Welcome to the Quarterly Results Call. My name is Adrianne, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note, this conference is being recorded. I'll now turn the call over to Scott Pagan.

Scott Pagan, you may begin..

Thanks, 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 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 the COVID-19 pandemic 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 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 SEC, the OSC and other securities commissions across Canada, including our management's discussion and analysis filed today.

We provide forward-looking statements solely for the purpose of providing information about management's current expectations and plans relating to the future. You are 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 is required by law.

And with that, let me turn the call over to Ed..

Brexit, acquisition performance, and rising shipment volumes. Those things contributed to record total revenues and service revenues, record income from operations, net income and adjusted EBITDA above our plans with adjusted EBITDA up 26% from a year ago, a 42% adjusted EBITDA margin and cash from operations at almost 99% of adjusted EBITDA.

Each of these things were ahead of our plans, and I want to thank our entire Descartes team and our customer base for all their help in getting us there. With that, I'll now turn the call over to Allan to go through our Q1 results in more detail.

Allan?.

Okay. Thanks, Ed. As indicated, I'm going to walk you through our financial highlights for our first quarter, which ended on April 30. We are pleased to report record quarterly revenues of $98.8 million this quarter, an increase of 18% from revenues of $83.7 million in Q1 last year.

While revenue from new acquisitions contributed nicely to this growth as Ed mentioned, growth and revenue from new and existing customers, including from new Brexit-related customs filings in the UK were the main drivers in growth this quarter when compared to last year.

We should note that the first quarter last year is a bit of a weaker comparable period as it did have a negative impact from lower transactional volumes at the outset of the global pandemic last year, really in the month of April last year.

In addition, we should mention that there is a benefit to revenue from foreign exchange this quarter of approximately $3 million as the U.S. dollar was weaker compared to the euro, the Canadian dollar and British pound compared to the same period last year.

As a reminder, the impact of foreign exchange on our adjusted EBITDA was once again, quite minor, as we remained fairly naturally hedged to FX on a profitability or cash flow basis.

Back to revenue, our revenue mix in the quarter continued to be very strong with services revenue increasing 19% to $88.3 million or 90% of total revenue compared to $74.1 million or 89% of revenue in the same period last year. Services revenue was also up nicely sequentially, increasing 7% in the fourth quarter of last year.

License revenues came in at $1.3 million or just over 1% of revenue in the quarter down from license revenues of $1.8 million in the first quarter last year, while professional services and other revenue came in at $9.2 million or 9% of revenue up 18% from $7.8 million in the same period last year.

Gross margin for the first quarter increased to 76% of revenue up strongly from gross margin of 74% in the first quarter last year. Gross margins continue to increase with a strong incremental growth from new and existing customers that we experienced in the quarter.

Our operating expenses increased in the first quarter and this was primarily related to the impact of the cost base from recent acquisitions, but also from additional labor-related costs as we continue to invest in our business.

These cost increases were partially offset by savings that we continue to see in our business, such as the continued lower travel, marketing and facilities costs related to the ongoing pandemic.

As a result, we continued to see strong adjusted EBITDA growth of 26% to a record $41.5 million or 42.0% of revenue in the quarter up from $33.0 million or 39.4% of revenue in the first quarter of last year.

With these exceptional operating results, cash flow generated from operations came in at $40.9 million or approximately 99% of adjusted EBITDA in the first quarter this year, up 49% from operating cash flow of $27.5 million or 83% of adjusted EBITDA in the first quarter last year.

Going forward subject to unusual events and quarterly fluctuations, we expect to continue to see strong cash flow conversion and generally expect cash from operations to be between 85% and 95% of our adjusted EBITDA in the periods ahead.

From a GAAP earnings perspective, net income came in at $18.4 million, up 67% net income of $11.0 million in the first quarter last year.

Overall, as Ed said, we are really pleased with these operating results in the first quarter as the strong organic growth and solid performance from our recent acquisitions resulted in an 18% growth in revenue and more importantly, 26% growth in adjusted EBITDA.

If we turn our attention to the balance sheet, our cash balances totaled $138.1 million at the end of April. Subsequent to quarter end, we announced that we have used approximately $25 million of our existing cash balances to complete the Portrix acquisition, which Ed described in some detail earlier on.

As a result, we still have over a $110 million in cash as well as $350 million available to us to draw under our credit facility for future acquisitions. So we continue to be very well capitalized to allow us to consider all acquisition opportunities in our market consistent with our business plan.

As we look at the balance of fiscal 2022, we should note the following; after incurring approximately $1.6 million in capital additions in the first quarter, we expect to incur approximately $4 million to $5 million in additional capital expenditures for the balance of this year.

After incurring amortization costs of $13.8 million in Q1, we expect the amortization expense would be approximately $32.5 million for the balance of the year, with this figure being subject to adjustment for foreign exchange changes and future acquisitions.

Our tax rate in Q1 came in at 21% of pre-tax income, lower than our statutory tax rate of 27%. And this was mainly as a result of recognizing certain benefits from previously unrecognized tax losses carry forward. Looking into Q2, we currently expect that our tax rate would be in the range of 8% to 15% of pre-tax income.

As a result of the expected reversal of valuation allowances on certain additional tax loss carry forward as well as the reversal of some uncertain tax positions.

As a result, for the year, we currently expect our tax rate to be in the area of 15% to 20% of pre-tax income before returning to our more expected range of 25% to 30% of pre-tax income in subsequent years.

As always, we should add that our tax rate may fluctuate from one-time items that may arise as we operate internationally across multiple countries.

And finally, after incurring stock-based compensation expense of $2.6 million in the past quarter, we currently expect stock compensation would be approximately $9 million for fiscal 2022, subject to any forfeitures of stock options or share units. I'll now turn it back over to Ed to wrap up with some closing comments and our baseline calibration..

Hey. Great. Thanks, Allan. One of the things we strive for Descartes consistency, we believe that consistency brings stability and reliability, things that we know are valuable to our customers and our broader stakeholders. To deliver this consistency, we operate from consistent business principles.

We plan for our business to grow adjusted EBITDA 10% to 15% annually. We plan to grow through a combination of organic growth and acquisitions. When we overperform, we expect to reinvest that overperformance back into our business and we focus on recurring revenues and establishing relationships with customers for life.

Finally, we thrive on operating predictable business that allows us forward visibility to our revenues and investment paybacks. I just wanted to spend a minute hitting some of these principles, particularly in light of us performing ahead of our plans for Q1.

We believe that when we overperform, we should look at invest in that overperformance back into our business. We believe that overperformance presents an opportunity to invest to make the future of our business better, more predictable and sustainable. It's how we can generate the forward visibility to revenues and investment paybacks that we crave.

And we think that's the circumstance that we find ourselves now. We have an opportunity to invest in our business to drive even more consistent organic performance in the future.

Specifically, we intend to look at opportunities to both enhance our go-to-market infrastructure and also customer service with the specific goals of impacting future organic revenue growth and customer retention.

So when we look to calibrating our business for Q2, we keep that investment opportunity in mind because for us overperformance is an opportunity to get better, not an opportunity to celebrate.

So on to calibration, in our quarterly report that Scott mentioned, we filed today, we've provided a comprehensive description of baseline revenues, baseline calibration and their limitations. Typically, we calibrate as of May 1, being the beginning of our fiscal quarter.

This quarter, however, we are calibrating as of May 7 being the date of the Portrix acquisition.

So as of May 7, and using foreign exchange rates of $0.82 of the Canadian dollar, a $21 to the euro, and $1.409 to GBP pound, we estimate that our baseline revenues for the second quarter of 2022 are approximately $92 million, and our baseline operating expenses are approximately $59 million.

We consider this to be our baseline calibration of approximately $33 million for the second quarter of 2022 or approximately 36% of our baseline revenues as at May 7, 2021. We've indicated previously that the targeted adjusted EBITDA margin range for our business is 35% to 40%.

As mentioned, our actual results for Q1 had us at about 42% and we've been above 40% for each of the past four quarters. Given what we see, we're raising that range, and we believe we'll operate in the 38% to 43% adjusted EBITDA range for the balance of fiscal 2022.

Even with my comments about investing for future organic growth, our focus for the balance of the year will be to grow both organically and by acquisition. We anticipate good contributions from both Portrix and QuestaWeb in Q2, and we intend to continue to be active in the acquisition market.

As I said last quarter, we believe there are still acquisitions that meet our financial and strategic criteria, and that continued focus and diligent efforts will guide us on the acquisition front. Last quarter, I described a few things that I think position us well to grow as a business.

They included our broad range of customers, our dedication to driving success for our customers, our broad partner portfolio, the positive impact that our solutions have on the environment, our ability to recruit talented people and market tailwinds.

Nothing has changed about those factors from what I said last quarter other than we're a bigger business with new acquisitions integrated and even better financial performance. But I do want to touch on some of the market tailwinds. As I described earlier, max vaccination efforts in the U.S. have enabled U.S. to start the process of reopening.

Similar efforts in the UK and Canada may soon put those economies in a position to begin to open up further as well. Well, that is positive news. There's still a long way to go with vaccination for many parts of the world. So while we expect the reopening in the U.S.

and some other markets to be a tailwind, it's not necessarily going to be hurricane strength. There are many large economies that are still in the grips of the pandemic, and they're an important part of the global community.

We need to continue to support our customers with logistics of vaccine distribution around the world, so that we can all get back to some of the pre-pandemic freedoms that we were used to. When economies do reopen things are never totally going back to the way they once were.

For each of us work conditions will change, how we interact with others will change, and our buying habits will change. We believe that some of those changes are sustainable tailwinds for our business specifically the accelerated move to further automation in business and the continued move to ecommerce from traditional buying mechanisms.

On the automation front, we believe that lockdowns and the resulting need to work remotely have convinced many that technology can have a meaningful impact on making our jobs easier to perform on a distributed or mobile basis.

And that is especially so in supply chain and logistics, where by its nature, remote people are managing remote assets moving via remote transportation. We're seeing this in the demand for our solutions.

Questions from customers are no longer, what if we wanted to do this remotely and more – how do we do this remotely? On the ecommerce front, we believe that there's been a permanent and accelerated shift to people's comfort in purchasing online and the future years will see a shift go from business-to-consumer further into the business-to-business world.

In short, we believe that ecommerce will make last mile deliveries even more important in the future and that will drive demand for our solutions. To wrap-up, we are happy with how the business is performing and believe that it provides a great opportunity for us to invest and make our business even better for the future.

Something that we know will be good for our customers and other stakeholders. And otherwise we are going to stick to our business principles that I described earlier because that's how we got this great opportunity that we have in front of us now. So thanks to everyone for joining us on the call today.

As always, we are available to talk to you about our business by phone or virtual meeting, and we hope sometime sooner rather than later in person. And with that, operator, I'd like to turn it over to you for questions..

Thank you. We'll now begin the question-and-answer session. [Operator Instructions] And our first question comes from Paul Steep from Scotia. Your line is open..

Hey. Great. Ed, thanks for all the details and the color. Can you just give us a little bit of a recap on the areas of investment? I noticed you mentioned go-to-market and customer service, and I'm assuming you're meaning like incremental investment of the outperformance despite the bumped up range. I didn't hear you call out anything around product.

I'm sort of curious, is there an area there of focus? And then I got one fast follow-up clarification. Thanks..

Yes. Sure, I mentioned that on the last call, and that's certainly one of the areas there's more – we have some products that are hot that we’re putting some more investment in as well. But I wanted to call out the new investment since we did even better this quarter..

I guess in terms of go-to-market Ed, should we be thinking like this is laying the groundwork for sort of 2023 and maybe into 2024 in terms of magnitude of change that you're making here? And then the clarification as well would just be, could you just re-hit the calibration numbers? You went a little fast there, and then I'll pass the line.

Thanks, Ed..

Yes. Give me a second. Yes. The customer facing stuff is – yes, expected to be over the next couple of years. Give me one second, let me just get back in my notes – the calibration..

Ed, I will just….

You got it. Okay. Perfect. Yes. Thank you..

Calibrated revenue?.

Yes..

$92.0 million and calibrated adjusted EBITDA $33.0 million..

Perfect. Thanks. Good quarter guys..

Thanks, Paul..

And our next question comes from Paul Treiber from RBC Capital. Your line is open..

Thanks so much. Good afternoon. I just want to follow-up quickly on the last comment you had just on the products you said that are hot, where you're putting more investment.

Just could you elaborate on which areas are you seeing the greatest momentum right now?.

Yes. Some of the ones I mentioned actually in the ecommerce businesses, and there's a bunch of businesses in there that are doing well both the shipment management and the warehouse management pieces of that business. Our global trade compliance business is doing very well.

You may have heard we mentioned, Brexit some of the regulatory compliance areas that have been doing very well lately. We made a lot of investment for Brexit last year. You could see some of that paying off right now. Most of that Brexit work has done prior to the go-live for Brexit. So that's awesome.

Now we get to kind of reap the rewards of that business. And then maybe moreover with all the ecommerce businesses, the direct beneficiary of all the last mile deliveries, but in the longer run, our mobile, routing tracking businesses, mobile handheld businesses all do well as last mile deliveries expand.

So we see that opportunity unfolding over the next five to 10 years as ecommerce volumes continue to grow..

At a high level, I mean, this past year has been extremely disruptive to supply chains and logistics probably culminated with the – that the ship getting stuck in the Suez Canal.

Have you just seen a general rise in interest for customers who want to automate more and more of their supply chain? And then are you seeing that in the ability to cross-sell or up-sell, the ability for your customers to adopt more solutions from you?.

Yes. That's exactly what we're seeing.

I mean, I think as the whole world realizes that logistics and supply chain is more important than they thought it was – in fact the most of the world's coming just now to understand what that is, that puts pressure on the companies that they're buying stuff from to give them status messages and tell them where shipments are all along and the trucks that deliver them to the warehouses even you kind of need to know where all these things are to orchestrate faster and faster deliveries for the consumer.

And that whole process puts a lot of pressure on our customers to have technology in place to deliver to those customer expectations. And we're one of the main places they would go to get that. And I think that's why – or at least part of why you're seeing us do very well right now and perhaps for some time to come into the future..

All right. Thanks for taking my questions..

Hey. Thanks, Paul..

And our next question comes from Raimo Lenschow from Barclays. Your line is open..

Hey. This is Frank on for Raimo. I want to stay on the topic of ecommerce, if I can. To point about – this is for you guys, especially around the pandemic, and it did really well. I want to ask how you're seeing the growth trending here as we continue to move into a post-pandemic world.

Can you also frame the long-term potential here in growth?.

We see it going back to growth levels that were probably what we were seeing in pre-pandemic and what we saw with a big step function up as the pandemic started to slow, but they're still pretty good levels.

I think we're in the 2020s since the big push that we got at the start of the pandemic where it really shut up upwards of 40%, and we're seeing it now come back to a normal level of growth, but still quite good, probably one of our fastest growing businesses. And I don’t know how long that goes on in the future. I suspect it will go on for some time.

I just look around historically that things talking to friends or whatever, it seems like people are more and more comfortable doing that and quickly look to order things online versus go to the store. And I think the pandemic probably started that process, but once you're comfortable doing that, it's hard to go back..

Great. That's really helpful. And one follow-up if I can. It was good to see the EBITDA target range raised.

Can you talk a little bit about how much of that was scaling into business and operational improvement over the past few quarters versus any cost discipline that you learned at the pandemic world?.

I mean, mostly growth in our business contributed to it. In beginning of the pandemic, there was some cost discipline. As our revenue went down, we cut costs in line with that. I think you've heard us talk about that in past calls. Last May, when we saw the April result down 5%, we kind of cut our cost 5%. We haven't done anything like that since.

In fact, we've probably been growing as our business has been growing since then, but most of that, what you're seeing now, that's gotten us up into the 42% range has been – our business growing and some of the dynamics that have always existed in our business, right.

The last dollar in it's almost all profit in most of our businesses because of the network that we operate and the recurring revenue model that we operate..

Perfect. Thanks, Ed..

Thank you, Frank..

And our next question comes from Justin Long from Stephens. You line is open..

Thanks and congrats on the quarter. So I wanted to follow-up on organic growth. Is there any way you could help us kind of ballpark the level of organic growth that you saw in the quarter? And I know we're comping against the initial stages of that pandemic on a year-over-year basis.

So maybe Ed, could you speak to the sequential trends you're seeing in organic growth as well?.

Maybe I have Allan jump in, so we got the numbers straight..

Yes. So listen, strong quarter organically, I think if you're looking into the financial statements, just over double-digit organic growth. But you remember, we run a business on a combined basis. So we're constantly integrating the business. As Ed mentioned in his prepared comments, some of those recent acquisitions are performing quite well for us.

Is that organic growth or is that acquisition growth? Again, the way we operate [indiscernible] all together. Overall, for the three reasons, Ed mentioned, the strong acquisitions, Brexit, and then just a general recovery in trade and adoption of our products, all contributing to probably what's the best organic growth number we've seen for a while.

Does that answer everything for you?.

That's great.

And then maybe the trend sequentially from an organic growth perspective as well?.

Yes. I mean, we're up 70% from a – sequentially in the business as far as adjusted EBITDA and heavily that's, again, it's going to be a mix of both that organic growth and new existing customers that are doing more volume with us.

So 5% revenue growth sequentially, about a 7.5% EBITDA growth sequentially, and those are all mix of both factors that are driving it..

Great. That's helpful. And just quickly to follow-up on that comment around investing outperformance back in the business.

Is there any way to put numbers around that comment? As we think about the incremental investment, we could see this year, and maybe you could speak to the organic growth environment that you're planning for over the balance of the year as you make that comment?.

I don't know the exact numbers and we'll just have to see how we go. We're going around our organization right now. I'm looking for areas where we think what the managers that run various groups in our business, trying to define the best areas to invest where we think we can get the biggest bang for our buck.

I don't think we put anything out specifically about how much we're going to spend, but you could take us at the word that we mentioned there, we're going to invest the overperformance back in the business and with an eye towards getting results in the coming years for that effort. So I think I answered the first part of your question.

What was the second part of the question? Could you repeat that?.

The organic growth profile that you're assuming over the balance of the year?.

Well, yes, I mean we assume 4% to 6% organic growth. We’re doing pretty well right now, chance we beat it. But as we’ve always stated, we're planning a 4% to 6% organic growth and if we beat that, we reinvest it back in the business. It's been going pretty well. Obviously, you can see the organic growth number was great this quarter.

We hope that trend continues, but we got to see how the economy performs in the coming months coming out of the pandemic..

Makes sense. I appreciate the time..

Hey. Thanks, Justin..

And our next question comes from Scott Group from Wolfe Research. Your line is open..

Hey. Good afternoon, guys. It's Rob Salmon on for Scott..

Hey, Rob..

To piggyback on a couple of questions regarding the EBITDA margins and the investments, as we look out to later in the year given the incremental investments you are planning on doing, should we be expecting EBITDA margins to be retreating in the near-term from the levels that we're at in the first quarter?.

I mean, listen, we just called out the range 38% to 43%. We think we'll continue to operate in that range. We like to keep that number going up. There's a lot of factors that go into it, and some of them outside of our control. But we would like to keep it in the range that we mentioned, we plan on keeping in the range you mentioned..

Got it. And then Ed, earlier in the call, you had highlighted the Brexit tailwinds that you've seen this past quarter, and you expect them to continue to be tailwinds for the remainder of the year.

How should we think about the Brexit revenue kind of scaling up over the course of 2021? And will you be at full run rate do you think even at the end of the year or continued to be a tailwind looking out into fiscal 2023?.

Remember, it's all recurring revenue, right? So the people pay us per shipment and they're paying us monthly minimums, and we expect that they'll do that with us forever or at least as long as they are customers of ours. So as I mentioned in the past, these regulatory initiatives are step functions, right. I can't control demand.

The government has to come in and tell our customers they have to comply with some regulation, and then we help our customer do that. We're fortunate in the Brexit scenario that it was already a business that we were very strong in that market.

We then came up with what we think is the best solution in the market and in the face of that, a bunch of our competitors kind of failed to deliver some or parts of that solution. So all that translated to us becoming the leader in that market.

And as you heard me on the call 20 minutes ago, I was kind of mentioning that there's a bunch of phases to this rule, and some of them are already in place, and some of them are rolling out over the course of the year. It's not going to be mandatory in whole until the end of the year. So customers have some ramp up period to get in.

We expect that's why we'll see a tailwind going over the course of the year. We think we'll continue to sign up some of the small and medium size players that have yet to do this yet, and that all of the players in the market will continue to ramp up their transactions through to the end of the year when they're supposed to be live.

After that, theoretically, everyone should be live at that point. And we may see increases, but they'll probably be more modest as international trade in and out of the UK grows.

But otherwise, we'd expect that we've gotten most of the customers and their volumes that we'll get for Brexit by the end of the year because it's a recurring revenue business. I think we can expect to get this for a long time to come.

At the same time, if we're going to have another substantial increase in our regulatory business, it's going to come from another jurisdiction..

Got it. And in terms of just the phase adoption through year-end, is it really stair-step towards the very end of the year or maybe you can kind of give us some sort of cadence that we should be thinking, and May we're at five, I mean whatever the number is….

I don't know yet. I think we've picked up a good piece of it – good chunk of the business. It's not easy for us to figure out how much everyone might do by the end of the year. We know they're not doing everything they can with us right now.

But it's hard for us to predict exactly what the increases are going to be over the course of the year and when they're going to occur. So we're just – as we always do, we're planning it conservatively and we're prepared for it. And we're prepared for whatever volume they might bring us, and we do expect that it will continue to rise.

We don't know to what level yet..

Appreciate it. Thanks for the time guys..

Thank you, Rob..

And this concludes our question-and-answer session. I will turn the call back over to the speakers for final remarks..

Great. Thanks, everyone. We appreciate your time this afternoon. Look forward to talking to you next, I think its early September for the Q2 results call. Appreciate your time today. Thanks guys..

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect..