The Descartes Systems Group Inc.

Good afternoon, ladies and gentlemen, and welcome to the Descartes System Group's 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. You may press star 1 now to queue up for questions. 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, September 6, 2023. I would now like to turn the conference over to Scott Pagan. Please go ahead.

Thanks, and good afternoon, everyone. Joining me on the call today are Ed Ryan, CEO, and 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 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 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. 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.

Hey, thanks, Scott, and welcome everyone to the call. We had an excellent first half of the year with record financial results this past quarter. We're excited to go over those with you and give you some perspective about the business environment we see right now. But first, let me give you a roadmap for this call. I'll start by hitting some highlights of last quarter and some aspects of how our business performed. I'll then hand it over to Alan, who will go over the Q2 financial results in more detail. I'll then come back and provide an update on how we see the current business environment and how our business is calibrated as we enter Q3. And then we'll open it up to the operator to coordinate the Q&A portion of the call. So let's get started by looking at the quarter that just ended July 31st. Key metrics we monitor include revenues, profits, cash flow from operations, and returns on our investments. For this past quarter, we again had record performance in each of those areas. Total revenues were up 17% from a year ago, with service revenues up almost 20%. Net income and EPS were up 23% and 19% respectively. Income from operations was up 17%, while adjusted EBITDA was up 12%, and we generated $52 million in cash from operations, representing 86% of adjusted EBITDA. At the end of the quarter, we had $227 million in cash, and we were debt-free with an undrawn $350 million line of credit. We remain well-capitalized, cash-generating, debt-free, and ready to continue to invest in our business. We believe a company like ours is well positioned to continue to thrive in market conditions like these because we've got good organic growth plus the experience and capital capacity to execute on acquisitions. We had a good quarter of organic growth in our core services revenues, so I wanted to highlight some of the drivers of that. The first issue is real-time visibility. Just a refresher on this, a large part of shipping is people moving goods on other people's assets, whether they be planes, trucks, rail, or boats. There may also be intermediaries involved in arranging the shipments or making required filings, including freight brokers, third-party logistics providers, and customs brokers. With all those assets, modes of transportation, data sources, locations, and parties involved, it can be challenging to know where a shipment is, and knowing the location of a shipment and when that's going to arrive is critical to serving your customer and running your business. Our visibility and transportation management solutions, which include MacroPoint, are increasingly important for our customers in this area. These solutions contributed to solid growth in the quarter for reasons including, first, our solutions are better at tracking loads. Customers pay based on the number of loads that are tracked by our solutions, so we're aligned with our customers on doing what we can to connect as many carriers and intermediaries as possible to get location information on loads. We've launched new carrier self-connect tools that have helped our customers get even more location coverage across their network of carriers. We've also made investments in customer success personnel to help maximize the number of loads with full visibility. The outcome has been a greater percentage of loads tracked, better data, happier customers, and strong growth. Second issue is we're winning more deals and seeing strong demand for visibility. The real-time visibility market is not without competitors. However, we're having good success at securing new customers and welcoming back some old ones because our commitment to tracking the success. We have a broader network that's across more modes of transportation than our competitors, and that's being recognized by customers as they choose their visibility solution for the future. Our customers also take comfort in our reliability and that we're operating a business that they know will be around to serve them for the long term. The third issue is visibility is embedded in more Descartes solutions. Some customers come to us just for visibility, but others are using Descartes solutions and are looking to have visibility as an add-on to what they're already doing. Each time we expand our solution set, including by way of acquisition, we look for how we can embed visibility into the new solutions to provide an easier mechanism for our customers to track their loads. We believe that our best source of business is often our existing expansive and supportive customer base, so we're making dedicated efforts to make visibility easier for those customers. Second big issue is routing, scheduling mobile solutions, and it's a big contributor to our revenue success this quarter. These solutions are principally for when you're managing your own fleet of vehicles rather than hiring space on other people's vehicles. We believe we're the most experienced company in this market and have the premier routing and scheduling solutions to offer. Our customers in this area have faced recent challenges, including rising labor costs, challenges in security data, rising fuel prices, and customer demands for accurate delivery windows. This has contributed to strong demand with new customer projects, and existing customers returning, retuning their solutions. We've also been innovative in this market, which has contributed to our market leadership. We've recently launched a new generation route planning solution that is being rolled out for customers. And we've made investments in our solutions through acquisitions, safety solutions from ground and cloud, and final model delivery, tracking from locals. All factors that contributed to good growth in this area. The third area is global trade intelligence. Once again, we saw good growth in the global trade intelligence solutions in our business. Those solutions generally fall into three buckets. The first bucket is competitive intelligence. Our data mine solutions provide information on trade flows, historical classification of goods, and other logistics and supply chain intelligence. This information can be used to help make decisions about your own supply chain, but also to see how competitive you are with other companies' supply chains. Recent attention on the efficiency of supply chains has helped drive demand in this area. In addition, our data is front and center in many leading business publications as a source for data about logistics and supply chains, which has also been a good demand driver for us. The second bucket is tariff and duty data to make intelligent shipping decisions. We provide up-to-date data about tariff and duty rates and rules around the world, which can be used by leading global trade management systems to help run international supply chains. We've seen an increased level of changes in tariffs and duties principally as a consequence of geopolitical tensions and trade disputes. This has changed the design of many supply chains and has increased the importance of having accurate and timely information like ours. The third bucket is compliance. These solutions help our customers make sure they're not shipping things to people they shouldn't be. This may be to specific people, to specific countries, to specific geographies, or in some cases, specific goods being shipped. These restrictions have expanded and increased in complexity as the geopolitical tensions have increased and trade disputes have emerged. In addition, governments in the larger economies like the United States have increased the resources dedicated to ensuring compliance and have levied substantial financial penalties on firms not taking compliance seriously. We've continued to see good demand for these compliance solutions as a result. The next area is e-commerce. This continues to be a growing market and part of our business. We've made investments into these solutions with additional leadership and also by way of acquisition with our purchase of XPS within the past year. The partial market has seen some recent challenges with labor challenges at UPS, changing service preferences at the U.S. Postal Service, and FedEx restructuring. However, our share of the market continues to increase as we work with partners to find the most efficient way for our customers to get their deliveries made. So good acquisition and organic contribution in the quarter. We're very happy with how the business performed in the quarter, and in particular with the organic growth, the business was able to produce a few comments on our two most recent acquisition additions. The first is on ground cloud. We combined with ground cloud in February. Ground cloud is particularly strong in safety and compliance solutions that help identify safety incidents faced by drivers and provide responsive and targeted video training on challenges drivers face. They also help companies manage delivery obligations as they have as subcontractors to other delivery brands, such as FedEx. This was one of our larger acquisitions, and when we first combined, we indicated we anticipated some impact overall on our adjusted EBITDA margin, which we saw in Q1. We've made good progress on integration and actually saw a slight uptick in aggregate adjusted EBITDA margin this quarter. So we're hoping that bodes well for the future. Finally, FedEx has recently announced that it may increase the number of shipments that will move to the independent contractor network. So we saw some good initial improved demand for that. Second acquisition is Locals. This business provides final mile visibility on deliveries. So if you're used to watching your Uber driver or food delivery vehicle come down the street to your house, Locals technology replicates that experience for delivery of other goods. This was a key investment in our routing scheduling mobile space, something our own customers need as they seek to provide a better delivery experience for their own customers. This investment was critical to some of our new customers trusting their fleet management to Descartes. So let me just summarize as I hand it over to Alan to give 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 $227 million in cash, $350 million in available credit, and a market opportunity where we continue to grow the business for our customers both organically and through acquisition. We remain focused on profitable growth so that we continue to ensure our customers have a secure, stable, and growing technology partner that can help them with their challenges well into the future. Many thanks to all the Descartes team members for everything they've done to contribute to a great quarter and continue to have our business in an enviable position for future success. With that, I'll turn the call over to Alan to go through our Q2 financial results in more detail.