The Descartes Systems Group Inc.

Good afternoon ladies and gentlemen and welcome to the Descartes Systems Group Quarterly Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. If you wish to ask a question during this time, simply press star 1 on your telephone keypad. If at any time during this call, you require immediate assistance, please press star 0 for the operator. 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 Alan 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 DCAR 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 OSC, 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 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 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 roadmap 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 Alan, 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 remained 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 from us. An excellent example of that is our recently announced acquisition of Locals, where we continue to deploy capital for leading technology and services for our customers. Locals is headquartered in Australia, and specializes in helping customers with final mile deliveries. Specifically, they provide an Uber-like tracking experience to the end recipient of a delivery, allowing them to be able to see the real-time progress of the delivery over the final miles. Lookhouse also provides customer self-scheduling deliveries and a click-and-collect solution to help with fulfillment of online purchases. Lookhouse's customer base is mostly in Asia Pacific and Europe. Our focus is to integrate Locale's leading technology stack into our routing and scheduling solutions and make it available through our distribution channels on a worldwide basis. We've already been active in welcoming the Locale's team in and had them interacting with our Australian partners and customers, so we're off to a great start. Welcome to the entire Locale's team. Locale's complements our continued investment in final model deliveries this calendar year. Our February investment in GroundCloud had a partial quarter of contribution to our results and added a robust solution to help independent final mile delivery companies manage their operations, with particular specialization for service providers who are performing the bulk of their deliveries for large transportation brands such as FedEx and Amazon. What really distinguishes GroundCloud is its specialization and attention to driver safety by delivering easily digestible driver training video content to drivers' mobile devices. Our customers focus on ESG issues and risk minimization, which include workplace and driver safety are a good demand driver here. Our focus is on integration of the safety technology with our broader routing and scheduling solutions and anticipate that the go-forward revenue mix with growth will trend more towards Descartes' revenue mix over time, where nearly 90% of our business comes from higher margin recurring revenues. While our acquisition engine continues to deliver, Our organic operations were the principal contributor to a very successful quarter of growth. I just wanted to highlight a few areas that performed well. The first is real-time visibility. This is an area that we've talked about in the past quarters and continues to be strong. A large part of the logistics market is people moving shipments on other people's assets, whether they be planes, trucks, rails, or ships. There also may be many intermediaries involved, including freight brokers, third-party logistics providers, and customs brokers. With all those assets, modes of transportation, and parties involved, entering the question of where is my shipment is not an easy one. It's also an important question as people have realized over the past few years how vulnerable their businesses are to a dysfunctional supply chain. Our MacroPoint solutions have continued to be market leaders in this space and see strong growth, especially with their integration to our global logistics network. which enables us to easily cross-sell MacroPoint embedded directly into a number of Descartes solutions. The second is final mile delivery solutions. The same factors that have driven our recent acquisition investments in final mile delivery and the desire for shipment visibility have also driven growth in our organic route optimization operations. Regardless of whether you have your own fleet of delivery vehicles or are contracting out, the recipient's delivery experience is now part and parcel of the product sale. We continue to see strong demand from our customers for technology that enhances the customer's experience, whether it be in the scheduling or delivery process. Third area is e-commerce. We've certainly seen headlines about how e-commerce is not growing as fast as it did during the pandemic. However, those headlines often miss the key. It's still growing. E-commerce continues to be an increasingly more prevalent way of purchasing, and e-commerce deliveries flow as a consequence. We've made historic investments to help our customers with this trend, and we continue to see strong volumes in the quarter that contributed to our organic growth. And finally, we have global trade intelligence. This was another strong quarter for our global trade intelligence pillar with some key drivers. You may have seen an increased presence of our data being used by leading publications like the Wall Street Journal to do market analysis, showing the value that customers get from our data mine solutions. We're also continuing to see strong demand for sanction party screening as a consequence of continued geopolitical tensions, including from the war in Ukraine and U.S.-China tensions. So a good contributor to growth in the quarter as well. So let me just summarize as I hand it over to Alan to give the full financial details on the quarter. We had record financial results, the business performed well, and we believe that's a good reflection of the value that our customers continue to get from our solutions and the hard work that our team continues to put in for our customers. We ended the quarter with $182 million in cash, $350 million in available credit, and a market opportunity where we can continue to grow the business for our customers both organically and through acquisition. We remain focused on profitable growth so that we can continue to ensure that our customers have a secure, stable, and growing technology partner that can help them with their challenges well into the future. My thanks to all Descartes team members for everything they've done to contribute to a great quarter and continuing to have our business in an enviable position for future success. I'll now turn the call over to Alan to go through our Q1 financial results in more detail. Alan?

Thanks, Ed. As indicated, I'm going to walk you through our financial highlights for our first quarter, which ended on April 30th. 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 over a $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. Removing the impact of the recent acquisition as well as the negative impacts from FX that we just mentioned. 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% in the quarter when compared to the same quarter last year. Pretty similar to the results we experienced in Q4. Gross margin in the first quarter came in at 76% of revenue. in the first quarter this year, consistent with gross margin realized in the first quarter last year, as the operating improvements that we continue to see in the business were offset by lower gross margins realized in the recently acquired ground cloud business. Our operating expenses increased in the first quarter. This was primarily related to the impact of the acquisition of ground cloud, but also from additional labor-related costs, primarily in sales, marketing, and the R&D areas as we experienced the higher run rate costs from the staffing investments we made throughout the past 12 months. As a result of the higher revenues, offset by the increase in sales, marketing and R&D costs, we continue to see our adjusted EBITDA growth of 13% to a record $57.7 million, or 42.2% of revenue in the quarter, up from $51.2 million, or 44.0% of revenue in the first quarter last year. As we had indicated at the end of Q4, the addition of the ground cloud business, while profitable, came to us with much lower adjusted EBITDA margins out of the gate than the rest of our business. The lower margins in that acquired business, as well to a lesser extent, lower license revenue recognized in the quarter, had a negative impact on our adjusted EBITDA ratio in the first quarter, very much as we expected. From a GAAP earnings perspective, net income came in at $29.4 million, up 27% from net income of $23.1 million in the first quarter last year. With these strong operating results, cash flow generated from operations came in at $48.9 million or approximately 85% of adjusted EBITDA in the first quarter, up 10% from operating cash flow of $44.4 million or 87% of adjusted EBITDA in Q1 last year. Note that Q1 is typically a seasonally lower cash flow quarter, mainly due to the timing of several tax and bonus payments that typically occur in the first quarter each year. Once again, we are pleased with the strong cash collections we realized during the quarter. So as Ed mentioned earlier, we are very pleased with these operating results in the first quarter as continued organic growth and a solid contribution from our recent acquisitions resulted in 17% growth in revenue and more importantly, 13% growth in adjusted EBITDA for the quarter. If we turn our attention to the balance sheet, our cash balances totaled $182 million at the end of April, down from cash balances of $276 million at the end of January, as we used our positive cash flow from operations to complete both the ground cloud and locals acquisition. As a result, we still have over $180 million of cash, as well as a $350 million undrawn credit facility available for future acquisitions. So we continue to be well capitalized to allow us to consider all acquisition opportunities in our market consistent with our business plan. As we look towards the balance of fiscal 2024, we should note the following. After spending approximately $1.2 million on capital additions in the first quarter, we expect to incur approximately $4 to $5 million in additional capital expenditures for the balance of this year. After incurring amortization costs of $14.7 million in Q1, We expect amortization expense will be approximately $45 million for the rest or the balance of this year, with this figure being subject to adjustment for foreign exchange changes and future acquisitions. Our income tax rate in Q1 came in at 22.3% of pre-tax income, slightly lower than our blended statutory tax rate, and this was mainly a result of a few smaller tax benefits and recoveries realized in the first quarter. Looking into the balance of the year, we currently expect that our tax rate will trend much closer to our expected range of 25 to 30 percent of pre-tax income in the next few quarters, meaning that our tax rate for the year is likely to end up in the range of between 23 and 27 percent of pre-tax income. However, as always, we should add that our tax rate may fluctuate from quarter to quarter from one-time items that may arise as we operate internationally across multiple countries. Also, after incurring stock-based compensation expense of $2.9 million in the first quarter, we currently expect stock compensation to be approximately $13.6 million for the remainder of fiscal 2024, subject to any forfeitures of stock options or share units. And finally, going forward, subject to unusual events and quarterly fluctuations, we expect to see continued strong cash flow conversion and generally expect cash flow from operations to be between 85% and 90% of our adjusted EBITDA in the quarters ahead. I will now turn it back over to Ed.

Hey, thanks, Alan. With you two a month in, we remain confident in our business but cautious about the broader economic circumstances that are out there. There's 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 US 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 month, 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 about 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. 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, it doesn't necessarily mean there's a corresponding impact on the number of shipments, just that there's tighter margins on many of these shipments. In terms of how that impacts Descartes' business, the number of shipments is a more important metric. We saw strong volumes through Q1, and we'll be continuing to monitor the shipment volumes over our global logistics network. Fourth is port delays have decreased. During the pandemic, there were tremendous backlogs at ports with ocean vessels moored waiting since ports couldn't handle the volume. However, ports have caught up and processed these volumes and are back moving goods at pre-pandemic levels. This is a key factor as parties consider lead times for orders. Fifth is China origin shipments have increased. China was still dealing with COVID shutdowns and resource availability challenges later than many parts of the world. This resulted in companies sourcing goods from other countries. However, in April, we saw sourcing from China pick up and we'll be monitoring whether this is a continued growth trend. The sixth is fuel costs are lower than a year ago. Diesel and other fuel costs are at lower levels than a year ago. So while carriers and intermediaries may be seeing some challenges with revenues with freight prices decreasing, they're seeing some relief on the cost side as well. Seventh is some funding challenges for earlier stage logistics companies. The technology community saw some recent shocks in the availability of capital to earlier stage technology companies, including those in the logistics and supply chain space. Many of these companies may not have access to further rounds of funding and may be required to consider other strategic alternatives. We'll be monitoring this as we look at our own acquisition strategy. And finally, ESG focus impacts supply chain and logistics. ESG discussions in boardrooms are having a meaningful impact on supply chain and logistics decisions. Our customers are looking for detailed information from their trading partners so they can meet and report on their own DSG goals. We're seeing legislation and regulation in different countries forcing companies to adopt solutions that will enable them to better monitor and report on their compliance with prohibitions on use of forced labor, environmental impact of their operations, and trading with restricted parties. So those are some of the things we're hearing from our customers and seeing in our business, things that also inform 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 EBIT at 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 establishing relationships with customers for life. and we thrive on operating a predictable business that allows us forward visibility to our revenues and investment paybacks. In our Q1 report, we provided a comprehensive description of baseline revenues, baseline calibration, and their limitations. As of May 1st, 2023, using foreign exchange rates of 74 cents to the Canadian dollar, $1.10 U.S. to the euro, and $1.26 U.S. to the Great Britain pound, We estimate that our baseline revenues for the second quarter of 2024 are approximately $120.5 million, and our baseline operating expenses are approximately $76 million. We consider this to be our baseline adjusted EBITDA calibration of approximately $44.5 million for the second quarter of 2024, or approximately 37% of our baseline revenues as at May 1, 2023. We continue to expect that we'll operate in 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. Last quarter, we flagged the ground cloud would impact our margin while we completed the integration activities and brought it up to our desired Descartes contribution level. We believe we've made good progress on the integration activities and are not planning for a further impact to our operating margin from where we were at in Q1. Got lots of exciting things planned for our business. It remains an uncertain, broader economic environment, but we believe our proven track record of execution, solid capital structure, and customer focus will serve us well. I want to thank 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, I'll turn the call over to the operator for questions. Operator.

Thank you. Ladies and gentlemen, we will now conduct the question and answer session. If you have a question, please press star followed by the number one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. If you would like to cancel your request, please press star two. Please ensure you lift the handset if you're using a speakerphone before pressing any keys. Your first question comes from the line of Raymond Lenschao from Barclays. Your line is now open. Thank you.

Congrats on another solid quarter. Ed, 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 how transportation volumes are continuing to go through, come through? Are we kind of through the worst? That's kind of what it feels like, but I kind of wanted to hear a view of you on that one, and I had one quick follow-up.

It's tough to tell. It 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 looks pretty good to us today. You know, I don't know what the future brings exactly. I mean, you know, it's a mixed news economy at the moment as I read the paper. But, you know, most of our customers seem to be in pretty good shape. I don't hear any of them, you know, sounding fire bells or anything like that. And certainly the volumes on our network continue to be strong, so we're happy about that.

Yeah, okay, perfect. And then what are you seeing in the field in terms of, you know, you always were very good and 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? Thank you and congrats.

Your hands are heavy. Yeah, 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 locales 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 smaller technology companies are facing. I think on the smaller end, you know, where we tend to play, we're seeing more stuff that's impacted more quickly by, you know, economic uncertainty out there and an unwillingness for people to put money into the market. So if they're, you know, losing money or not making much money and the people that historically have invested and maybe perhaps overinvested in those areas in the last four or five years have kind of stopped doing that, all of a sudden we're 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. 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.

Okay, perfect. Thank you.

Thank you, Rem.

Your next question comes from the line of Matt Paul. from William Blair. Your line is now open.

Great. Thanks for taking my questions. First, I wanted to follow up on one of the comments you made. 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, you know, we have been in a very fortunate situation where I think while, you know, customers, particularly big retailers and manufacturers are probably the first place we saw this, you know, in the last six months where they were worried about, you know, what the economy looked like and they were probably telling us they were, you know, kind of putting their foot on the brake and maybe holding back on some investments. They continued 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, you know, what the longevity is there?

Yeah, 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, you know, the the risk that you might be into doing that. It's not just a risk of, you know, whether it'll be there or not. It's a risk of, is it going to get sold to somebody else who is going to change the direction soon? And do I want to sign up 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.

Great. Thanks for taking my questions. I appreciate it.

Hey, thank you, Matt. Have a great day.

Your next question comes from the line of Paul Treber. from RBC Capital Markets. Your line is now open.

Thanks very much and good afternoon. I was just hoping, could you elaborate on one of your earlier points about MacroPoint and that it's been growing even though 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 taken away from their competitors. It's also come with, you know, over the last several years with companies saying, you know, I used to track some of the shipments. I now need to track them all. And that, you know, 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 which 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's 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 year. 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, your longterm 10 to 15% growth outlook, which does include, uh, organic growth plus acquisitions.

Uh, you know, we're slow and steady wins the race kind of company. I think, uh, you know, we're, we're, we proceed cautiously all the time. If we overperform, that's great news. But, uh, I don't know that we see what's going to happen out, you know, five, ten 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. You know, we've seen a lot of people roll by us over the years, you know, screaming from behind them that, you know, we're going to the moon and we'll see you later. And then, you know, in the next couple of years, they implode, and we quietly come behind them and pick up all the pieces. And, you know, the reason those things happen is because they overinvest in sales and marketing because they start making promises they're going to grow faster than they can in the long run. And when something goes bad, you know, they implode, everyone gets fired, the customers, you know, get forgotten, and they probably get sold to somebody else. And, you know, 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?

Yeah, thanks for asking that. A lot. 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 think of the way 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. We continue to do more and more of that. 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. That's exciting times for us because we're now at the point where you're looking at our routing systems and going, how did it know that? I don't understand. It's all because we're collecting a lot of data points over a long period of time and able to help our customers figure out things like what's that intersection going to look like at 5 o'clock? 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 six, eight 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 lot of money. More internally, and you've probably heard this at a lot of software companies, standard routines and standard pieces of code that you can use AI to, you know, pull up a chunk of code that you might have taken three days to write, you know, and now all of a sudden you're pulling up a chunk of code in 20 minutes, configuring it to your use case and saving yourself a whole lot of time in the development and engineering process. So we're seeing some of that right now. I think I'm going to see a lot more of that in the future. And then, you know, another obvious one that I think a lot of software companies are doing is Better and better customer support, more cost-effective customer support, better interpreting the questions that customers are going to ask and being able to disperse those answers out to them quickly and often in a self-service model. This all started like 10 years ago. You saw all these customer experience applications that come out. Well, now it's table stakes and really starting to become the norm, and we're using it in our tools, and I think you're going to see us use a lot more of it over the coming years to more quickly answer customers' questions and get them back to solve on the problems that they're actually trying to solve. So there's more, but those are the big ones, and I'm happy to ask because I think it's an important topic for the future.

Thanks for taking the questions.

Hey, thank you, Paul.

As a reminder, If you wish to ask a question, please press star one on your telephone keypad. Your next question comes from the line of Justin Long from Stephens. Your line is now open.

Thanks. I wanted to start with a question on organic growth. Alan, 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.

Yeah, 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 non-recurring 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 Alan 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 small licensed 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 three 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 real 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 and 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 headcount requirements to support that and maybe where sales and marketing headcount 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 six or eight months, I think I've described it to people as we took our foot off the gas and just kind of covered the break 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 of 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. Thanks, and congrats on the quarter.

Hey, thank you very much, Justin. Have a great day.

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

Hey, 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 five years ago. 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, you know, how do I make this investment to be better off in the next six months? I think they're probably more like, how do I make this investment to be better off in the next five to ten 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 six months? You know, probably. Guys that made the investment last year is probably going to get some benefit out of it this year. Guys making it right now is probably going to get some benefit out of it, you know, coming into Christmas season this fall. But, you know, if I listened 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. Thank you. And then maybe a following 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's 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 does anything but help us. I mean, we were partners 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.

That's great. Thank you.

Thank you, Dean.

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

Hi, Dean. Maybe a quick clarification on the previous question around the replenishment cycle. You said that retailers skipped a replenishment cycle and 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 operated 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 six months. But the volumes weren't down that much. And we were growing through that, so we kind of, you know, we're growing while volumes, you know, 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 had prices coming down somewhat dramatically and then volumes coming down a little bit from pre-pandemic or from pandemic, you know, times. I think that's fine because, you know, 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, you know, our growth in our business probably, you know, 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 recurring revenue and towards subscription. I think you started off the answer to that talking about volumes, but I think maybe you were 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 in a very odd way for a software company, we're one of the few that you might hear say this, but 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 on the call was license fees, pro services, hardware sales. 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. I think my comment was when I hear that the growth is highest in that services business or the recurring revenue business, you know, that's exactly what we're looking for. That's great news for our business and great news for our shareholders.

Got it. Thanks.

Hey, thank you, Robert.

Your next question comes from the line of Stephen Lee from Raymond James. Your line is now open.

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

Thanks. Yeah, no. First of all, we're thrilled with the ground cloud 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 the cart 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 quarters is fine, and you'll start to see – us continue to move those numbers up over that time. I don't know, Alan, if you have anything else to say about it.

No, just it's similar to other acquisitions where we've done, Stephen, 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, Steve, 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. And, you know, we're proceeding cautiously to make sure that we get the margins up. But, you know, we're not going to rush through it in any way that harms the business.

Makes sense. Thanks, guys.

Thank you, Steve, and have a great day.

Your next question comes from the line of Kevin Krishnarathne from Scotiabank. Your line is now open.

Hey there. Good evening. Just on the shipping strength that you saw in Q1, I think you're now above 2019 levels. Can you talk about if 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 in 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?

Yeah, thanks for the question. You'll hear about the main numbers we're going to release next quarter, so I can't speak to them specifically. I can't tell you what customers are telling us, and I can tell you some of the trade statistics we're hearing that And certainly maybe April will give you some indication. We saw February as kind of a low point and it 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 two. We'll give you some indication of that. But if I could use April as an example, I'm optimistic about what we see in May. And we'll see what happens 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. The U.S. got the 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.

Okay, good stuff. Thanks. I appreciate it. Pass the line.

Thanks, Kevin. Have a great day.

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

Hey, thanks, everyone. Appreciate your time on the call today, and we'll 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.