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Presentation

Operator: 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. [Operator Instructions] This call is being recorded on Tuesday, December 3, 2024. I would now like to turn the call over to Mr. Scott Pagan. Please go ahead.

Scott Pagan: Thank you, and good afternoon, everyone. Joining me remotely on the call today are Ed Ryan, CEO; and Allan Brett, CFO. And I trust that everyone has received a copy of our financial results press release that was issued earlier this afternoon. 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 and economic uncertainty on our business and financial conditions, Descartes’ operating performance, financial results and condition, Descartes’ gross margins and any growth in those gross margins, cash flow and use of cash, business, 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: Great, Scott. Thanks, and welcome, everyone, to the call. Today, we’re reporting record third quarter results, continued strong revenue and adjusted EBITDA growth and two new businesses that have joined the Descartes team. We’re excited to go over these results with you and give you some perspective about the business environment we see right now. But first, let me give you a word map 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 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 as we entered our fourth quarter 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 quarter that ended on October 31. Key metrics we monitor include revenues, profits, cash flow from operations, operating margins and returns on our investments. For this past quarter, we again had very good performance in each of those areas. Total revenues were up 17% from a year ago with services up 15% from a year ago. The organic growth in our total revenues in this quarter is about 10%. Net income was up 38% from a year ago, with adjusted EBITDA up 14% from a year ago. Our headline targets are 10% to 15% adjusted EBITDA growth per year and we’re at 15% over the first 3 quarters of this year. Adjusted EBITDA margin held at the same rate as last quarter at 43%. And — However, as we talked about last quarter, Q2 and Q3 had unique items that impacted this margin.

Our GroundCloud business entered an accelerated hardware replacement cycle with our customers in Q2 to get AI-enabled cameras in place. This resulted in more low-margin hardware sales to customers in Q2 and Q3, and — changing the revenue mix and impacting the margin. The hardware replacement cycle is now done, so we anticipate this drag on margin won’t be there in Q4. The core Descartes business and margin is otherwise performing as we’d expect. Allan will speak to this in more detail later on the call. We also generated over $60 million in cash from operations in Q3 or 83% of adjusted EBITDA, in line with how we would expect the business to perform. At the end of the quarter, we had over $180 million in cash, and we were debt free with an undrawn $350 million line of credit.

This is after we used about $22.5 million to acquire MyCarrierPortal and paid $110 million to acquire Sellercloud. We remain well capitalized, cash generating, growing and ready to continue to invest in our business. Our growth strategy remains one of total growth. We’ve designed our business to be a profitable business that generates cash and can otherwise be reinvested to improve the business for our customers and stakeholders. We consider where to invest based in part on the returns we can generate in our invested capital. Our plans for our year are based on growing our business 10% to 15% a year through a combination of organic and acquisition activities. Speaking of acquisitions, we’ve completed five so far this year. We bought OCR and ASD in Q1 and bought BoxTop in Q2.

We then combined with MyCarrierPortal and Sellercloud in Q3 and I just wanted to comment on how these acquisitions have fit in and are contributing. So first, we combined with OCR in March of this year, OCR are experts in sanctioned party screening and export compliance, a key part of our global trade intelligence offerings. For clarity, sanctions are when a government puts a restriction on doing business with a particular party, jurisdiction or country, while broader export compliance includes securing the necessary licenses and other permissions to export a particular control item to a person or country. OCR complements our existing strong screening solutions, but makes us even stronger by adding advanced export compliance technology that can serve some of the biggest companies in the world.

OCR has hit the ground running for us and is the head of our integration plans. We’ve added a broad base of industry knowledge in India that is already contributing to our broader global intelligence solutions. We’ve had some sizable joint wins in each quarter since the acquisition and market conditions are such that it’s even more challenging environment for our customers to comply with the current situation and plan for future rumored restrictions on global trade, in part driven by statements made by the new incoming Trump administration in the United States. For the time ASD deal that we completed in Q1, their business is focused on European customs and security filings with particular strength in Ireland. They also do asset tracking for airlines.

This business is also performing ahead of our plans with deliberate work done on integration. We think there are some good potential tailwinds for this business with potential increased scrutiny from Europe on cargo security on airlines, something that may be addressed through an additional data and filing requirements and asset tracking. In Q2, we combined with BoxTop, a business we had a track record of working with as a partner long before the acquisition. BoxTop has shipment management solutions for small and midsized logistics service providers the same customer base that makes up a large percentage of our customers for our forwarder and broker solutions. BoxTop’s integration and contribution is ahead of plan. It’s also well placed to help this customer base as the cross-border trade environment threatens to become more complex.

In Q3, we bought two new businesses. The first was our combination with MyCarrierPortal in September. MyCarrierPortal helps U.S. freight brokers with risk management of the thousands of truck carriers that they deal with. Their platform also allows the brokers to evaluate the risk of working with the carrier based on a number of factors, including licensing, past service record, safety, potential fraud risk and insurance compliance. This is a natural fit with our MacroPoint business where we’re helping freight brokers track loads and identify potential available capacity. We think this is a natural fit for our business with our best experience with screening and compliance solutions combined with our market-leading domestic truck business. We only had a partial quarter with MyCarrierPortal so far, but already have profit contribution ahead of our expectations due to the hard work of the teams to rapidly get our businesses working together.

We were able to get the combination completed before our innovation forum/user group that we held for this customer base in Chicago, and it was great to hear the endorsement of the broker community for this solution, becoming part of the Global Logistics Network portfolio. Welcome to everyone from the MyCarrierPortal team. In October, Sellercloud joined the Descartes family. This is a great addition to our e-commerce solutions, essentially filling a hole that we had in our solution set Sellercloud focuses on inventory and order management for e-commerce sellers, who are using multiple channels to sell with particular strength with small and mid-market e-tailers. Our existing solutions are focused on the warehousing, shipping of e-commerce orders, but by adding inventory and order management, we can offer a more comprehensive suite to our customers that’s flexible as they grow and add new sales channels.

We’ve already seen great post-deal success in getting customers signed up for a combined Descartes Sellercloud solution, so we’re optimistic of achieving our growth plans for this business. As with MyCarrierPortal, it’s encouraging to hear the industry and customer community confirm the sensibility of our business coming together with Sellercloud and it’s also an endorsement of the strong work that our entire organization puts into our corporate development efforts. Welcome to the whole Sellercloud team. We look forward to achieving great things with you together. I mentioned that our customers are facing some big challenges in managing global trade and are facing heightened uncertainty for what the future global trade landscape will be. Let me just hit a few of the items shaping the market environment right now.

The biggest source of uncertainty has been the comments from the incoming Trump administration about the potential for the imposition of tariffs by the U.S. on imports from China, Canada and Mexico as well as other broad-based sanctions. These tariffs and sanctions may force U.S. businesses to restructure their supply chains and logistics operations with the potential for movement of manufacturing and sourcing facilities, changes in trading partners heightened scrutiny and sanctions on particular goods and countries and the potential for retaliatory sanctions and tariffs by other countries. We’re already helping our customers with information and planning, and we expect that our global trade intelligence businesses will be very busy over the coming months.

We’ve seen good volumes in Air and Ocean, but have seen fairly flat volumes in U.S. trucking. Ocean, in particular, has seen very high levels with larger amounts of imports into the U.S. and Mexico from China. There’s a couple of things we’re monitoring for volumes as we enter Q4. First, the seasonal impact of peak holiday buying periods, which we expect will be more visible in air and truck because of their shorter transit times. Second, with the potential for new tariffs. We’ve heard commentary from many U.S. businesses that they’re bringing inventory in early to get ahead of the potential new U.S. tariffs. Progress security issues are front and center, particularly with parcel air cargo in Europe. Earlier this year, there were incidents with explosive devices and parcels that made their way on to European carriers.

Some carriers responded by refusing to ship certain parcels containing electronics. Regulators have also intervened requiring more information about cargo shipments on a plane before the plane takes off, including the new requirement of an identification of the underlying shipper of the package rather than just the intermediary shipping package. Our customers are committed to helping ensure that there is cargo security to minimize the chances of catastrophic events, but there’s also a burden that our customers are having to bear right now as they reengineer their processes and information gathering practices to help comply with the new regime. Labor uncertainty continues to impact our customers’ ability to plan, U.S. East Coast and Gulf ports have had a labor contract that expires again in January.

Canadian ports had just dealt with strikes where the government legislated people back to work and Canada Post is currently on strike impacting many e-commerce deliveries into Canada, all just examples of how our customers have to plan for the reality of labor unrest that will impact their fulfillment operations. I’ve mentioned this in past quarters, but we’re a business designed to meet challenging business conditions in thriving periods of change. We focus on total growth and try to diversify our business. We grow organically and by way of acquisition. We’re diversified across all modes of transportation. We provide business value across seven solution pillars. We have over 26,000 customers with low customer concentration. We serve all parties to supply chain and logistics transactions, carriers, logistics service providers, ports, governments and shippers.

We serve customers on a global basis with a global workforce. We believe that all of these levers to our business provide us with many opportunities to help manage our business through prosperous and challenging times. Descartes is a business our customers rely on, that our team can be proud of and that our stakeholders have rely on consistently to deliver. Descartes has done that again this quarter. I’ll just finish up my comments by referencing some of our recent marketing activities. A few months ago, we held some Descartes innovation forms. These are essentially user groups that are focused on particular solution pillars. The recent innovation forms focused on private and for higher transportation management and serving the logistics provider community.

These innovation forms for select pillars have greater participation than our pre-pandemic user groups that we held for our entire business as a whole. We’ve also hosted some recent online events relating to global trade intelligence, trade compliance and tariffs and duties. These also had record attendance. While the increased attendance can partially be explained from our growth of the company, I think the interest we’ve seen in these events reflects the extreme need for help and information that our customers have right now. Nothing is constant for our customers, and they’re having to be very dynamic and radical in meeting the challenges facing their supply chain and logistics operations. Supply chain and logistics roles at our customers’ business continue to have heightened importance and the potential upcoming changes to global trade are unlikely to change that.

Our mission is to help our customers manage this complexity, and I believe we have a track record, people and solutions and expertise to help them not just survive, but to thrive. So let me just summarize the handover Allan to give the full financial details in the quarter and year-to-date. 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, the quality and contribution of acquisitions we’ve added to our business and the hard work that our team continues to put in for our customers. We ended the quarter with more than $180 million in cash, $350 million in available credit and a market opportunity where we can continue to grow the business for our customers, both organically and through acquisition.

We remain focused on profitable growth, so that we continue to ensure that our customers have a secure, stable and growing technology partner that can help them with their challenges well into the future. My thanks to all Descartes team members for everything they’ve done to contribute to a great quarter and a great business. With that, I’ll turn the call over to Allan to go through our Q3 financial results in more detail. Allan?

Allan Brett: Thanks, Ed. As indicated, I’m going to walk you through our financial highlights for our third quarter, which ended on October 31. We are pleased to report record quarterly revenue of $168.8 million this quarter, an increase of 17% from revenue of $144.7 million in Q3 last year. While revenue from acquisitions completed in the past 12-months, including the acquisitions of both MCP and Sellercloud completed during the third quarter contributed nicely to this growth. Similar to the past several years, our growth in revenue from new and existing customers from our existing solutions also helped drive growth again this quarter when compared to the same period last year. Looking at our revenue details further. Our revenue mix in the quarter continued to be strong, with services revenue increasing 15% to $149.7 million, compared to $130.4 million in the same period last year, representing approximately 89% of total revenues in the third quarter.

License revenue came in at $3.5 million or 2% of revenue in the quarter, up nicely from license revenue of $1.5 million recorded last year in Q3. While professional services and other revenue came in at $15.6 million, up 22% or coming in at 9% of total revenue compared to $12.8 million in the third quarter last year. As Ed mentioned, similar to last quarter, we had some additional hardware revenue this quarter from our GroundCloud business as we continued the rollout of AI-enabled cameras as part of a specific mandate that FedEx gave to their independent contractors. In Q3, this added approximately $3.5 million of very low-margin hardware revenue. While also, at the same time, expanding our base of subscription customers in GroundCloud, which should benefit our subscription revenue from this part of the business in the quarters and years ahead.

We should also highlight that after recording unusually high hardware sales in Q3 and — Q2 and Q3, we would expect that hardware sales in GroundCloud and our business in total will return to a nominal amount in Q4 and remain at those lower levels going forward. Based on the above, we would estimate that our total organic growth for the business came in around 10% for Q3, while organic growth in just services revenue came in at around 7%, pretty consistent with the second quarter of this year. For the first nine months of this year, revenue came in at $484 million, an increase of 14% from revenue of $425 million in the same period last year. Again, with revenue from acquisitions completed this year, as well as organic growth in our existing solutions, both driving this 14% growth.

Gross margin came in at 74.4% of revenue for the third quarter, down from gross margin of 76.3% in the third quarter last year, and this temporary decrease in margins is due to the impact of the very low margin hardware revenues that were recorded in the GroundCloud business that I just mentioned earlier. Excluding these hardware revenues, our gross margin percentage would have been very similar to the third quarter last year. Operating expenses increased by approximately 14% in the third quarter over the same period last year, and this was heavily related to the cost impact of the five acquisitions completed this year. But operating costs also increased some from some head count additions that we completed as well as some higher marketing costs, including the costs from our successful innovation forums, customer events that were held earlier in Q3, as Ed referenced earlier.

So as a result of both revenue growth, offset with some unusually higher cost increases this quarter, we recorded adjusted EBITDA growth of 14% to a record $72.1 million or 42.7% of revenue, up from $63.5 million or 43.9% of revenue in Q3 last year. We should also mention as a reminder that similar to Q2, our adjusted EBITDA margins are down slightly from Q3 last year due to the impact of the low-margin hardware revenue recorded in the quarter, but also partly due to the impact of lower margins from some of our recent acquisitions. Excluding the impact of the hardware revenue in GroundCloud, as well as these acquisitions, adjusted EBITDA margins would have been right around 44% of revenue or just slightly ahead of where we were in Q3 last year.

For the first three quarters of the year, adjusted EBITDA has increased by just over 15% to $210 million from $182 million in the same period last year, with adjusted EBITDA ratios increasing to 43.4% from 42.8% last year. Looking at the other GAAP line items on our income statement this quarter. Other charges decreased to $1.8 million from $9.7 million in Q3 last year. As last year, we included an accrual of $7.8 million in other charges related to higher-than-expected earn-out payments on past acquisitions. As a result of the increased operating profits and growth from the business, and this decrease in other charges, net income came in at $36.6 million or $0.42 per diluted common share in the third quarter, up nicely from net income of $26.6 million or $0.31 per diluted common share in the third quarter last year.

We should also note that the income tax expense for the third quarter came in at $11.9 million or 24.5% of pretax income, which is slightly lower than our blended statutory tax rate of 26.5%, mainly as a result of the recognition of certain unrecorded tax benefits from past periods. Net income for the nine-month year-to-date period was $105.9 million or $1.21 per diluted common share, compared to $84.1 million or $0.97 per diluted common share last year in the first nine months, again, as a result of the higher operating report profits from our growing business. With these operating results, strong AR collections, offset partially by higher cash tax payments in the quarter, cash flow generated from operations came in at $60.1 million or 83% of adjusted EBITDA in the third quarter, up from $56.1 million in the third quarter of last year.

For the nine months year-to-date, after adjusting for the higher earnout payments made in Q2 that went through cash flow from operations, our operating cash flow has increased 17% to approximately $184 million or 88% of adjusted EBITDA from $157 million or 86% of adjusted EBITDA in the same period last year. And we should mention that subject to unusual events and quarterly fluctuations, we expect to continue to see strong cash flow conversion and generally expect cash flow from operations to be between 80% and 90% of our adjusted EBITDA in the quarters ahead. Overall, we’re once again pleased with our quarterly operating results as the addition of our recent acquisitions, combined with continued organic growth in services and license revenue, resulted in strong adjusted EBITDA growth in Q3.

If we turn our attention to the balance sheet, our cash balances totaled $181 million at the end of October, down slightly from — down from approximately $253 million from the end of Q2 — at the end of Q2 in July. The decrease in cash is primarily related to the $133 million in cash that we used to complete the MCP and Sellercloud acquisitions this quarter, with that partially being offset by $60 million of cash flow generated from operations that I referenced earlier. As a result of the above, we currently have the $181 million in cash, as I mentioned, as well as our unused $350 million credit facility available to deploy towards future acquisitions consistent with our business plan. As we look to the final quarter of 2025 or fiscal 2025, we should note the following: after incurring approximately $4.7 million in capital additions for the first nine months of the year, we expect to incur approximately $1 million to $2 million of additional capital additions for the fourth quarter.

We expect that in the fourth quarter, we will use approximately $3.6 million of our cash to complete the purchase of the final 5% of the ASD business, bringing our ownership in that business to 100%. We should also mention that we don’t expect to make any payments in the fourth quarter on any earn-out arrangements that we currently have in place. After incurring amortization costs of $50 million in the first nine months of the year, we expect amortization expense will be approximately $18.1 million for the fourth quarter, with this figure being subject to adjustment for foreign exchange changes and future acquisitions. Our income tax rate for the first nine months of the year came in at approximately 25.9% of pretax income, which is just below our blended statutory tax rate of approximately 26.5%.

For the fourth quarter, we currently expect that our tax rate will once again come in very close to our blended statutory tax rate and as a result, we should experience a tax rate in the range of 24% to 27% of pretax income. However, as always, we should state that our tax rate may fluctuate quarter-to-quarter from onetime tax items that may arise as we operate internationally across multiple countries. And finally, after incurring stock-based compensation expense of $14.6 million in the first 9 months of the year, we currently expect stock compensation to be approximately $5.4 million in Q4, subject to any forfeitures of stock options or share units. And with that, I’ll now turn it back over to Ed, who will wrap up with some closing comments and our baseline calibration for Q4.

Ed Ryan: Great. Thanks, Allan. We’ve done five acquisitions so far this year and two since our last call. We believe these acquisitions will contribute more to our calibration over time as we become more experienced in operating them together. As we look at our calibration, we’re mindful of some weakness in U.S. domestic truck volumes, but also mindful of factors that may contribute to a recovery of volumes, including shipping in advance of the imposition of new tariffs. We’re also mindful that the accelerated hardware replacement cycle of GroundCloud is complete, and we don’t anticipate any incremental hardware volumes above the ordinary course. Our business is designed to be predictable and consistent. We believe the 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 operating 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 overperform, we try to reinvest that overperformance 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 quarterly report, we’ve provided a comprehensive description of baseline revenues, baseline calibration and their limitations.

As of November 1, 2024, using foreign exchange rates of $0.72 to the Canadian dollar, $1.09 to the Euro and $1.29 to the pound, we estimate that our baseline revenues for the fourth quarter of fiscal ’25 are approximately $144.5 million and our baseline operating expenses are approximately $89.5 million. We consider this to be our baseline adjusted EBITDA calibration of approximately $55 million for the fourth quarter of fiscal 2025 or approximately 38% of our baseline revenues as at November 1, 2024. We continue to expect that we’ll operate an adjusted EBITDA margin range of 40% to 45%. Our margins can vary in that range, given such things as revenue mix like we saw with hardware these past two quarters, foreign exchange movements and the impact of acquisitions as we integrate them into our business.

We believe the GroundCloud hardware replacement cycle has completed, so we will see some relief to adjusted EBITDA margins coming out of that. We’ve got lots of exciting things planned for our business. It remains challenging economic supply chain and compliance environment for our customers, but we believe our proven track record of execution, solid capital structure, the customer focus will help us serve them well. I want to thank 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 will now turn it over to you to handle the Q&A portion of the call.

Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. Your first question comes from the line of Faith Brunner from William Blair. Please go ahead.

Faith Brunner: Hey guys, Thanks for taking my question. I guess you guys talked on the call also in your recent white paper. There’s a lot of uncertainty going on with this new administration on top of an already complex environment. And you talked about some customers may be trying to get inventory in ahead of time. So I guess what are you hearing maybe more broadly from customers on how they’re trying to navigate the situation and what tools are they looking for? And maybe how are they leading to you guys to kind of help them navigate this?

Ed Ryan: Thanks, Faith. Yes, so a lot of discussions about this. You can see it in the papers and certainly having a lot of discussions with our customers on these subjects. I mean, first and foremost, there’s a lot of use of our Global Trade Intelligence Solution right now to try and figure out what the potential impacts would be for changes in tariffs. And no one really knows what those are going to be. They know what’s been threatened and they’ve also seen maybe in Trump’s last term where there were threats that kind of were used as a negotiating points. And that was really sure what’s going to happen there. But it is — it caused an increased use of our system, which is helpful for us and helpful for our customers is they’re trying to figure these things out.

Otherwise, the other thing you might see in the papers is people talking about shipping things in advance. We haven’t seen that happen yet so clearly, but I’m hearing our customers talk about it and certainly seems like it’s something that might be a possibility over the coming months. So we’ll just continue to monitor the situation. In that case, they’d be using our network as they always do to ship goods.

Faith Brunner: Okay cool. And then maybe one other quick one for me. I’m just looking at Sellercloud you talked about, you’re already seeing some encouraging customer adoption of this and you’re optimistic about the growth plan. So can you maybe talk about like what the potential is here now that there’s a more comprehensive solution, how can this like slowly fold into the financial profile and help expand your wallet share with customers?

Ed Ryan: Yes. And as we put this e-commerce solution set together, we started to realize that it would be very helpful for the customers if we could add order entry functionality and some of the other things that Sellercloud does to the solutions that some of the customers don’t have any of those solutions that would like them all to work together. Just in the couple of months that we’ve owned them, we’ve already had a number of sales where we sold the complete solution set theirs and ours in one package, and that’s exciting to us because we think there’s a lot of opportunity to do that going forward. It makes us more attractive to a broader customer base as a result of doing that. Just other commentary we’ve heard in the industry when we’re out talking to others at Sellercloud was a great company and very interesting that Descartes and Sellercloud are coming together and people we’re excited about. So we’re excited as well.

Faith Brunner: All right, awesome. Thanks for the color. And congrats again on the call.

Ed Ryan: Yes. Thanks, Faith.

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

Paul Treiber: Thanks very much and good afternoon. Just a question on tariffs in regards to your Global Trade Intelligence solutions. Just what’s the penetration across our customer base of Global Trade Intelligence? And then what do you see as a longer-term opportunity? Like I imagine you’re trying to drive it more into your customer base. Is there a structural tap? Or do you think every customer should have those solutions?

Ed Ryan: Every customer that moves multiple products to multiple countries is a potential target for this. If you have one product and one SKU, you that you only move to one country, you’re probably going to be able to monitor the tariff rate yourself. As that comes into thousands of SKUs and as most companies do, and tens or even upwards of 100 or more countries that you might ship these things to, you have to know this information. And there’s lots of ways to do it, and there’s lots of places in your organization that you need access to it in the beginning before starting before you build a factory all the way to doing this live every day and shipping stuff I want to make sure I’m paying the right rates. That’s what’s created a massive opportunity for us here.

And the fact that we’ve put all these solutions together in 1 accessible data set that we can give you access to the applications that we provide or download it into your Oracle or SAP, your NetSuite applications so that you can use it there and embedded in it, and we provide it in those formats for people to try to make it very easy for them to make all the countries look the same and all be delivered to your SAP Oracle system in a format that’s usable or digestible by those systems. And that’s what distinguishes us from our competitors and why we’re taking a leading position in the market. And there’s a lot more companies that need to do it, they don’t do it right now. There’s a lot more companies coming up as we can see what’s going on with e-commerce right now.

There’s a lot of midsized and smaller guys that didn’t used to think they needed stuff like this, and all of a sudden, they do. Thanks to parties. It’s not the same thing, but it’s an extra neighborhood for tariffs and duties are shipping at the same time, and you want to make sure you’re able to ship that to those people. companies tend — midsize and smaller companies, large companies have already gotten into this, but the midsize and smaller companies tend to get into it when they get in trouble. They ship to someone they weren’t supposed to or ship to a country they weren’t supposed to and they find out that they need to start doing this. And it’s the way that they mitigate their fines by telling the government had just bought a solution from The Descartes that’s going to make sure I don’t make this mistake anymore.

And that’s what creates the opportunity for us there. So — it’s a great business. I think we’ve bought a bunch of good companies in this space and ended up in a strong leadership position that we’re excited about.

Paul Treiber: And then shifting gears, you mentioned e-commerce with Sellercloud, your e-commerce business is getting quite large. Edward can you speak to the go-to-market strategy for e-commerce in particular and how that may differ versus your more sort of traditional market of logistics service providers.

Ed Ryan: Well, in the case of our e-commerce solutions, we’re going after small and medium-sized e-tailers primarily. And there’s lots of them and they keep coming, and there’s new ones forming all the time. And as they get bigger, they need shipping solutions, they need warehouse management solutions, we need to order interest solutions. And we’re trying to provide all in 1 package that helps them solve that problem, make sure they looks like the big guys when they’re shipping stuff to their customers and our sales force is finding ways to contact those people and then making calls on them, in most cases, not in person calls, they’re talking to wherever the phone and showing them our solutions and showing how they would solve their problems and try and bring them to a point where they’re operating more efficiently, and they’re saving money on transportation costs because they’re using our systems.

Paul Treiber: Thanks for taking the questions.

Ed Ryan: Hey, thanks Paul.

Operator: Your next question comes from the line of Stephanie Price from CIBC. Please go ahead.

Stephanie Price: Hi, good evening. Maybe, Allan, this one I think is for you. Just in terms of all the M&A that Descartes has done so far this year, — how should we kind of think about the time line to integration for these acquisitions and margins kind of trending back towards the typical level here?

Allan Brett: Yes. Every acquisition is different. Obviously, part of — we’re pretty experienced at doing that. Part of our approach is going to be to look for both cost synergies, revenue synergies take a little bit longer, typically, although as Ed said, we’re starting to see some good success early on some of the deals. So each deal takes us time, but every deal has a model where we think we can get it back to usually improve the margins either through growth and most likely through a combination of growth and cost control, to improve the margins back towards our company average. So it’s pretty common that we’ll buy businesses. They may not be at the margins that we think we can get that we are at right now, and we will work to get them there. Some will take a couple of quarters, some may take a couple of years. It’s just a journey based on the individual deal.

Stephanie Price: Okay. And then just on MCP. It sounds like the opportunity with MyCarrierPortal is to cross-sell into MacroPoint’s customer base. Ed, can you kind of expand on that a little bit? And just curious if it’s going to be offered as a Global Trade Intelligence solution as well.

Ed Ryan: Probably more something that’s in our transportation management vertical focused on helping brokers and 3PLs identify which carriers are financial status and maybe just what carriers are doing a good job of maybe delivery so they can evaluate that before they select a new carrier. It’s combined with the MacroPoint solution because MacroPoint sells to almost all of those brokers. And so the continent thing to celebrate next door to it. Also if you’re using our capacity management solutions where you’re actually making shipping decisions. It’s nice to know. Hey, I’m selecting a new carrier here, and that carriers kind of got a good rating in the MyCarrierPortal solution. So that’s the mindset of it. I don’t know that it would go into the Global Trade Intelligence solutions or I guess I can see why you asked that, but it’s probably more likely to be used the long side of our MacroPoint solutions.

Stephanie Price: Great. Thank you very much.

Ed Ryan: Hey, Thanks Stephanie.

Operator: Next question comes from the line of Lachlan Brown from Redburn Atlantic. Please go ahead.

Lachlan Brown: Hi all, thanks for the question. If you look at your North American trucking volume. Are you able to provide any color on your exposure to shipment volumes between Canada and the U.S. and Mexico and the U.S.? And given the prospect of a 25% tariff has been raised, what have your compensations being like for the customers that are poor movement of goods between the U.S. and these countries? Thanks.

Ed Ryan: Hey, thanks, Lachlan. At of top of my head, I don’t know the exact volumes, but it’s substantial. We have a number of carriers that we do a lot of business with in either Canada United States or Mexico or in a lot of cases, all three. And they have to go do cross-border shipments, which result in custom silence and things in that nature. I don’t know what’s going to happen. I’ve heard lots of different theories about what’s going to happen if 25% tariffs go into place. My gut is that it’s not going to be quite that simple. It’s probably going to be negotiated to certain commodities and things of that nature. I don’t know whether it will be to the truck line. It could increase that I could see a world where people ship stuff into 1 place and then trying to get in the United States, some other way to avoid China.

I could also see these tariffs slowing it down because we would not ship as much stuff that way. So let’s put it this way. When I think of it at a higher level, there’s a whole bunch of consumers out there that want stuff and there’s manufacturing facilities that need stuff to produce their goods. Those goods are going to have to still get there. And I don’t know how they’re going to get there, but I do know that we’re going to probably help our customers do it whenever these rules change or come down. And you’ve heard us say that in the past that we help our customers deal with complexity. And this is exactly what we’re talking about. There’s a lot of changes being discussed right now. People have to think quickly about what they’re going to do when these new changes come into place.

And we provide a lot of the tools that help them figure that out. And then a lot of the tools that would help them actually execute on it when they do. So customers are not thrilled about this by any stretch. But they have to deal with it. And when they do, we hope to be there to help them figure out how to do it as efficiently as possible.

Lachlan Brown: That’s very clear. Thanks. And whilst that had its investigate overnight, and it recently released solution compliance by little bit of a focus. I know you don’t necessarily overlap with them too much getting that focus on freight forwarding. But I’m just wondering within your customers and regulatory compliance solutions, do you come up against them too often?

Ed Ryan: Sorry, I didn’t catch the name of who you’re talking about.

Lachlan Brown: Vistek. Do you come up against them in customs and compliance.

Ed Ryan: No, no. Not usually. I mean we come up against them in our forwarder, custom broker back-office systems, but our strength there is in selling data to other global trade software providers, more like SAP and Oracle, a broad customer basis. If you look at what Vistek does they compete against us, but it’s — in the brokerage space, it’s to sell back office systems to brokers. So they don’t buy our data, they get their own data, but they sell a limited use case to potential typically combine freight forwarders and custom sales brokers. And we do the same. It’s about 5% of our business. So it’s not a gigantic business for us. I think it’s a much larger business for them. But that’s where we compete against them. And otherwise, we know them well from that area, but we don’t run into them at all in our Global Trade intelligence business because they don’t sell their data that way.

Lachlan Brown: That’s right. Thanks.

Ed Ryan: Thank you.

Operator: Next question comes from the line of Raimo Lenschow from Barclays. Please go ahead.

Raimo Lenschow: Hey, perfect. Thanks for squeezing me in. Ed, like if you think about — you mentioned trucking is kind of the one that is still not quite there yet. Can you just remind us like how the value chain works?, Is that like — is that just a waiting game or kind of what are the things that kind of are driving that versus the other areas?

Ed Ryan: I mean there’s a whole bunch of things that drive truck, one of the things you’ve heard us mention in the past calls is when Ocean Air start to move up, they end up resulting in truck moves at the origin and at the destination. That’s one of the issues. And there’s just the local demand in whatever country we’re talking about. And if I just look back like ’21 — sorry, ’22 and ’23, were really tough years for truck. It’s starting to come back now, but still not back to anywhere near where it was prior to that and I’m hearing things from the trucking companies and it’s starting to tick-up a little bit, but it’s not by no means back. If more international shipments start coming in, like I kind of mentioned it could happen at the beginning of the call, we could see increased truck volumes as a result of that.

Just other things in the economy that tend to help it. High interest rates were not helping truck volumes, I believe. And as they start to trickle back down, maybe keep buy more products and those products that we truck places and the trucking volumes come back. Net-net right now, they’re doing a little better than they were, but they’re still not — I’m talking to trucking companies and freight brokers, they’re not thrilled right now. They’re surviving.

Raimo Lenschow: Yes. Okay. Okay. Makes sense. And then on the increased regulation or is it regulation like the tariffs coming in, like how quickly — how are customers reacting in terms of getting ready for that? Do you think there’s a — like do you see that as a big bunch of pre-investing? Or is it more like a reactive approach? How do you think this will translate into kind of opportunities for you?

Ed Ryan: Thans, Raimo. I appreciate it. our customers are right now looking to see what their tariffs are. I think they don’t necessarily talk directly to us about this, but I think you’d see in some circumstances, they’re starting to get lobbyists to try and get their tariffs excluded from whatever changes are going to occur as a result of any of these trade negotiations. And as we get closer to it, they’d start to hear what people are going to do and then start to think about whether that is going to impact them or how much it’s going to impact them. And is there any other way to ship the goods around the world, so that they don’t have to have these tariffs. I think some of them are going to think about shipping stuff in advance to make sure that they have more product in countries so that they have an advantage over the competitors for some period of time because they get products in before the tariffs change.

So I think all kinds of things like that, and our systems help with some of that, not all of it, but some of it. And obviously, if the rates change, the real thing they’re going to do with us is use our systems and our databases to rate these shipments as the new rates change quickly and they want to make sure they get the rates right.

Raimo Lenschow: Yes, okay, thanks.

Ed Ryan: Thanks, Raimo.

Operator: Your next question comes from the line of John Shao from National Bank. Please go ahead.

John Shao: Hey guys, thanks for taking my questions. So it looks like 2025 physical has been a big year in terms of your M&A with a record amount of capital deployment. So you think that’s going to be a new normal going forward? And maybe could you also comment on the pace of acquisition in the future?

Ed Ryan: Yes. I mean I don’t want to say too much because we never know what’s going to happen. But we — a year ago, we didn’t do any deals because we didn’t like the prices on any deals kind of the put. And then as things started to loosen up and we start to be able to reach agreement with more potential acquisitions. You see us getting more acquisitions done right now. It feels like a pretty good environment right now for these types of — I don’t know what’s going to happen in the future. We don’t try to — when people ask us, what’s your normal pace of acquisitions? Our answer would be we don’t have a normal pace of acquisitions. We buy companies and we think they’re good deals, and we don’t when we don’t. And I don’t think we’re going to change that philosophy.

If we see good acquisitions out there to do, we want to be prepared to do them both financially and also from an integration perspective. We spend a lot of time making sure we’re streamlining good at those things. And if we don’t see anything we like, then we think the best decision is to not buy anything. So, we’ll see how it goes in the future. We’re optimistic about what we’ve seen so far this year. That’s why we’ve got five acquisitions done. We’ll see if that continues. If it does, great. And if it doesn’t, we’ll keep running our business the way we have.

John Shao: Okay, thanks for the colors. And just a modeling question, it looks like the Sellercloud is a high growing business. Is there any way you can help us quantify that organic growth and maybe the contribution to your overall target?

Ed Ryan: I don’t think we’ve broken that out yet, and it’s probably a little too soon even if we did break it out to say for sure. I can tell you that we’re really happy with the solutions we’ve got. We’ve got a lot of compliments from customers about putting these things together, and we’re starting to sell these things together. So as I think I mentioned in the prepared comments, we’re excited about it and specifically excited that we see customers that are looking to buy all these things together. And we think we can, as a result, drive revenue growth at Sellercloud in the future. And if we’re able to do that, it’s going to be a great acquisition for us. So we’re happy about it.

John Shao: Thank you. I’ll pass the line.

Ed Ryan: Thanks very much.

Operator: Your next question comes from the line of Dan Chan from TD Cowen. Please go ahead.

Unidentified Analyst: Hi, thanks. This is Justin on for Dan. Thanks for taking my question. Just one on organic growth. It came in really strong this quarter at 10%. Anything specific to call out that’s driving the acceleration over the past few quarters? And is this a good kind of run rate that you feel comfortable with kind of going forward.

Ed Ryan: We never know exactly what’s going to happen in the future. We try to run our business as best we can to prepare for when times are good and also times are not as good. We think we benefit even in a down market from running our company financially better than our competitors so that we are in a better position to make acquisitions when things turn tough. I don’t know what’s going to happen in the future with the economy. I hope it goes great. If it does, you’re probably going to see our numbers accelerate from here. And if it’s flat, it will probably be around here and if it’s — if it’s a down market. My hope is that we still performed pretty well, but obviously, our revenue growth numbers would be lower than they are today.

And I don’t know what’s going to happen going forward, if anyone does give me a call. But I think we’re going to try and run our company to be a consistent performer and still make money every quarter, a little more than we did the last no matter what the general economic circumstances are in the world. Right now, it feels to us like things are doing okay, but there’s a lot of talk in the world about a lot of things changing right now. So we just have to see what the impact of that is. And in the meantime, we’re going to try and run our business to keep making more money every day.

Unidentified Analyst: That’s great. And the recent acquisitions in OCR and ASD, you mentioned that they are ahead of integration plans. Can you provide any color on the margins of these businesses? And where do you think you can take it in the future? Are they near the OCR and ASD?

Ed Ryan: Yes. I mean, or the big one, that’s a business that we’ve done very well, and we’ve had been able to get out of the other businesses that we bought in that Global Trade Intelligence business, very high margins over time. We bought OCR at a lower margin than normal and maybe even a little lower than our normal Descartes margins, and we’re optimistic that we can move them higher. ASD’s a smaller company and will fold into our customs filing, security found businesses, and I expect over time, I don’t get the margins that we get out of that business as well. But it’s a smaller business than OCR.

Unidentified Analyst: Awesome, thanks. That’s all I’ll pass the line.

Ed Ryan: Thank you.

Operator: Next question comes from the line of Scott Group from Wolfe Research.

Scott Group: Hey, thanks, afternoon. So I know that you talked already about like tariff potential, but what are you hearing from customers about Eastern Gulf Coast port strike in January? And is it — since you set the calibration in November, like any sort of tariff pull-forward, strike pull forward, would that be in the calibration or not?

Ed Ryan: No, probably not. I mean we don’t know what’s going to happen there. Yes, I’m not hearing too much about that strike other than I know they got a 60% raise over five years. So I suspect the money is fine. The comment I’ve heard and you probably could read this in the paper, too, but I’ve heard them saying that this is — the last little issue here is around technology and whether they’re allowed to implement technology. So I give me a little chuckle when I read that. I think — from what I’ve heard and a few comments I’ve heard from our customers that are somewhat involved in this is that the money is probably fine. It’s some other issues around the fringes. I’m somewhat optimistic that they won’t go on strike again. And now, we probably did — I would say we did not factor those things into the calibration.

Scott Group: Okay. And then can you just say how much of the — how much did Sellercloud help the calibration for Q4?

Ed Ryan: I couldn’t say something specific. I don’t know — I don’t know if you have any comments on that, but I don’t.

Allan Brett: Yes, we typically don’t break that out. What I can say is that when we run these businesses when we first acquired them, we get comfortable with the revenue streams over time and the contracts they have. And so we start off sort of softly integrating these acquisitions into the calibration, just the known — the absolutely known revenues, we’ll fine-tune that number over time. But part of the Sellercloud acquisition revenues are in that calibration and we’ll just improve that and perfect that over time.

Scott Group: Okay. So bigger picture, Ed, right? We’ve done, I think, what, five deals this year, most in a while. Like do you think this sets you up to see an accelerated pace of EBITDA growth next year as we start to sort of reap the benefits of some of these acquisitions?

Ed Ryan: I’m sure it will help our EBITDA margins. Yes, we’re buying companies that we think are growing pretty fast, and we think we can do things to help them grow faster, both from a revenue perspective and an EBITDA margin perspective. So that’s why we do them and yes, I’m hopeful that, that will help us in the future. But bear in mind, that’s standard operating procedure for us. I mean we’re always doing this. I could probably say the same for every year. Yes, the things I bought this year are definitely going to help us next year or at least that’s why we bought them. So I don’t know…

Scott Group: Okay. I got that. And it’s been a more active year than we’ve seen at least in…

Ed Ryan: For sure. I mean but just from our perspective, we’re buying these companies and we think they’re good deals, and we’re not when we’re not. We’re very proud to say we’ve never had gone help successfully held to our head like you got to buy this thing. That’s not us. We think we have to buy anything. We’ll buy it if we think it’s a good deal, we’re going to be able to make money for our shareholders and get a good ROIC and we won’t if we don’t.

Scott Group: Okay, thank you guys appreciate it.

Ed Ryan: Hey thank you. Yes have a good one.

Operator: Next question comes from the line of Kevin Krishnaratne from Scotia Bank. Please go ahead.

Kevin Krishnaratne: Hey, good evening. Thanks for squeezing me in. I had a question as well on Sellercloud. It looks like it is a really good asset, fast growing. I’m wondering what was the motivation behind them selling? And was it a competitive process?

Ed Ryan: It was a competitive process as bankers involved as you would almost always have when it gets to that level. We knew them for a while. We wanted a solution like this. We’ve heard in the industry, they were one of the best and thought they would be a good fit with us. We got to know them over time. and eventually became pretty friendly with them, we’re able to get a deal down there, a pretty cooperative guys in doing that, and they’ve been very cooperative since the acquisition, which is all great for us. nothing terribly contentious in it. And we’re excited about having it because the customers are excited about us having it. So that’s the kind of stuff that gets us excited.

Kevin Krishnaratne: Got it. Maybe 1 for Allan. You guys do run very lean operations, but I’m wondering about your thoughts on use of AI and automation in your cost base, whether it’s R&D, G&A. Any thoughts you can talk about there, maybe squeezing out an extra point or two time lines, anything. Everyone’s talking about the use of AI in the cost base. Just wondering what your thoughts are there?

Allan Brett: Yes, for sure. Ed commented and obviously, there’s a revenue or product side of that. We’ll be looking at how we can improve things within development, within support, even within the finance function, there will be opportunities over time. Those will just be things that we do. We constantly look at how we’re using technology internally ourselves to try to improve our business, and this will be another area that we look at and probably always finding some level of cost improvements as we think about how to reduce manual processes in some of the product areas. So more to come on that.

Kevin Krishnaratne: Thanks a lot. Pass it.

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

Robert Young: I’ll ask two at the same time for time here. The license, that was up quite a bit. Is that a one-time item? Should we model that at that sort of pace based on recent M&A? And then second question would be I mean the Trump administration, the other big thing is the lower level of regulation, maybe lower environmental regulation. I think back to the last time they weakened in emission standards. Is there any kind of second derivative impact that you think will impact your business? And then I’ll pass on.

Allan Brett: Yes. So Ed, maybe I’ll just take the first one on licenses. You should always factor in that licenses are not recurring. So they’ll happen when they happen. $3.5 million in a quarter was high. We don’t want to sell licenses. We’d rather sell a subscription and most likely, you’ll see the numbers come back down to more trending to where they’ve been in the last number of quarters. And then, Ed, over to you on the second question.

Ed Ryan: I think it was — do I see any changes coming from the Trump administration that are put in the calibration? And the answer No. I mean we don’t know what’s going to happen yet. I think our customers are going to need help dealing with some of these things, and we want to be there to help them. There’s all kinds of possibilities of what customers may do from here, and I don’t know what those are yet. So we haven’t really modeled it in. When I listen to some of these things, I’m thinking probably going to need to help our customers do more stuff than they were dealing with three months ago. So that’s probably going to help us but probably more focused on making sure we do a good job for them and the money comes from that.

Robert Young: Great. Okay, thanks.

Operator: Your last question is from the line of Steven Li from Raymond James. Please go ahead.

Steven Li: Thank you. Hey guys. Hey Ed, I should continue to fill out your portfolio. Is there a metric that you track like what is the average number of software modules your customers are buying from you?

Ed Ryan: When we track the cross-sell percentages. We’re like 65% to 70% right now, which I think is a great number. And each acquisition is different. It’s a different hypothesis about what’s going to happen. But usually, it does involve us selling more stuff to existing customers. But some of the stuff sells a lot, robust, some of the stuff that’s a different kind of larger sales. We don’t sell as many deals, but they’re for more money. And some of the companies are very big, and therefore, driving a lot more revenue and some of the companies are smaller in size. And even though they’re still in as great growth, they’re starting from a small place. So, we just basically look at the — each company that we buy, the hypothesis we have going in, the ROIC that we’re expecting to get and go do we get there?

And did something else happen out of it. And if it does try to adapt and take advantage of some of the opportunities that we see over time. We’ve had a lot of things happened in the last 10-years where we bought something. And we thought it was pretty good. And then we thought we were hitting a single or double and all of a sudden, it turns into a triple or I’m run. So we try to be nimble when we see those things so we can take advantage of them. And otherwise stick to the hypothesis we had when we went in and make sure we get the ROIC that we expected to get out of the company regardless of what happened. That gives you some sense of how we think about these things.

Steven Li: Yes. Got it. Very helpful. And then maybe a question for Allan on — on that 10% organic growth, was there an FX had been tailing year-over-year?

Allan Brett: Yes, a small tailwind on revenue, just very slight, virtually nothing very, very neutral when it comes to adjusted EBITDA. As you would expect from our business, we’re fairly naturally hedged at that cash flow or profit level. but a slight positive from FX, but it doesn’t really change the percentage is still 7% on services and 10% overall.

Steven Li: Okay, perfect. Thanks.

Ed Ryan: Thank you, Steven.

Operator: There are no further questions. I’d like to turn the call over to Ed Ryan for closing remarks. Sorry, sir, please go ahead.

Ed Ryan: Hey, thanks, everyone. I appreciate your time this afternoon, and we look forward to reporting back to you on Q4 in March. Talk to you all soon.

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