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 Tuesday, December 5, 2023. I would now like to turn the conference over to Scott Pagan. Please go ahead.

Thank you, and good afternoon, everyone. Joining me remotely 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. 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 relating 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're coming off a great third quarter with record financial results, good organic growth and strong operating margins. 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 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 our Q3 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 Q4. And finally, we'll open it up to the operator to coordinate the Q&A portion of the call. So let's start with the quarter that ended on October 31. Key metrics we monitor include revenue, profits, cash flow from operations, operating margins, and returns on our investments. For this past quarter, we again had outstanding performance in each of those areas. Total revenues were up 19% from a year ago, with service revenues up 18%. Adjusted EBITDA was up 17% from a year ago. Adjusted EBITDA margin was at 44%, back up to the levels before we bought GroundCloud, and we generated $56 million in cash from operations, representing 86% of adjusted EBITDA. At the end of the quarter, we had almost $280 million in cash, and we were debt-free, with an undrawn $350 million line of credit. We remain well capitalized, cash-generating. We have strong organic growth and remain ready to continue to invest in our business. We had a good quarter of organic growth in our core services revenues. Many of the drivers are similar to past periods. The…

Thanks, Ed. As indicated, I'm going to take you through our financial highlights for our third quarter, which ended on October 31. We are pleased to report record quarterly revenue of $144.7 million this quarter, an increase of 19% from revenue of $121.5 million in Q3 last year. While revenue from acquisitions completed in the past 12 months contributed nicely to this growth. Similar to the past several quarters, our growth in revenue from new and existing customers from our existing solutions was the main driver in 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 18% to $130.4 million compared to $110.1 million in the same quarter last year, representing approximately 90% of total revenues in the third quarter. Removing the impact of both the recent acquisitions as well as the impacts from foreign exchange, 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% this quarter when compared to the same quarter last year and fairly consistent with the first half this year. License revenue came in at $1.5 million or 1% of revenue in the quarter, up slightly from last year, while professional services and other revenue came in at $12.8 million, up 24% to 9% of total revenue compared to $10.3 million or 8% of total revenue in the third quarter last year, as both professional service hours and hardware revenues were higher this quarter. For the 9 months this year, revenue came in at $425 million, an increase of 18% from revenue of $361 million in the first 9 months last year. Gross margin came in at 76% of revenue…

Great. Thanks, Allan. So we're a month into Q4 and the end of our fiscal year. General areas of our business that benefit from end-of-year holiday sales such as e-commerce and truck deliveries will see an uptick in volumes, and other areas such as ocean transportation are at a seasonal low point as the inventories are already in store. Our forecasting and plans remain relatively cautious, given the general malaise in shipment volumes seen in the previous quarters this year, however, we're also mindful of the press reports with initial positive statistics on Black Friday sales volumes. We keep these things in mind as we set our calibration for the quarter. Our business is designed to be predictable and consistent. We believe that stability and reliability are valuable to our customers, employees and our broader stakeholders. To deliver this consistency, we continue to operate from the following principles. Our long-term plan is for our business to grow adjusted EBITDA 10% to 15% annually. We grow through a combination of organic growth and acquisitions. We take a neutral party approach to building and operating solutions on our Global Logistics Network. We don't favor any particular party. We run our business for all supply chain participants, connecting shippers, carriers, logistics service providers and customs authorities. When we overperform, we try to reinvest that overperformance back into our business. We focus on recurring revenues and establish relationships with customers for life, and we thrive on operating a predictable business that allows us to forward visibility to our revenues and investment paybacks. In our Q3 report, we provided a comprehensive description of baseline revenues, baseline calibration and their limitations. As of November 1, 2023, using foreign exchange rates of $0.72 to the Canadian dollar, $1.06 to the euro and $1.21 to the pound, we estimate that our baseline revenues for the fourth quarter of 2024 are approximately $127 million, and our baseline operating expenses are approximately $79 million. We consider this to be our baseline adjusted EBITDA calibration of approximately $48 million for the fourth quarter of 2024 or approximately 38% of our baseline revenues as at November 1, 2023. We continue to expect that we'll operate an adjusted EBITDA operating margin range of 40% to 45%. Our margin can vary in that range, given such things as foreign exchange movements and the impact of acquisitions as we integrate them into our business. We've got lots of exciting things planned for our business. It remains an uncertain broader economic and supply chain environment, but we believe our proven track record of execution, solid capital structure and customer focus will serve us well. Thanks to everyone for joining us on the call today. As always, we're available to talk to you about our business in whatever manner is most convenient for you. And with that, operator, I'll now turn it over to you to manage the Q&A portion of the call. Thank you.

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

Wanted to ask a question on competition and on the macro. So one of your public competitors had some notable struggles this past quarter, and there's another private competitor that went out of business. Just wondering if you're seeing some of the same headwinds that they're seeing and some of their struggles is having any impact on you competitively.

Thanks, Matt. I mean, I think we saw some of the things that impacted them. We obviously fought our way through it and ended up with pretty good results. The 2 companies you're talking about may have been in a different position in that things went bad maybe with transaction volumes, and when the customers suffered as a result, and they didn't have any other products or services to make up for it. We obviously were in a different situation and we're able to take advantage of that. And sometimes, competitors struggling end up being good news for you because customers turn elsewhere, and it also makes them potentially concerned about who they're doing business with and when you're a strong company like Descartes, that ends up playing in our favor.

Got it. And then just on the services revenue that did tick down sequentially, was that driven by some of the headwinds on the transaction side that you cited?

I think so, yes. I mean, we had a very strong quarter but it probably would have been better if some of our customers' volumes were doing even better. The -- it wasn't a horrible quarter. I think people predicted it was going to be a lot worse than it was in terms of our customers' transportation volumes. And we have the benefit of continuing to sign up new customers in the face of that. So we did all right in that period. Probably would have done even better if that part had gone well. And we had a bunch of other parts of our business that I mentioned on the call that were really doing well, so that kind of more than made up for it. So we're happy with the result under the circumstances, for sure.

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

Ed, maybe building on that last question, could you share what your -- how your transportation volumes performed on a year-over-year basis in the quarter? And Allan, I heard your commentary around organic growth for the services revenue line, but do you have the estimate for all-in organic growth as well?

I don't know that I have the exact numbers, Allan, year-over-year, but if you could jump in.

Yes. So if we want to talk about organic growth numbers, we're just over 9% on the services side and just very, very similar to that overall in the business. There was certainly some slight negative impacts on FX that would have affected the question Matt just had with respect to our services revenue being down slightly quarter-on-quarter. That was -- they were up actually neutral with FX, but roughly 9% in both services revenue and total revenue for the quarter.

Okay. And any sense on transactional volumes on a year-over-year basis, even if it's just kind of directionally? It sounds like maybe there was pressure year-over-year. Or any additional color you can share there?

Yes, there was definitely some pressure year-on-year. We certainly did better with our subscription services for software and databases. But as Ed said a couple of times in the prepared comments, we kind of expected that. Our business is built to deal with those types of fluctuations. Those are not new for us. We'll see those types of things happen from time to time. Quite honestly, we've probably seen weaker transactions in the last 12 months. But overall, what matters for us is the overall blended growth rate, and the business is built to grow, and the 9% overall is more of our focus.

Got it. And I guess lastly, Ed, could you just talk about the acquisition pipeline? Curious what you're seeing today versus a quarter ago and your level of confidence that we can see capital deployment pick up the next couple of quarters or so.

Yes. Without getting into too much detail on it, we like the environment we're in right now. A couple of years ago, there were not many companies for sale and the ones that were, in our estimation, were oftentimes trying to charge too much. It made a difficult acquisition environment for us. Things are certainly softening from that perspective and creating opportunities for us to get more deals done in price ranges that we think are good value. More companies are coming up for sale, and as a result and maybe in addition to, companies are coming up for sale with a more reasonable expectation on valuation, and that's creating an environment where we think we're in a very good position to get more deals done in the future.

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

Maybe to follow on that last question. The cash balance continues to grow. You're now at about $280 million, and you do about $200 million of free cash flow a year, which is more than you've typically spent on acquisitions in prior years. So any other considerations for that capital, just given the strong cash balance and the strong cash flows? Or do you think you'll be able to deploy that towards acquisitions over the next few years?

Listen, I mean, we're making more and more money every year and that's great. We only buy companies when we think it's a good deal. And if that means we have extra cash, then that means we have extra cash. We're not going to apologize for that. We absolutely think that the winner in our space is going to continue to be acquisitive, and we absolutely believe that there are many more companies that are acquisition candidates for us. So while we talk about it at our Board level, we'll discuss every quarter, should we have a dividend? Should we somewhat give this money back to shareholders, share buyback, whatever? But at the moment and I think for the foreseeable future, we believe that, that money should go towards acquisitions. And it's not really going to harm us at the moment to have more cash sitting in the bank. It's actually a good thing. Our company continues to make more money. And as we look forward and say, "Hey, we think we're going to like this future acquisition environment." Go ahead, I think we'd be smart to hang on to it and be ready to act if a bunch of stuff comes up for sale at the same time. We certainly think we have the team to negotiate, purchase and integrate those types of companies when they come in, and we want to be ready when that happens. So that's why you see us holding on to our cash.

That makes a lot of sense. Maybe another question on the macro environment. You talked about weaker volumes last quarter. Just wondering whether you saw that extend into the peak holiday shopping season over the last month. We've seen headlines at Black Friday, Cyber Monday volumes.

Well, listen, we're not reporting on this month, but I have seen some of the transportation statistics unrelated to our transaction volumes, and I'd say they look good. And you can probably see some of that as you read the paper right now. Black Friday was a pretty good Black Friday is the reports I'm reading right now. And when I look at -- and again, independent of our transaction lines, when I look at the transportation statistics that we would normally look at over the last month, they look at starting -- things certainly were starting to pick up in anticipation of Black Friday. So that's good news.

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

Ed, I just want to follow up on that last point, because I think we're seeing a little bit of better import activity, better air freight rates. You're saying you're not reporting on that. But is that sort of -- to the extent that you are seeing that, is that -- would that be reflected in your calibration?

Calibration was done at the first day of the quarter, so technically, no. And my comment about not reporting on it is just saying, "Hey, I'm reporting on through the end of the quarter, not the first month of the first quarter." And specifically to your question, our calibration this quarter was done as of the first day of the quarter.

Okay, that makes sense. Okay. I wanted to get your perspective. A year ago, we were talking about just-in-time is becoming just-in-case. I'm wondering is, with much higher rates, are we just -- is that sort of done or are we back to just-in-time? And how does that -- is that a good thing or a bad thing?

We'll probably -- I mean, it's a bit of a guess on my part. We're just getting some comments from customers about this, but I don't know this perfectly. But we always believe that just-in-time, now just-in-case, we've always believed it would end up gravitating towards back just-in-time. People forget about how bad it was 3 years ago when the ports were all backed up and then they start going, "Boy, I'm losing a lot of money and inventory carry costs have had all this extra stuff and now interest rates just went up significantly. And so now that's a lot of money and I should be more careful." And we always believed that it was going to drift towards back that. And I'd say -- if I had to venture to guess, we're probably somewhere approaching back to just-in-time in a lot of cases because high interest rates and the warehouses are only so big and you can only hold so much inventory, and you've got to make good approximations about what customers are going to buy in stores and companies are always going to try and do that. And I think we're drifting back towards just-in-time for sure, in most cases.

Makes sense. And then just lastly, a nice step-up in the EBITDA margin. Did we see the full impact of some of the cost actions this quarter? Or do we see more of that show up in Q4, and so maybe we see another further step-up in the margin?

Yes, let me let Allan answer that more specifically.

Yes, sure. So we did initiate our restructuring plan earlier in the quarter. So for the most part, we've completed it, and the results are in the quarter. There will be a little bit of an impact coming through Q4, given that there will be a full quarter impact for all the changes. But for the most part, Q3 had most of it baked in, if that helps.

[Operator Instructions] Your next question comes from the line of Robert Young from Canaccord Genuity.

The first question was asking about the shutdown of a private competitor. Maybe just another question there. A lot of reports in the news suggested that they really struggled to find a strategic buyer, that there is not a lot of activity out there. And so like is there a big sea change or is there a bigger change in the number of buyers or the interest in the space that puts you in a better position competitively or...

While I knew who they were talking about when they asked the question a couple of questions ago, and I didn't bother disagreeing with the question, I don't know that we're the technically competitor of the guy that he was talking about going out of the business. They're more of a freight broker. They had a business that was an electronic freight brokerage, and that's not something we would buy. That's a customer of ours. They were a small customer of ours. And furthermore, when I -- this has happened, like -- I've watched this movie like 30 times in my life, where a company comes in that does the same thing as everybody else in an industry and says, "I'm going to be the automated guy that does that." And every time I hear that, I'd go, that's a misnomer. You're trying to pretend like you're a technology company, when in this case, you're a freight broker. And you're saying that the reason that we should invest in your freight brokerage is because you're going to be more automated than everyone else. And I always think to myself, even if that creates an advantage for you for some period of time, it's not going to last long because your competitors are going to buy automation from people like us that provide automation in this industry. And that advantage will evaporate in short order, and you'll be back to being a freight broker with no significant advantage over anyone else. I think that's what happened here. I think in addition to that, because they raised a lot of money, they dumped a lot of money into becoming an automated freight broker. And as a result, they had a big burn that was hard to overcome when things went back to normal. And as a result, they went out of business. And we didn't even look. That's not something we would buy. And that's maybe one of our competitors -- sorry, one of our customers would buy. And they didn't. I think the competitors probably thought, "I'll just steal those customers from them, and that will be the end of it." That'd be my guess as to what happened there. But that -- for us, that business, we were just looking at from afar. They were some minor customer of ours. We were aware of what's going on but not particularly interested in any of the assets.

Okay. Second question for me would be about, I think on the call, you've been talking about maybe offsetting weaker transaction volumes than you expected with maybe better subscription side. And so I was curious, is that consolidation? Is there any other factor there maybe to call out? Are customers...

No. I mean -- no. Listen, we have a bunch of areas in our business that are booming. We have transaction volumes that are stuffed in like -- a little over 30% of our business that have always and will always fluctuate up and down a little bit. Every once in a while, you've seen them fluctuate down a lot, like in '08. But even that a lot is 8%. That was -- they were down in all of '08, 8%. And I think, geez, why is that? Because most of the stuff that we use still has to ship. And maybe in good times, we're all buying lobster, and in bad times, we're all buying chicken, but it's the same shipping volume. One costs a lot more than the other. And maybe we don't buy boats and jet skis for a couple of years, but most of the stuff that we need to live and run our households still gets shipped, and we get that shipping volume. So even in the worst of times, an 8% down for the worst it's ever going to get is not that much. And these variations in our business happen from time to time. Guys like us need to be prepared for it. And fortunately for us, we have a broad enough business where we have a bunch of other things that are really going great, so that when the transportation volumes are a little weak like they were in the last 6, 8 months, while they were recovering but not as strong as we'd like to see them, our business continues to perform well through that. And I think that's a great sign of a resilient business, that -- something like volumes go down, and we -- our answer to that is nothing to see here. We continue to do well.

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

All right. Great. Thanks, everyone, for your time. We look forward to seeing you in the coming weeks and months and reporting back to you next quarter with the Q4 results. Have a great day.

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