the last quarter. I'll then hand it over to Allan who will go over the Q1 financial results in more detail. I'll then come back and provide an update on how we see 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 let's get started by looking at the quarter. Key metrics we monitor include revenues, profits, cash flow from operations and return on our investments. For this past quarter, we had record performance in each of those areas. Total revenues were up 17% from a year ago with services revenues up 21%. Net income and earnings per share were up 27% and 26%, respectively. Income from operations was up 19%, while adjusted EBITDA was up 13% with a slight FX headwind. And we generated almost $49 million in cash from operations, representing 85% of adjusted EBITDA. At the end of the quarter, we had $182 million in cash and were debt-free with an undrawn $350 million line of credit. We remain well capitalized, cash generating, debt free and ready to continue to invest in our business. We believe a company like ours is well positioned to continue to thrive in market conditions like these. As I've said in the past, our investment strategy is heavily influenced by what our customers are looking for…

Thanks, Ed. As indicated, I'm going to walk you through our financial highlights for our first quarter, which ended on April 30. We are pleased to report record quarterly revenues of $136.6 million this quarter, an increase of just over 17% from revenues of $116.4 million in Q1 last year. While revenue from our acquisitions in the past 12 months, in particular, GroundCloud and XPS, contributed to this growth, growth in revenue from new and existing customers was again the main driver in growth this quarter when compared to last year. Consistent with past quarters, our revenue mix in the quarter continued to be very strong, with services revenue increasing 21% to $124.1 million or 91% of total revenue compared to $102.8 million or 88% of revenue in the same quarter last year. Services revenue was also up nicely sequentially, increasing over 9% from $113.4 million that we recorded in Q4 last year. License revenues came in lower at only $1.0 million or 1% of revenue in the first quarter, down from license revenues of $2.3 million in the first quarter last year. While professional services and other revenue came in at $11.5 million or 8% of revenue, up 2% from $11.3 million in the same period last year. In addition, we should mention that there was also a decrease in revenue from FX this quarter. As consistent with the past few quarters, the U.S. dollar continued to be stronger compared to the euro, the Canadian dollar and the British pound compared to the same period last year. This resulted in an over $2 million negative impact on revenue in Q1 when compared to Q1 last year but only had a very small impact on our profitability as we continue to be fairly naturally hedged to the various currency movements.…

Thanks, Allan. With Q2 a month in, we remain confident in our business but cautious about the broader economic circumstances that are out there, this continued high interest rates, pervasive conflict in the Ukraine, various recessionary pressures and economic discussion that could impact the freight market. We've seen some companies taking action from impacts they've seen in their business. So for us, we continue to be cautious in the face of uncertainty. Supply chain and logistics continues to be a critical business function for our customers regardless of the economic circumstances. I wanted to share some areas that our customers are monitoring and that shape the market that we're currently operating in. First is U.S. ocean container imports are growing but at pre-pandemic levels. Based on public data available through our data mine service, ocean imports have grown month by month since February but are tracking more in line with pre-pandemic levels than the elevated 2021 and 2022 levels. We'll be monitoring growth over the coming months, with May numbers expected in the coming days. The second is that retailers have made good progress in shedding excess inventories. Over the past months, the market saw some decreased ordering from retailers as they dealt with excess inventories. Essentially, some retailers skipped a replenishment cycle, which had an impact on freight demand. We've heard from customers they've had good success in recent months of moving that excess inventory with a potential return to more normalized replenishment cycles on the horizon. The third is freight prices have come down. The recent abnormal replenishment cycles had an impact on demand for freight, which has impacted the spot markets for freight across the different modes of transportation. That's good news for shippers but less good for logistics carriers and intermediaries. Just because prices come down,…

[Operator Instructions] Your first question comes from the line of Raimo Lenschow from Barclays.

Congrats on another solid quarter. Ed, just if you think about the cycle that we're kind of living in at the moment, how do you see this continue to play out in terms of like how transportation volumes are continuing to go through -- come through? Like, are we kind of through the worst? That's kind of what it feels like, but I kind of wanted to see your view on that one. And I had one quick follow-up.

It's tough to tell. Depends on the mode of transportation you're talking about. I mean ocean probably had a weaker point a few months ago. We see it strengthening in the last couple of months. I think truck also had some weaker points over the last couple of months. We didn't see that in our network as much because it was growing considerably, specifically with MacroPoint kind of growing its way out of any volume issues our customers were having. And on the air side, it's continued to perform pretty strong, and it looks pretty good to us today. I don't know what the future brings exactly. I mean it's a mixed news economy at the moment, as I read the paper. But most of our customers seem to be in pretty good shape. I don't hear any of them sounding fire bells or anything like that. And certainly, the volumes on our network continue to be strong, so we're happy about that.

Yes. Okay. Perfect. And then what are you seeing in the field in terms of -- you always were very good in finding good assets and finding them at good prices. Like, where do you see the private market in terms of their understanding of new asset values and valuation levels? Where are we on that journey?

Yes. Thank you. It's certainly coming around right now. We're starting to see, I think, the early signs of change in that market. There's still a decent amount of stuff for sale. You can see we got the Localz deal done. That was probably something that we might have struggled to do a year ago because we wouldn't have been able to agree on price, and we were able to do it in the last few months based on the conditions that the company -- smaller technology companies are facing. I think on the smaller end, where we tend to play, we're seeing more stuff that's impacted more quickly by economic uncertainty out there and an unwillingness for people to put money into the market. So if they're losing money or not making much money and the people that historically have invested and maybe perhaps over invested in those areas in the last 4 or 5 years have kind of stopped doing that, all of a sudden were a very attractive choice to people. Our company continues to perform well, and we have a good track record of integrating acquisitions in and making their businesses grow when they get here. So I think that's played well for us, and you can see it in some of the acquisitions that we've done so far. And I think there may be more to come just based on what I'm seeing.

Your next question comes from the line of Matt Pfau from William Blair.

First, I wanted to follow up on one of the comments you made, and I don't know what the exact wording was, but it was something along the lines of some of your customers have taken actions based on macro impacts they've seen in their business. Has that had any impact to Descartes?

No, I think we have been in a very fortunate situation where I think while customers, particularly big retailers and manufacturers are probably the first place we saw this in the last 6 months where they were worried about what the economy looked like and they were probably telling us they were kind of putting their foot on the brake and maybe holding back on some investments, they continue to green light their logistics and supply chain investments. So we would hear about them at some of our larger customers, but they were continuing on with their projects because they felt the supply chain and logistics area was an area of focus for them and something they should continue to invest money, even though they were proceeding cautiously in other areas of their business.

Got it. And just to follow up with your comments in terms of the acquisition environment and funding pressures that some private companies are seeing. Have you seen that have an impact in terms of some of your customers perhaps becoming less willing to do business with VC-backed companies over fear of what the longevity is there?

Yes, I think there's some of that going on right now. There's a lot of talk of that in the logistics trade publications and the risk that you might be in doing that. It's not just a risk of whether it will be there or not. It's a risk of is it going to get sold to somebody else who was going to change the direction soon and do I want to sign up for -- to make a decent-sized investment with someone who might have that happen to them. And the management team that I'm talking to today can't make promises that they can keep for a long time. And I think that's benefited us. We certainly see some of it going on. I think we'll continue to see that happen. And honestly, I think our customers are smart to think that way. I think that is an actual concern. And if you do business with someone that's probably a lot more likely to be around for the long run, you're probably making a smarter decision.

Your next question comes from the line of Paul Treiber from RBC Capital Markets.

I was just hoping, could you elaborate on one of your earlier points about MacroPoint, and that has been growing even though that the truck market in general has been weak. Does that reflect MacroPoint growing share of wallet or penetration within customers? Or are you seeing continued new customer wins?

Both. I mean MacroPoint has done an excellent job of growing, and I think it's come with new customer wins they were taking away from their competitors. It's also come, over the last several years, with companies saying, "I used to track some of the shipments. I now need to track them all." And that takes a while for companies to roll out. But I think a lot of companies are starting to say, "I'm not going to be selective about what shipments I'm going to track anymore. I'm going to track all of them." And it's just going to be table stakes in their business. And that certainly benefited MacroPoint as they have a large chunk of the industry that's made that decision.

That's insightful. The other question, just more broadly speaking, despite the freight market perhaps going through a slower period here, your organic growth has been very resilient, much higher than you've averaged in the past. Do you think you're seeing structurally and sustainably higher organic growth than in the past? And then if so, why not take up your long-term 10% to 15% growth outlook, which does include organic growth plus acquisitions?

We're a "slow and steady wins the race" kind of company. I think we proceed cautiously all the time. If we over perform, that's great news. But I don't know that we see what's going to happen out 5, 10 years. And so we think, hey, this is the rate that we think this market may grow at. Maybe we're doing a little better than that right now. But we're going to continue to run our company like that. So if something bad happened in the future, we're not dramatically impacted by it. We've seen a lot of people roll by us over the years, screaming from behind them, "We're going to the moon, and we'll see you later." And then in the next couple of years, they implode, and we quietly come behind them and pick up all the pieces. And the reason those things happen is because they overinvest in sales and marketing as they start making promises they're going to grow faster than they can in the long run. And when something goes bad, they implode. Everyone gets fired. The customers get forgotten. And they probably get sold to somebody else. And that's a disaster that we don't want to be a part of.

And just one last question. There's been a lot of enthusiasm in the market recently around AI. How do you see AI impacting the logistics market in your business? And to what degree have you been making investments in AI?

Yes. Thanks for asking that. A lot of -- it's impacted us for years. First of all, our routing business has a lot of AI in it before the words AI really became a common discussion point. If you take away our routing solutions work for the last 10 or 15 years, we've been making AI-like decisions for our customers, and our guys have been thinking like that. So we continue to do more and more of that. And with all these IoT devices coming out, we get more and more information that we can help our customers make better and better decisions about how to move their freight around every day. And that's exciting times for us because we're now at the point where you're looking at our routing systems and going, "How does it know that? Like, I don't understand." And it's all because we're collecting a lot of data points over a long period of time and are able to help our customers figure out things like, "What's that intersection going to look like at 5:00," and "Should I make a left turn or a right turn or completely avoid that intersection and tell them to do it at 3?" And when you can combine millions of those things a day -- those decisions a day for a customer and make pretty damn accurate decisions every day, you help them route their trucks a lot more efficiently and save them a lot of money, which is awesome. In our content and classification space, we are starting to look, over the last 6 to 8 months, at using AI to help our customers more quickly and accurately classify goods so that they can make better decisions about how to make their customs filings, which potentially saves them a…

[Operator Instructions] Your next question comes from the line of Justin Long from Stephens.

I wanted to start with a question on organic growth. Allan, I think you mentioned in the services business, organic growth was a little bit over 9%. But could you share what all-in organic growth was in the quarter? And then maybe comment on what you're seeing from a transactional volume perspective on a year-over-year basis.

Yes, I'll start with the organic growth one, and Ed may look at -- or talk to you about the volumes. So just over 9% in the services piece of our business, which is the most important piece, the recurring part of our business. Licenses, I mentioned earlier, were down. We had a weaker license number. It's only $1 million, down from $2.3 million and a little bit of drop in some nonrecurring areas, including hardware. So 6.5%, 7% growth organically in total revenues because of those drops. So 9.5% from services leading to a 6.5%, 7% overall organic growth in the business. And from a volumes perspective, Ed?

I mean I commented on the volumes earlier, but let me just comment on some stuff that Allan said. I mean we are a recurring revenue business. We are trying to get all our customers up and running as fast as possible on recurring revenue-type products. I am aware of the license component -- the small license component of our business, the small hardware component of our business and the small professional services and training component of our business. They are not our focus. If we could eliminate all 3 of those and get everyone over to fast installed recurring revenue products, that would be our ideal goal. So we spend most of our time looking at that services line. I'm aware that there's a little bit more to the business than that, but certainly, we're really happy that our highest growth is coming from the area that we think is the most valuable.

Understood. And I guess building on one of the earlier questions, when I think about the services business growing over 9% organically, in this economic backdrop in a freight market that's challenged, and we're hearing about a lot of weakness in volumes from the transportation companies, if this type of growth is sustainable and the framework for organic growth is more in that high single-digit range, can you talk about the head count requirements to support that and maybe where sales and marketing head count is today versus pre-pandemic? I'm just curious if you've already ramped enough to support that growth or if we're going to need to see further investment there.

No, I don't think you're going to see us -- let's just say, I think you're going to see us continue to behave the way we have in the past. And for the past 6 or 8 months, I think I've described it to people as we took our foot off the gas and just kind of covered the brake with it in an attempt to be cautious and are still very happy with the growth rates that we're getting given that's the case. We're not the type of company that's going to go invest ahead, too far over our skis, in terms of sales and marketing. We want to have people in place to answer our customers' questions and help them make buying decisions when they're there, but I don't think you're going to see us start to make material additions to sales and marketing beyond what we've done in the past, which I think is, by all accounts, cautious. And I think you're going to see us continue to behave that way.

Understood. Congrats on the quarter.

Thank you very much, Justin.

Your next question comes from the line of Daniel Chan from TD Cowen.

Ed, you were talking about an expectation for the replenishment cycle to normalize. Just wondering if that is translating into the investments that your customers are making. In other words, are they investing ahead of what may be higher anticipated volumes?

Maybe, but my first guess is they're probably thinking a little more long term than that. They went through the pandemic. They had their customers realize that supply chain and logistics is a lot more important than they thought it was. They saw that translate into their business and a need to be able to tell their customers what's going on in the supply chain and logistics world a lot better than they did 5 years ago, and they're making investments to do that right now. I don't think they're -- at least as we talk to them, I don't think they're sitting there thinking about, "How do I make this investment to be better off in the next 6 months." I think they're probably more like, "How do I make this investment to be better off in the next 5 to 10 years." And I'd say that's probably more the way we hear them talking about it. Now will it benefit them in the next 6 months? Probably. Guy who made the investment last year is probably going to get some benefit out of it this year. Guy who's making it right now is probably going to get some benefit out of it coming into Christmas season this fall. But if I listen to what their thinking was or logic was coming into it, it was probably a longer-term one than just this resupply period.

That's helpful. And then maybe a follow-on question on these VC-backed competitors of yours. Shopify made a big splash by divesting its logistics business to Flexport. And Flexport seems to have some similar solutions to you. Are they a competitor that you see often? And does them taking on the Shopify assets change the competitive landscape at all?

No, no. Flexport is a big customer of ours and a good customer of ours, and we don't compete with them in any way. And nothing about what Shopify did does anything but help us. I mean we were partner with Shopify before this. We're a bigger partner of Flexport now. And we don't compete with them nor do we have any intention of competing with them at any point.

Your next question comes from the line of Robert Young from Canaccord Genuity.

Maybe a quick clarification on a previous question around the replenishment cycle. You said that retailers skipped a replenishment cycle. It didn't seem to impact your numbers at all, and so I'm just curious why that would be. Is there something to understand there?

I think my first kind of look at that would be we continued to grow through a cycle that wasn't that bad across all the modes of transport that we operate in. Things were down, for sure. Transportation volumes were down, and prices were down significantly for our customers from '21 and '22 to today or, let's say, the last 6 months. But the volumes weren't down that much, and we were growing through that. So we've kind of -- we're growing while volumes are tempering a little bit, and that probably kind of masks it from our perspective. Maybe not from our customers' perspective, they probably suffered a little more because they have prices coming down somewhat dramatically and then volume's coming down a little bit from pre-pandemic or from pandemic times. I think that's fine because, during those times, our customers were making tons and tons of money, and we certainly did well in the pandemic. But once they're shipped for full, we could process no more transactions for them. Their prices shot up at that point. Our revenue kind of just stayed along with the high transaction volumes that they were living with. So on the way out of that, I think we probably benefited from that, right? As their backlogs got less and less, their prices went down. We weren't really impacted by that. When they went down below full, they didn't go down below full that much. And as a result, our growth in our business probably made up for it and put us in a position where our numbers look good all the way through.

Okay. Okay. And then maybe just a question around the comment you made about pushing as much as possible into a recurring revenue and towards subscription. I think you start off the answer to that talking about volumes, but I think maybe you're talking about license and hardware. But was there an element to that answer you were talking about moving volumes, volume-related revenue, more into a subscription product? And then I'll pass the line.

No. No, I mean we love our subscription business and we love our transaction business. We actually think our -- in a very odd way for a software company, we're one of the few that you might hear say this, we think our transaction business might even be stronger than our subscription business in a lot of ways. They're all recurring revenue to us. What I was referring to earlier in the call was license fees, pro services, hardware sales that -- we recognize that's a small part of our business. We think our subscription and transactional recurring revenue businesses are the heart of our business and the core to our business and the thing that makes us a great business and differentiates us from a lot of other companies out there. And so when I -- I think my comment was when I hear that the growth is highest in that services business or the recurring revenue business, that's exactly what we're looking for. That's great news for our business and great news for our shareholders.

Your next question comes from the line of Steven Li from Raymond James.

Ed, on GroundCloud and the margin impact, it sounds like Q1 would mark the low point. So based on what you've seen so far from GroundCloud, do the margins stay there for a couple more quarters as you digest? Or can we quickly get back to that 43%, 44% range?

Yes. No, we think we're going to -- first of all, we're thrilled with the GroundCloud investment. We think, in the long run, there's a lot of tailwinds behind it. And we also think it's a business that historically operated at a much lower margin than Descartes did, and there's a lot of opportunity for us there. We're going to push that and continue to try and get it much closer to our margin levels, but I'm not trying to do that so fast that we cause any problems. A couple of quarters is fine, and you'll start to see us continue to move those numbers up over that time. . I don't know, Allan, if you have anything else to say about it, but...

No, just it's similar to other acquisitions where we've done, Steven. Where the margins start out low, we will work hard to improve those margins. We'll improve them to whatever level we can get them to. And that depends on product line, what the ultimate high point is, but that's what we'll do over time. And I would expect it to go steady, slow and steady with that. We'll improve it much like we did with MacroPoint.

I mean, listen, Steven, we're in this for the long run. And I'd much rather do it right than do it fast. We're trying to make sure we make this a great business for the long run. Like a lot of the other businesses we operate in, we're proceeding cautiously to make sure that we get the margins up. But we're not going to rush through it in any way that harms the business.

Your next question comes from the line of Kevin Krishnaratne from Scotiabank.

Just on the shipping strength that you saw in Q1, I think you're now above 2019 levels. Can you talk about -- did you see those same drivers continue on into May? And then what are your thoughts on volumes? I know it's a tough one to answer here, but thoughts maybe on how you're thinking about your guidance for the year in terms of are you anticipating potential for volumes to be above levels that you saw in 2019 in the industry?

Yes. Thanks for the question. We have -- you'll hear about the May numbers when we release next quarter, so I can't speak to that specifically. I can tell you what customers are telling us and I can tell you some of the trade statistics we're hearing. and certainly, maybe April will give you some indication. We saw February was kind of a low point, and it's trending up in March and April. And we'll see what happens in May. You can probably take a look at some of the trade statistics that we put out in a week or 2. It will give you some indication of that. But if I could use May as an example -- or sorry, April as an example, I'm optimistic about what we see in May. . And we'll see what happens to the rest of the year. I mean I read the newspapers like you do. It's hard for me to figure out exactly what's going to happen with the economy right now. It doesn't seem like it's terrible, but it doesn't seem like it's great. I'm glad that U.S. got a debt deal done or almost done, and we'll see what happens here. But either way, just the way we run our business, I like our chances. We think we're in a very good position and certainly better than a lot of the other companies in our space that we compete against.

There are no further questions at this time. I will now hand over to Ed Ryan. Please continue.

Hey, thanks, everyone. I appreciate your time on the call today, and we look forward to reporting back on next quarter in a few months. Thanks, and have a great day.

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