The Descartes Systems Group Inc.

Good afternoon, and welcome to the Descartes Quarterly Results Call. My name is Brandon, and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session during which you may dial 01 if you have a question. Please note it is 01, not star 1. As a reminder, this conference is being recorded. I will now turn the call over to Scott Pagan, and you may begin, sir.

Thanks, and good afternoon, everyone. Joining me on the call today are Ed Ryan, CEO, and Alan Brett, CFO, and I trust that everyone's 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 and Russia-Ukraine conflict 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, our application to commence a normal course issuer bid and potential purchases pursuant to such bid, our business outlook, baseline revenues, baseline operating expenses, and baseline calibration, Anticipated 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 achievement 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 the inception entitled, Certain Factors That May Affect Future Results, in documents filed and furnished with the Securities and Exchange Commission, 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. Your caution is 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.

Hey, great. Thanks, Scott, and welcome everyone to the call. We kicked off the new fiscal year right with record financial results. These were our best results ever across a host of different metrics. I'll hit some highlights for you, but first let me give you a roadmap for this call. I'll start with highlighting some aspects of our financial results, speak to current business conditions, and identify where we're making investments to grow our business. I'll then hand it over to Alan, who will go over the Q1 financial results and some corporate finance matters and more detail. I'll then come back and provide an update on some corporate matters and how our business is calibrated. And we'll then open it up to the operator to coordinate the Q and a portion of the call. So let's get started by looking at Q1. We had record high revenues of $116.4 million up 18% from a year ago. Net income was $23.1 million up 26% from a year ago. Adjusted EBITDA was a record high of $51.2 million, up 23% from a year ago, and this was with a $500,000 drag compared to FX rates from a year ago, or $300,000 from FX rates last quarter. We generated $44.1 million in cash from operations, or 87% of our adjusted EBITDA. Our adjusted EBITDA as a percentage of revenue was 44%. All of these metrics were ahead of our plans, so a very strong financial quarter for us. At the end of the quarter, we had $211 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. So I'd like to address three areas. One, why we did well this past quarter. Two, what the market conditions are that we're operating in right now. And three, where we're making investments. On the first point, our focus at Descartes has been on building a consistent, predictable, and sustainable business that is resilient to changes in the market conditions. So as I described some key contributors to our performance last quarter, you're going to hear some common themes from past conference calls and our previous successes, and that's by design. Key things that helped us grow last quarter include Past investments are paying off in a sustained organic growth. We continue to see good organic growth in our business year over year. We see this as a payoff from the targeted investments we've made in sales and marketing over past quarters. Our biggest change in sales and marketing was growing a group that's now aligned by different pillars of our business and geographically. In the past, we were purely organized and engaging with customers by geography. But as we've grown and matured, we've moved to further solution specification to be able to focus on customer-centric engagement that helps customers drive more value from our solutions. Second is real-time visibility contribution. We've been in the visibility business for a long time. It's one of the foundations of the global logistics network. When we started, we were providing purchase order line item visibility from EDI status messages. We've grown with the market to move to real-time visibility leveraging GPS and other technologies. A few years ago, we joined with MacroPoint to become a leader in the space. Our real-time visibility business continues to grow. We're receiving and tracking more shipments than ever, and our capabilities are expanding across all modes of transportation, including identifying available shipment capacity. The third is strong demand for denied party and sanctioned party screening and tariff changes. We foreshadowed this last quarter, and it happened as expected. With geopolitical conflicts escalating, in particular with the war in the Ukraine, governments around the world have imposed sanctions on particular countries, parties, and commodities. There are enormous financial and economic consequences of violating these sanctions. Businesses need to be more diligent than ever in who they're doing business with, who they're employing, and who they're importing from or exporting to. A good portion of our content business is specifically focused on this, helping businesses stand for compliance with the various sanction lists around the world. Also with all of the challenges and tariffs because of these geopolitical events, our databases of tariffs and duties have become even more vital for our customers. And the fourth is past acquisitions have contributed well. Those who followed us for some time know that we've taken a consistent measured approach to adding to our business by way of acquisitions. We generally are buying houses that are right in our neighborhood and complement our existing business. If we combine with a business that's not yet at our desired profit level, we take very quick steps to get it there, using Descartes resources and experience to help the business thrive. So it's no surprise when a business positively contributes to our growth post-acquisition, that's our plan. This past quarter was our first quarter with NetCHB in our business, a company I described to you in detail on our last call. They're a very good compliment to our existing solutions for freight forwarder and customs brokers. The business has really hit the ground running, and we've already had some combined successes, so we're happy to see their contribution in the quarter. So that's how last quarter went. It went very well. We performed well and bought some businesses. Things continue to change quickly in the global market, though. We've built a resilient business that in the past has grown through some very challenging business environments. However, we need to be prudent and cautious when things are changing. Generally, the things impacting the supply chain and logistics markets right now fall into two categories. The first is conflict and geopolitical issues, and the second is economic issues. On the conflict and geopolitical front, there are three main things we're monitoring for their impact on logistics and supply chains. One, the war in Ukraine. Two, Brexit. And three, China COVID lockdowns. The war in Ukraine has caused sanctions and retaliatory actions from countries around the world, even those not directly involved in the conflict. As I mentioned, businesses in our space are having to be extra diligent to screen all relationship and shipments for compliance with a myriad of sanctions and restrictions out there. Also, changes in tariffs and duties have made sourcing from or shipping to Russia expensive and or prohibitive. Businesses have had to restructure critical supply relationships to continue operations. Shipments to and from ports in Ukraine and Russia have become very dangerous or blockaded, causing virtually all major carriers and all modes of transportation to travel alternative routes that are sometimes lengthier and more expensive. And recently, we're seeing Russia shutting off supply and energy commodities to neighboring countries, causing disruptions in those supply chains. The war has had a wide-ranging impact on virtually everyone's supply chain. The biggest overall impact has been on energy and commodity markets. These are generally supplied by cables, pipelines, or bulk commodity carriers, usually ocean vessels. Not much of Descartes' business is in this supply and logistics space. So we haven't seen a big impact on shipment volumes in our business. However, we've seen an impact from our customers, increasing screening for sanctions and or using technology to look at alternative supply and logistics strategies that bypass the region. Inside our own company, we have a limited number of individual contractors in the region helping us. We're fortunate that they're all safe and we've been trying to do what we can to support them and their families. The second geopolitical item I flagged was Brexit, specifically issues relating to Ireland. The island of Ireland is divided into the south, which is part of the EU, and the north, which is part of the UK, and therefore not a part of the EU. A key part of the UK Brexit separation from the EU was establishing a protocol that would avoid having to put an enforced land border between Northern Ireland and Ireland, as that type of separation has been a source of prior trouble and conflict for many years. So rather than have checks on goods going from Northern Ireland to Ireland, the Northern Ireland Protocol established filings declarations, tariffs, duties, and checks on goods entering Northern Ireland from Great Britain in accordance with EU standards. We've been helping many businesses with their filings and declarations for goods going into Northern Ireland. It's been a good business for us over the past year or so. Recently, elections were held in Northern Ireland where, for the first time in history, the political party with a focus on reunifying North and South Ireland won the most seats in the Northern Ireland government. This party is supportive of the existing Northern Ireland protocol However, some of the other political parties needed to form a government are not as supportive. All that's to say we'll be continuing to monitor for our customers the continued viability of the Northern Ireland Protocol and whether additional filing and documentation changes will be required by our customers as they continue to adapt to Brexit. The third geopolitical item we're monitoring are the COVID lockdowns in China. China has taken an aggressive zero-COVID approach, which has resulted in many businesses in China being shut down while they deal with the outbreaks. This includes manufacturers, distributors, ports, and logistics operations. With China being a major source of manufactured goods and components, this has had a big impact on the supply chains of Western companies. We've heard of parts and component shortages in many industries, including the auto and electronics industry, resulting in manufacturing slowdown. Over the past years, Western companies have had to be very agile to meet supply chain challenges. In response to these China COVID lockdowns, many have sought alternative suppliers in neighboring countries or in parts of China not impacted by the lockdowns. We've seen it to be a challenge for businesses, but not a fatal choke point. On the logistics front, prior to the lockdown, supports and carriers were dealing with backlogs and sparse capacity to move goods. With these China COVID lockdowns, we're seeing many of the clogs in the logistics infrastructure work themselves out, with wait times at USC ports coming way down and prices starting to come down with increased capacity. To date, we've continued to see steady shipment volumes from Asia Pacific. Things seem to now be opening back up right now in China. And in the meantime, we'll continue to monitor the situation for any potential impact on future shipment volumes. So those are some of the major conflict and geopolitical issues impacting supply chain and logistics. But there are also some economic issues impacting our space many of which are connected in some ways to these events. The first, inflation. We've seen very high inflation rates in various economies. This is called price increases, which then has businesses looking at alternative sourcing within their supply chains. We've had to manage this in our own business by adjusting pricing to reflect supply costs that have been passed on to us. Second, interest rates. Higher interest rates put additional pressure on businesses with leverage, in particular logistics businesses with hard assets. We're also aware of technology peers and creditors with highly leveraged businesses. As I mentioned earlier, Descartes is debt-free, so this is a limited challenge to us right now, and it's potentially an opportunity as highly leveraged private tech businesses could have depressed valuations in the future. The third is currency movements. Global economic and political conflict has caused many currencies to move. For our customers, this can also be driving force to looking for alternative sourcing strategies as low-cost offshore jurisdictions suddenly become much more expensive. As I detailed earlier, our own business faced some FX currency headwinds this quarter compared to a year ago. However, we have some natural hedges in our business that doesn't really have us too exposed to any one particular currency movement. The fourth is fuel costs. Fuel costs are rising. Diesel costs in particular are impacting the trucking industry. This puts pressure on companies to more efficiently use their vehicles and sometimes contributes to broader inflation as fuel costs are passed on. For our business, our routing and scheduling business and transportation management business are specifically designed to reduce miles driven, so fuel cost increases often also increase demand for our solutions in this space. Fifth is labor availability. Competition for logistics and supply chain workers remains fierce, with many companies exploring alternative sources for workers. More specifically, there's still ongoing negotiations for the West Coast port workers contract. And while both sides seem committed to a resolution there, a labor disruption there could also contribute to more logistics backlogs and alternative logistics strategies. And the sixth is returns to stores and office workplaces. As the world begins to leave lockdowns, it remains to be seen whether the buying patterns of consumers will return to in-store versus the boom that e-commerce purchases have seen over the pandemic. We strongly believe that e-commerce remains a growth area for the future, but probably with more subdued growth rates than seen over the recent past. We continue to see e-commerce as an area of investment for us, and even more so if valuations for companies in this space come down. So that's the broader market environment we're in right now. That's certainly a lot going on that impacts supply chain and logistics. As I've said in the past, our business generally does well where things are changing. When our customers are changing sourcing and logistics strategies, they're generally benefiting from our technology to do so. But we, like every business out there, need to keep an eye on the broader market impact on global trade for the rest of the year. It's one thing if businesses are finding different ways and strategies to still do what they did before. It's entirely another if the world starts doing less overall. For us, especially coming off our financial performance in recent quarters, we remain committed to profitable growth in our business. Our strategy remains to grow our existing business and look for businesses to combine with, so let me speak to each of those. We've had good recent success with organic growth driven by past investments in sales and marketing. We anticipate continuing those types of investments. Specifically, we'll be continuing investments in the following areas. The first is investing in our customer success group. Our specific goals for this group are to increase customer satisfaction, decrease churn, and expand product adoption in our existing customer base. We have a very large customer base of over 20,000 customers. We think we can do great things for our business by serving them better. Two years ago, we didn't even have a dedicated customer success group, so we anticipate this group is something that will continue to grow out given our early successes. Second is investing in our marketing technology. Our marketing activities used to be primarily events and trade shows. We've invested in various technologies to improve our search engine optimization, enable account-based marketing, and otherwise provide customers and prospects with useful information that lets them know how we can help them with their specific challenges. We've also moved away from one big global in-person user group and have moved to several virtual innovation forums that are focused on our particular Descartes solution sets. The third is investing in build-out of our European team. Historically, this team is exclusively geographically structured. We moved to a structure that's both geographic and solution-focused. We've expanded the team and brought in broader solution experts, enabling customer-centric engagement across our various solution pillars. On the acquisition front, you can see that we remain active. We've completed two acquisitions already this fiscal year. Earlier in the year, we combined with NetCHB, which I mentioned earlier, and went through into town our last results call. More recently, we've also combined with Foxtrot. Foxtrot is an investment that complements our existing routing and scheduling technologies Specifically, Foxtrot has strength with machine learning capabilities that will help our customers with iterative improvements to their delivery route plans. This was of particular interest to us, given Foxtrot and Descartes have some common customers. Also, Foxtrot's strength in retail food and beverage complements our other previous investments, such as Green Mile, making us, in our mind, the premier solution provider in the food and beverage distribution industry. Welcome to everyone from Foxtrot, and we are excited to be working with you. We're committed to continuing to grow Descartes. These sales and marketing acquisition investments are designed to keep us on that path. We're very excited about where we are now and our future path. To wrap up, we had great Q1 financial results. That was in part because of the past sales and marketing investments paying off, our solution leadership in certain markets, and the contribution of past acquisitions. In the current quarter, there are challenging and changing business conditions caused by geopolitical conflict and economic changes. While we're cautious about how these business conditions will impact the global economy and shipment volumes for the rest of the year, we remain committed to investing in profitable growth for our business through continued sales and marketing investments and business combinations. Once again, thanks to the entire Descartes team for their efforts this past quarter and for the work they're doing right now to help our customers deal with all the change and complexity in the world right now. And with that, I'll turn the call over to Alan to go through our Q1 financial results and more detail. Alan?