Descartes Systems Group Inc Q4 FY2022 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to The Descartes Systems Group quarterly results conference call. This call is being recorded on Wednesday, March 1, 2023. I would now like to turn the conference over to Scott Pagan. Please go ahead.

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 geopolitical and economic uncertainty on our business and financial condition; Descartes' operating performance, financial results and condition; Descartes' gross and operating margins and any variation in those 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 required by law. And with that, I will turn the call over to Ed.

Great. Thanks, Scott, and welcome, everyone, to the call. We had an excellent fourth quarter and year with record financial results. We've also made some significant investments in the business. We're excited to go over those with you and give you some perspective about the business environment we see right now. But first, let me give you a roadmap for this call. I'll start with highlighting some aspects of our financial results, how our business performed in the last quarter, and some investments we've made. I'll then hand the call over to Allan, who will go over the Q4 and annual financial results in more detail. I'll then come back and provide an update on the current business environment and how our business is calibrated, and we'll then open it up to the operator to coordinate the Q&A portion of the call. So let's get started by looking at our year. Key metrics we monitor include revenues, profits, cash flow from operations, and return on investment. For this past year, we had record performance in each of those areas. Total revenues were up 14% in the year, with services revenues up 15%. Net income and earnings per share were both up 18%, while adjusted EBITDA was up 16%. We generated almost $200 million in cash from operations, representing 89% of adjusted EBITDA, 92% if you exclude the acquisition earnout payments we made during the year that went through cash from operations, a good headwind to have considering how well the acquisitions performed and contributed to our business. And the year ended strongly for us as well. We had record Q4 quarterly revenues, with services revenues up 14%. We had record profits of almost $30 million in net income and $55 million of adjusted EBITDA. We generated more than $50 million of cash from operations, representing 91% of our adjusted EBITDA. And we used that cash flow and our balance sheet to make further investments in our business. So a very strong financial quarter and year for us. These results happened in a very challenging foreign exchange environment. Our annual revenues would have been $14 million higher if we used last year's FX rates, and our quarterly revenues would have been $3 million higher. While we're fairly naturally hedged, we still faced some foreign exchange headwinds to adjusted EBITDA. Allan will go into this in more detail later, however, strong results that might have been even stronger in a different foreign exchange environment. At the end of the year, we had $276 million in cash and were debt-free, with an undrawn $350 million line of credit that we just extended the term on. We used some of that cash after the year to buy GroundCloud, which I'll discuss in a few minutes. However, we remain well-capitalized, cash-generating, debt-free, and ready to continue to invest in our business. We believe a company like ours is well positioned to continue to thrive in market conditions like these. There are some areas in our business that were very strong in the fourth quarter. Our data content businesses continue to have high demand, particularly in denied party screening as companies continue to deal with complying with the myriad of new sanctions that have come out relating to the conflict in Ukraine. Our transportation management businesses saw strong growth, with demand for MacroPoint's real-time visibility shipments across all modes leading the way. And we saw a good seasonal bump in e-commerce volumes to end the year. Transportation volumes were otherwise as we would expect in our business to end the year given seasonality. Descartes was able to deliver superior financial performance last year while continuing to invest in our business. We continued our approach of making both organic and acquisition investments. On the organic side, the improvement we saw this past fiscal year in organic growth was helped by the customer-facing investments we made in our business in the year and in the prior fiscal years. We expanded our sales and marketing groups. We created a pillar focused on internal management oversight structure. We established and expanded a customer success group designed to improve the customer experience and identify additional ways our customers can get value from using our solutions and consequently improve our revenue and customer retention. These investments were made while balancing, achieving our immediate financial targets and positioning the company even better for the future. This fiscal year was no exception to that organic investment. We organically added more than 150 people to our business this year. Many of those roles were designed to help us with future organic growth, with sales, customer success, and development continuing to be a focus area for hires. We believe we built a resilient business that our customers can rely on for their needs today and tomorrow, and that's a key reason we continue to invest for not just the business we have today, but the business we'll have in the near future. We take that same customer-centric approach to considering acquisition investments in our business. Last fiscal year, we brought 4 new businesses into Descartes, with our customers continuing to see e-commerce as a growth and focus area. We combined with NetCHB in February 2022 to strengthen our e-commerce customs filing capabilities as our customers expressed interest in enhanced routing and scheduling solutions that leverage artificial intelligence and machine learning. We combined with Foxtrot in April. And with our customers moving more and more small parcel goods, particularly in e-commerce, we teamed up with XPS in June of 2022. Our last deal of the fiscal year was in January when we combined with Supply Vision. Our logistics service provider customers are in the midst of a big push to digitize their operations, both internal and customer-facing. We've made several historical investments to help them out, including containers Portrix and QuestaWeb. With Supply Vision, we're adding to that arsenal of tools to help logistics service providers better manage the lifecycle of shipments for their customers. It's a comprehensive digital system that helps them quote, route, and book shipments through to final delivery. And when combined with our real-time shipment visibility solutions like MacroPoint, it provides a comprehensive end-to-end solution for them. We can also link Supply Vision into the Global Logistics Network, giving Supply Vision customers broad access to a community of trading partners and services that can enhance their own business. While there was less than a month of Supply Vision in our Q4 results, we're thrilled with the early returns and excited to have the Supply Vision team on board. Welcome to them all. Finally, at the end of the fiscal year, we ended up closing one of the larger acquisitions we've done. And like the previous acquisitions I've described, this one was very much guided by customer demand and input. Starting from even before the pandemic, final-mile delivery to homes and businesses has become a critical part of the logistics cycle. There are tens of thousands of independent final-mile delivery specialists and carriers in North America alone, before you even consider all the private fleets also making these deliveries. With the increased delivery volumes, our customers have been eager for more help to make these delivery operations more efficient, reliable, and safe. GroundCloud is the perfect fit for this market. It provides a robust solution that helps independent final-mile delivery companies manage their operations with particular specialization for service providers who are performing the bulk of their deliveries for large transportation brands such as FedEx, Amazon, or Frontdoor Collective. The platform lets them receive delivery orders, plan and execute the routes, train and monitor driver performance, manage their assets and resources, and analyze their operating efficiency. GroundCloud is also integrated to video telematics solutions to provide driving event detection and verification, combining with reactive coaching solutions to improve driver safety. It's a great solution for the market and an excellent complement to our investment in ShipTrack for the carrier market. GroundCloud is a well-run and profitable business with lots of room for future growth with independent last-mile delivery companies. What really distinguishes GroundCloud is its specialization and attention to driver safety. They've done an excellent job of creating and providing easily digestible driver training video content deliverable to drivers' mobile devices. We've seen increased attention to driver and worker safety through our broader customer base, particularly in private fleet. This is often driven by environmental, social, and governance views of having safer roads for our communities and safer work environments, but also for economic reasons due to the high cost of accidents, litigation, and resulting insurance impact. We believe the GroundCloud safety and driver training solutions can be very helpful to our private fleet clients in having safer businesses and a meaningful impact on their communities. We're very excited to have GroundCloud as part of Descartes. Welcome to the whole team. We look forward to being able to report back on what we've been able to accomplish together in the near future. With that, let me just summarize and then hand over to Allan to give the full financial details on the year and quarter. We had record financial results. The business performed well. We believe that's a good reflection of the value that our customers continue to get from our solutions and the hard work that our team continues to put in for our customers. Even with broader economic challenges last year, including significant foreign exchange headwinds, we were able to achieve our targets, and we did it while continuing to invest in our business to drive our longer-term growth. We continue to make internal investments in customer-facing roles to drive future organic growth. We also invested in 4 acquisitions to address areas where our customers continue to see growth. We ended the year in a great financial shape with a large customer roster and a high percentage of recurring revenues. We ended the year with $276 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. And following the year, we used some of that cash to complete one of the largest acquisitions to date. We remain focused on profitable growth so that we can 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 year and continuing to have our business in an enviable position for future success.

Okay. Thanks, Ed. As indicated, I'm going to walk you through our financial highlights for our fourth quarter and year ended January 31. We are pleased to report record quarterly revenues of $125.1 million this quarter, an increase of 11% from revenues of $112.4 million in Q4 of last year. This revenue growth was achieved despite the continued headwind from FX, resulting from a strong U.S. dollar. On an FX-neutral basis, our revenue growth would have been over $3 million higher in Q4, meaning that our revenue growth year-over-year would have been over 14% for Q4. Our revenue mix in the quarter continued to be very strong, with services revenue increasing 14% to $113.4 million, up from $99.5 million in the fourth quarter last year, with services revenue increasing to 91% of total revenue this quarter, up from 89% of total revenue in Q4 last year. Removing the impact of both the recent acquisitions as well as the negative impacts from FX that we have mentioned, on a like-for-like basis, we would estimate that our growth in services revenue from new and existing customers would have been approximately 9.5% in the quarter when compared to the same quarter last year. Professional services and other revenue, including hardware revenue, came in at $10.0 million or 8% of revenue, down slightly from $11.7 million or 10% of revenue as a result of lower hardware revenue as well as a decrease in professional service as more of our solution sales require less implementation or configuration work, which is certainly consistent with our long-term plans. In addition, license revenue came in at $1.7 million compared to $1.2 million last year in the fourth quarter, consistent at just 1% of revenue. For the year, revenue was a record $486.0 million, up 14.4% from revenue of $424.7 million in the previous year. Again, the foreign exchange headwinds on revenue were significant all of last year with a negative impact on revenue of $14 million from FX. As a result, revenue growth was closer to 18% on a currency-neutral basis. For the year, services revenue came in at $435.7 million, up 15% from $378.7 million in Q4 last year. Gross margin increased to 77% of revenue for the fourth quarter and the year, up from gross margin of 76% for the fourth quarter and the entire period last year. The slight improvement in gross margin is consistent with the operating leverage that we would expect to achieve as a result of the continued growth in our business. Operating expenses in the fourth quarter and for the year ending January 31 increased mainly due to the impact of recent acquisitions and additional investments made in areas such as marketing, sales, product development, and network security. Adjusted EBITDA reached a record $55.4 million in the fourth quarter, representing an 11% increase from $50.1 million in the same quarter last year. Although we are generally well-hedged against foreign exchange rates, our adjusted EBITDA would have been higher without the negative impact from foreign exchange this quarter, as both the euro and British pound were weaker against the U.S. dollar compared to the Canadian dollar. For the annual results, driven by revenue growth and expanded gross margins, we achieved strong adjusted EBITDA growth to a record $215.2 million, which is 44.3% of revenue for the year, up 15.9% from $185.7 million, or 43.7% of revenue, last year. Notably, for the fifth consecutive year, our adjusted EBITDA as a percentage of revenue has continued to rise as we benefit from operating leverage amid business growth. With these solid operating results, cash flow generated from operations came in at $50.6 million or 91% of adjusted EBITDA in the fourth quarter this year, up 11% from operating cash flow of $45.5 million or 91% of adjusted EBITDA in Q4 last year. For the year, cash flow from operations was $192.4 million or 98% of adjusted EBITDA, up from $176.1 million or 95% of adjusted EBITDA last year. In addition, we should note that as a result of the stronger-than-expected results on the past acquisitions of both ShipTrack and containers, we ended up paying an additional $5.6 million in earnouts compared to our original estimates that were made at the time of those acquisitions. And as a result, those additional cash payments went through our cash flow from operations this year. Excluding the impact of those additional earnout payments, cash flow from operations would have been approximately 92% of adjusted EBITDA for the year. Going forward, we expect to continue to see strong operating cash flow conversion in the range of 85% to 90% of our adjusted EBITDA for the years ahead, of course, subject to unusual events and quarterly fluctuations. From a GAAP earnings perspective, net income for the fourth quarter came in at $29.8 million, up 55% from net income of $19.2 million in the fourth quarter last year. For the year, net income was $102.2 million or $1.18 per diluted common share, up 18.4% from $86.3 million or $1 per diluted common share last year. Overall, as Ed mentioned earlier, we're certainly pleased with our operating results for fiscal 2023 as our continued revenue growth allowed us to invest in several areas of our business while still allowing us to achieve 15.9% growth in adjusted EBITDA, expand our adjusted EBITDA margin to 44.3% of revenue, and achieve growth in our cash flow from operations for the year. If we examine the balance sheet, our cash balances amounted to $276.4 million at the end of January, and we had no borrowings under our credit facility at the year's end. As I noted, after the year-end, on February 14, we announced that we utilized about $138 million of our existing cash balances to complete the GroundCloud acquisition, which Ed detailed earlier. Consequently, we still have around $138 million in cash as well as $350 million available to draw from our credit facility for future acquisitions. This demonstrates that we remain well-capitalized to explore all acquisition opportunities in our market, in line with our business plan. Looking ahead to fiscal 2024, we should point out the following. After incurring roughly $6.1 million in capital additions last year, we anticipate incurring about $5 million to $7 million in additional capital expenditures this year. We also expect amortization expense to be approximately $15 million for fiscal 2024, subject to changes due to foreign exchange rates and any future acquisitions. Our income tax rate in the fourth quarter was approximately 17.5% of pretax income, resulting in a tax rate for the year of about 24%, slightly lower than our statutory tax rate, primarily due to the reversal of certain uncertain tax positions recorded in Q4 of this year. Looking at fiscal year 2024, we currently expect our tax rate to be slightly lower than our statutory rate if certain uncertain tax positions are released. Therefore, we anticipate the tax rate to be between 22% and 27% of our pretax income for fiscal 2024. However, as always, we note that our tax rate may vary from quarter to quarter due to one-time tax items that may arise as we operate internationally across multiple countries. Additionally, we expect stock compensation to be around $10 million to $11 million for fiscal 2024, subject to any future equity grants and any future forfeitures of stock options or share units. Now, I'll turn it back over to Ed to conclude with our baseline calibration.

Thanks, Allan. We're already a month into our new fiscal year and quarter. We've already been busy by completing the acquisition of GroundCloud. We're excited about the upcoming year and our business. However, we remain cautious about the broader economic circumstances that are out there. There's high-interest rates, higher inflation, a pervasive conflict in Ukraine that's into its second year, and various recessionary pressures and economic discussions. We've seen some companies taking actions to ready their business for what may come. So for us, we will be cautious in the face of uncertainty. Supply chain and logistics continue to be a critical business function for our customers regardless of the economic circumstances. I wanted to share some areas that our customers are monitoring and to shape the market that we're currently operating in. The first is U.S. ocean container imports are at pre-pandemic levels. Based on public data available through our data mine service, it's clear that there was a pullback in ocean imports over the past 6 months starting in August. Current volumes are 15% to 20% lower than the pandemic highs, but are consistent with the levels we saw in 2019 and 2020. There's less impact from COVID delays in China. Part of the reason for the pullback in ocean imports was China's approached to Zero COVID, with many businesses critical to the international logistics and supply chains either shuttered or severely understaffed. Recently, China has eased up on that policy, and so our customers anticipate goods may start to flow more freely. The next is port transit delays. Port transit delays have improved. As volumes came off a bit, the backlog that had been seen at many ports has begun to work through. We're no longer seeing ocean ports with long lines of ships offshore and containers that are otherwise starting to move through the ground system more efficiently. The next is U.S. ocean imports have shifted to East Coast ports. There's been a recent trend where volumes have shifted to East Coast ports. That's likely, in part, due to continued labor challenges on the West Coast. There still isn't a contract in place with the dock workers and new regulations impacting truck drivers being classified as employees rather than independent contractors in California. Our customers are mindful of this import flow change when making their decisions. Ocean freight rates are expected to come down. During the pandemic, ocean rates surged almost $20,000 a container from pre-pandemic $2,000 to $3,000 levels. The spring period is when many shippers and carriers negotiate their freight rates for the upcoming year. Our customers are expecting that rates will come down, and that may be a catalyst for volumes to increase over time. Next, our customers anticipate that shipment volumes may increase as the year progresses. Prior to this past holiday season, many retailers had excess inventory, and accordingly, didn't order or ship as much to replenish inventory. Now that we're through the holiday period, we're hearing retailers and mindful of the broader economic circumstances, but are cautiously looking to replenish inventories. That may have retailer-driven shipment volumes increase as the year progresses. Next, final-mile delivery is still key. During the pandemic, e-commerce volumes grew at unprecedented rates. We're still seeing growth in e-commerce, just not as strong as during the pandemic. E-commerce growth has, in part, contributed to a continued focus on the importance of last-mile delivery. Gone are the days of a home delivery of anything being a novelty. Recently, Target announced that it was investing $100 million into its network to improve next-day and final-mile delivery. And Amazon just announced it's enhancing its delivery options. The final mile is still a big topic for retailers, and our recent acquisition investments reflect that feedback. The next is ESG focus impacts supply chain and logistics. Environmental, social and governance discussions in board rooms are having a meaningful impact on supply chain and logistics decisions. Our customers are looking for detailed information from their trading partners so they can meet and report on their own ESG goals. Also, our customers need this information to show their compliance with existing and pending regulations addressing such issues as use of forced labor, environmental impact of operations, and trading with restricted parties. We've recently seen several countries roll out additional sanctions on entities and people connected with the Ukraine conflict so we anticipate compliance and ESG reporting solutions will continue to get mind share with our customers. So those are some of the things we're hearing from our customers and seeing in our business, things that also inform our calibration for the quarter. Our business is designed to be predictable and consistent. We believe that stability and reliability are valuable to our customers, employees, and our broader stakeholders. To deliver this consistency, we continue to operate from the following principles. Our long-term plan is for our business to grow adjusted EBITDA 10% to 15% annually. We grow through a combination of organic growth and acquisitions. We take a neutral party approach to building operational 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 finally, we thrive on operating a predictable business that allows us forward visibility to our revenues and investment paybacks. In our annual report, we've provided a comprehensive description of baseline revenues, baseline calibration, and their limitations. We typically provide calibration as of the first day of the fiscal period. However, with the GroundCloud acquisition happening on February 14, we've updated calibration to that date and included those aspects of GroundCloud for which we feel we have sufficient visibility to at this point. As of February 14, 2023, using a foreign exchange rate of $0.75 to the Canadian dollar, 1.07 to the euro, and 1.21 to the Great Britain pound, we estimate that our baseline revenues for the first quarter of 2024 are approximately $117 million. And our baseline operating expenses are approximately $74 million. We consider this to be our baseline adjusted EBITDA calibration of approximately $43 million for the first quarter of 2024 or approximately 37% of our baseline revenues as of February 14, 2023. Last quarter, we indicated that our targeted adjusted EBITDA operating margin range of 40% to 45%. Last year, in Q1 and Q2, we were at 44%. In Q3, we were at 45%. And in Q4, we were at 44%. We're maintaining that same 40% to 45% for this fiscal year. As we've indicated in the past, we anticipate that our margin will vary in that range, given such things as foreign exchange movements and completing larger acquisitions that are operating below our aggregate margin at the time of acquisition. GroundCloud is a profitable, cash-generating business and one of the larger acquisitions we've ever done. However, GroundCloud currently operates at a lower margin than Descartes' target aggregate adjusted EBITDA margin, primarily as a result of its revenue mix with higher professional services from in-person safety training courses that complement the software platform. So we anticipate that for Q1, our adjusted EBITDA operating margin could be lower than Q4 by between 1 and 2 percentage points as we work on integrating this business into Descartes. We've included that margin impact into our consideration in providing our Q1 calibration. We've got lots of exciting things planned for our business this year. We've already completed some exciting acquisitions and other investments that we believe will be a big benefit to our customers. It remains an uncertain broader economic environment, but we believe our prudent track record of execution, solid capital structure, and customer focus will serve us well to have a great fiscal year. Thanks to everyone for joining us on the call today. As always, we're available to talk to you about our business in whatever manner is most convenient for you. And with that, I'll turn the call over to the operator to handle the Q&A portion of the call.

Your first question comes from the line of Matt Pfau from William Blair.

Ed, just circling back to all the macro comments that you made. Maybe just help us understand what the impact you're seeing on your business from those comments is. Are you seeing any impact on either transactions or deal closures as a result of some of the items you called out?

Minor, but there are parts of our business that are really doing well right now to call a few of those during the call. And while our ocean business was being impacted in a minor way by shipment buyings being down, we had other parts of the business booming. So I think that's why you see the results you saw today.

Okay. Great. Then in terms of acquisitions, I think larger acquisitions is an area that you called out where there was perhaps a bigger discrepancy between valuations you were willing to pay and where valuation expectations were. You made a larger acquisition with GroundCloud. Is that sort of signal that the market's opening back up? Or maybe just some comments in terms of what you're seeing there?

Yes. Ever since, it's a healthy market for that. The prices can be all over the place depending on the company and who's selling them and what bank's representing and things like that. But we're certainly seeing lots of opportunity out there. And you can see we just pulled off 2 acquisitions in the past couple of months. So we certainly see a market that's open for business.

Your next question comes from the line of Paul Treiber from RBC Capital Markets.

Just hoping that you could elaborate on some of the financial details for GroundCloud. Specifically, you mentioned the mix of professional services is higher than your business. How should we think about the mix there? And then any additional comments you could provide on the company's revenue or growth or the main to the profitability is different than Descartes?

Okay. Yes. Let me handle that at a high level, and I'll see if Allan has any other comments. But if you think about their business, they're providing training services to customers. A lot of it is based on driver feedback on telematics devices where they're seeing drivers do certain things during the day, and then they're recommending them for video-based training at night when they're maybe in their cab or before they go to work the next morning. At the same time, when they start those businesses off, when they start new customers off, they go through a comprehensive training program that involves on-site training. That's why you see a little higher professional services rates in those businesses than maybe Descartes accustomed to. Normally, we say in our business today, we would like it if there was no professional services because that would mean the products were all easy to install and no one had to get anything complicated to get them in, but there's obviously products even in our business that are more sophisticated and take a little while to put in. GroundCloud is kind of the same. When they get a new customer, as part of the process, they provide a comprehensive training program for all the drivers and then specific behavior-based training as the driver's driving routes during each business day and they're seeing errors being made and they're recommending them based on those errors for videos that they might watch at night. I don't know if you have anything to add to that, Allan, but...

Yes. Not a lot. I think from a revenue perspective, it still fits the mold of what we want to buy, which is predominantly a recurring revenue business. In this case, yes, the professional service and other category will be higher than Descartes number. We were at 8%, 9%, it will probably be double that percentage, but it still fits the exact multiples we want, which is very predictable subscription-based business recurring.

Okay. That's helpful. It puts it in the ballpark, so that's useful. How do you see it integrating with or complementing the rest of your existing mobile routing and telematics business?

Well, think about it, we're helping these same types of companies plan routes every day. So it's a very similar customer base. We do business with a lot of delivery companies that are doing daily route plans in our routing software to deliver to the home. And that's a great customer base to sell this into. But like a lot of the companies that we've bought, they have a certain type of customer they go after, and they have a couple of hundreds of them or a couple of thousands of them, whatever it is. And we have a couple of hundred or a couple of thousand more than that. And so we're able to go out and quickly bring our solutions to a much broader audience, and that's a big advantage for us when we buy a company like GroundCloud.

Okay. And then just one last one. Just can you speak to the impact of inflation on your business? To what degree or not have you updated pricing for inflation? And how do we think about it from a cost point of view?

So we've had some impact from all of it. You probably heard us say in the past that we typically only raise prices in the areas where our costs are going up directly. So we have avoided in the past inflation-based price increases on our network and the transaction-type businesses. That changed when the inflation rates went up to 7%, 8%, and maybe higher around the world over the last couple of years. And we started to make some adjustments to customer prices, minor compared to maybe what some other companies were doing. So I would say it was fairly well received for a price increase within our customer base and is probably seen as fair. And on the cost side, we've certainly seen some of it, and we certainly have some cost to proceed in some of our numbers, our costs are going up maybe a little faster than we might have otherwise. But we're more than making up for that with growth in our business.

Your next question comes from the line of Justin Long from Stephens.

Following up on the GroundCloud acquisition, could you provide any details on the financial targets that need to be met for the earnout to occur? Additionally, can you give us an idea of the expected revenue contribution from this business in the first year?

Let me start with that, at least. We're not going to get into specifics because I don't want to provide competitive information out there to people that might not be on our side. But suffice it to say, like every acquisition we've done, when we have an earnout, we are more than happy to pay it. In other words, if they can get the growth that's set forth in the earnout, it's great for our business. So let's hope that, that happens in this one as well. Suffice it to say, if you could see it, it's a fairly significant number in the GroundCloud acquisition that some substantial growth for them to get there. So let's see what happens, but we would hope that, that does happen and be more than happy to pay the earnout if we got there. Allan, I don't know if you have any more detail you want to provide.

Generally, when we make acquisitions that involve earnouts, we are eager to pay the full earnout if the company achieves the growth necessary to trigger it. This aligns perfectly with our financial goals. We would be pleased to pay that earnout.

Okay. And when you say meet your financial objectives, are you saying that it would be within that target margin range if the revenue objectives are achieved?

I'm more speaking to getting our payback on our acquisitions. When we deploy that capital, we're looking to get our money back in 5 to 7 years, a 15% to 20% return. And we think we can achieve that at any level within that earnout with 0 or whether we hit that earnout. That's what...

I can add to that, Justin. Our earnouts are almost always based on revenue, specifically reaching revenue targets. We take responsibility for managing the business costs and improving profitability over time. Therefore, the targets generally focus solely on revenue growth.

I'll take the first one, and then, Ed, if you want to talk to the headcount. But as far as the organic growth, that's our estimated growth within the services category. You know our services are split between transactional and subscription. Now for the most part, both are growing. Our subscriptions tend to be some of the higher growth areas of the business. But growth a little bit slanted towards subscription, but both growing, adding up to that 9.5%. Ed, on head count, did you want to make a comment?

Yes, absolutely. We have a full year ahead of us, and we are open to adjusting our plans based on business developments. Last year, we didn't expect to require as many new hires, but due to strong business performance, we proactively brought in more talent. Our current intention is to increase headcount by about half of last year's growth, but that could change. If business conditions improve, we might hire more. However, if the economy takes a downturn, we may consider reducing our hiring to manage the business prudently. I've mentioned previously that there's significant economic uncertainty, which has led us to ease our hiring pace, although not as drastically as some other tech companies. It looks like we may be moving past some of those challenges based on recent news. Overall, we've planned for about half the organic growth in headcount that we experienced last year, and we'll continue to adjust our approach as the business evolves.

Your next question comes from the line of Daniel Chan from TD.

Ed, you talked about GroundCloud having a higher mix of professional services driving a lower EBITDA margin. Just wondering whether for you to get their EBITDA margin more in line with your target, whether you have to change their business model to reduce that PS mix? And if so, how do you do that? And how long will it take for you to get those margins up to where you want it to be?

We have some ideas on how to approach this. They were offering one-on-one training sessions for various companies. We envision expanding that to virtual formats and larger audiences, which could lead to a more profitable mix of professional services or training in the long run. A key factor for any software company is increasing sales. For instance, if you have 100 customers using your software and you grow that to 200, the profitability typically increases, as you're delivering the same software to twice as many users. If all customers are paying a reasonable price, your profits rise. This has significantly contributed to our growth in EBITDA over the past decade by expanding our customer base, which in turn creates more opportunities to cross-sell to our new clients. I believe we can achieve similar results with GroundCloud in the future.

That makes sense. And then shifting gears a bit, just wondering if there's any impact from the Windsor framework that just got passed.

We're still analyzing it, but they've established a green lane and a red lane, much like a seat passenger traffic. We understand that both lanes are going to continue to have a filing. So at first blush, my gut is that there's not going to be a ton of impact to our business, negative or positive.

Your next question comes from the line of Robert Young from Canaccord Genuity.

The couple of the macro comments and questions around the transactions. I get the sense that maybe that was a minor headwind. And so if you could clarify that and then maybe just give a refresher on how minimum contracts protect that or if that's still in place, maybe just maybe a refresher there.

Yes, I mentioned the ocean business. If I look at the Datamyne statistics, it’s actually beginning to recover in January and into early February. I expect that we’re seeing the effects of the easing situation in China right after Christmas. Truck and air transportation remained strong, and I have noticed air cargo becoming stronger over the last couple of weeks according to Datamyne. We’ll see how this evolves. However, the impact in the past quarter was minor. We had enough strengths in other areas that more than compensated for it, allowing us to exceed our projections for the last quarter, as many of our businesses were performing exceptionally well, and the ocean business only declined slightly. Overall, this is promising news for us.

Okay. And then you touched on my second question around China. There's a lot of news about the reopening and the impact. Maybe it's more on air travel. Just is that not having a more positive impact?

Yes, I think it is. In the ocean space, we've started to notice improved statistics from governments over the past month. This aligns with the end of their Zero COVID policy around mid-December, which allowed people to return to work and factories to reopen for increased production. Retailers have also recovered from the Christmas season. Many were selling inventory ordered well in advance last Christmas, and now, as their shelves are being restocked with items from newly opened factories in China, they are looking to replenish their supplies. My guess is that the situation may be a bit more favorable than most expect, although I'm not completely certain what will happen. However, I am beginning to see the effects of this change and an increase in trade volumes over the past couple of weeks.

Okay. And last question, just a little clarification in the press release, the 40% to 45% adjusted EBITDA range. I think the quote from you, Allan. Maybe the way I read it, it seemed to suggest it was inclusive of M&A forward. I just want to make sure I'm not reading that incorrectly. The 40%, 45% doesn't include any anticipated future M&A, that's just up to this point?

Well, yes, just remember that it's an EBITDA margin range. So barring us buying stuff in massive, and you can see here with GroundCloud, it has a bit of a negative impact on our overall margins because we bought a company that makes less money as a percentage of revenue than we do, but still only a point or 2. That was a fairly large acquisition for us. So yes, no, I think we are trying to say we'll be in that 40% to 45% margin range. If we did something gigantic, sure. If you go outside of that's way more profitable than us, it would move up. If it's less profitable than us, it moves down. But net-net, I'd be surprised if it changed outside of that range, 40% to 45% based on acquisitions.

Your next question comes from the line of Kevin Krishnaratne from Scotiabank.

Question for you just on competition or potential competition. Understanding you cover several areas in the broader logistics ecosystem. Just curious, given the momentum that we're seeing in the space, is there any particular areas where you're seeing new competitors or outsized funding from private equity or anything in that regard, areas that are hot? I'm curious what you're seeing and how well you may be positioned in these areas. Are these areas you may be willing to direct more of your attention to from an M&A perspective?

Yes. Thanks, Kevin. Over the last several years, we have seen a significant increase in funding within this space, which I believe is positive. While you're referring to it as competition, it's important to recognize that there are also potential acquisition candidates for us, which is how we view it as much as we do competition. Competitors introduce new ideas, and we observe around ten of them as they emerge, allowing us to identify the top one or two players in the market. Perhaps one day, we might choose to acquire one of those companies. This is generally how we approach it. But yes, there has definitely been a substantial rise in investment in the sector, and I see that as great news.

Is it pretty widespread? I'm curious if there are any particular areas that are emerging.

Well, you can see the supply chain visibility space is hot. We were the first mover in that space buying MacroPoint. MacroPoint has some competitors that have also attracted a ton of investment. And there's more people popping up in that space all the time. They're also potential customers of ours, right? They need access to the data that we have because we do business with most of the freight brokers in North America. We tend to have more data than any of our competitors in that space and are able to sell that to other people who are building their own supply chain visibility tools but don't have access to a network like ours. So that's been great for us. You can see all these IoT devices that you're starting to see come out, and I suspect we're just at the beginning of this, but people are making smaller and smaller things to put in packages, to put in pallets, to put in planes and trucks and containers and everything else. And I'll tell you what's happening to your product while it's moving, where it is, what temperature it's at, did it get a hard bounce, all kinds of stuff like that. So you can eventually build software around that to help the big manufacturers and retailers make better decisions about what's going on in their supply chain based on these IoT devices that are out there. So I think we're at the beginning of that right now, hundreds, if not thousands, of companies that start up based on that. And we're really excited about it because that's all information that we can use to help our customers get better results.

I understand. Thank you for your comments. To continue on the topic of mergers and acquisitions, I've noticed that activity has been increasing recently, with larger assets involved. It's been a while since your last acquisitions, which were all cash transactions. In the past, you included some stock with MacroPoint. I'm interested in your approach to determining purchase prices for acquisitions and the balance between cash and equity in those deals. What are your thoughts on that?

We aim to be cash buyers. When stock is included in a deal, it's often because the business owners have requested part of the payment in our stock. Typically, they might say they're purchasing a company for around $50 million and want $40 million in cash and $10 million in stock. If they ask for this, it's a positive signal for us. We aren’t looking to dilute our shareholders, but if the owner wants us to be the buyer and to receive some of our stock, we see that as an opportunity we should pursue. This means we now have an owner in that business who is likely to continue working there and will be invested in our success, so we usually agree to such arrangements.

Got it. Maybe just the last one for me, just a question on the sort of your marketing spend and efforts. I think it was just over a year ago when you kind of talked about more meaningfully stepping up the efforts there, the customer success team, the new digital marketing initiatives. I'm just wondering how that's been progressing? Are you happy with the ROI? Is there anything you could share there in terms of net retention, share of wallet increases? Is there anything that you're seeing or that you're willing to share in terms of the return on that step-up that you've been through?

We're very pleased with it. I don't want to share additional retention statistics beyond what we currently provide. We believe it has been very beneficial for us. We have experienced enough success in the past year that we are now beginning to roll it out in Europe as well. As our business grows, we need to implement strategies that keep us close to our customers, just as we did when we were a smaller company. We view investments like this as prudent decisions. The good news is that we executed this over the past two years, and it has been very successful, which encourages us to do more of it going forward.

Your next question comes from the line of Steven Li from Raymond James.

Maybe a question for Allan to start. Can I check with you, so the overall organic growth is around 7.5% at constant currency, Allan?

Yes. So in the prepared comments, we mentioned 9.5% growth in services revenue. We did see a slight drop in professional service and other revenue. It was partly hardware, a little bit on the P&L side. When you blend those together for the fourth quarter, we are somewhere in that 7.5%, 8% range. But most important for us is going to be that long-term growth in services, which is highly recurring revenue for us. So 9.5% on services coming down to sort of that 7.5%, 8% on the total revenue.

Got it. And I was curious, given the higher PS mix with GroundCloud, does that not mean that the services organic growth going forward is going to miss those PS organic growth from GroundCloud? Is it better to look at the overall organic growth?

Yes. We are definitely aiming to grow that business, both in terms of subscription for the software and in the professional services area. Realistically, the subscription segment should see faster growth if we execute our plan successfully. We will keep focusing on both aspects and will update you as we make progress. We are reporting services revenue growth since that is the most relevant figure for us and crucial for the long-term sustainability of the business, but both areas will be significant, and we will communicate accordingly.

Got it. Ed, considering your comments, we have shipment volumes on one side, and the other part is thriving. With this organic growth of around 7% to 8%, which is a high single-digit range, do you think that's a solid foundation for this year, or can we achieve even more?

We believe we will remain within that range. We typically aim for 4% to 6% organic revenue growth and seek 10% to 15% EBITDA growth from that. In previous years, we have exceeded those expectations. However, if the economy experiences a boom for a year or two and then starts to decline, we are satisfied with being around 9% right now. This growth can be attributed to the quality of acquisitions we have made in the past, as well as customers recognizing the importance of supply chains and logistics, more so than they did before the pandemic. I am optimistic that we can maintain growth in the 8% to 9% range, but we will have to wait and see.

Got it. Ed, you mentioned that shipping volumes may increase for the year. Does that suggest we might experience a slower first half and potentially stronger growth in the second half?

Yes. I mean I don't want to make predictions a year out. But if our customers do well like that, yes, I would expect our business to continue to do better and better over time.

Got it. And then a couple of questions on your recent acquisitions. So GroundCloud, what has been the growth profile in recent years? And was it all organic?

It was. They're a fast-growing company, and it was all organic.

So sorry, did you say double digit in terms of growth, Ed?

I didn't call out specific digits. But it's a fast-growing company. It's one of the reasons we wanted to buy it. And we think we have an opportunity to expose it to a lot more customers. And as a result, maybe continue that growth into the future.

Got it. And then maybe an update on the XPS, I remember the earnout there was sizable. How are they doing so far? And would you expect them to be hitting their earnout targets this year?

I can't comment specifically on the earnout targets, but I can say that the business has been performing very well since we acquired it. We're pleased with our decision to buy it. I won't provide any comments on the earnout until it's achieved, but overall, we're satisfied with the acquisition to date.

Your next question comes from the line of Scott Group from Wolfe.

Is there significant seasonality to the revenue at GroundCloud? Should we consider the increase in the baseline for Q1 and annualize it? I'm trying to determine the best way to estimate full year revenue.

It's a fairly consistent performing business, yes. There's not a ton of seasonality.

But is it a kind of business where you would expect the actual revenue to outperform the baseline like we see in the rest of the business?

I don't know the exact numbers, but yes, with most of our business, we're expecting a baseline. And then quarter-to-quarter, there'll be some increase in the business as we get the actual results in. And I think GroundCloud would probably be no different.

Okay. And then I know it's obviously the very beginning of the year. You always talk about 10% to 15% EBITDA. I think you've pretty much get there to the high end or exceed it every year. I know it's early, but what's the visibility to repeating that again this year?

We don't take our bonuses when we don't get to 15%. So we're all planning on getting to 15%. I think we've beaten it 15 years in a row, Scott. And I obviously can't make a promise about it, but that's certainly our intention is to be at 15% or better. Let's say, 10% to 15%, and we do our darndest to get to 15%.

Your next question comes from the line of Raimo Lenschow from Barclays.

This is Jeremy on for Raimo. I was just wondering if you could share a bit more detail on how the e-commerce business is trending. Would you say like it's reached more of a steady state post-deceleration from the pandemic? Or really, any color you can share there would be helpful.

Thanks, Jeremy. We experienced significant growth following the pandemic in late 2020 and throughout 2021, similar to many e-commerce companies. However, our situation changed soon after. While many e-commerce businesses saw their growth plateau, we returned to our usual low double-digit growth trend, which we continue to see currently. Our business remains strong and grows steadily each quarter. Although I hesitate to use the term flat, the growth rates are stable, and we are still experiencing positive growth each quarter and year following the initial surge during the pandemic. Based on what I read about other e-commerce performances, I don't believe we are facing the same challenges. Perhaps our growth is bolstered by acquiring more new customers, allowing us to continue expanding even if e-commerce sales stagnate temporarily.

There are no further questions at this time. Ed Ryan, please proceed.

Okay. Thanks, everyone. Appreciate all your time today, and I hope to see you as we're out on the road in the coming weeks. And otherwise, I look forward to reporting back to you next quarter. Have a great night, and thanks for your time.

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