Good afternoon, ladies and gentlemen, and welcome to the Descartes Systems Group's quarterly results conference call. [Operator Instructions] This call is being recorded on Wednesday, September 6, 2023. I would now like to turn the conference over to Scott Pagan. Please go ahead.

Thanks, and good afternoon, everyone. Joining me 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 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 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 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 first half of the year with record financial results this past quarter. 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 by hitting some highlights of last quarter and some aspects of how our business performed. I'll then hand it over to Allan, who will go over the Q2 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 as we enter Q3. And then 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 the quarter that just ended July 31. Key metrics we monitor include revenues, profits, cash flow from operations and returns on our investments. For this past quarter, we again had record performance in each of those areas. Total revenues were up 17% from a year ago with service revenues up almost 20%. Net income and EPS were up 23% and 19%, respectively. Income from operations was up 17%, while adjusted EBITDA was up 12%. And we generated $52 million of cash from operations, representing 86% of adjusted EBITDA. At the end of the quarter, we had $227 million in cash, and we 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 because we've got good organic growth plus the experience and…

Okay. Thanks, Ed. As indicated, I'm going to walk you through our financial highlights for our second quarter, which ended on July 31. We are pleased to report record quarterly revenue of $143.4 million this quarter, an increase of 17% from revenue of $123.0 million in Q2 last year. While revenue from new acquisitions, including the GroundCloud acquisition completed earlier in the year, as Ed just mentioned, contributed nicely to this growth. Similar to the first quarter and really the last several years, growth in revenue from new and existing customers from our existing solutions was the main driver in growth this quarter when compared to last year. Looking further at our numbers. Our revenue mix in the quarter continued to be very strong with services revenue increasing 19% to $130.7 million or 91% of total revenue compared to $109.4 million or 89% of total revenue in the same quarter last year. Services revenue was also up nicely sequentially, increasing just over 5% from the first quarter this year as we continue to help our customers expand with new services and additional volumes. Removing the impact of recent acquisitions on a like-for-like basis, we would estimate that our growth in services revenue from new and existing customers would have been just over 9% for the quarter when compared to the same quarter last year, similar to the results we saw in Q1 this year. License revenue came in at $1.4 million or just 1% of revenue in the quarter, down from license revenue of $3.3 million in the second quarter last year as we had a couple of larger-than-normal license deals close in the second quarter last year, while professional services and other revenue came in at $11.3 million or 8% of revenue, up approximately 10% from revenue of $10.3…

Great. Thanks, Allan. With the Q3 a month in, we remain confident in our business but cautious about the broader economic circumstances and various statistics and commentary relating to the supply chain and logistics markets. On the broader economic front, we have continued high interest rates, pervasive conflict in the Ukraine, labor availability challenges and various recessionary pressures and economic discussions. In the supply chain and logistics market, here's a few things that were noted. First is shipping volumes. Shipping volumes across various modes of transportation are below their pandemic highs and more closely tracking pre-pandemic trends. In addition, there are some current challenges such as the reduced flow through the Panama Canal caused by low water levels that could impact shipping alternatives. The second is retailer inventories. There's high levels of retailer inventories potentially impacting fall replenishment cycles. Inventories aren't decreasing, implying retailers are matching demand with replenishment and potentially carrying more safety stock. The third is consumer demand. There's uncertain consumer demand coming into this peak buying season. In particular, it's uncertainty how spending habits will split between durable goods and services and experiences. Overall, U.S. consumer spending is still high, but there's caution as we approach the holiday season. The fourth is some capacity has left the market. The U.S. truck market has seen some capacity come out of the market with the recent bankruptcy of Yellow. The market continues to adjust to post-pandemic volumes, and it's possible more capacity will leave. In air, we've seen capacity adjustments with less reliance on pure air freighters. Fifth, additional trade restrictions. There continue to be new restrictions announced principally relating to the war in Ukraine and in connection with burgeoning trade tensions between the U.S. and China. Some new restrictions have been announced with respect to investment in and…

[Operator Instructions] Your first question comes from the line of Matt Pfau from William Blair.

Ed, I wanted to follow up on some of the comments you made about potential headwinds in the back half of the year here. How should we think about those in terms of the potential impact on your business? Part of your business is transaction based, but it's not as simple as just being tied to shipping volumes. So how do we think through the potential puts and takes there in terms of the impact on your revenue?

Well, as we've been talking about for a year or 2 now, we have a lot of things going very well in our business. And maybe we'll be going better if at some point in the future transportation transactions went down. We don't know what the future is going to bring. We're just running the business, looking at what's going on in the market and going, hey, there's some uncertainty out there, so we'll see what happens. As you've seen in the past, transportation transactions have gone down, and we still have performed very well. We do that because we sell a lot of software outside of that. 60% of our recurring revenue is outside of transaction-based volume. And even in the transaction space, we tend to be picking up more volume over the course of a quarter or a year because our customers are doing more business with us. And as a result, we end up doing pretty well even in the face of the industry having a lackluster time. So we'll see what happens. I don't know what's going to happen the rest of the year. We've heard different things and same stuff you probably read in the paper. We'll see what happens, but we like our chances either way.

Great. And just wanted to follow up on the macro point. You called out that that's been an area of strength and performing well in a trucking environment that was oversupplied. How does trucking capacity coming out of the system potentially impact that? Is that anything material to think about?

Well, that's interesting. That's actually one of the areas I think about when I made the comment a minute ago. MacroPoint continues to grow in a relatively flat truck environment because it continues to pick up more and more customers and more volume from our competitors. I went over that in some of the prepared comments on the call today. But MacroPoint is a big beneficiary of that. As people realize the importance of having a network and they value that over a flashy application because we can track more loads, more and more customers are settling with Descartes because they're saying, hey, that's what's the most important. My ability to put in 100 loads and be able to track high 80s, low 90s percentage of those loads is much more important than the visibility application I'm using myself. Most of the time, they're not even using an application to look at these things.

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

Just a question on the earn-outs. I don't recall in the past you're having this degree of earnouts. What's changed now or over last several acquisitions that are leading to these earnouts versus acquisitions in the past?

Yes. Thanks for the question. And you're right, several of the deals we've done in the past couple of years have done that. I think it's -- there was -- you probably heard me talk about it on past calls. There's a rebalancing going on where everything was selling for high dollar volumes as everyone was booming, coming out of the pandemic. And when that started to slow down, companies were finding it hard to get people to pay up for acquisitions. And earnout is one way to bridge that gap. We've used it effectively a few other times. It's not really our first choice. We'd rather just pay cash for something and own the asset outright. But when there is, let's say, a dispute about what the fair price is for something, we've used them to get over that hurdle. And quite effectively, most of the time or in fact every time, we have an earnout in a process. We're very happy for that acquisition to get the earnout because that usually means we bought a business that's doing very well and probably going to do very well for us in the future. So we've used it. It's probably not our first choice but certainly something we've done when we think it's appropriate.

And then shifting to one of your more recent acquisitions, GroundCloud. You mentioned you're seeing the integration go well and some margin expansion. How do we think about the long-term margin profile at that business? I mean do you think you can get it up to the company average margin profile?

We'll see. Our hope is to -- we bought it much, much lower than that, and our hope is to get it up as close as we can to that. I don't know if we have our sights set on the company average margin profile right now. But certainly, we'd like to get it up 10, 12 points, which will get it close.

And that would be great to see. Just the last question, just on the M&A environment in general. Your comments about the macro environment exposed a lot of caution. Are you seeing that caution still in the M&A environment in regards to the valuation?

I think we're starting to see [indiscernible] in some of the deals we've been doing. We're getting more deals done now than we were 6 to 8 months ago. So I think it's starting to settle itself out right now. And we'll see what happens in the economy. If the economy gets worse, it's probably going to get easier for us to get stuff done. If it gets better, people might start saying, I want more money for the companies I'm selling. So we'll have to see what happens. But we like what we see right now, we're happy with what we've been able to get, what we think are very high-quality acquisitions done at a price we think we can make money for our shareholders on.

Your next question comes from the line of Justin Long from Stephens.

And I guess to start building on that last question, it sounds like valuations on acquisitions have started to come down, and you've talked about that the last couple of quarters or so. In terms of deal activity, have you seen things pick up? And maybe could you talk about your confidence in deploying capital in the back half of the year? I know there weren't any acquisitions in this most recent quarter.

Yes, I think that's right. I think we're starting to see prices come into what we think is a reasonable range. That's why we're able to get acquisitions done. And I think we're starting to see more stuff for sale again. There was kind of a lag there for 6 months or so where no one knew what to do. I think that's starting to open up now. We're starting to see the type of quality assets that we wanted at prices that we think are fair prices for them. And we'll see what happens, but hopefully, that translates into ability to get more deals done in the future.

Got it. And I know organic growth in the Services business is what's most important. But Allan, could you share your estimate for all-in organic growth in the quarter? And maybe just going forward, Ed, how do you feel about the sustainability of the organic growth we've seen in that services business? It's held up really well despite a weak freight market. So I just wanted to get a sense for your confidence in that continuing.

Yes. So I'll take the first part of it. Overall growth was less than the -- just over 9% that we saw in services. We certainly saw a lower license quarter, as I mentioned earlier. We had larger licenses in Q2 last year. We're back to the more basics of $1.4 million this quarter. Professional services and other revenue was also flattish, down slightly. So in and around the 6% or so currency neutral for the entire business compared to just over 9% on services. And Ed?

Yes. Thanks, Allan. With regard to sustainability, I mean we'll see what happens in the long run. But in the quarters coming up here, we think we're in pretty good shape, right? We think we're running a strong business. Some of the things I went over on the -- in the prepared remarks in the beginning of the call, I think -- we think that puts us in a position to continue to have good organic growth in the business. I've probably mentioned this on past calls, but over the past 7 or 8 years, we've tended towards buying higher-quality assets as we've been forced to pay a little more than we used to for stuff. We tended to pick higher-quality assets with higher rates of growth, and that translated into us moving from the mid-single digits before the pandemic to after the pandemic coming out in the high single digits. And we're going to do our best to stick in that range. And obviously, the economy has some effect on that. But at the moment, we like what we see.

Congrats on the quarter.

Your next question comes from the line of Scott Group from Wolfe Research.

Ed, I think last quarter, you were talking about ocean volumes starting to improve and customers telling you maybe a little bit more normal inventory replenishment trends coming. Are you -- are they now saying something different? I just want to understand sort of what you're saying on the macro and more broadly just your views around like peak season, if you have any?

Well, yes, I don't know yet. I've heard rumors it's going to be maybe a muted peak season. I also see stuff going on with the Panama Canal. Probably for us, it probably doesn't matter very much. People tend to find other ways to move the cargo, which results in other shipments on our network. So it ends up being fine for us. But for our customers, if that's what you're asking, I think that disruptions like that tend to cause them some trouble. I don't have a crystal ball on what's going to happen in Christmas season. I'll probably tell you -- I'll know for sure at the end of next quarter. But the rumors I've heard is it might be a little muted. But I don't think it's something that's significant and certainly not something that's probably going to impact our numbers as much. Maybe it might impact some of the ocean carriers' numbers a bit. But I don't hear anything horrific going on. I don't hear anything spectacular going on either. So we'll just have to see.

Okay. And then you spent some just time talking about the parcel carriers and volume shifts with UPS and FedEx and the post office. Does that matter to you? Are you agnostic to where the volume goes? I just want to understand [indiscernible] time. I just want to understand why.

Yes. Yes. We were trying to describe what was going on in the market for us. You're right, we're probably a little more agnostic to it. We do business with all of them. We like all of them. We have good relationships with all of them. We're not trying to help pick winners in this. We just help service each of them. And there are times when some do better than others. There are some times when some move more freight to us than others. But in general, it works out, tends to balance out across all those -- the larger carriers you mentioned.

Okay. And then just lastly, when I think about the step-up in organic growth now versus pre-COVID, how much is price helping now? Even if it's not like real price, just nominal price to just keep pace with more inflation. Is that a meaningful contributor now to organic that maybe you didn't have in the past?

I'll let Allan comment a little bit on this, but I wouldn't call it meaningful, but it's there. We certainly -- we raised prices last year because of the high inflation. But Allan can comment on it.

Yes. We're raising prices across the business, across our product lines. Despite that, the overwhelming majority of our growth is still going to be volume related. That's going to be consistent theme. So we're using price to offset the cost pressures we have. We should be doing that as a business. But for the most part, our growth is going to be heavily focused on volume, doing more with new and existing customers.

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

Just wanted to ask the very first question around transaction revenue not being as simple as just tied to shipping volumes. I think there's some transaction minimums on some of the contracts. Just maybe you could refresh that and how much protection that provides in weaker volumes.

Most of our contracts in the transaction space are done at a minimum of 85% to 90% of the normal volume that a customer has. That plays a role from time to time with individual customers. I think more importantly, we watch the transportation volumes. Our business continues to grow. And in tougher economic times, we tend to have more companies head our direction because they tend to shy away from the smaller guys when they get worried about people in the space struggling. So we've tended to pick up more volume then. When customers start hurting, they start asking everyone for discounts. Because we provide 10 or 15 different services to them, we have a lot to negotiate with and the potential to pick up more business from our smaller competitors that are not in as strong a position as us. So as it happened in '08 and in the pandemic and a couple of other times when we've had weaker economic times, and again, I don't know that that's what we're looking at right now. We're probably looking at more of a muddled economic scenario right now. But in weaker economic times, we've tended to pick up volume in the face of our customers having less volume. And we come out of that stronger than ever, and we tend to not have the same lows that maybe some of our competitors would have in transaction volumes, which is why when these things happen, you look at our numbers and say, why didn't they go down? And it's that, plus the combination of other strengths in the subscription part of our business that continues to do well to this day.

All right. And then second one for me. You're talking about the impact of union agreements, a lot of change there. Does that have an impact on your customers' willingness to invest in technology to improve the visibility? I mean if the price of the delivery itself goes up and you would assume that technology becomes a better way to seek efficiency, is that something you're seeing? Or does it just pressure volumes?

Well, I mean in the short term, it can pressure volumes. It can do things to our customers, probably a lot more than it would to us. In the longer term though, you're absolutely right. You've heard us say a number of times, change in our business or in our customers' business drives more success for Descartes. I think that's absolutely true in situations like this. The more that you have supply chain disruptions and strikes at ports are certainly one of them, the more you have people saying, I need more information and I need more technology so that I can do something about that next time it happens. And that plays right into our hand. And you saw it in spades in the pandemic. There's probably 10 other scenarios I could walk you through in the past where that's really helped us, the tariffs, Trump, et cetera, things like that. And we're not looking forward to those changes, but when they occur, they tend to be a tailwind for us.

Your next question comes from the line of Raimo Lenschow from Barclays.

This is Jeremy on for Raimo. I was just wondering if you could give a bit more color on how the trade intelligence segment performed in the quarter and then just broadly your outlook there in terms of both organic investment and M&A around that business line.

Thanks, Jeremy. Trade intelligence has been doing very well for several years now, starting with the tariff stuff when Trump became President and the nationalistic tendencies you saw around the world. That caused maybe people to pay more attention to it. Ukrainian war -- Ukraine-Russian war has also added to it. We see sanctions getting put on a number of parties, and a big part of our database is there, sanctions. And right through to today. I mean this business has been doing very well. And I think you asked where we continue to be bullish about it. We absolutely do. It is one of our best-performing businesses. It's one of our most profitable businesses. It's one of the businesses where we think we help the customers the most in a very simple way. And of course, if there were acquisition opportunities there, we would be excited about that because we love the business.

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

You talked about some of the strength and the success you're seeing in visibility. You talked about winning new customers but also bringing guys back in. I'm curious if you can remind us why a customer might leave, why they're coming back. You mentioned some new products like self-service tools. Just curious to know your thoughts there.

Yes, yes. I mean you saw over the past 7 or 8 years since we bought MacroPoint, there were a number of other players in that space that were spending a ton of money advertising, getting their name out there and launching themselves towards the moon, losing a ton of money while they're doing it without -- what seemed to us like without a whole lot of regard to that. I think over time, that helped them pick up some customers, right? You make enough noise and you spend enough money. You probably pick up some customers. But in the long run, those customers start looking and saying, hey, who's the best provider here? And maybe it's not the guy with his name is in the newspaper. Maybe it's the guy that can track the most loads for me. And over time, I think we've been -- as a network operator, you would expect us to focus on this. It does get focused on things like I just mentioned. We focused on getting more connections on the network. And as a result, we track more loads by a lot than our competitors do. And I think over time, the customers realize that's what's most important, and that's helped us get some competitive wins in that space.

Got it. Second question, e-commerce, a growing market. You made a bunch of acquisitions during the pandemic. Can you remind us how you guys think about that business maybe in terms of size, percentage of revenue? And maybe if you can give us some thoughts on the growth profile there. E-commerce industry-wide seems to be trending back up after normalizing a year ago. Just comment on the e-commerce business.

Yes. We're big fans of the e-commerce business. We got in it 7, 8 years ago, 9 years ago now and continue to buy any assets in that space that we think would be a good fit for what we already do and with an ability to help us grow our network. It's about 10% of our business today. It's one of our faster-growing businesses. And yes, we absolutely continue to like that business and think that as more and more people order stuff online, that business is going to continue to do well for us for the foreseeable future.

Got it. Just last one for me. Localz sounds it's doing well. I know that was more of an APAC-focused business. Are you starting to sell that product into other geos and customers?

We are. We've always provided that service through third parties. And when we had a chance to buy Localz, we thought that was a great opportunity for us to be able to do that ourselves without paying a third party to do it. So that's what we did, and we're bringing it to all the jurisdictions that we operate in right now. It's a simple service, right? You order something, and you want to see the truck driver in your house. And you can go in an app, and you can see where the driver is. That having been said, if someone is trying to deliver furniture or something of that nature, it's very important that you are there when they come to make the delivery. And a mobile functionality like that really helps make sure that customers know when the truck is coming so that they're there to get their furniture or whatever it is that they order from you. So we want to make sure we're able to bring that experience to all of our customers. And now we're doing it in a way where we own the entire solution. So we're happy about that.

There are no further questions at this time. Please continue.

Great. Thanks, everyone. Appreciate your time today, and we look forward to reporting back to you next quarter. Have a great day.

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