The Descartes Systems Group Inc.

Good afternoon, ladies and gentlemen, and welcome to Descartes Systems Group quarterly results call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. If anyone has any difficulties hearing the conference, please press star zero for operator assistance at any time. I would now like to turn the conference call over to Scott Pagan. Please go ahead.

Thanks and good evening, everyone. Joining me in person on the call today are Ed Ryan, CEO, Allan 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 future and current 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 of revenues and incurrence of expenses, potential acquisitions and acquisition strategy, cost reduction and immigration initiatives, timing of management changes, the approval and potential share purchase under a normal course issuer bid, 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 SEC, 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. 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 in which any such statement is based except as required by law. And with that, let me turn the call over to Ed Ryan.

Thanks, Scott, and welcome everyone to the call. Today we're reporting record strong quarterly revenues and adjusted EBITDA. We're now ahead of our year-to-date plans and focused on a strong end of the year. We're excited to go over these results with you and describe how we're well positioned to help our customers in an environment where they're making many tariff and artificial intelligence investment decisions. But first, let me give you a roadmap for this call. I'll start by hitting some highlights of last quarter, some aspects of how our business performed, and how we're positioned to help customers. I'll then hand it over to Allan, who will go over the Q3 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 third quarter that ended 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 strong record performance in each of those areas. Total revenues were at a record high of $187.7 million, up 11% from a year ago. Record high services revenues were up 16% from a year ago with our continued focus on generating recurring revenues. Record net income was up 20% from a year ago. Record income from operations was up 24% from a year ago. Record adjusted EBITDA was up 19% from a year ago. Our adjusted EBITDA margin was up three points from a year ago to 46%. We generated a record high of $73 million in cash from our operations, up 22% from a year ago. So strong record results across all of these key metrics. At the end of the quarter, we had $279 million in cash and we were debt free with an undrawn $350 million line of credit. That included us using $37 million of our cash in Q3 to acquire Finale Inventory, an acquisition that we discussed on our September financial results call. We remained well capitalized, cash generating, growing, and ready to continue to invest in our business. Our principal growth drivers in Q3 were largely the same as I've described in detail in past quarters. They are as follows. First, global trade data and intelligence. It remains a chaotic tariff and trade environment for our customers. In the last 90 days, our customers have seen these significant changes. One, a truce on tariffs between China and the U.S., extending the tariff status quo while negotiations continue. Two, tariff expansions on metals. Copper, Timber, and Furniture. Three, tariff relief for foodstuffs. Four, new reciprocal trade agreements between the U.S. and countries like Argentina, Switzerland, and Malaysia. And five, the implementation and temporary pause and enforcement of BIS 50, a regulation that expanded the number of denied parties that the U.S. entities needed to screen against. We continue to be a provider of choice for our customers for tariff data, sanctioned party assistance, and research on trade flows. We help our customers keep their business flowing and help them plan for tomorrow. When things are changing rapidly, they rely on us for timely and accurate updates. In Q3, the changing trade environment provided strong demand for our solutions. Second is foreign trade zones. The uncertain trade and tariff environment has many of our customers needing more of our help to find the most efficient way to import goods. One mechanism that's being investigated by more of our customers than ever before is foreign trade zones, or FTZs. These are designated spaces for U.S. companies to import goods on a tariff and duty-deferred basis, only triggering payment when the goods are removed from the FTZ for shipment into free circulation. There's a detailed regulatory regime to manage these FTZs, including keeping track of everything flowing in and out of the FTZ and regular government reporting. However, with heightened and uncertain tariffs, it has become an effective way for our customers to manage their imports and cash flow. We've seen higher demand for our FTZ solutions than in previous years, and that was a good driver again this quarter. The third is e-commerce customs clearance. Earlier in the year, the U.S. eliminated the de minimis exemption, which allowed foreign companies to ship goods duty-free to U.S. customers where the value of the goods was less than $800. With that exemption gone, foreign e-commerce sellers needed to adapt to a new regulatory structure with new filings and submissions of tariffs. To do this, these sellers and their brokers need solutions that can handle large volumes and velocities of shipments that interact with U.S. customs and get goods cleared quickly to prevent delivery delays. We have market leading solutions to help these high velocity importers and it was a strong driver of growth in the quarter. The fourth is real-time shipment visibility. Shippers and brokers want real-time visibility into the location of shipments in transit. Shipment tracking is an expected part of the consumer experience, so this is critical information for customers. In the business-to-business environment, shipment tracking allows for better planning on preparing delivery resources, whether they be loading dock doors or human resources on loading trucks. Getting accurate location information isn't always simple, particularly in the truck market. as many smaller independent truckers may not have the technology to provide automated location information. However, our MacroPoint solutions are the best at getting tracking information, leveraging carefully designed mobile applications and artificial intelligence agents. This market leading tracking rate led to continued strong network performance by MacroPoint in the quarter. So similar revenue drivers to previous quarters have contributed to our record revenue performance this quarter. When combined with the cost rationalizations effort we undertook earlier this year, we also had record operating performance. Next, I want to talk about artificial intelligence because it's becoming a bigger and bigger part of our business. I mentioned artificial intelligence helped our MacroPoint business, but I wanted to take a bit more or talk a bit more about how AI impacts Descartes overall. First, let me give some context for when you're thinking about Descartes and AI. Descartes is a network business with a huge network infrastructure. We run the global logistics network. We're built by connecting huge numbers of shippers, carriers, governments, and logistics intermediaries together. We are not an enterprise software business. Logistics and supply chain problems are not enterprise problems. They are intra-enterprise problems and challenges. To solve them, you need data from multiple external sources, and that's what we do. We transmit and house massive amounts of data. We help our customers source trusted, clean, formatted, and real-time data because that's what's most valuable to them. So the questions I've been getting from shareholders, analysts, and others is what's the impact of artificial intelligence on Bichart's business? The answer is that the impact is overwhelmingly positive. I'll talk about this in detail, but in summary, AI increases demand for our data and decision-making tools. Our customers want massive amounts of clean, formatted, real-time data to help them make decisions on our own network or to power their own AI investments. Data is the fuel for AI solutions. That data needs to be from a trusted source. Everyone knows poor data can lead to poor decision-making and execution. AI allows us to offer new solutions and services leveraging our network infrastructure and data, and AI allows us to run our network and business more efficiently. Now, let me go into a A bit more detail. The first, GLM data powers AI. AI tools massively speed up the pace of automation for our customers. With AI agents or agentech AI, we expect that most of our customers will eventually be running some form of AI tools to automate processes within their business. These AI tools are powered by data, businesses that will be The most successful with AI are the ones that can train their tools with enormous amounts of current and clean data. In the supply chain and logistics world, that means that our customers' AI strategies and successes rely on getting more clean data from their trading partners. Our customers need information about things like the location, schedule, and amounts of resources not in their control, including inventory, vehicles, vessels, and people. This is why AI makes Descartes Global Logistics Network even more important for the customers. The Global Logistics Network helps our customers get massive amounts of real-time data from an enormous number of global trading partners, delivered in a clean manner that can power AI tools. The scale, reach, and global nature of Descartes Network has never been more important to our customers. Descartes is a network business. We get paid as we help customers get and process more data. We believe that AI is a huge potential tailwind in demand for our global logistics network. The second is that the GLN data includes the collective intelligence of the network. We expect that our customers will use AI to answer questions about how to best run their own businesses. And the power of AI may mean that they'll be able to answer questions that they haven't even thought of asking yet. But some of those questions will be best answered using the collective intelligence of data available on the Global Logistics Network. Think of it as the difference between predicting the traffic patterns on a particular road using only vehicles in your own fleet compared to being able to get a better answer for traffic patterns using the vehicles of every participant on the Global Logistics Network. Or the difference between responding to a shipment delay by limiting yourself to one airline you've worked with versus every possible alternative with an air carrier available over the global logistics network. Collective intelligence available over a massively scaled network matters when you're solving inter-enterprise solutions, and that collective intelligence is another data source that powers AI for our customers. The third area is the GLN fuels AI with real-time information. Further, the most successful businesses will power their AI with current information so that the answers they get aren't stale. For that, our customers really need real-time and constantly updated information from a trusted source dedicated to data, and that's what the Global Logistics Network provides. We're processing shipment moves and getting location information in real-time. We're quickly updating compliance rules, sanction parties, tariff rates, trade agreements and regulations, shipping rates, and schedules. We live, eat, and breathe supply chain and logistics at scale, and we believe that's even more powerful business in the AI world. So we believe that just the fact that our customers want to use AI increases demand for the global logistics network, but AI also allows us to make meaningful changes in the services and value we deliver to customers, and also in how we make our own operations more efficient and effective. Next area is AI enables new GLN services for our customers. We recently ran an internal employee AI Descartes hackathon with exactly that goal in mind. What are our employees' ideas for using AI to deliver more value to customers or making our business more efficient? We had overwhelming employee interest and participation with more than 50 new suggestions for projects, and this is in addition to the projects we've already completed or have underway. Generally, we leverage AI for customers in two ways. One, by delivering new automated services that were too expensive or challenging when they were manual. And two, by allowing our customers to leverage the large amounts of data on the GLN to get better or faster answers that can help them manage their business. An example of new automated services include using a Gentech AI with our MacroPoint business. MacroPoint helps our broker and shipper customers get location information on in-transit shipment. Oftentimes, we can get this information from direct data feeds to vehicle telematics or trucking company transportation management systems. However, there's still a substantial number of small and or independent truckers that don't have those technological capabilities. Having a staff of hundreds of people to call these trucks and ask them where they are just isn't economically feasible for our customers. However, with the Gentech AI, we can work with them to download and use our mobile app or automate inquiries to truckers and get more tracking information for our customers much more efficiently. In just a few short months, we've had more than 300,000 outreaches using our AI agents, resulting in more than 180,000 drivers joining the MacroPoint network. The result is happy customers, more billable track loads for our customers. So it's a great example of an enhanced service that just wasn't feasible before AI automation came to the table. Some other things that already got underway for our customers. Natural language searches of our GLN datamined U.S. import information and faster results to get competitive intelligence. Automated logic in the nine-party screen to deal with challenging match scenarios on parties with ambiguous names and addresses. This allows customers to process large shipment volumes more quickly. Free Trade Eligibility Assessments Using AI Recommendations Based on Past Practices Helping Our Customers Reduce Their Tariff Bill Automated Tariff Classification Suggestions for Goods Using AI Agents to Interpret Lengthy Carrier Rate Agreements and Present Optimal Selection Recommendations And finally, Leveraging Actual Historical Delivery Service Times for Particular Businesses to Allow for Better Planning Decisions AI also allows us to run our own network more efficiently. AI allows us to make our own internal operations more efficient by automating tasks, minimizing human error, and enabling oversight and analysis that wasn't previously possible. For us, AI can help us with these areas, such as enhanced network security as we deploy tools to monitor, target, and even counterattack malicious activity. More intense network performance monitoring to minimize service disruptions. Code development by providing engineers with a running start with suggested code and development or maintenance of services. This is something we're already seeing great benefit in. And finally, automated and self-serve customer service, leveraging the enormous amounts of product documentation that we produce. So AI is a great opportunity for Descartes and for our global logistics network. We believe it will spur further demand for our trusted, real-time, clean, formatted GLN data, and the collective intelligence of the network. It's already allowing us to deliver additional value to our customers with enhanced services and it's helping make our business more efficient. We believe that the inner enterprise scaled network infrastructure of our business puts us in a much better position to benefit from AI than legacy or emerging point or enterprise technology solutions. To sum up before I hand it over to Allan, Q3 was a very strong quarter for us. and others. Trade and tariff uncertainty fueled demand for many of our services. We saw AI have a meaningful impact on our service delivery to customers, and we completed an acquisition in our e-commerce pillar that's already contributing. An excellent job all around by our Descartes team. I'd like to touch on one other item outlined in our press release today, and that is that we're planning on a CFO transition after the end of this fiscal year. Allan has decided that after More than 30 years as a public company CFO, including 12 at Depart, he wants to take steps towards retirement. So Allan will be handing things over to Ed Gardner in March 2026, consistent with our established CFO succession plan. Allan is going to stick around in the business as an advisor to help us with the CFO transition and also more generally to keep helping our business grow. It continues to be a great privilege to work with Allan. He cares for the business a ton, which I think is reflected in his desire to stay involved with the business going forward. We're also thrilled to have Ed Gardner ready to assume the CFO role, someone that I've worked with for more than 20 years and that Allan has worked with over his entire 12-year stint at Descartes. Ed has a ton of financial experience with our business and the many acquisitions that we brought on board and will likely already be a familiar face to many shareholders and analysts. With Allan and Ed's long working relationship together, we expect a seamless transition in March. So those are our plans for the future, but we still have Allan in the saddle until March. So now I'll turn the call over to him to go through our Q3 financial results and more to tell. Allan?