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The Descartes Systems Group Inc. (NASDAQ:DSGX) Q2 2024 Earnings Call Transcript

The Descartes Systems Group Inc. (NASDAQ:DSGX) Q2 2024 Earnings Call Transcript September 7, 2023

Operator: Good afternoon, ladies and gentlemen, and welcome to The Descartes Systems Group Quarterly Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions]. This call is being recorded on Wednesday, September 6, 2023. I would now like to turn the conference over to Scott Pagan. Please go ahead.

Scott Pagan: Thanks and good afternoon, everyone. Joining me on the call today are Ed Ryan, CEO; and Allan Brett, CFO. I trust that everyone has received a copy of our financial results press release that was issued earlier today. Portions of today's call, other than historical performance, include statements of forward-looking information within the meaning of applicable securities laws. These statements are made under the Safe Harbor provisions of those laws. These forward-looking statements include statements related to our assessment of the current and future impact of geopolitical and economic uncertainty on our business and financial condition; Descartes' operating performance, financial results and condition; Descartes' gross margins and any growth in those gross margins; cash flow and use of cash; business outlook; baseline revenues, baseline operating expenses and baseline calibration; anticipated and potential revenue losses and gains; anticipated recognition and expensing of specific revenues and expenses; potential acquisitions and acquisition strategy; cost reduction and integration initiatives; and other matters that may constitute forward-looking statements.

These forward-looking statements involve known and unknown risks, uncertainties, assumptions and other factors that may cause the actual results, performance or achievements of 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.

Ed Ryan: Thanks, Scott, and welcome everyone to the call. We had an excellent first half of the year with record financial results this past quarter. We're excited to go over those with you and give you some perspective about the business environment we see right now. But first, let me give you a roadmap for this call. I'll start by hitting some highlights of last quarter and some aspects of how our business performed. I'll then hand it over to Allan who will go over the Q2 financial results in more detail. I'll then come back and provide an update on how we see the current business environment and how our business is calibrated as we enter Q3. And then we'll open it up to the operator to coordinate the Q&A portion of the call.

So let's get started by looking at the quarter that just ended July 31. Key metrics we monitor include revenues, profits, cash flow from operations and returns on our investments. For this past quarter, we again had record performance in each of those areas. Total revenues were up 17% from a year ago with service revenues up almost 20%. Net income and EPS were up 23% and 19%, respectively. Income from operations was up 17% while adjusted EBITDA was up 12%. And we generated $52 million in cash from operations representing 86% of adjusted EBITDA. At the end of the quarter, we had $227 million in cash and we were debt free with an undrawn $350 million line of credit. We remain well capitalized, cash generating, debt free and ready to continue to invest in our business.

We believe a company like ours is well positioned to continue to thrive in market conditions like these, because we've got good organic growth plus the experience and capital capacity to execute on acquisitions. We had a good quarter of organic growth in our core services revenues, so I want to highlight some of the drivers of that. The first is just real-time visibility. Just a refresher on this, a large part of shipping is people moving goods on other people's assets, whether they be planes, trucks, rail or boats. There may also be intermediaries involved in arranging the shipments or making required filings, including freight brokers, third party logistics providers and customs brokers. With all those assets, modes of transportation, data sources, locations and parties involved, it can be challenging to know where a shipment is and knowing the location of a shipment and when that's going to arrive is critical to serving your customer and running your business.

Our visibility in transportation management solutions, which include MacroPoint, are increasingly important for our customers in this area. These solutions contributed to solid growth in the quarter for reasons including first, our solutions are better at tracking loads, customers pay based on the number of loads that are tracked by our solutions. So we're aligned with our customers on doing what we can to connect as many carriers and intermediaries as possible to get location information on loads. We've launched new carrier self-connect tools that have helped our customers get even more location coverage across their network of carriers. We've also made investments in customer success personnel to help maximize the number of loads with full visibility.

The outcome has been a greater percentage of loads tracked, better data, happier customers and strong growth. Second issue is we're winning more deals and seeing strong demand for visibility. The real-time visibility market is not without competitors. However, we're having good success at securing new customers and welcoming back some old ones, because our commitment to tracking the success. We have a broader network that's across more modes of transportation than our competitors and that's being recognized by customers as they choose the visibility solution for the future. Our customers often take comfort in our reliability, and that we're operating a business they know will be around to serve them for the long term. The third issue is visibility is embedded in more Descartes solutions.

Some customers come to us just for visibility, but others are using Descartes solutions and are looking to have visibility as an add-on to what they're already doing. Each time we expand our solution set including by way of acquisition, we look for how we can embed visibility into the new solutions to provide an easier mechanism for our customers to track their loads. We believe that our best source of business is often our existing expansive and supportive customer base. So we're making dedicated efforts to make visibility easier for those customers. Second big issue is routing, scheduling and mobile solutions and this contributed to our revenue success this quarter. These solutions are principally for when you're managing your own fleet of vehicles rather than hiring space on other people's vehicles.

We believe we're the most experienced company in this market and have the premier routing and scheduling solutions to offer. Our customers in this area have faced recent challenges including rising labor costs, challenges in security data, rising fuel prices, and customer demands for accurate delivery windows. This is contributing to strong demand with new customer projects and existing customers retuning their solutions. We've also been innovative in this market, which has contributed to our market leadership. We've recently launched a new generation route planning solution that has been rolled out with customers. And we've made investments in our solutions through acquisitions with safety solutions from GroundCloud and final mile delivery tracking from Localz, all factors that contributed to good growth in this area.

The third area is global trade intelligence. Once again, we saw good growth in the global trade intelligence solutions in our business. Those solutions generally fall into three buckets. The first bucket is competitive intelligence. Our data mine solutions provide information on trade flows, historical classification of goods, and other logistics and supply chain intelligence. This information can be used to help make decisions about your own supply chain, but also to see how competitive you are with other companies supply chains. Recent attention on efficiency of supply chains has helped drive demand in this area. In addition, our data is front and center in many leading business publications as a source for data about logistics and supply chains, which has also been a good demand driver for us.

The second bucket is tariff and duty data to make intelligent shipping decisions. We provide up-to-date data about tariff and duty rates and rules around the world, which can be used by leading global trade management systems to help run international supply chains. We've seen an increased level of changes in tariffs and duties principally as a consequence of geopolitical tensions and trade disputes. This has changed the design of many supply chains and has increased the importance of having accurate and timely information like ours. The third bucket is compliance. These solutions help our customers make sure they're not shipping things to people they shouldn't be. This may be to specific people, to specific countries, to specific geographies, or in some cases specific goods being shipped.

These restrictions have expanded and increased in complexity, as the geopolitical tensions have increased, and trade disputes have emerged. In addition, governments in the larger economies, like the United States, have increased the resources dedicated to ensuring compliance and have levied substantial financial penalties on firms not taking compliance seriously. We've continued to see good demand for these compliance solutions as a result. The next area is e-commerce. This continues to be a growing market and part of our business. We've made investments into these solutions with additional leadership and also by way of acquisition with our purchase of XPS within the past year. The parcel market has seen some recent challenges with labor challenges at UPS, changing service preferences at the U.S. Postal Service and FedEx restructuring.

However, our share in the market continues to increase as we work with partners to find the most efficient way for our customers to get their deliveries made. So good acquisition and organic contribution in the quarter. We're very happy with how the business performed in the quarter and in particular with the organic growth the business was able to produce, a few comments on our two most recent acquisition additions. The first is on GroundCloud. We combined with GroundCloud in February. GroundCloud is particularly strong in safety and compliance solutions that help identify safety incidents faced by drivers and provide responsive and targeted video training on challenges drivers face. They also help companies manage delivery obligations as they have subcontractors to other delivery brands, such as FedEx. This was one of our larger acquisitions.

And when we first combined, we indicated we anticipated some impact overall on our adjusted EBITDA margin, which we saw in Q1. We've made good progress on integration and actually saw a slight uptick in aggregate adjusted EBITDA margin this quarter, so we're hoping that bodes well for the future. Finally, FedEx has recently announced that it may increase the number of shipments that will move to the independent contractor network. So we saw some good initial improved demand for that. Second acquisition is Localz. This business provides final mile visibility on deliveries. So if you're used to watching your Uber driver or food delivery vehicle come down the street to your house, Localz technology replicates that experience for delivery of other goods.

This was a key investment in our routing, scheduling and mobile space, something our own customers need and they seek to provide a better delivery experience for their own customers. This investment was critical to some of our new customers trusting their fleet management to Descartes. Let me just summarize as I hand it over to Allan to give full financial details on the quarter. We had record financial results. The business performed well. And we believe that's a good reflection of the value that our customers continue to get from our solutions and the hard work that our team continues to put in for our customers. We ended the quarter with $227 million in cash, $350 million in available credit, and a market opportunity where we continue to grow the business for our customers both organically and through acquisitions.

We remain focused on profitable growth so that we can continue to ensure our customers have a secure, stable and growing technology partner that can help them with their challenges well into the future. Many thanks to all the Descartes team members for everything they've done to contribute to a great quarter and continue to have our business in an enviable position for future success. I'll turn the call over to Allan to go through our Q2 financial results in more detail.

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Allan Brett: Thanks, Ed. As indicated, I'm going to walk you through our financial highlights for our second quarter, which ended on July 31. We are pleased to report record quarterly revenue of 143.4 million this quarter, an increase of 17% from revenue of 123.0 million in Q2 last year. While revenue from new acquisitions, including the GroundCloud acquisition completed earlier in the year, as Ed just mentioned, contributed nicely to this growth, similarly to the first quarter and really the last several years, growth in revenue from new and existing customers from our existing solutions was the main driver in growth this quarter when compared to last year. Looking further at our numbers, our revenue mix in the quarter continued to be very strong with services revenue increasing 19% to 130.7 million or 91% of total revenue compared to 109.4 million or 89% of total revenue in the same quarter last year.

Services revenue was also up nicely sequentially increasing just over 5% from the first quarter of this year, as we continue to help our customers expand with new services and additional volumes. Removing the impact of recent acquisitions, on a like-for-like basis, we would estimate that our growth in services revenue from new and existing customers would have been just over 9% for the quarter when compared to the same quarter last year, similarly to the results we saw in Q1 this year. License revenue came in at 1.4 million or just 1% of revenue in the quarter, down from license revenue of 3.3 million in the second quarter last year, as we had a couple of larger than normal license deals closed in the second quarter last year while professional services and other revenue came in at 11.3 million or 8% of revenue, up approximately 10% from revenue of 10.3 million in Q2 last year.

This was mainly as a result of recent acquisitions, including GroundCloud. Gross margin for the second quarter was 76% of revenue for the quarter, pretty consistent with gross margins we realized both in the first quarter of this year and the second quarter last year. Operating expenses increased by approximately 19% in the second quarter over the same period last year, and this was primarily related to the impact of recent acquisitions, including GroundCloud but also from additional labor-related costs as we continue to invest in various areas of our business to prepare for future growth. So as a result of both revenue growth offset slightly by our planned cost increases in the business, we continue to see strong adjusted EBITDA growth of 12% to a record 60.6 million, up from 54.0 million in Q2 last year.

As a percentage of revenue, adjusted EBITDA came in at 42.3% of revenue, down from 43.9% of revenue in Q2 last year. And as mentioned in Q1, this is once again primarily related to the acquisition of GroundCloud earlier in the year as it came into Descartes with much lower EBITDA ratios than the rest of our business. We should note that our adjusted EBITDA ratio as a percentage of revenue did increase slightly in Q2 when compared to Q1 of this year, as we've already started to work at improving the profitability on the GroundCloud business consistent with our plans as Ed mentioned earlier. As a result of the above, net income under GAAP came in at 28.1 million or $0.32 per diluted common share in the second quarter, an increase of 23% from net income of 22.9 million or $0.27 per diluted common share in the second quarter last year.

If we look at our operating results for the first half of the year, the trends stay the same. Revenue came in at 280.0 million, an increase of 17% from revenue of 239.4 million in the first six months last year. For the six months year-to-date, adjusted EBITDA came in at 118.3 million or 42.3% of revenue, up just over 12% from 105.2 million or 43.9% of revenue last year. Net income for the six-month year-to-date period increased 25% coming in at 57.5 million or $0.66 per diluted common share compared to 46.0 million or $0.53 per diluted common share in the first half of last year, again, with higher operating profits being partially offset by higher tax expense. With these strong operating results and continued strong accounts receivable collections, cash flow generated from operations came in at 52.0 million or 86% of adjusted EBITDA in the second quarter, an increase of 12% from operating cash flow of 46.4 million or also 86% of adjusted EBITDA in the same quarter last year.

For the six months year-to-date, operating cash flow has been 100.9 million or 85% of our adjusted EBITDA, up 11% from 90.8 million in the first half of last year. And we should mention as always going forward, we expect to continue to see strong cash flow conversion and generally expect cash from operations to be between 80% to 90% of our adjusted EBITDA in the periods ahead, subject any unusual fluctuations or future changes and contingent consideration payments that we'll discuss later as I comment on our outlook for the second half of the year. So overall, we're once again pleased with our operating results in the quarter as strong organic growth and solid performance from our recent acquisitions resulted in 17% growth in revenue and a 12% increase in adjusted EBITDA for the quarter.

If we turn our attention to the balance sheet, our cash balances totaled 227 million at the end of July, an increase of approximately 45 million from the end of the first quarter in April. While we generated 52 million in cash flow from operations, we also used 6 million of our existing cash balances to complete an earn-out or contingent consideration payment on a past acquisition, while also adding 2 million in capital additions during the quarter. As a result, we currently have our 227 million of cash as well as a $350 million line of credit available under our credit facility available to deploy towards future acquisitions. So we continue to be well capitalized to allow us to consider all opportunities in our market consistent with our business plan.

As we turn our attention to the second half of fiscal 2024, we should note the following. After incurring approximately 3.4 million in capital additions in the first half of the year, we expect to incur approximately 2 million to 3 million in additional capital additions for the balance of the year. At this point, we currently expect the second half of the year we'll use approximately 22.8 million of our cash to pay additional contingent consideration payments on two acquisitions. While the entire 22.8 million estimated contingent consideration to be paid is now accrued for on our balance sheet, 12.7 million of this balance relates to the portion of the earn-out arrangements that were accrued for at the time of the acquisition and will be reflected in cash flow from financing activities while the remaining balance of approximately 10 million will be reflected in cash flow from operating activities when paid as a result of these acquisitions have been better than our initial expectations.

After incurring amortization costs of 30.2 million in the first half of the year, we expect the amortization expense will be approximately 29.8 million for the second half of the year, with this figure being subject to adjustment for foreign exchange changes and future acquisitions. Our income tax rate for the second quarter came in at approximately 27% of pre-tax income, which is right around our blended statutory tax rate. Looking into the second half of the year, we currently expect our tax rate will continue to be in the range of 25% to 30% of our pre-tax income, or somewhere either side of our statutory blended rate. However, as always, we should state that our tax rate may fluctuate quarter-to-quarter from one-time items that may arise as we operate internationally across multiple countries.

And finally, after incurring stock-based compensation expense of 7.4 million in the first half of this year, we currently expect stock compensation will be approximately 9.3 million for the balance of the year, subject to any forfeitures of stock options or shared units. And with that, I'll turn it back over to Ed to wrap up with some closing comments as well as our baseline calibration for Q3.

Ed Ryan: Great. Thanks, Allan. With Q3 a month in, we remain confident in our business but cautious about the broader economic circumstances and various statistics and commentary relating to the supply chain logistics markets. On the broader economic front, this continued high interest rates, pervasive conflict in Ukraine, labor availability challenges and various recessionary pressures and economic discussions. In the supply chain and logistics market, here's a few things we're noting. First is shipping volumes. Shipping volumes across various modes of transportation are below their pandemic highs and more closely tracking pre-pandemic trends. In addition, there are some current challenges such as the reduced flow through the Panama Canal caused by low water levels that could impact shipping alternatives.

The second is retailer inventories. This higher level of retailer inventories potentially impacting fall replenishment cycles, inventories aren't decreasing, implying retailers are matching demand with replenishment and potentially carrying more safety stock. The third is consumer demand. There's uncertain consumer demand coming into this peak buying season, in particular it's uncertain how spending habits will split between durable goods and services and experiences. Overall, U.S. consumer spending is still high, but there's caution as we approach the holiday season. The fourth is some capacity left the market. The U.S. truck market has seen some capacity come out of the market with the recent bankruptcy of Yellow. The market continues to adjust the post pandemic volumes and it's possible more capacity will leave.

In air, we're seeing capacity adjustments with less reliance on pure air freighters. With additional trade restrictions, there continues to be new restrictions announced principally relating to the war in Ukraine and in connection with burgeoning trade tensions between the U.S. and China. Some new restrictions have been announced with respect to investment in and trade in chip manufacturing, AI and quantum technologies. These restrictions can be positive for our global trade intelligence business, but can also impact freight volumes. There’s also labor challenges. Labor negotiations have created challenges for UPS, West Coast ports and Yellow and may impact other unionized supply chain players. Next are some logistics participants planning for a muted peak season.

General commentary from logistics participants is bracing for lower volumes in the second half of the year with some companies taking proactive cost reduction activities. This is illustrative of the pervasive sentiment of caution. And then finally, distribution of parcel volumes among larger players is uncertain. As I mentioned earlier, UPS has some labor challenges which may have resulted in some parcel buying cautiously being redirected to other players. FedEx has publicly indicated it will be moving more parcel volume to its ground division with independent contractors and away from its Express division using employees. The U.S. Postal Service has implemented various new service adjustments as it seeks to compete and Amazon has announced its reentering the parcel delivery business.

All of this combines to provide a very competitive environment with uncertainty as to how the volumes will shake out among the various providers. So those are some of the things we're hearing from our customers and seeing in our business, things that also inform our calibration for the quarter. Our business is designed to be predictable and consistent. We believe that stability and reliability are valuable to our customers, employees and our broader stakeholders. To deliver this consistency, we continue to operate from the following principles. Our long-term plan is for our business to grow adjusted EBITDA 10% to 15% annually. We grow through a combination of organic growth and acquisitions. We take a neutral party approach to building and operated solutions on our global logistics network.

We don't favor any particular party. We run our business for all supply chain participants, connecting shippers, carriers, logistics, service providers and customs authorities. When we over perform, we try to invest that over performance back into our business. We focus on recurring revenues and establishing relationships with customers for life. And we thrive on operating a predictable business that allows us forward visibility to our revenues and investment paybacks. In our Q2 report, we provided a comprehensive description of baseline revenues, baseline calibration, and there are limitations. As of August 1, 2023, using a foreign exchange rate of $0.75 to the Canadian dollar, $1.10 to the euro and $1.28 to the Great Britain pound, we estimate that our baseline revenues for the third quarter of 2024 are approximately $124 million and our baseline operating expenses are approximately $78 million.

We consider this to be our baseline adjusted EBITDA calibration of approximately $46 million for the third quarter of 2024 or approximately 37% of our baseline revenues as at August 1, 2023. We continue to expect the adjusted EBITDA operating margin range of 40% to 45%, our margins vary in that range given such things as foreign exchange movements and the impact of acquisitions as we integrate them into our business. Last quarter, GroundCloud impacted our margin while we started the integration work to bring it up to our desired Descartes contribution levels. The integration activities have gone well, we've already seen some margin improvement in Q2, and we're planning for some additional margin improvement going forward, absent any other acquisition activity.

We've got lots of exciting things planned in our business. It remains an uncertain broader economic and supply chain environment. But we believe our proven track record of execution, solid capital structure and customer focus will serve us well. Thanks, 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 turn it over to you for questions.

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Q&A Session

Operator: Thank you. Ladies and gentlemen, we will now conduct a question-and-answer session. [Operator Instructions]. Your first question comes from the line of Matt Pfau from William Blair. Your line is now open.

Matt Pfau: Great. Thanks, guys. I wanted to follow up on some of the comments you made about potential headwinds in the back half of the year here. How should we think about those in terms of the potential impact on your business? Part of your business is transaction based but it's not as simple as just being tied to shipping volume. So how do we think through the potential puts and takes there in terms of the impact on your revenue?

Ed Ryan: Well, as we've been talking about for a year or two now, we have a lot of things going very well in our business. And maybe it will be going better if at some point in the future, transportation transactions went down. We don't know what the future is going to bring. We're just running the business, looking at what's going on in the market and going hey, there's some uncertainty out there. So we'll see what happens. As you've seen in the past, transportation transactions have gone down and still performed very well. We do that because we sell a lot of software outside of that 60% of our recurring revenues outside of transaction-based volume. And even in the transaction space, we tend to be picking up more volume over the course of a quarter or a year because our customers are doing more business with us and as a result we end up doing pretty well even in the face of the industry having a lackluster time.

So we'll see what happens. I don't know what's going to happen in the rest of the year. We've heard different things, the same stuff you probably read in the paper. We'll see what happens, but we like our chances either way.

Matt Pfau: Great. And just wanted to follow up on MacroPoint. You called out that that's been an area of strength and performing well in a trucking environment that was oversupplied. How does trucking capacity coming out of the system potentially impact that? Is that anything material to think about?

Ed Ryan: That's interesting. That's actually one of the areas I think about when I made the comment a minute ago. MacroPoint continues to grow in a relatively flat truck environment, because it continues to pick up more and more customers and more volume from our competitors. I went over that in some of the prepared comments on the call today. But MacroPoint's a big beneficiary of that as people realize the importance of having a network and they value that over a flashy application, because we can track more loads, more and more customers are settling with Descartes because they're saying, hey, that's what's most important. My ability to put in 100 loads and be able to track high 80s, low 90s percentage of those loads is much more important than the visibility application I'm using myself. Most of the time, they're not even using an application to look at these things.

Matt Pfau: Great. Thanks guys for taking my questions. I appreciate it.

Ed Ryan: Thanks, Matt.

Operator: Your next question comes from the line of Paul Treiber from RBC. Your line is now open.

Paul Treiber: Thanks very much. Good afternoon. Just a question on the earn-outs. I don’t recall in the past you having this degree of earn-outs. What's changed now over the last several acquisitions that are leading to these earn-outs versus acquisitions in the past?

Ed Ryan: Yes, it’s an interesting question and you're right that several deals we've done in the past couple of years have done that. I think there was a -- you probably heard me talk about it on past calls, a rebalancing going on where everything was selling for high dollar volumes as everyone was booming coming out of the pandemic. When that started to slow down, companies were finding it hard to get people to pay up for acquisitions. An earn-out is one way to bridge that gap. We've used it effectively a few of the times. It's not really our first choice. We’d probably just pay cash for something and own the asset outright. But when there's a dispute about what the fair price is for something, we've used them to get over that hurdle and quite effectively, most of the time or in fact every time, we have an earn-out in a process.

We're very happy for that acquisition to get the earn-out because that usually means we bought a business that’s doing very well and probably going to do very well for us in the future. So we've used this. It’s probably not our first choice, but certainly something we've done when we think it's appropriate.

Paul Treiber: And then shifting to one of your more recent acquisitions, GroundCloud, you mentioned the integration go well and some margin expansion. How do we think about the long-term margin profile at that business? Do you think you can get it up to the company average margin profile?

Ed Ryan: We'll see. Our hope is to -- we bought it much, much lower than that. And our hope is to get it up as close as we can to that. I don't know if we have our sights set on the company average margin profile right now. But certainly, we'd like to get it up 10, 12 points, which will get it close.

Paul Treiber: That will be great to see. Just a last question just on the M&A environment in general. Your comments about the macro environment expressed a lot of caution. Are you seeing that caution still in the M&A environment in regards to the valuation?

Ed Ryan: I think we're starting to see it in pricing [ph] in some of the deals we've been doing now. We're getting more deals done now than we were six, eight months ago. So I think it's starting to settle itself out right now. And we will see what happens in the economy. If the economy gets worse, it's probably going to get easier for us to get stuff done. If it gets better, people might start saying I want more money for the companies I’m selling. So we'll have to see what happens. But we like what we see right now and have been able to get what we think are very high quality acquisitions done at a price we think we can make money for our shareholders.

Paul Treiber: Thanks for taking the questions.

Ed Ryan: Thank you, Paul.

Operator: Your next question comes from the line of Justin Long from Stephens. Your line is now open.

Justin Long: Thanks. And I guess to start building on that last question, it sounds like valuations on acquisitions have started to come down and you've talked about that the last couple of quarters or so. In terms of just deal activity, have you seen things pick up and maybe could you talk about your confidence in deploying capital in the back half of the year? I know there weren't any acquisitions in this most recent quarter.

Ed Ryan: Yes, I think that's right. I think we're starting to see prices come into what we think is a reasonable range. That's why we're able to get acquisitions done. And I think we're starting to see more stuff for sale. Again, if there was kind of a lag there for six months or so when no one knew what to do, I think it’s starting to open up now. We're starting to see the type of quality assets that we wanted at prices that we think are fair prices for them. And let’s see what happens. But hopefully that translates to the ability to get more deals done in the future.

Justin Long: Got it. And I know organic growth in the services business is what's most important. But Allan, could you share your estimate for all-in organic growth in the quarter? And maybe just going forward, Ed, how do you feel about the sustainability of the organic growth we've seen in that services business? It's held up really well despite a weak freight market. So just wanted to get a sense for your confidence in that continuing?

Allan Brett: Yes. So I'll take the first part of it. Overall growth was less than the -- just over 9% that we saw in services. We certainly saw a lower license quarter, as I mentioned earlier. We had larger licenses in Q2 last year. We’re back to the more basic sort of 1.4 million this quarter. Professional services and other revenue was also flattish, down slightly. So in around the 6% or so currency neutral for the entire business compared to just over 9% on services. Ed?

Ed Ryan: Yes. Thanks, Allan. With regard to sustainability, we'll see what happens in the long run. But in the quarters coming up here, we think we're in pretty good shape, right? We think we're running a strong business, some of the things I went over in the prepared remarks in the beginning of the call we think that puts us in a position to continue to have good organic growth in the business. I've probably mentioned this on past calls, but over the past seven or eight years, we've tended towards buying higher quality assets as we've been forced to pay a little more than we used to for stuff, we tended to pick higher quality assets with higher rates of growth. And that translated into us moving from the mid single digits before the pandemic to after the pandemic coming out in the high single digits. And we're going to do our best to stick in that range. And obviously, economy has some effect on that. But at the moment, we like what we see.

Justin Long: Great. Thanks for the time and congrats on the quarter.

Ed Ryan: Thank you very much, Justin.

Operator: Your next question comes from the line of Scott Group from Wolfe Research. Your line is now open.

Scott Group: Thanks. Good afternoon, guys. Ed, I think last quarter you were talking about ocean volume starting to improve and customers telling you maybe a little bit more normal inventory replenishment trends coming. Are they now saying something different? I just want to understand sort of what you're saying on the macro and more broadly just your views around like peak season, if you have any?

Ed Ryan: Well, I don't know yet. I've heard rumors that it's going to be maybe a muted peak season. I also see stuff going on with the Panama Canal, which probably for us it probably doesn't matter very much. People tend to find other ways to move the cargo which results in other shipments on our network. So it ends up being fine for us. But for our customers, if that's what you're asking, I think disruptions like that tend to cause them some troubles. I don't have a crystal ball on what's going to happen in Christmas season. I’ll probably tell you -- I'll know for sure at the end of next quarter. But the rumors I've heard is it might be a little muted, but I don't think it's something that's significant and certainly not something that's probably going to impact our numbers as much as maybe it might impact some of the ocean carriers numbers a bit. But I don't hear anything horrific going on. I don't hear anything spectacular going on either. So it looks the same.

Scott Group: Okay. And then you spend some time talking about the parcel carriers and volume shifts with UPS and FedEx and the post office. Does that matter to you? Are you agnostic to where the volume goes? I just want to understand the volumes.

Ed Ryan: Yes. We were trying to describe what was going on in the market for us. You're right. We're probably a little more agnostic to it. We do business with all of them. We like all of them, have good relationships with all of them. We're not trying to help pick winners in this. We just help service each of them. And there are times when some do better than others. There are sometimes when some move more freight to us than others. But in general, it works out, tends to balance out across all the larger carriers you mentioned.

Scott Group: Okay. And then just lastly, when I think about the step up in organic growth now versus pre-COVID, how much is price helping now? Even if it's not like real price, just nominal price to just keep pace with more inflation. Is that a meaningful contributor now to organic that maybe you didn't have in the past?

Ed Ryan: I'll let Allan comment a little bit on this, but I wouldn't call it meaningful, but it's there. Certainly we raised prices last year because of the high inflation. But Allan can comment on it.

Allan Brett: Yes. We're raising prices across the business, across our product lines. Despite that, the overwhelming majority of our growth is still going to be volume related. That's going to be consistent. So we're using price to offset the cost pressures we have. We should be doing that as a business. But for the most part, our growth is going to be heavily focused on volume doing more with new and existing customers.

Scott Group: Thank you, guys.

Ed Ryan: Thanks, Scott.

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

Robert Young: Hi. Just wanted to add to the very first question around transaction revenue not being as simple as just tied to shipping volumes. I think there's some transaction minimums on some of the contracts. Just maybe you can refresh that and how much protection that provides on weaker volumes?

Ed Ryan: Most of our contracts in the transaction space are done at a minimum of 85% to 90% of the normal volume that a customer has. That plays a role from time to time with individual customers. I think more importantly, we watch the transportation volumes. Our business continues to grow. And in tougher economic times we tend to have more companies hit our direction because they tend to shy away from the smaller guys when they get worried about people in this space struggling. So we’ve tended to pick up more volume then. When customers start hurting, they start asking everyone for discounts because we provide 10 or 15 different services to them. We have a lot to negotiate with and the potential to pick up more business from our smaller competitors that are not in a stronger position as us.

So as it happened in '08 and in the pandemic and a couple other times when we've had weaker economic times, and again I don't know that that's what we're looking at right now, we're probably looking at more of a muddled economic scenario right now. But in weaker economic times, we've tended to pick up volume in the face of our customers having less volume, and we come out of that stronger than ever and we tend to not have the same lows that maybe some of our competitors would have in transaction volumes, which is why when these things happen, you look at our numbers and say, why didn't they go down? And it's that plus the combination of other strengths in the subscription part of our business that continued to do well to this day.

Robert Young: All right. And then second one for me, you're talking about the impact of union agreements and a lot of change there. Does that have an impact on your customers’ willingness to invest in technology to improve the visibility or having the price of the delivery itself goes up, then you would assume that technology becomes a better way to seek efficiency? Is that something you’re seeing or does it just pressure volumes?

Ed Ryan: In the short term, it can pressure volumes. It can do things to our customers probably a lot more than it would to us. In the longer term, though, you're absolutely right. You've heard us say a number of times change in our business or in our customers’ business drives more success for Descartes and I think that's absolutely true in situations like this. The more of the supply chain disruptions and strikes, of course, are certainly one of them. The more you have people saying I need more information and I need more technology, so that I can do something about that next time it happens. And that plays right into our hand. We saw it in spades in the pandemic. It's probably 10 other scenarios I could walk you through in the past where that's really helped us, the tariffs, with Trump, and et cetera, things like that. And we're not looking forward to those changes, but when they occur, they tend to be a tailwind for us.

Robert Young: All right. Thanks for the question.

Ed Ryan: Thank you, Robert.

Operator: Your next question comes from the line of Raimo Lenschow from Barclays. Your line is now open.

Jeremy Campbell: Great. Thank you. This is Jeremy on for Raimo. I was just wondering if you could give a bit more color on how the trade intelligence segment performed in the quarter, and then just broadly your outlook there in terms of both organic investment and M&A around that business line. Thank you.

Ed Ryan: Thanks, Jeremy. Trade intelligence has been doing very well for several years now. Starting with the tariffs stuff when Trump became President, the nationalistic tendencies you saw around the world that caused maybe people to pay more attention to it. Ukraine-Russian war has also added to it as we see sanctions getting put on a number of parties and a big part of our databases there are sanctioned and right through to today. This business has been doing very well. And I think you asked if we continue to be bullish about it? We absolutely do. It’s one of our best performing businesses. It’s one of our most profitable businesses. It's one of the businesses where we think we help the customers the most in a very simple way. And, of course, if there were acquisition opportunities there, we would be excited about that because we love the business.

Jeremy Campbell: Got it. Thank you.

Ed Ryan: Thank you.

Operator: Your next question comes from the line of Kevin Krishnaratne from Scotiabank. Your line is now open.

Kevin Krishnaratne: Hi there. Good evening. You talked about some of the strength and the success you're seeing in visibility. You talked about winning new customers, but also bringing guys back in. I'm curious if you can remind us why customers might leave, while they're coming back. You mentioned some new products like self service tools. Just curious to know your thoughts there.

Ed Ryan: Yes. So over the past seven or eight years since we bought MacroPoint, there were a number of other players in that space that were spending a ton of money advertising, getting their name out there and launching themselves towards the moon, losing a ton of money while they're doing it without what seemed to us like without a whole lot of regard to that. I think over time, that helped them pick up some customers, right? You make enough noise and you spend enough money, you probably pick up some customers, but in the long run those customers start looking and saying, hey, who's the best provider here? And maybe it's not the guy with the name in the newspaper, maybe it's the guy that can track the most loads for me. And over time, I think we've been -- as a network operator, you expect us to focus on this.

Those guys focused on things like I just mentioned. We focused on getting more connections on the network. And as a result, we track more loads by a lot than our competitors do. And I think over time, the customers realize that's what's most important. And that's helped us get some competitive wins in that space.

Kevin Krishnaratne: Okay, got it. Thanks for that. Second question is e-commerce, a growing market. You made a bunch of acquisitions during the pandemic. Can you remind us how you guys think about that business in terms of the size, percentage of revenue, and maybe if you can give us some thoughts on the growth profile there? E-commerce industry wide seems to be trending back up after normalizing a year ago. Can you just comment on the e-commerce business?

Ed Ryan: Yes. We're big fans of the e-commerce business. We got in it seven, eight years ago, nine years ago now and continue to buy any asset in that space that we think would be a good fit for what we already do and with an ability to help us grow our network. It's about 10% of our business today. It's one of our faster growing businesses. And yes, we absolutely continue to like that business and think that as more and more people order stuff online, that business is going to continue to do well for us for the foreseeable future.

Kevin Krishnaratne: Got it. Just last one for me, Localz sounds it's doing well. I know that was more of an APAC focused business. Are you starting to sell that product into other dealers and customers?

Ed Ryan: We've always provided that service through third parties. And when we had a chance to buy Localz, we thought that was a great opportunity for us to be able to do that ourselves without paying a third party to do it. So that's what we did. And we're bringing it to all the jurisdictions that we operate in right now. It's a simple service, right? You order something and you want to see the truck driving to your house and you can go on an app and you can see where the driver is. That having been said, to someone who's trying to deliver furniture or something of that nature, it's very important that you're there when they come to make the delivery. And a mobile functionality like that really helps make sure that customers know when the truck’s coming so that they're there to get the furniture or whatever it is that they ordered from you.

So we want to make sure we're able to bring that experience to all of our customers. And now we're doing it in a way where we own the entire solution. So we're happy about that.

Kevin Krishnaratne: Got it. I appreciate the color. Thanks.

Ed Ryan: Thanks, Kevin.

Operator: There are no further questions at this time. Please continue.

Ed Ryan: Great. Thanks, everyone. I appreciate your time today and we look forward to reporting back to you next quarter. Have a great day.

Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.