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. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Tuesday, December 5, 2023. I would now like to turn the conference over to Scott Pagan. Please go ahead.

Thank you and good afternoon, everyone. Joining me remotely on the call today are Ed Ryan, the CEO, and Alan Brett, CFO. And I trust that everyone has received a copy of our financial results press release that was issued earlier. Portions of today's call, other than historical performance, include statements of forward-looking information within the meaning of applicable securities laws. And these statements are made under the safe harbor provisions of those laws. These forward-looking statements include statements 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. You're cautioned that such information may not be appropriate for other purposes. We don't undertake or accept any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements to reflect any change in our expectations or any change in events, conditions, assumptions, or circumstances on which any such statement is based, except as required by law. And with that, let me turn the call over to Ed.

Hey, thanks, Scott, and welcome everyone to the call. We're coming off a great third quarter with record financial results, good organic growth, and strong operating margins. We're excited to go over those with you and give you some perspective about the business environment we see right now. But first, let me give you a roadmap for the call. I'll start by hitting some highlights of last quarter and some aspects of how our business performed. I'll then hand it over to Alan, who will go over our Q3 financial results in more detail. I'll then come back and provide an update on how we see the current business environment and how our business is calibrated as we enter Q4. And finally, we'll open it up to the operator to coordinate the Q&A portion of the call. So let's start with the quarter that ended on October 31st. Key metrics we monitor include revenue, profits, cash flow from operations, operating margins, and returns on our investments. For this past quarter, we again had outstanding performance in each of those areas. Total revenues were up 19% from a year ago, with service revenues up 18%. Adjusted EBITDA was up 17% from a year ago. Adjusted EBITDA margin was at 44%. Back up to the levels before we bought GrandCloud, And we generated $56 million in cash from operations, representing 86% of adjusted EBITDA. At the end of the quarter, we had almost $280 million in cash, and we were debt-free with an undrawn $350 million line of credit. We remained well-capitalized, cash generating. We have strong organic growth and remain ready to continue to invest in our business. We had a good quarter of organic growth in our core services revenues. Many of the drivers are similar to past periods. The biggest growth areas were in real-time visibility, global trade intelligence, and routing and scheduling solutions. So let me touch on each of those here for a minute. First is real-time visibility. When you're moving goods on other people's assets, their ships, planes, and trucks, it's a challenge to know where your goods are. This is even more difficult if you're not the one who's arranged the shipments. if instead you book through an intermediary like a broker, freight forwarder, or third-party logistics provider. To get this visibility, you need a network that sources information from all these assets and parties and presents it in a way that makes business sense. Knowing the location of a shipment and when it's going to arrive is critical to serving your customers and running your business. Our visibility and transportation management solutions, which include MacroPoint, provide critical help to customers. We're winning more time visibility deals and seeing strong demand from our customers, and I think there's three key reasons for this. The first reason is our solutions are better at tracking loads. Simply put, we track a greater percentage of loads than our competitors can. Customers pay us based on the number of loads that we track, so we're motivated to have as many carriers and intermediaries as possible to source location information from. If they're not already connected, We've got self-connected tools that help our customers get even more location coverage across their network of carriers. We also have customer success personnel who help expand the network in more complex cases. The outcome has been a greater percentage of loads tracked, better data, happier customers, and strong growth in our business. The second reason is visibility is embedded in many Descartes solutions. Some customers come to us just for visibility. but visibility is also embedded into many of our Descartes solutions. Our customers can make transportation management decisions, including planning who they tender to, consolidations and otherwise, and ensure they have visibility while those shipments are executed. We believe we offer a more comprehensive solution than our competitors in this regard. The third reason is we're a reliable, stable, and growing partner. Our customers take a lot of comfort from working with Descartes as a larger public company with a long track record of financial stability. Also, our customers value our lengthy experience operating secure cloud services across the globe. This makes us a service provider of choice in the real-time visibility market. The second area where we're seeing strong growth is in global trade intelligence solutions. There's a lot of geopolitical conflict in the world right now. When that happens, it has an impact on supply chain and logistics. Goods move on new routes away from conflict areas Sanctions are put in place restricting who you do business with and what types of goods can be shipped. The duties and tariffs are adjusted to incentivize certain trading relationships. We've continued to see strong demand from our customers for help with these challenges. Our solutions help them in three principal areas. The first is competitive intelligence. Our data mine solutions provide information on trade flows, historical classifications 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. The second area is tariff and duty data to make intelligence 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. And the third area is compliance. These solutions help our customers make sure they're not shipping things to people they should not be shipping them to. And this may be to specific people, to specific companies, to specific geographies, or in some cases, specific goods being shipped. And the final area we're seeing high growth at the moment that I outlined at the beginning is in our routing and scheduling solutions. These solutions help you manage your own fleet of vehicles rather than hiring space on other people's vehicles. We believe we have the premier routing and scheduling solutions in the market. Our customers have faced pressure to use their vehicles efficiently, whether it's due to cost pressures, limited labor, or environmental concerns, so we've seen continued good demand. Also, our customers recognize that the delivery experience is a key part of the consumer's purchase experience, so they're very interested in being able to provide delivery recipients with time-definite delivery windows and an Uber-like delivery visibility experience in the final miles. Our innovations in this area continue to drive customers with complex delivery challenges to us for our solutions. We were able to show good organic growth in the quarter, even with some broader macroeconomic challenges in the supply chain and logistics market. As we went into the quarter, the market was bracing for reduced transportation volumes. In the quarter, we did see lower volumes, but not as bad as may have been initially expected. Our supply chain messaging and customs filing businesses saw some impact with lower transaction volumes, but not inconsistent with our plans. Overall, our businesses designed to grow through fluctuations in transportation volumes and the superior performance of the parts of our business that are less volume sensitive, combined with the addition of new customers, continue to drive our organic growth. Our organic growth was complemented by the contribution of recently completed acquisitions. Several of the acquisitions are performing better than we originally planned for, resulting in more earn-out being accrued in the quarter. Alan will get into that in more detail in his section, but let me touch on the two most recent acquisitions. The first is GroundCloud. We've got about eight months' experience with GroundCloud's safety and compliance solutions. GroundCloud helps us identify safety incidents faced by drivers and provides responsive and targeted video training on the challenges that drivers face. They also help companies manage delivery obligations as they have as subcontractors to other delivery brands such as FedEx. When we first combined with GroundCloud, we indicated we anticipated some impact on our overall adjusted EBITDA margin, which we did in fact see in Q1 and Q2. We've made good progress on integration and our aggregate adjusted EBITDA margin is back up to 44% for Q3. We're also seeing good opportunity for cross-sell of the safety solutions into our existing routing customer base, and we're monitoring the impact of FedEx and increasing the number of shipments it moves through the independent contractor network, as that may increase demand from customers looking to help FedEx. The second acquisition was Locals. I spoke to this a bit earlier, as Locals helps with the Uber-like delivery experience for the final mile. If you're receiving a delivery, you can track the vehicle in real time on a map as the goods arrive. Locals has been immediately incorporated into our routing solutions, and we saw good demand for combined Locals-Descartes solutions. We're very happy with the technical capabilities and initial performance and hope to be able to share more on progress in the upcoming quarters. With that, let me just summarize as I hand it over to Alan to give the full financial details in 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 almost $280 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. Many 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. With that, I'll turn the call over to Alan to go through our Q3 financial results in more detail. Alan?