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 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 Wednesday, September 3, 2025. And I would now like to turn the conference over to Mr. Scott Pagan.

Thank you. Please go ahead.

Thanks and good afternoon, everyone.

Joining me in person on the call today are Ed Ryan, CEO, Alan Brett, CFO, and Ed Gardner, EVP, Corporate Development. 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 trade tariff and economic uncertainty on our business and financial condition, Descartes operating performance, financial results and condition, 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 revenues and expenses, potential acquisitions and acquisition strategy, cost reduction and integration initiatives, and other matters that may constitute forward-looking information. 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 and 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. Accept is required by law. And with that, let me turn the call over to Ed.

Thanks, Scott, and welcome everyone to the call. Today we're reporting record quarterly revenues and adjusted EBITDA after a period when we recalibrated our business. We're edging ahead of our plans and are already focused on the second half of the fiscal year. We're excited to go over these results with you and give you some of our perspective on the current challenging business environment for our customers. 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 the Q2 financial results in more detail. After that, I'll come back and provide an update on how we see the current business environment and how our business was calibrated for Q3. and we'll then open it up to the operator to coordinate the Q&A portion of the call. So let's start with the second quarter that ended on July 31st. Key metrics we monitor include revenues, profits, cash flow from operations, operating margins, and returns on our investment. For the past quarter, we had very good performance in each of those areas. Total revenues were at a record high, $179.8 million, up 10% from a year ago and 7% from last quarter. Record high services revenues were up 14% from a year ago with our continued focus on generating recurring revenues. Record high net income was up 10% from a year ago. Record high income from operations was up 5% from a year ago. And record high adjusted EBITDA was up 14% from a year ago. Our adjusted EBITDA margin was up two points from a year ago to 45%. We generated $63 million in cash from our operations, even considering that we had $5 million in personnel departure costs in the quarter. Without those costs, we'd have been at 86% cash conversion.

So strong results across all of these areas.

In June, we completed a small tuck-in acquisition of PackageRoute that complements our ground cloud business. Then right after the quarter, we paid $40 million plus $15 million in potential earn-out consideration to acquire Finale Inventory, an acquisition I'll speak to later. At the end of the quarter, we had more than $240 million in cash, and we were debt-free with an undrawn $350 million line of credit. We remain well-capitalized, cash-generating, growing, and ready to continue to invest in our business. I'd like to talk about four of the primary drivers of growth for our business this quarter. The first is global trade intelligence. The second is customs and regulatory solutions. And third is transportation management. So global trade intelligence. Tariffs have always been something that's been talked about in logistics and supply chain. However, they're now much more part of the mainstream discussion. Today's trade landscape, even over the past 90 days, includes new tariffs, tariffs being repealed, new commodities impacted, new timelines for implementation, delay, repeal, and new country-specific tariff arrangements and trade agreements. In the GTI part of our business, there are two main areas where our customers have looked to Descartes for help with tariffs. The first is to expand access to our real-time updated global tariff database used to fuel global trade management systems. And the second is accessing our research tools to show how our customers, peers, and competitors are handling tariffs so that our customers can make better import and tariff classification decisions. Right now, our global trade intelligence business is seeing strong demand. We anticipate that this is going to continue considering the pervasive tariff uncertainty in the market. In short, as the tariff environment becomes more complex, our global trade intelligence solutions see more demand. Secondary is customs and regulatory solutions. Tariffs have also impacted our solutions in the forward of worker enterprise solutions in two principal ways. The first is the transition to new filing mechanisms to deal with the elimination of Type 86 or de minimis programs in the United States. And the second is the demand for foreign trade zone or FTZ solutions. De minimis, the U.S. has eliminated the de minimis program, which allowed imports with a value below $800 to come into the United States duty-free. Now, all imports other than some country-specific $100 exemptions for individual gifts attract tariffs and duties. This has a big impact on foreign companies selling direct to U.S. consumers and even U.S. sellers who may have fulfilled or shipped their orders from foreign warehouses and facilities. Under the old de minimis regime, importers would file a Type 86 electronic filing to attract the duty-free treatment. Now, importers are making a Type 1 or Type 11 filing and remitting the appropriate duties. We've helped numerous customers transition to the new filing mechanism and have developed a reliable process to help our customers handle large volumes of time-sensitive filings. Our success in this area has also attracted some large volume filers away from our competitors. These circumstances have combined to make the transition away from de minimis a growth area for us in the customs filing space. With regard to foreign trade zones, With most U.S. imports now tracking tariffs, our customers have been looking for ways to not have to finance the burden of tariffs pending sales to the end U.S. consumer. U.S. Customs has a mechanism to enable this called foreign trade zones or FTZs. These are U.S. Customs-approved warehouses and facilities where goods can come into the United States duty-free until the goods leave the warehouse facility to be sold to a U.S. consumer. So if I'm an importer, I can defer paying duties until I have a sale and the goods leave the warehouse. Once you have an approved U.S. Customs FTZ, you have rigorous procedures to follow and regular filing obligations about what has come in and left the FTZ. Foreign trade zone solutions do exactly that. We've been seeing very strong demand for FTZ solutions, especially over the last three months or so. And this has also picked up with the end of de minimis, with U.S. sellers looking to ease the financing burden they'd otherwise need to bear from the new tariffs. So both of those areas contributed well to the growth in the quarter. In addition, we saw some increased filing volumes in the quarter across different modes of transportation, some tariff implementations being set for early July and then pushed to August. Many importers rushed to get goods into the U.S. in advance of those deadlines. In particular, ocean imports to the U.S. from all geographies were at their highest levels in July. And the customs and securities funds supporting those imports have benefited our business. The last one is transportation management. As we've discussed in past quarters, transportation management was again a strong contributor to our growth in the quarter. The three main reasons were, one, the efficiency of our MacroPoint tracking solutions, two, the contributions of 3G TMS, and three, the importance of our fraud prevention assistance solutions. With regard to MacroPoint, MacroPoint provides a real-time visibility solution. We've built up a strong network of connected road carriers and freight workers to get unprecedented access to real-time location information on all shipments. Our solutions are used in the U.S., Europe, and Australia. When a load is given to us for tracking, we believe we have the highest compliance rate out there to get our customers the location information they need. Our solutions are complemented by interfaces to numerous transportation management systems, including our recently acquired 3G TMS solutions. Even in a domestic U.S. freight market, where the number of road shipments has been declining over the past few years, MacroPoint has been able to grow as it gained market share and track more of the loads available to our customers. So MacroPoint continues to shine. 3G TMS. Transportation management systems are key sources of information for loads that need to be tracked. So 3G TMS customers have a natural pickup with the integration between 3G TMS and MacroPoint. But in addition, Descartes has a rich history of providing shippers with transportation management solutions, and Descartes' experience is now enhanced with the modernized cloud-based 3G TMS solution. 3G TMS has come in and been recalibrated to our Descartes model, and we've seen some excellent early success and demand. So 3G, a great team to welcome in and a very good contributor in the quarter. And the last one's fraud prevention. One of the biggest areas for investment for supply chain and logistics other than AI is fraud prevention. As shipping mechanisms have become more digitized and distributed, it has become harder and harder to gauge the legitimacy of carriers and brokers that you're working with. Information and identities are being leveraged to create phony logistics training partners who are either intent on theft of loads or taking margins for work not performed. We previously invested in fraud prevention with our MyTarrier portal acquisition, solutions that help our customers evaluate their logistics partners and separate fact from fiction. We continue to be happy with the performance of that business, its contribution in the quarter, and the continued demand we see for fraud prevention. Let me talk about acquisitions for a minute. In June, we combined with PackageRoute. PackageRoute helps independent service providers who are subcontracted by larger parcel delivery companies, a customer base that is very familiar to us given our ground cloud solutions. By bringing these businesses together, we believe we can offer a broader solution set to the customers and operate the businesses more efficiently for sustainable investment. All in all, a logical tuck-in for us with good customers and people. Just as their last quarter ended, we also acquired Finale Inventory to complement our e-commerce solutions. Finale has inventory management solutions, and this is an area you've seen us invest in recently as it complements our seller cloud solutions. Our approach is to have solutions that e-commerce sellers can use at all stages of their growth, from starting out with just a few product lines and selling mechanisms to more complex warehouse operations and sales channels. With Finale joining, we believe we have a comprehensive solution set for the e-commerce seller lifecycle. We have numerous leads in our business that now will find a home with Finale inventory and opportunities for cross-sell within our broader e-commerce solution portfolio. We have really hit the ground running in the first 30 days and see excitement in the team and the customer base. A great combination with more good things to come. So Q2 is a very attractive quarter for us, a very active quarter for us, I should say. Our customers are dealing with a very uncertain market, and we've had strong efforts from our team members to support that. We've been responding to heightened demand across many solutions to help new customers deal with an increasingly complex trade environment. We've continued to invest in our business with two acquisitions. And we've completed a restructuring of our operations so that our business is appropriately calibrated to deal with the revenue fluctuations that may come from an uncertain economy and trade landscape. I can't say enough about the job our team has done to help us get prepared for this with our customers. But as I said last quarter, we're doing what you'd expect Descartes to do. We've got a business prepared for difficult times. We're executing on-demand areas in the market. We're investing in new technologies and businesses. And most importantly, we're running our business consistent with our commitment to a 10% to 15% adjusted even to growth. Our business did very well in Q2. We're already hard at work on Q3, as you'd expect us to be. And with that, I'll turn the call over to Alan to go through our Q2 financial results and more to chat.

Okay, thanks, Ed. As indicated, I'm going to take you through our financial highlights for our second quarter, which ended July 31st. We are pleased to report record quarterly revenue of $179.8 million this quarter, an increase of 10% from revenue of $163.4 million in Q2 last year. Revenue from the acquisitions completed in the back half of last year, as well as the acquisition of 3G TMS completed earlier in the first quarter of this year, contributed nicely to our revenue this quarter. While revenue growth from new and existing customers, once again, also contributed to our revenue growth in the quarter, including growth in our global trade intelligence, customs and regulatory compliance, as well as our transportation management solutions, as Ed mentioned earlier. our revenue mix continued to be very strong with services revenue coming in at 166.8 million, or 93% of total revenue, up 14% from services revenue of 146.2 million, or 89% of total revenue in Q2 last year. License revenues were again minor at less than 1% of revenue in the quarter, while professional services and other revenue came in at 12.8 million, down from 15.8 million in Q2 last year. Note that for us other revenue includes hardware revenue. And last year in the second quarter we had an unusually high revenue hardware revenue in our ground cloud business as a result of an focused hardware replenishment cycle. And this accounts for the majority of the drop of this revenue category year over year. We should also mention that there was a positive impact on revenue of approximately two million from foreign exchange this quarter as the U.S. dollar was weaker against the British pound. the Euro and the Canadian dollar this quarter when compared to the same period last year. Excluding the impact of our recent acquisitions as well as the impact of foreign exchange, we estimate that our growth in services revenue from new and existing customers or organic services revenue growth came in at around 4% in the second quarter, a similar level to the growth experienced in Q1. Gross margin for the second quarter came in at 77% of revenue, up from gross margins of 75% of revenue that we realized in the second quarter last year. And this was mainly as a result of the unusual lower margin hardware sales in the ground cloud business that we recorded in Q2 last year that I mentioned earlier. Operating expenses increased by just over 8% in the second quarter over the same period last year. And this was mainly related to the result of recent acquisitions, including the 3G TMS acquisition quarter of this year. OpEx expenses in the second quarter also increased to the impact of foreign exchange from a weaker U.S. dollar and this increase was offset by a partial quarter benefit from the restructuring efforts that were completed throughout the second quarter. So as a result of both revenue growth, offset slightly by the operating cost expenses we just mentioned, we continue to see strong adjusted EBITDA growth of 14% to a record 80.2 million in the second quarter, up from 70.6 million in Q2 last year. As a percentage of revenue, adjusted EBITDA came in at 44.6% of revenue, up from 43.2% of revenue in Q2 last year, in part due to the impact of the lower margin hardware revenues recorded in Q2 last year. As a result of the above, net income under U.S. GAAP came in at $38.0 million, or $0.43 per diluted common share in the second quarter, an increase from net income of $34.7 million or $0.40 per diluted common share in the second quarter last year. With these solid operating results and strong receivable collections again this quarter, we once again generated strong cash flow from our operations, recording an additional $63.3 million in operating cash flow in the second quarter. I will note that the operating cash flow in the second quarter was negatively impacted by the payment of approximately $5 million in personnel departure costs. So while the operating cash flow came in at 79% of our reported adjusted EBITDA, excluding these personnel departure costs, operating cash flow would have been approximately 86% of our adjusted EBITDA. Looking at our operating results for the first half of the year, revenue came in at $348.6 million, an increase of 11% from revenue of $314.8 million in the first six months last year. For this first six months of the year, adjusted EBITDA came in at 155.3 million, or 44.5% of revenue, up 13% from 137.6 million, or 43.7% of revenue last year. Net income for the first half of the year also increased, coming in at 74.3 million, or 85 cents per diluted common share, and this compares to 69.3 million. or 80 cents per diluted common share in the first half of last year. Overall, we are again quite pleased with our operating results this quarter and the solid performance from recent acquisitions and continued organic services growth resulted in a 10% growth in revenue and a 14% increase in adjusted EBITDA for the second quarter. If we look over to the balance sheet, our cash balance increased by approximately 64 million in Q2 as we continue to generate strong cash flow from operations while we used approximately two million to complete the smaller package route acquisition during the quarter and just over one million for an earn out payment related to a past acquisition leaving our cash balances at approximately 240 million at the end of the quarter we should also note that just subsequent to the quarter we we also used 40 million of our cash balances to complete the acquisition of finale inventory as ed mentioned earlier As a result, we currently have approximately $200 million in cash available, as well as a $350 million credit facility that we can draw on, available to continue to deploy towards future acquisitions. In short, we continue to be well-capitalized to allow us to consider all opportunities in our market, consistent with our business plan. So as we look to the second half of our fiscal 2026, we should note the following. After incurring approximately 3.1 million in capital additions in the first half of the year, we expect to incur approximately 3 to 4 million in additional capital expenditures for the balance of this year. After paying approximately 1.2 million in earn-out payments during the first half of the year, we currently expect that we will make an additional earn-out payment of 1.1 million in the second half of this year. After incurring amortization costs of $39.6 million in the first half of the year, we expect that amortization expense will be approximately $39.7 million in the second half of the year, with this figure being subject to adjustment for foreign exchange rates and future acquisitions. Going forward subject to any unusual events and quarterly fluctuations we expect it will continue to see solid cash flow conversion and generally expect the cash flow from operations will come in between eighty and ninety percent of our adjusted EBITDA in the quarters ahead. Our tax rate for the first half of the year came in at approximately twenty four percent of free tax income which is just slightly lower than our estimated blended statutory tax rate of twenty six point in the first half. Looking to the second half of the year, we currently expect that our tax rate will continue to be in the range of 24 to 28 percent of our pre-tax income or somewhere on either side of our blended statutory tax rate. However, as always, we should state that our tax rate may fluctuate quarter to quarter from one-time tax items that may arise as we operate internationally across multiple countries. And finally, after recording stock-based compensation expense of $8.8 million in the first half of this year, we currently expect stock comp will be approximately $12.2 million for the balance of this year, subject to any forfeitures of stock options or share units. And with that, I'll turn it back over to Ed, who will wrap up with some closing comments and our baseline calibration for Q3.

Great. Thanks, Alan. As I said earlier and also last quarter, these are challenging business conditions for our customers. Just some of those most recent changes include new reciprocal tariff frameworks between the U.S. and various countries, new baseline reciprocal tariffs of 15% on many other countries, a 90-day reciprocal tariff truce between China and the U.S. that expires in November, steel and aluminum tariffs increased to 50%, pending court challenges to the legality of tariffs, de minimis tariff-free U.S. import exceptions have been eliminated, Various countries and postal authorities have suspended parcel and postal deliveries to the United States as they understand the new tariff collection and remittance regime, and heightened tensions and conflicts in Ukraine and the Middle East and corresponding sanctions that go along with it. So far, the economy has shown a degree of resilience. However, as we enter the second half of the year and the holiday bonding period, it's uncertainty. There's uncertainty as to the impact of new tariffs on pricing and inflation and even more of the consumer buying reaction to increases in pricing. This buying reaction will have a big impact on general economic activity and shipping related to inventory replenishment in 2026. So an important period upcoming with the economic and tariff uncertainties. As I mentioned last quarter, change is better than uncertainty for our customers. Our business thrives on helping customers adapt to changes and managing complexity. However, uncertainty puts our customers in a position where they don't know what decision to make or whether they should make any decision at all. Uncertainty can impact the shipping market, and so can deadlines for tariff changes, regardless of whether the deadlines are ultimately adhered to. We've seen broad tariff change deadlines in early April and July, the most recent tariff delay between the U.S. and China kicking in in early August. Often we'll see shipping upticks in advance of tariff increase deadlines. Each month we prepare a global shipping report that monitors ocean imports into the United States with data obtained from U.S. Customs and Border Protection. Our report for August will be coming out in the next few days. However, the July report showed record high ocean imports with strong levels of shipments to the U.S. from China, we expect those elevated shipments were highly impacted by the tariff deadlines. Subsequent to July, we've seen the prices to ship ocean containers come down, which may be indicative of less demand of ocean shipping once that tariff deadline has passed and is also influenced by typical seasonality. We've had an early look at August U.S. ocean imports based on public data. Imports are up about 3% from a year ago, but down 4% from July, the same seasonal drop as last year. Imports from China were down 10% from a year ago and 6% from August, with the notable impact of a 44% decrease in aluminum imports from China. There was an import strength in other Asia-Pacific countries, such as Vietnam, Thailand, Indonesia, Malaysia, and Cambodia. U.S. domestic truck volumes remain depressed year over year. Though we've seen a slight increase since last quarter, which may also be attributed to seasonality, air shipments have been trending with modest growth but look to be under pressure, in particular with some overseas partial shipping to the United States being suspended. For Descartes, we've grown during challenging business conditions in the past. Our plan is to continue to do so now. Some of these things we believe continue to put us in a good position to do that include we're diversified in domestic logistics and international logistics. Many of the changes right now impact international supply chains. However, we have great strength in domestic transportation moves in our routing and scheduling businesses, transportation management, and e-commerce last mile businesses. We're particularly strong in global trade intelligence. We believe we can provide a ton of help to our customers in an environment where people are looking for information or help managing tariffs. Continually updating sanctioned parties lists, thirsting for competitive intelligence, dealing with increased export license complexity, and implementing new duty-deferred foreign trade zones. The next is we're diversified globally. We've got domestic transportation solutions that can be used around the world, and where there's shifting international trade relations, we have an established global logistics network that can be leveraged by our customers. We've proactively taken steps to reduce our cost base to address potential revenue uncertainty. We have a total growth model. We have an extensive track record of acquisition activity to complement organic growth. changing market conditions often provide us with even more opportunities to add solutions for our customers and grow by acquisition and finally we're well capitalized cash generating business at q2 quarter end we have more than 240 million dollars in cash and 350 million dollar undrawn line of credit ultimately regardless of how well descartes positioned our success is determined by our ability to help our customers our customers remain uncertain about how these market conditions will impact their business We're mindful of this and the impact of the changing global trade and foreign exchange environments in setting our calibration and considering what our final quarterly financial results may be. In our quarterly report, we provided comprehensive description of baseline revenues, baseline calibration, and their limitations. As of August 1st, 2025, using foreign exchange rates of 72 cents to the Canadian dollar, $1.15 to the euro, and $1.32 to the pound, and including estimated contributions from the acquisition of Finale Inventory. We estimate that our baseline revenues for the third quarter of fiscal 2026 were approximately $157.5 million, and our baseline operating expenses were approximately $96.5 million. We consider this to be our baseline adjusted even to calibration of approximately $61 million for the third quarter of fiscal 26, or approximately 39% of our baseline revenues as at August 1st, 2025. 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 revenue mix, foreign exchange movements, and the impact of acquisitions as we integrate them into our business. These are uncertain times for our customers. It's a challenge for them to know what they can rely on in this global trade environment. Our goal is to continue to show our customers and other stakeholders that the one thing they can rely on is Descartes. Thanks to 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, operator, I'll now turn it over to you to handle the Q&A portion of the call.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star four by the one on your telephone keypad. You will hear a prompt that your hand has been raised. And should you wish to cancel your request, please press star followed by the two. If you're using a speakerphone, please lift the handset before pressing any keys.

One moment, please, for your first question. Thank you. And your first question comes from the line of Dylan Becker from William Blair.

Please go ahead.

Hey, gentlemen. This is Jackson Bogley on for Dylan Becker. I was wondering about the transactional side of the business. How do you think about the recovery there and how that shape of the recovery evolves now that we've kind of moved past the peak uncertainty? I know it's still out there, but how does that recovery look like on the transactional component and especially considering the impact of de minimis going away as well?

Well, on the minimus side, we've done quite well. Actually, we thought there was some risk there for us six months ago, and it turned out to be a great opportunity for us. So we're happy about that. On the tariff's impact on our network, well, you saw we had pretty good results this quarter. So that's in large part because those volumes started to tick up. As there was some certainty about what was going to happen all the way through, you know, early August. Now, you know, we've hit that August 9th date, and you would think that's created more certainty, excuse me. But, you know, then a federal appeals court judge said that, you know, it invalidates the tariffs, and the Trump administration comes back and says, we'll find a way around that, and it's probably going to end up at the Supreme Court. And my gut is it's probably that they're going to be able to, they're going to continue to give the president the ability to handle the tariff regime as he sees fit. But we'll see. I agree with you that there's less uncertainty than there was a month or two ago, but still plenty left, I think, that we're, you know, cautious of.

Great. That's helpful. And then maybe going back to that network piece and thinking about your AI positioning and how – how well positioned you are to use that. What does the opportunity look like to lean into the data across this network and maybe to drive more operational decisioning and performance and maybe also what you think monetization could look like over time as you continue building out your AI capabilities?

Sure. There's a lot of unknowns in what you asked there, but we do believe we're in a very attractive position in this regard in that You know, we process a large number of the world's shipments. And what that means is we know where a large number of the world's shipments are supposed to be days, weeks, and months from now. And the fact that that's in our network combined with IoT devices out there that continue to collect more and more information about what's going on out in the field, and then AI gives you the ability to sort through it very quickly and make good decisions considering everything you know right now. We think the guy that has the network that is the record of what's supposed to happen is in a very good position to help make modifications to those shipments, which would enable our customers to operate more efficiently. Something goes wrong on every shipment, it's really about what do you do about it. And to the extent we can use IoT and AI to figure out something went wrong and what we're going to do about it quickly, puts us in a very good position as the guy that's already managing the shipment to take advantage of that better than anybody else.

So we're excited about that in the long run. Great. Thanks, guys. Thank you, Jackson.

Thank you.

And your next question comes from the line of Chris Quintero from Morgan Stanley. Please go ahead.

Hey, Ed. Hey, Alan. Thanks for taking the questions, and really nice to be on the call here with you today. I wanted to ask on organic services growth. Is there any way you can kind of contextualize the impact from that record shipping volumes in the quarter? And what were maybe some of the softer areas that detracted from that and were a drag on organic growth?

Yeah, so we obviously estimate all these numbers and breaking down estimated organic growth. I think as Ed indicated in the prepared comments, we had some good strength in our global trade intelligence solutions. We had good strength in regulatory compliance solutions as well strong for us. We had some, you know, the volumes themselves, as much as they came back a little bit, we're still not at, you know, we're still in depressed levels of transactional volumes. So certain other transactional services continue to limp along a little bit, the flattish or even down slightly.

But those were the areas of strength that we had, those areas that we mentioned earlier.

Got it. That's super helpful.

And then I was wondering if you could update us on the restructuring and kind of how that's progressed versus your expectations so far and how you're thinking about that in context with your 10% to 15% EBITDA kind of growth targets.

Yeah, as we said last quarter when we came out, we started, we made some plans. We saw a change in some businesses, business product revenues, et cetera. And so we said we made some changes. We've implemented those plans for the most part. We're fundamentally complete on the restructuring plan. It's worked out pretty much as we expected. There's savings of approximately $2 million in the quarter. There'll be some additional savings as we get to a full quarter of run rate of savings from... from those changes. If we look back, we think we're unfortunate decisions, but decisions that had to be made given the weakness in transaction volumes that we were experiencing. So for the most part, complete the restructuring, and that's the kind of metrics as far as numbers.

Excellent. Thanks, Alan. Thanks, Chris.

Thank you.

And your next question comes from the line of Stephanie Price from CABC. Please go ahead.

Hi, good evening. Last quarter, you mentioned that you weren't seeing customers tripping their minimums on transaction revenue. Just wondering if that's still the case and what customers are kind of thinking about here and talking about in the current environment.

Yeah, thanks, Stephanie. Hi. No, I mean, the numbers ticked up, especially in the network this quarter. So we're not having a whole lot of discussions about people not hitting their minimums. You know, I think most of our customers are looking for help to figure out what to do about all the changes that are coming at them. And you can see our tariff businesses and some of our visibility businesses are doing very well as a result. And we had record sales in our subscription area this quarter. And I think that's a large part due to people going, all right, I know some, I have a little more certainty, but certainly it's still not enough. And what can they, you know, buy from us to help them figure out how to better manage through that. And, you know, the good news for us is, you know, even, you know, the network struggled a couple quarters ago. Now it's getting a little better. But subscription sales held up through all of that at a very high level because of what I just discussed there. People need more information to deal with the complexity and change just being thrown at them. And we're in an enviable position where we have a lot of other tools that can help them deal with that.

That makes sense. And then in your prepared remarks, you mentioned fraud prevention as a growth area. Just curious about the size of that fraud prevention business today and whether it's an area of potential future M&A. Okay.

It's not a gigantic business.

It's a little less than 1% of our business. It is an area that's growing nicely. As we pick it up and we have a whole lot more customers to bring it to, and it happens to be a hot topic right now. We're seeing it grow nicely, but still relative to the overall size of our business, it's still relatively small. As for acquisitions in that space, You know, maybe.

We'll see how this one goes, but it's looking all right so far.

Great. Thank you very much.

Thank you.

Thank you. And your next question comes from the line of Paul Draber from RBC Capital. Mark, please go ahead.

Hey, good afternoon, and thanks for taking the question. A question for you, Ed. Just, you know, what was the biggest surprise of the quarter compared to when you gave or you reported the last quarter? And then what are you looking to hear or see going forward that you give you more confidence in the underlying environment?

I'm sorry, this is going to be a very simplistic answer, but the pleasant surprise was that the networks picked back up. And what I'd like to see is that continue. And I know that's probably a vast oversimplification of it, but that is the biggest issue going on for us right now. We had, you know, what customers uh didn't know what was going to happen next they bought a lot of subscription services from us to figure out how they might handle those things and stop shipping stuff and uh then when they got a little more certainty they started shipping more stuff and that you know we get paid by the shipment so 30 percent of our business was you know not a whole lot we could do about it other than help our customers figure out what to do uh and you know that Turned around this quarter, as you can see in our numbers, and it performed very well. And what I'd like to see is that continue to answer your question. Whether or not, I don't know. They definitely got more certainty the other day on the 9th. You know, at least we know what's going to happen. And, you know, might that make people ship more stuff? Maybe. you know, then an appeals court judge kind of throws a little more uncertainty in it and says, hey, you know, I'm not sure Trump's allowed to do this. And I don't know that I buy that. And I suspect that's either going to be overturned by the Supreme Court, or even if it's not, the Trump administration is going to come up with five other ways to do the same thing. So, you know, what we're looking for is a little more certainty out of people, I think. I think most of our customers would say, I kind of don't really care what the tariffs are. I just want to know what they are, and then my competitors are going to have to pay them too, and we'll get going again and see what the consumer thinks of these new higher prices.

One of the things you mentioned is the pickup and services, sorry, subscriptions. I imagine a portion of that is related to the GTI business. Do you have a sense for how successful sustainable that uplift is? And do you expect it's sort of doing businesses is taking into account tariffs much more than companies have done in the past and using tools like your GTI to help manage it?

Yeah, that's playing a role in it for sure. I think once they buy additional countries and additional commodities from us, which is how the amount they pay goes up and is what's happened in most cases during this, let's say, last year of high tariff increases. I think they probably won't turn those things off. They'll probably keep them, so it's probably going to end up being a nice recurring revenue stream for us. And then you have the whole de minimis thing that, you know, we were wondering six, eight months ago if that was going to, you know, go well for us. And I think we've been pleasantly surprised that it went great for us. We were always a big provider. The customers started to say, hey, you know what? I'm just going to pay tariffs. I have plenty of consumers that are willing to buy this, whether this charge record is $3 or $3.50. I don't care. And I'll just pay the tariffs. And that put them in a situation where they had to do millions and millions of Type 1 and Type 11 filings, and we were prepared for that because of the number of filings we already managed. And fortunately for us, our competitors were not, and that shifted a lot of traffic our way for good, which is nice.

And thanks for taking the questions. Thank you. Thank you, Paul.

Thank you. And your next question comes from the line of Kevin Krishna Ratney from Scotiabank. Please go ahead.

Hey there. Good evening. Thanks for taking my questions. It's nice to see the continued strength in MacroPoint. I know you're doing well there even despite seeing declines in trucking. Can you remind us what's driving that strength? Are you winning share? There's other competitors like Fork Heights, Project 44. Maybe there's others. Are you winning share from them? the pricing, just sort of talk about what's driving the edge right there.

Largely winning market share from competitors in the past year. You can see the transportation volumes are relatively flat in the truck space, maybe even down in some months, some quarters. And yet we continue to go up every month and continue with a relatively high growth rate, considering that the market's otherwise flat. We have... And we spent a lot of time and effort on an ability to track every trucker that's out there. And we continue to spend most of our time and energy looking at the macro point business that way. That's because we're, you know, in our lifetime network operators. We understand the network effect. You have to have two people that want to talk to each other. And you have to be able to talk to both of them to get them communicating with each other. And we spent our time and energy on that, and I think some of our competitors spent a lot of time and energy building software that their customers told them to build that is of very little use if you can't get in touch with the trucker to track the shipment. And, you know, I think that's worked out very well for us in the MacroPoint business. You know, we have track rates, 14, 90%, and our competitors are nowhere close.

Yep, makes sense. Thanks for that. I appreciate it. The second question, good to see the sort of stability here, the 4% services growth, the transaction element help there. On the software side, you're positive on what's to come there. I know there's a lot of uncertainty, but at some point, I think customers might have no choice but to eventually buy and deal with the uncertainty. So is there any sort of underlying metrics that you're looking at, whether that's, you know, pipeline, demo activity, conversations with customers that you can kind of point to that's sort of, you know, maybe a leading indicator to what could be coming at some point? Thanks.

Thanks. No, I mean, I think we're going to know pretty soon. You're going to see it in the volumes. I mean, you know, if they... If they think there's enough certainty and they're going to, okay, here are the new tariff rates. They're probably going to stay in effect. Let me shift stuff without thinking about changing the tariffs. That's going to be great news for us. If they pause again or something new happens, you know, in the coming days that causes them to pause again, you know, that would be bad news for us. The subscription side continues to sell at a pretty rapid clip. We're pretty happy with that side of the business. It's just 30% that ends up in... You know, decrease bookings, decrease bills of lading, decrease status messages, decrease customs filings if there's, you know, uncertainty where they think maybe I shouldn't ship now. Or increases to all those areas if they think that, you know what, I know what the tariff rate's going to be, the same rate my competitors are paying, let's just ship the stuff, pass it on to the consumers and see how they react. And, you know, that would be the last thing. You know, how do consumers react to this over time? Now, that we're probably not going to know. It's not going to be a day in time where we know, hey, you know, this is over. We're going to have to watch for several months here and say, hey, the consumer's getting, you know, some item that, you know, is 15% more than it used to be. Do they still buy it? And if they do, I think we're fine. And if they don't, I think we're, you know, not just us, but everyone's headed towards, you know, towards recession.

I don't know how far it goes. And that's it. Yeah, thanks. Thanks, Pastor Lyon. Thank you.

Thank you. And your next question comes from the line of Franklin Brown from Rothschild and Co-Redburn. Please go ahead.

Hi, Ellen. Hope you've been well. The finale acquisition, could you talk to us about the competitive bidding process and how should we think about the relative multiples that you're paying for acquisitions in this environment when compared to prior years? And maybe if you just maybe more broadly talk to the strategic rationale and how it complements, dive into how it complements CellCloud.

Yeah, I mean, it's inventory management and, you know, to a lesser extent, warehouse management in that space. It's a good complement to CellCloud. That's why we bought it. There was some competition for it, but I'd say across all the deals we're doing now, there's less competition. There's less private equity firms showing up and things. A good friend of mine in the private equity business told me long ago, we're either buying or we're selling. We are never doing both at the same time. And I think right now they are all selling. They have investors that are clamoring, principals that are clamoring to get some of their money back and see if those multiples that they have on their books are actually accurate because they just keep telling them every time that they go up and up and up. And that's not always true. And so I think a lot of their principals are saying, hey, let's get some returns here before I give you more money. and uh we're seeing signs of that in the market they're selling assets versus buying assets it means they're putting more up for sale whether we buy them or not immaterial they put more up for sale there's only so many dollars available for everyone to buy companies with the more companies that are for sale the less uh people and uh companies that are you know looking at them are in the market and you know that's helpful for us uh Three, four years ago, it was us versus two private equity firms in every deal we were looking at. Now it's us versus maybe a private equity firm, maybe a strategic, something like that, but someone where we go, hey, we actually might be the guy that can make the most of this acquisition. We'd be willing to pay the most for it because the other people that used to show up and what we thought made bad decisions are no longer there. And so we're trying to take advantage of that as best we can. You see us doing more deals now probably than ever, so. That's good. I don't think we would have gotten a finale deal two years ago.

Somebody else would have overpaid for it.

Interesting.

That's very clear.

Thanks. And maybe another M&A question. I mean, AI was mentioned at the start of the call. So do you see acquiring AI-native technologies as a potential part of the AI strategy, or are you comfortable with capturing this organically through investing internally? I mean, we're, you know...

We always buy stuff if it has customers and profits and growing and things that our customers want. While we always consider should we build stuff on ourselves, usually that decision comes down to I think we'd be better off buying a profitable company that we think is going to be the winner in that particular space. I see a lot of AI functionality in our space right now that looks to me like features on products that we have, and those would be potential acquisition candidates. You said naked. I don't think you're going to see us buying any native or naked pure play AI tools that could be sold in other industries. We are focused on logistics and supply chain and don't really want to get out of that anytime soon. I'd also add that a lot of this AI stuff is, and you see these startups come out fast, a lot of it's pretty easy to do. So when we see a new idea, Whereas five years ago, we'd say, you know, I don't know that it's worth it for us to code that new idea into our system. We should buy a company to do it and merge them in. We can go further faster that way. I would say more frequently now, we are looking at some AI functionality and going, we can do that too. And it's not going to be that hard. And it's just a feature in a system like we have, and we should do that ourselves. And so, you know, we'll see what happens.

But I wouldn't be surprised if it was a little bit of both. Appreciate it. Thanks for the question. Yeah.

Thank you.

And your next question comes from the line of Jan Hsiao from National Bank. Please go ahead.

Hey, guys. Thanks for taking my question. On AI, some investors ask about the risk of, you know, day cards being disrupted by startups using AI to develop similar software, potentially take the market share. So from your perspective, what are some of the interim barriers to reduce that risk?

Well, you know, our network connectivity that connects to all these people, you can say you're going to do that with AI, but you've still got to create all the connections. And those connections change so quickly, and the mechanisms they use change so quickly. By the time you're done, you'll have to start all over again, and we don't. And that's a pretty big barren entry. There's all these governments that we file to that we have certifications in and tools that handle every little thing that make it hard for people to compete. You know, think about someone, if they want to compete with our network, you can't walk in and say, I can connect to these five trucking companies. That's not good enough. You need to be able to connect to everyone that we connect to. Or I have all this tariff data, but I have it from 20 countries. Boy, I've got it from 140 countries. Who do you think the customers want to buy this stuff from? uh i do customs filing i do it in three countries like great you know what my vendor does it in 100 countries so i want to do it with them because it's just easier i don't feel like signing up with 50 of you to get the same job done and those types of things are the barriers to entry dust uh and it's not like i just mentioned one there and i could go on and on and on about it too by the way so there's a lot of barriers to entry and they start to build up pretty quick and uh You know, you might be able to convince my mom you could do this quickly, but you're probably not going to convince our customers that you could do it pretty quickly. You know, it's a lot of work, and you have to be done all of it to put yourself in a position to actually be competitive with us. And, you know, at a high level, that's our barrier to entry. We've got a lot of stuff that you'd have to figure out how to do at the same time to steal customers from us. Let me add one more thing to that. just because I've been doing this a long time and watching it go down. You know, we have to stay on top of our game, and we always have, right? There's always going to be someone trying to do something that we do and trying to snake in and find some other angle to do it. And we have to keep doing a good job for our customers and looking at what we do for them and saying, how does this need to change over time so that we stay the leader here? And this is one of the reasons I like recurring revenue, because there's always a gun to our head to do that, because if the customer pays you every month, you better be the best solution every month. and uh you know i think it you could argue recurring revenue is really good for us but i also go it's really good for the customer too because you are when you're paying per month you always know that you're paying for the best solution because if you if you're not paying for the best solution you will switch to the best solution uh quickly uh when you get out of it you know relatively quickly because you're on a month-to-month basis everyone it's a little harder when you gave this guy 20 million dollars for your license to leave the sap system people get stuck on it because they put so much money into it and That pressure is always there for us. And I think it's healthy for us to have it too, right? We better be the best or someone will beat us and the customers will leave. And, you know, that's the mentality we have around here that's kept us on top for 25 years and hopefully for a lot more time to come.

Got it. Thanks for the color. So maybe you just want to revisit one of the earlier topics. So my understanding is there has been a rebound in freight ball in this quarter. which is a tailwind for you guys, but your service organic growth is flat quarter to quarter, and just curious what the offset is.

We were concerned that it was going to be going down, and the fact that it's 4% again this quarter and looking pretty good is something we thought was pretty good for our business under the circumstances. So I'm not disappointed in any way in the numbers. You put a spin on it, they made it sound like it's not good. As someone who's been working here for most of their life, I think what just happened was pretty good.

Okay. Sounds good. Definitely good to see the stabilization out there. Thank you so much, Papala. Thank you.

Thank you. And your last question comes from the line of Robert Young from Canaccord. Please go ahead.

Hi, good evening. Another de minimis question, if I could. I'm just trying to understand if the, I mean, I guess customers are swapping a type 86 for a type 1, type 2, or type 11. Is that a wash? Is it better than you expected? Or is this now a bigger business than it would have been under the previous de minimis? I'm just trying to understand that.

It was a wash. to start and that the customer said, hey, just pay me this. I'll just pay the same way. But instead of making a type 86 filing, you'll make these gigantic type 1 or type 11 filings, mostly type 1, by the way, with millions of records in it. Then the really good news happened for us, which was on top of that, our competitors struggled to process those transaction files with millions of transactions in it. We had a lot of experience doing this because we've been dealing with the likes of DHL and FedEx and UPS for a long time that have very large transactions in Type 1 and Type 11 filings. And our systems had the scale and scope to be able to deal with it, and our competitors did not. And, you know, they had a bunch of their largest customers come to us and say, I need to switch and I need to switch now. Show me you can do this. We did a day of filings for them, and they went, let's switch now. In fact, several of them talked about, like, let's switch over a couple weeks. And after day one, they called and said, we're going to switch everything to you tomorrow.

Okay. That's clear. Okay. And then the second question, maybe just a continuation of the volumes question. You said truck volumes were up quarter to quarter. You said the network was up. And I'm just trying to understand. I think you noted something about seasonality. Is that just holiday season build or is it – I mean, maybe you just parse that out a little better just to understand if that's something that – might continue to grow through the back half of the year.

Truck hasn't really grown. We just had growth in truck volumes because we continue to pick up business from our competitors in the macro point space. Otherwise, you know, Christmas season's upon us. That has different meaning in each of the modes of transportation. But in an ocean right now, you're seeing the Christmas deliveries getting ordered with the intention to get everything in in October or maybe early November. So we're going to know pretty soon here if the volumes continue. Still that looming China renegotiation, I don't know where that's going to go. I think our customers don't either, so they're probably going to try and sneak as much stuff in as they can before it happens. And truck and air, it's a little later, but same kind of things. Go on there.

Okay, thanks. That's fine.

Thank you, Robert.

Thank you. There are no further questions at this time. I would now hand the call back to Ed Ryan for any closing remarks.

Great. Thanks very much. I appreciate everyone's time tonight, and we will look forward to reporting back to you in three months with the Q3 results. Have a great night.

And this concludes today's call. Thank you for participating. You may all disconnect.