The Descartes Systems Group Inc.

Welcome to the Daycare Quarterly Results Call. My name is Adrienne, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. During the question-and-answer session, if you have a question, please press star then 1 on your touch-tone phone. Please note this conference call is being recorded. I'll now turn the call over to Scott Pagan. Scott, you may begin.

Thanks, Adrian, and good afternoon, everyone. Joining me remotely on the call today are Ed Ryan, CEO, and Alan 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 the COVID-19 pandemic 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 day cuts 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 FCC, the OSCE, 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. We caution 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 excellent third quarter financial results. We'll walk you through those shortly, including some of the reasons for those results, but let me first give you a roadmap for this call. I'll start with a summary of the financial results and some factors that we believe are impacting the supply chain and logistics markets. I'll then hand it over to Alan, who will go over the Q3 financial results in detail. I'll then come back and update on 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 to it. In Q3, we had record revenues of $108.9 million ahead of our plans for the quarter and year to date. We had record income from our operations of $27.8 million. We had net income of $25.5 million. We had adjusted EBITDA of $48.2 million, again, well ahead of our plan for the quarter and year to date. Adjusted EBITDA margin as a percentage of revenues was 44%. Cash provided by operating activities was $43.3 million, or 90% of our adjusted EBITDA for the quarter. These are the principal financial numbers that we track for our business. They were all very good for Q3. They were all well ahead of our plans. Even though we're ahead of our plan, that doesn't mean that these results are surprising to us. We generally do well as our customers do well, and a large portion of our customer base is continuing to do well. Ocean carriers, trucking companies, air cargo providers, freight forwarders, non-vessel operating common carriers, freight brokers, customs brokers, third-party logistics providers. These are boon times for logistics service providers across the board. As they process more transactions, they are more chargeable transactions on our global logistics network. When our customers do well, they have opportunities to invest in improving their technologies and businesses for the future. often choosing Descartes Solutions to do that. Our business is benefiting from other things as well. We continue to benefit from customers needing our help to comply with Brexit rules that are still in flux. E-commerce sellers need help organizing their inventory, selling across multiple channels, and shipping their goods. Many of our customers that manufacture and ship across the globe are gearing up for new tariff classification codes that become effective in the new year, And our travel and marketing expenses are still well below pre-pandemic levels. But I wanted to spend some time speaking about some of the broader issues impacting the logistics and supply chain markets and how we think they could impact our customers and our business. Specifically, I wanted to address supply chain and logistics strains, labor issues, and inventory levels. So let's get started first with supply chain and logistics strains. You can browse headlines on any business news site and see the words supply chain and logistics more than you would have seen before. The current state of affairs is variously described as a crisis, chaos, a snarl, a mess, or a challenge. No matter what words you use to describe things, there are real issues out there right now. They're impacting every participant of the business community, and they have everyone's attention. I'm sure there will be in-depth papers written about this period in history. However, at its heart, production in the Asia-Pacific region was severely curtailed for a period of time for issues ranging from the COVID impact on work sites to energy shortages to port capacity limits. So there was supply chain disruption. The U.S. is the principal destination for many of these goods, and there was no corresponding demand disruption. In fact, there was more demand than ever from the U.S. for goods, especially in light of the economic stimulus impacting production So there was a supply disruption and an increase in demand hitting the market at the same time. This was a recipe to create supply chain and logistics headlines. As Asia Pacific production ramped up, competition was on to source the scarce goods and to get access to the limited transportation capacity available to move these goods to their destinations. When there's more demand than supply, prices go up. as we saw in previous months with record high prices for ocean and air cargo moves. And with these increased prices, you see potential profits for logistics service providers and freight cost pressures for importers. If you want to find the potential weak points in a system, then just put that system under some stress or pressure, and that's what we've seen over the past month with logistics and supply chains. We've seen logistics port infrastructure stressed past its limits with vessels anchored offshore on the west coast of the United States and container yards stacked high with containers under emergency orders. We've seen extreme vessel capacity constraints with customers choosing to charter their own vessels or moving goods that they would historically move by ocean or via ocean or via the more expensive air mode. And we've seen vessel carriers turning away less profitable business, resulting in the elimination of some ports of call or tempered movement of less profitable commodities. All these challenges really show how interconnected and interdependent the supply chain and logistics world really is. They also show how critical the sourcing and movement of goods are to business and economies as a whole. Supply chain and logistics is not a niche market. These are headline issues. These supply chain and logistics challenges are complicated, multi-party, international issues involving a myriad of people, businesses, technology systems, and assets. These challenges are too complicated to be met without the use of technology. And that's where Descartes comes in. We are a supply chain and logistics specialist. We have been for more than two decades. We specialize in complicated, multi-party, international supply chain and logistics challenges. Our customers have relied on us to help them meet this supply chain crisis. and as they succeed in doing so, our business benefits. So to sum up, what you're reading in the news is accurate. There are unprecedented supply chain and logistics challenges for businesses around the world. We believe they will carry on for some time, in part for resource reasons I'll mention soon. We specialize in helping our customers solve these types of complex issues. We've been successful in helping our existing customers, and this has benefited our business. We've also been successful in attracting new customers based on our track record and commitment to continue to invest in innovative technology solutions. This has also helped our business. The second issue is labor issues. Supply chain and logistics market have seen tremendous physical capacity constraint issues, from port constraints to vessel constraints to container constraints and component and inventory unavailability. But another big factor pushing the limits of our supply chain and logistics infrastructure is human resource availability. For many years now, even pre-pandemic, truck markets have struggled with driver shortages. There has been an ever-increasing demand for more trucks to move goods, and hence a need for more drivers. At the same time, drivers are becoming scarcer as some age out of the profession, while others either leave or don't enter the driving workforce for issues including pay levels or quality of life. So high demand for drivers and a driver supply disruption. This phenomenon is not limited to just drivers. Especially with the increase in e-commerce activity, warehouse and fulfillment center workers have been more and more in demand. Businesses are struggling to find a balance to get affordable and capable labor while providing competitive, safe, and appropriate work conditions to attract workers. High demand for workers with supply challenges. One of the working condition issues that logistics and supply chains are dealing with are vaccine mandates. This is an international issue. Quite apart from the health impact, we've seen what a COVID outbreak can do to immediately shutter manufacturing facilities, ports, warehouses, and other key parts of the supply chain infrastructure. On a country-by-country basis, we see different levels of vaccine hesitancy, and implementing a mandate may put limits on available workforce needed to operate the various critical roles and facilities for supply chains. Our customers are having to manage these issues carefully while being mindful of the demands of their business and workforce. And yet another issue impacting labor is the International Longshore and Warehouse Union contract that expires in July 2022. This contract impacts more than 20,000 U.S. dock workers and workers at other port facilities. In the past, these negotiations have been contentious, and when last negotiated in 2014 and 15, resulted in labor disruptions. I mention these issues to point out that the current supply chain and logistics challenges that businesses are facing aren't things that are going to be quickly solved. While there continue to be labor issues impacted by COVID, directly or indirectly, we anticipate that there will continue to be challenges in the supply chain and logistics markets. The CART solution can help our customers with at least some of these issues. Our routing and scheduling solutions are designed to help those with their own fleets of vehicles and drivers to efficiently plan and execute routes. to optimize the limited driver resources they may have. More broadly, we have solutions that are designed to limit the amount of wait times drivers have for pickups and deliveries at dock doors, reducing wait times. And further, our mobile solutions help connect with drivers to efficiently communicate route instructions, updates, and trigger payment. But beyond solutions specifically impacting drivers, our vast network of interconnected parties is ideal for helping customers when there may be labor disruption in the markets. We're already helping customers who are expediting 2022 sourcing in advance of potential port facility disruption from the ILWU contract. In summary, while there is a supply chain and logistics crisis that has arisen as a consequence of the pandemic, we believe there are underlying labor issues in the market that will continue to present supply chain and logistics challenges to the market through calendar 2022 as well. We don't believe it will become easier to source or move goods from point A to point B. We continue to invest in our own business to make sure we're ready to help our customers meet these challenges. And the third issue is inventory levels. Through the early portion of the pandemic period, we saw runs on various goods, depleting inventory levels. We then saw manufacturing shutdowns in key areas of Asia Pacific that impacted key components, such as computer chips that are used in pretty well anything with an electronic pulse. Demand for components and inventory recovered quickly, much quicker than the manufacturing shutdowns being a main contributor to the supply chain crunch the world is seeing now. For retailers, inventory levels as a percentage of revenues were at historical lows. While inventory levels are now starting to recover, there's still a deficiency that needs to be filled. This process has been concerning to all involved in supply chain, with comments about companies moving from just-in-time inventory to just-in-case inventory. We don't know when or if inventory levels will return to historical norms or if they will be even higher as people look for safety stock. In addition, it's much more common now for a business to have its inventory in multiple locations as opposed to one central facility or store. Inventory could be direct or drop shipped from a supplier. It could be stored with a reseller or sales agent. It could be in various warehouses dedicated to different go-to-market experiences such as online purchases versus in-store purchases. or even with the customer. In short, businesses are managing not just inventory levels, but an increasingly wider array of inventory locations. As these distribution mechanisms become more complex and involving more external parties, shipment visibility becomes more important. Our customers rely on us to help them manage the massive amount of information relating to their businesses so they can make their operations more efficient. This is particularly so as we see increased shipments until inventory levels normalize. In short, we had a very good financial result for Q3 ahead of our plans. Our customers are doing very well in a very strong market, and that's contributed to our success. The supply chain and logistics issues that are being highlighted in the market have shown a light on the importance of what we do for our customers. And I'm thrilled that our team has this opportunity to have broader recognition for the critical work that they do to help keep the economy functioning. Thanks to every Descartes team member for everything they've done to help get us in this very fortunate position. With that, I'll turn the call over to Alan to go through our Q3 results in more detail. Alan?