Descartes Systems Group Inc Q1 FY2024 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, May 29, 2024. And I would now like to turn the conference over to Mr. Scott Pagan. Thank you. Please go ahead.

Thanks, and good afternoon, everyone. Joining me remotely on the call today are Ed Ryan, CEO; and Allan Brett, CFO. I trust that everyone has received a copy of our financial results press release that we 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, trade, and economic uncertainty on our business and financial condition; Descartes' operating performance, financial results and condition; Descartes' gross margins and any growth in those gross margins; cash flow and use of cash; business outlook; baseline revenues; baseline operating expenses, and baseline calibration; anticipated and potential revenue losses and gains; anticipated recognition and expensing of specific revenues and expenses; potential acquisitions and acquisition strategy; cost reduction and integration initiatives; and other matters that may constitute forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties, assumptions, and other factors that may cause the actual results, performance, or achievements of Descartes to differ materially from the anticipated results, performance, or achievements implied by such forward-looking statements. These factors are outlined in the press release and in the section entitled Certain Factors That May Affect Future Results in documents filed and furnished with the SEC, the OSC, and other securities commissions across Canada, including our management's discussion and analysis filed today. We provide forward-looking statements solely for the purpose of providing information about management's current expectations and plans relating to the future. You're cautioned that such information may not be appropriate for other purposes. We don't undertake or accept any obligation or undertake 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 Ryan.

Thanks, John, and welcome, everyone to the call. Today, we're reporting strong first quarter results with record numbers, continued solid organic growth, and an improved operating margin compared to last year. We've also welcomed two new businesses into The Descartes team. We're eager to discuss these results and share our insights on the current business environment. To outline our agenda for the call, I'll start by highlighting some key points from the last quarter and how our business performed. Then, I'll hand it over to Allan, who will provide detailed financial results for Q1. After that, I'll return to update you on our views of the current business environment as we move into our second fiscal quarter. Finally, we will open up the floor for questions. Let's begin with the quarter that concluded on April 30. We monitor essential metrics, including revenues, profits, cash flow from operations, operating margins, and returns on investments. In this past quarter, we delivered exceptional results across these areas. Total revenues and services revenues increased by 11% year over year. Adjusted EBITDA rose by 16% compared to last year, with the adjusted EBITDA margin steady at 44%, representing a 2-point year-over-year increase. We generated $63.7 million in cash from operations, which is 95% of adjusted EBITDA. By the end of the quarter, we held nearly $270 million in cash, with no debt and an undrawn $350 million line of credit. This comes after deploying approximately $140 million for acquisitions towards the end of the quarter. We remain well-capitalized, generating cash, experiencing strong organic growth, and are prepared to continue investing in our business. Speaking of the $140 million allocated for acquisitions, we added OCR Services to our business at the end of March. OCR is an excellent business that aligns perfectly with our global trade intelligence team. They specialize in sanctioned party screening and export compliance, which complements our existing trade compliance solutions. As I've highlighted in previous calls, sanctioned party screening involves reviewing transactions, shipments, customers, and employees against global lists to identify sanctioned entities. With the numerous geopolitical conflicts currently affecting sanctions, ensuring compliance with international regulations is crucial for many businesses and can lead to significant fines and prohibitions on trade. Additionally, OCR has been utilizing AI for gathering, compiling, and presenting trade and sanctioned party information, leading to potential efficiencies as we integrate our operations. Their expertise in export compliance also strengthens our broader global trade management portfolio. In particular, they excel in securing export licenses, classifying goods, and assisting companies with intricate trade regulations like the International Traffic in Arms Regulations, ITAR. OCR serves several large multinational clients that we view as excellent opportunities for additional Descartes solutions. Looking at the market, we see continuing opportunities with our combined offerings, especially as challenges surrounding global trade and compliance intensify, including recent tariffs and sanctions issued by the U.S. regarding China. OCR is larger than some of our prior acquisitions, and we believe our trade professionals in the U.S. and India will complement our business effectively. We're excited to demonstrate the additional value we can offer as a combined entity, and we warmly welcome the entire OCR team. Later in the first quarter, we also partnered with ASD, which operates under the brand name Thyme. ASD specializes in customs and regulatory services with a strong presence in Ireland, complementing our existing customs business in Europe. This merger enhances our ability to deliver a more comprehensive solution for customs and security filings. Additionally, ASD's focus on providing visibility into air community assets aligns perfectly with our existing low-energy Bluetooth solutions, which help track air cargo containers globally. These acquisitions signify a $140 million investment aimed at enhancing the solutions we provide for our customers, aligning with our historical strategy and our future plans. Our business model is structured to generate and access capital for acquisitions that enhance our offerings, while also making organic investments to support our existing operations. Both approaches are vital to building a reliable long-term technology partner for our customers as they navigate supply chain and logistics challenges. Our emphasis remains on overall growth, both organic and inorganic, specifically targeting total growth and adjusted EBITDA. This strategy has benefited us in building the company we have today and in shaping our future. We've discussed the investments we've made in organic growth during past calls, and our financial results reflect the benefits of those investments. We've strengthened our customer success function to enhance client understanding of how to maximize our solutions, differentiated ourselves from competitors, invested in specialized personnel in our commercial team to convey the value of Descartes’ offerings, and bolstered our service group to help customers efficiently implement our solutions. These investments are yielding positive outcomes for both our customers and Descartes. We enjoyed another solid quarter of organic growth, driven by four key areas: our global trade intelligence business, real-time visibility solutions, routing and scheduling, and our e-commerce initiatives. In prior calls, I’ve elaborated on these areas, so I’ll briefly touch on each today. First, in global trade intelligence, we've seen growth due to the ongoing importance of compliance with global sanctions, as discussed earlier concerning OCR. Factors like evolving tariffs, duties, and navigating trade routes, including challenges with the Red Sea and Panama Canal, have influenced this growth. Second, our real-time visibility solutions provide customers with insights into shipments across various transportation modes. The strength of our carrier network and our efforts to quickly onboard new carriers have contributed to this growth, and we continue to lead the industry in shipment visibility. Third, in routing and scheduling, our solutions help customers optimize their fleets and improve delivery experiences. Our GroundCloud safety solutions are delivering market value with real-time driver feedback. Lastly, our e-commerce solutions assist customers with shipping and fulfillment challenges. We've observed good shipment volumes from smaller e-commerce retailers. The parcel shipment market in the U.S. is undergoing significant changes, and we've effectively collaborated with USPS, Amazon Logistics, UPS, and FedEx to enhance our customers' service quality. Despite facing pressures on global shipping volumes at the start of the quarter, we were pleased to see growth. As the quarter progressed, logistics providers expressed increased optimism for shipping volumes, particularly in ocean freight, where challenges in the Red Sea have increased demand and rates. While we experienced slower growth in international and domestic shipments this quarter, logistics providers are hopeful for a rebound as the year continues. In summary, our business performed well despite global shipping challenges, reaffirming its resilience. Now, I’ll hand it over to Allan for a detailed look at our Q1 financial results.

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 $153.1 million this quarter, an increase of approximately 11% from revenues of $136.6 million in Q1 of last year. While there was some revenue in the quarter from our recent acquisitions completed late in Q1, namely the OCR and Thyme ASD acquisitions, growth in revenue from new and existing customers was again the main driver in growth this quarter when compared to last year. We continue to see good growth in several areas of our business, including global trade intelligence solutions as well as our MacroPoint third-party visibility solution. While the full effect of both recent acquisitions will be more fully seen in Q2. Consistent with past quarters, our revenue mix in the quarter continued to be very strong, with services revenue increasing 11% to $137.8 million compared to $124.1 million in Q1 last year, consistent at 91% of revenue in each period. License revenue came in lower at only $500,000 in the first quarter, down from license revenues of $1.4 million in the first quarter last year, while professional services and other revenue came in at $13.0 million or 9% of revenue, up 17% from $11.1 million in the same period last year. As the revenue from past acquisitions, in particular, GroundCloud, contributed nicely to our growth in professional services revenue in the quarter. In addition, we should mention that there was also a slight decrease in revenue from FX this quarter, as the U.S. dollar continued to strengthen slightly against the euro, Canadian dollar, and British pound compared to the same period last year. We would estimate that our growth in services revenue without the impact of recent acquisitions or foreign exchange changes would have been nicely north of 8% in the quarter. Gross margins for the first quarter came in at 77% of revenue this year, up slightly from gross margin of 76% realized in Q1 last year, as operating leverage from growth in the business continued to drive a slight improvement in our gross margin ratio. Our operating expenses increased in the first quarter. This was primarily related to the impact of adding one month of the results from the recently acquired OCR business, while labor-related costs were also up but only slightly when compared to Q1 last year, as again, we continue to experience really good operating leverage in our growth in services revenue. As a result, we continue to see adjusted EBIT growth of 16% to a record $67.0 million or 44.3% of revenue in the quarter, up from $57.7 million or 42.2% of revenue in the first quarter of last year. As we indicated last year, the addition of the GroundCloud business in Q1 last year, while profitable, came to us with much lower adjusted EBITDA margins out of the gate than the rest of our business. Consistent with our plans with that acquisition, we have worked to integrate the GroundCloud business into our current business and in the process have improved those GroundCloud operating margins over the past year or so. In addition, as mentioned earlier, we simply continue to benefit from operating leverage that we experienced as we grow our business organically across several different product areas. From a GAAP earnings perspective, net income came in at $34.7 million, up 18% from net income of $29.4 million in the first quarter of last year. With these strong operating results, cash flow generated from operations came in at $63.7 million or approximately 95% of adjusted EBITDA in the first quarter, up a very strong 30% from operating cash flow of $48.9 million or 85% of adjusted EBITDA in Q1 last year. Note that Q1 is typically a seasonally lower cash flow collection quarter for us, so we are extremely pleased with the strong collections that were realized in the quarter. So as Ed mentioned earlier, we are pleased with the strong operating results in the first quarter as continued organic growth and some contribution from our recent acquisitions resulted in 11% growth in revenue and, more importantly, a 16% growth in adjusted EBITDA for the quarter. If we look at the balance sheet, our cash balances totaled $239 million at the end of April, down from cash balances of $321 million at the end of January. Despite continued positive cash flow from operations, we used just under $140 million of our cash balances to complete both the OCR and ASD Thyme acquisitions. As a result, we still have almost $240 million of cash as well as $350 million available for us to draw under our credit facility for future acquisitions. We continue to be very well capitalized to allow us to consider all acquisition opportunities in our market, consistent with our plans. As we look forward to the balance of our fiscal 2025, we should note the following: after spending $1.8 million on 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. Simply put, our business will continue to be non-capital-intensive. After incurring amortization costs of $15.0 million in Q1, we expect amortization expense will be approximately $51 million for the balance of this year, with this figure being subject to adjustments for foreign exchange and future acquisitions. Our tax rate in Q1 came in at 24.9% of pretax income, slightly lower than our expected range of 25% to 30%, and this was mainly as a result of a few smaller tax benefits realized in the first quarter. Looking at the balance of the year, we currently expect our tax rate will trend much closer to our expected range of 25% to 30% in the next few quarters, meaning that our tax rate for the year is likely to end up in a range between 23% and 28% of pretax income, so somewhere on either side of our blended statutory tax rate of 26.5%. However, as always, we should note, we should add that our tax rate may fluctuate from quarter to quarter from one-time tax items that may arise as we operate internationally across multiple countries. Additionally, after incurring stock-based compensation expense of $4.3 million in the past quarter, we currently expect stock-based compensation will be approximately $16.6 million for the balance of fiscal 2025. As well as we have mentioned in the past few quarters, we estimate the payments of contingent consideration for earn-out arrangements accrued for at the end of the quarter will be approximately $35.5 million in the balance of the year, subject to any necessary adjustments resulting from the final earn-out calculations. Of the estimated $35.5 million balance to be paid, $9.2 million relates to the portion of the earn-out arrangements accrued for at the time of acquisition and will be reflected in the cash flow from financing activities, while the remaining balance of just over $26 million will be reflected in cash flow from operating activities, most likely in Q2 when these balances are paid. And finally, going forward, 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. I will now turn it back over to Ed, who will wrap up with some closing comments and our baseline calibration.

Great. Thanks, Allan. So we're a month into Q2 and things are progressing as planned. We've got two new acquisitions that we're integrating and who we think will contribute more to our calibration as we become more experienced in operating them together. We're mindful of some weakness in U.S. domestic truck and parcel volumes but also mindful of some logistics service providers expressing some optimism about international ocean and air shipments. We keep these things in mind as we set our calibration for the quarter. 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 annual report, we provided a comprehensive description of baseline revenues, baseline calibration, and their limitations. As of May 1, 2024, using foreign exchange rates of $0.73 to the Canadian dollar, $1.07 to the euro, and $1.24 to the pound, we estimate that our baseline revenues for the second quarter of fiscal 2025 are approximately $136 million, and our baseline operating expenses are approximately $84 million. We consider this to be our baseline adjusted EBITDA calibration of approximately $52 million for the second quarter of fiscal 2025 or approximately 38% of our baseline revenues as of May 1, 2024. We continue to expect that we'll operate in an adjusted EBITDA operating margin range of 40% to 45%. Our margin can vary in that range, given such things as foreign exchange movements and the impact of acquisitions as we integrate them into our business like we saw with GroundCloud last year. We've got lots of exciting things planned for our business. It remains a challenging economic supply chain and compliance environment for our customers, but we believe our proven track record of execution, solid capital structure, and customer focus will help us serve them well. 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, operator, I'll turn it over to you for the Q&A portion of the call.

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

So Allan, you talked about the services growth being nicely north of 8% organically. That's a slight moderation from what we saw in the prior quarter. So I'm curious if you could give a little bit more color on what drove that moderation. And then as you think about the logistics customers expressing more optimism about the trends ahead, would you expect organic growth to reaccelerate as we move into the second quarter?

Yes. I'll just start, Justin, and then turn it over to Ed. But as far as the past quarter, organic growth was very, very solid in that mid-8% range, 8.5%, slightly better. There's a few minor adjustments in Q1 of last year, a few extra pieces of revenue that came in, which would have impacted the growth rate slightly this quarter, pulling it down a bit. So that's what we experienced. As far as going forward, Ed, any comments?

Yes, sure. Thanks, Justin. So we're hearing from and we're seeing in ocean stats that the ocean carriers are picking up and certainly processing more transactions and also charging more as they're trying to get their customers around some of the problems in the Red Sea and the Panama Canal. We've typically seen that translate into domestic volume increases in the U.S. and Europe, which we think will benefit us. You described it as moderation. We kind of see it all as in the same range right now. We're in the high 8s to low 9s over the past several quarters, and we think that's good for our business and don't really see much difference between this quarter and last quarter. And going forward, we like the environment certainly in our subscription business as we continue to sell well. And I think that's going to be a tailwind for us for a long time to come with more people putting money into solving logistics and supply chain problems. We'll see what happens with the transaction volumes. It's looking all right, right now, but we have to see if some of these domestic truck volumes come through. That would obviously be a tailwind for us if it does happen. And if we look back over the last 10 years, let's say, we're pretty happy to be in the high single digits in terms of organic services growth. So we'll see what happens, but we like what we see right now.

Okay, that's good to hear. That's helpful. And I guess secondly, I wanted to ask about the two acquisitions, OCR and ASD. It was good to see the capital deployment in the quarter. Anything we should be mindful of in terms of the impact these acquisitions could have on margins, similar to what we saw with GroundCloud? And any high-level commentary on the impact on overall organic growth as well based on how these businesses have been trending?

Yes. So we love these acquisitions. I mean, if you look at them, they're both in an area that we've done very well in the past with acquisitions. They are both coming in slightly below our margin levels at the moment. We think we have a great opportunity to raise that over time, up to our margin levels on average or even better as we have performed in some of those areas in sanctioned party screening, online party screening, and some of the other businesses we've acquired over the years. So we're very optimistic about that, and we think they bring a lot to the table in terms of providing new solutions in those areas to our customers. So we think there's a great opportunity there with those two acquisitions. We put some of what we see from them into calibration so far. We probably didn't put it all into the calibration yet because it's a new business for us, and we want to get comfortable with where the revenue numbers actually fall out as we're running them. But we put a bunch of it in, maybe not all of it. And hopefully, the next quarter or two, as we get more comfortable with the revenue production from those businesses, we'll put it all into the calibration number moving forward. But net-net, we're happy to have them here for our customers because we think it's the stuff that they want. We've also had a lot of success running these businesses that we've bought, businesses like theirs in the past. So we're excited about the opportunity to make these businesses more profitable over time like we have with some of the past acquisitions in the sanctioned party space.

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

A question just on the comments regarding strong ocean volumes didn't translate into domestic and, I guess, international trucking volumes. Is that primarily timing-related or are you referring to something else that impacted that?

No, no. What we're saying is, we're just, in the last short while here, last few months, we're seeing ocean volumes pick up and over the next couple of months, we expect that to translate as it has in the past into domestic volume increases.

Okay. That's helpful to understand the dynamic there. Is that reflected in baseline or no because baseline reflects, I think?

No, it wouldn't be reflected in baseline because baseline reflects visible and recurring revenue at the start of the quarter.

Okay, that's helpful. Just given the acquisitions, you deployed a lot of capital in two fairly large acquisitions. Has that consumed your internal teams for the time being? Are you still in the hunt for acquisitions of the capacity, internal capacity to make acquisitions here?

No. We really like what we see ahead of us in terms of the acquisition environment. I think I've mentioned maybe on the last call the same thing. We see a lot of stuff for sale and a settling of the prices for things that we're taking a look at that we think we can have an opportunity to get a bunch of deals done. Certainly, it's not taking up all the time of our team. We're busy, but we're happy to get those two acquisitions done and look forward to having more in the future.

And your next question comes from the line of Dylan Becker from William Blair.

Maybe to continue kind of the idea of ocean recovery to a certain extent, Ed, given that you guys have been in a better position here over the last several quarters of monetizing the customers in kind of more of a challenged volume environment, how do you think about your positioning here with maybe greater wallet share for that potential impending kind of recovery from a volume perspective?

Yes. I mean we're excited about it. The big news and what's been driving our growth rates over the past year in a lackluster transportation environment is that our subscription services are selling quite well and we see that strength continuing. We're happy to hear the ocean carriers start to say things are picking up. We think that will not only benefit us in the ocean space but potentially in the air space, which tends to follow along with it and the because they're both international. And the domestic space that eventually, when the goods land, has to move that cargo so domestically, so we see some opportunity for ourselves in that.

Okay. Great. And then obviously, kind of the two acquisitions here, following a common theme on content and compliance and maybe there's certainly kind of a localization component of that. But also, how do you think about kind of the leverageability of those resources over time, the compounding value that you can deliver, and maybe kind of deeper levels of automation throughout that intelligence network?

Yes, I appreciate your question. Regarding OCR, we have gained capabilities that we didn't possess prior to the acquisition. We look forward to introducing these offerings to our customer base. They have an ability to handle hazardous goods that we lacked before, and importantly, they utilize various artificial intelligence processes that enhance data collection and help organize commodities for their customers. We believe these capabilities can be expanded within our customer network over the next few years as we implement this functionality. We're really excited about it.

And your next question comes from the line of Daniel Chan from TD Cowen.

In the past, when you made some of these acquisitions, you've been able to drive significant operating leverage, and I know you talked about the margin opportunity you're expanding. But are there more cost synergies from these data acquisitions than from other business segments that you can extract out of these acquisitions to drive even more operating EBITDA margin expansion than you typically would?

I don't have a definite answer on that. There are certainly various possibilities. We have successfully managed many of these businesses well above our typical EBITDA margins. Both of these businesses have been operating just below those margin levels, so we see a chance to improve them over time. Additionally, they are gathering some of the same data that we collect, and there may be an opportunity for consolidation that aligns with what you mentioned. While this isn’t our primary focus when acquiring the company, it's something we might leverage in the coming years as we aim to enhance operating margins in those sectors and elevate them to levels we’re used to in similar segments. We’re optimistic about what we’ve observed so far. We’ve acquired companies in some of our strongest business areas, both of which are growing steadily, and we believe there’s potential to increase their profitability, which are all favorable signs in an acquisition. All these factors are present in this situation with these two companies.

That's helpful. And then maybe just a more general question on the sales cycles, and we're still hearing about long sales cycles from a lot of peers in the logistics space. But it seems like you guys are still not totally seeing that. The growth rate is suggesting those sales cycles are still holding in fine. Why do you think you're not seeing some of those sales cycles making whereas a lot of your peers are?

I have mentioned several times over the years that post-pandemic, with the supply chain challenges faced during that time, many of our customers have become more focused on enhancing their supply chain operations. I can't speak for other companies, but we've noticed that our customers are prioritizing areas they feel need improvement. Consequently, many of their investment dollars tend to be directed toward these enhancements, often irrespective of their daily business conditions. They recognize the need to improve their supply chain over time and are willing to invest in that area, even if they aren't able to increase investment in other parts of their business as quickly when they encounter daily challenges. They might opt not to pursue certain projects, but the supply chain initiatives remain a priority, which I believe addresses your question.

And your next question comes from the line of Stephanie Price from CIBC.

I was hoping you could talk a little bit more about what you're seeing in e-commerce. I think you added to the growth vectors commentary this quarter for the first time in a few quarters. Maybe touch on what's changed there and maybe a bit about what you're seeing with Amazon Logistics as well.

I mean Amazon and some of the larger providers there continue to kind of switch around. You've seen Amazon rise up to the #2 provider for local delivery in that e-commerce business, which is fine with us. I mean, the big growth that we have and the bulk of our customer base in that e-commerce business is in the small- and medium-sized e-tailers, and we continue to do very well there. You heard me mention it as a growth area for us, and I think it will be for some time to come as we believe that e-commerce is going to continue to grow. And when it does, we're going to continue to help those service providers with the picking, the packing, the labeling, and then the parcel manifesting so that they can actually ship the goods. They all need help with that. The small and medium-sized e-tailers are growing not only in number but also in size once they get into the markets, and we're one of their main software providers in helping them solve some of the biggest challenges they have. And we think that's created a great opportunity for us. And you can see in the numbers in that business, and I suspect it's going to continue to be like that for some time to come.

Yes. This has been our target for years. We're targeting 10% to 15% growth in adjusted EBITDA, and I think we've overperformed that. I think our 10-year average is 18%. I think you could expect more of the same. We're going to set a target. We're going to strive to overachieve and to do better than that target. And we see a lot of opportunity to continue to do that. Nothing is guaranteed, but with the acquisition opportunities, with solid organic growth, that's going to continue to be the target. And we do operate at the high end of our EBITDA margin range at 44.3%, our range being 40% to 45% that Ed mentioned earlier. And same sort of theme there. We're going to continue to run our business to try to improve our EBITDA margins. Probably have to see us operate above that 45% for a number of quarters before we would entertain any increases. But more of the same, I think, is what we would like to see and expect to continue to see from our business.

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

I wanted to ask about your acquisitions, OCR and ASD. What were their growth rates last year? Can I say they were in the teens, or was it low double digits or maybe single digits?

Yes, they're both coming in high single digits, low double digits over the last couple of years, which is consistent, maybe a little lower than what we're seeing in the same areas in our business, but in the same ballpark, let's say.

Okay, I was going to ask you, so you said like OCR is tracking a little bit slower than, let's say, your own MK or visual compliance?

Yes, but close enough. It's in the range. It's maybe a little smaller, but growth, but close.

Yes. Okay. Got it. Got it. And Ed, the calibration you gave, $136 million. Last quarter was about $130.5 million. Can I think that, that delta is the contribution from ASD and OCR?

Yes, Steven, as Ed mentioned earlier, we haven't operated those businesses for a significant time. Consistent with our approach to calibrating new acquisitions, a substantial part of those acquisitions has been incorporated into our calibration. This is why the numbers increased more than you might have anticipated. We expect to refine this further and see potential growth as we manage those businesses for a longer duration, which is partially included in the calibration. Both acquisitions are certainly partially represented in that.

And your next question comes from the line of Kevin Krishnaratne from Scotiabank.

Just a follow-up on e-commerce. So a couple of years ago, you bought NetCHB, which I think had technology on expedited shipping for small packages, the Type 86 filings. It sounds like there has been some recent changes in the U.S. that might require more scrutiny on how quickly customs are cleared under that type of filing, and I think some brokers are seeing their ability to ship beyond pause. So I guess my question to you is, how do you think about that business? It seems like it could be a short-term headwind. But on the other hand, maybe it's a bit of a tailwind if the change is sort of increased demand for some of your other customs services. I'm just wondering if you could comment on this, it seems relatively new.

Thank you, Kevin. We've seen significant growth in our businesses over the past few years, and we believe our long-term outlook is positive. I agree that the government is requesting more information from certain service providers, which we see as a beneficial opportunity for us in the long run, since we are positioned to collect and deliver that information to the government, enhancing our service for customers. Some providers have faced challenges with the government and may have been asked to improve their filing practices or stop altogether. We view this as an opportunity, as we expect to gain volume from those firms due to our dominant position in the market. Additionally, with the government's demand for more information, we see potential to offer enhanced services to our customers moving forward. Overall, particularly with platforms like Instagram and TikTok driving growth and product sales, we anticipate continued progress and benefits as the largest filer for Type 86.

And your last question comes from the line of Scott Group from Wolfe Research.

Guys, I'm on the road. Hopefully, you can hear me okay. So Ed, when you guys do a couple of relatively large acquisitions in the quarter, is the thought that from here, you pause for a little bit and see how they perform? Or do you think that there's more to go in terms of M&A activity over the course of the year?

Thanks, Scott. We can hear you fine. We have a pretty significant corporate development function at this point and think we have certainly the bandwidth to do more acquisitions. We're also in a position where we see a lot coming at us right now, a lot of things for sale, a lot of things that we think are in a price range that we think is reasonable and we'd like to take advantage of that. So I don't think you're going to see us slow at all based on the last two acquisitions we did. Certainly, they were significant, at least one of them was significant, and that's a great addition for our business. But we also have the ability to get more done and the ability to get more people working on getting more acquisitions done while we integrate the ones that we just did. So we're taking advantage of the breadth and size of our business to do that. A lot of the price increases don’t really affect us other than being an indication of the current situation. Rates are increasing, and it's a capacity-focused industry. When there's excess capacity, rates typically decrease. Conversely, when capacity is reduced, rates go up, and we are observing that trend. Some of the challenges I've mentioned regarding the Red Sea and the Panama Canal are playing a role in this. Companies are doing well at the moment, which gives them the chance to raise rates, but this doesn’t significantly impact us. We monitor these changes, but we charge by the transaction, so we are not heavily affected by their rates. In fact, it's a good sign for the ocean freight market, and the air freight market usually follows close behind. Domestic trucking also tends to react quickly to these shifts. Regarding the U.S. Postal Service, we see significant opportunities in e-commerce, which involves the U.S. Postal Service and other providers like Amazon, UPS, FedEx, and smaller companies we work with. As their business grows, we anticipate benefiting from that, as we have in the past.

That concludes our question-and-answer session. I will now hand the call back to Mr. Ed Ryan for any closing remarks.

Great. Thanks, everyone. We appreciate your time today on the call and look forward to reporting back to you on our Q2 results in September. Thanks, and have a great day.

This concludes today's call. Thank you for participating. You may all disconnect.