Descartes Systems Group Inc Q4 FY2024 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the Descartes Systems Group Quarterly Results Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct the question-and-answer session. This call is being recorded on Wednesday, March 5, 2025. 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 trade tariffs and economic uncertainty on our business and financial condition; Descartes' operating performance, financial results and condition; cash flow and use of cash; business outlook; baseline revenues, baseline operating expenses, and baseline calibration; anticipated and potential revenue losses and gains; anticipated recognition and expensing of specific revenues and expenses; potential acquisitions and acquisition strategy; cost reduction and integration initiatives; and other matters that may constitute forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties, assumptions and other factors that may cause the actual results, performance or achievements of Descartes to differ materially from the anticipated results, performance or achievements implied by such forward-looking statements. These factors are outlined in the press release and in the section entitled Certain Factors that May Affect Future Results in documents filed and furnished with the Securities and Exchange Commission, the Ontario Securities Commission, and other securities commissions across Canada, including our management's discussion and analysis filed today. We provide forward-looking statements solely for the purpose of providing information about management's current expectations and plans relating to the future. You're cautioned that information may not be appropriate for other purposes. We don't undertake or accept any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements to reflect any change in our expectations or any change in events, conditions, assumptions or circumstances on which any such statement is based, except as required by law. And with that, let me turn the call over to Ed.

Hey, thanks, Scott, and welcome, everyone, to the call. Today, we're reporting record fourth quarter and annual results and continued strong services revenue and adjusted EBITDA growth. We're excited to go over these results with you and give you some of our perspective on the current business environment. But first, let me give you a roadmap for this call. I'll start by hitting some highlights of last quarter and the fiscal year and some aspects of how our business performed. I'll then hand it over to Allan, who will go over the Q4 and FY '25 financial results in more detail. After that, I'll come back and provide an update on how we see the current business environment and how our business was calibrated for FY '26. And we'll then open up to the operator to coordinate the Q&A portion of the call. So let's start with the fourth quarter that ended on January 31. Key metrics we monitor include revenues, profits, cash flow from operations, operating margins, and returns on our investments. For this past quarter, we again had a very good performance in each of those areas. Total revenues were up 13% from a year ago with services revenues up 15% from a year ago. Net income was up 27% from a year ago with adjusted EBITDA up 14%. Our adjusted EBITDA margin climbed 2 points to 45% from Q3 and 1 point from a year ago. We also generated almost $61 million in cash from operations in Q4 or 81% of adjusted EBITDA, in line with how we would expect the business to perform. That quarter topped off a great year with record results. For the year, revenues were up 14%, net income was up 24%, and adjusted EBITDA was up 15%. Our headline targets are 10% to 15% adjusted EBITDA growth per year so it's great to see the business performing as expected. At the end of the year, we had over $235 million in cash, and we were debt-free with an undrawn $350 million line of credit. We remain well capitalized, cash generating, growing and ready to continue to invest in our business. We had a few things that were the primary drivers of growth in our business, and I'll talk a bit about each of those now. First off was our strength in domestic logistics and supply chain. Our business has had a long history of helping domestic transportation moves, including our deep strength in truck route scheduling, dispatch and execution solutions, last-mile delivery enablement, mobile delivery monitoring execution, vehicle tracking, transportation management and driver training. We've continued to make investments in these solutions over the past year to help our customers make their fleets more efficient, provide customers with Uber-like fast last-mile delivery experiences, and plan and track shipments on vehicles that they've hired. One area of investment for us continues to excel. Our MacroPoint solutions are still the leading customer source for real-time visibility. The solution is integrated to our own and other transportation management solutions to provide customers a seamless ability to track shipments. And with its integration to the Global Logistics Network, it can provide visibility even deeper in the supply chain to other modes of transportation or necessary before the domestic move. A broad network of connected carriers, freight brokers and other logistics intermediaries and shippers give us better tracking efficiency than any provider out there. So MacroPoint was a great catalyst of growth and we think an important area of continued investment as domestic transportation increases in importance. The second area was our global trade intelligence business. This encompasses such things as our tariffs and duties technologies, our sanctioned party screening solutions, and our data mine trend research tools. We saw strong demand for these solutions in Q4, likely in no small part due to the focus on the global trade environment. Potential and implemented tariff changes have had our teams very busy updating our solutions and supporting our customers with various tariff-related questions. Sanction lists went through many changes from both an outgoing and incoming U.S. administration. And with the trade environment becoming more challenging, we've seen an increase in interest in our data mine trade research tools as companies monitor competitors and peers' trade flows to understand the most efficient and cost-effective way to move goods from existing and potentially new suppliers and routes. The interest in our global trade intelligence solutions was very apparent as the in-person innovation forum we recently held in Washington, D.C. At the event, we shared many new developments in our tools, including those leveraging artificial intelligence technologies to help with tariff classification and research and enhancements to our risk assessment capabilities. We had many Descartes' speakers and government trade representatives on-site to provide the latest information. The high attendance reflected a thirst for information at this point about global trade issues, as well as interest in not just speaking to Descartes but to share information with other attendees about how businesses are coping with the amount and pace of change in the global trade landscape. So big interest in global trade intelligence, which was reflected in our Q4 results. The third area of contribution was from our recent acquisitions. In fiscal 2025, we combined with five businesses, consistent with our total growth strategy. Our plans for the year were to grow our business 10% to 15% over the previous year through a combination of organic and acquisition activities. Our business generates cash that can be reinvested to improve the business for our customers and stakeholders, including in acquisitions. We consider where to invest based in part on returns we can generate in our invested capital. As I mentioned, we combined with five businesses this year. I've spoken about how their contribution to our business has been reflected on previous calls. However, I wanted to provide a bit more of an update on our two most recent acquisitions, MyCarrierPortal and Sellercloud. Our MyCarrierPortal investment helps U.S. freight brokers with risk management of the thousands of truck carriers they deal with for domestic moves. Their platform allows the brokers to evaluate the risk of working with a carrier based on a number of factors, including licensing, past service record, safety potential fraud risk, insurance compliance. This is a natural fit with our MacroPoint business where we're helping freight brokers track loads and identify potential available domestic truck capacity. Our MyCarrierPortal integration is well ahead of plan and the contribution to the combined business has been exceptional. In particular, the combined offering of MacroPoint and MyCarrierPortal has been well received by customers with several new customers coming on using the combined solutions. A great investment, a great team and excellent contribution to our business in Q4. Our Sellercloud investment has been paying similar dividends as a great contributor to Q4 ahead of our plans. Sellercloud focuses on inventory and order management for e-commerce sellers who are using multiple channels to sell, with particular strength with small and mid-market e-tailers. By combining Sellercloud with our strength in warehousing and shipping of e-commerce orders, we offer a very comprehensive suite to our customers that's flexible as they grow and add new sales channels. In particular, the combination of Peoplevox and Sellercloud is a very powerful offering for our customers. We've already seen significant post-deal joint selling success in the U.S., Europe, and Australia, a good Q4 contributor with momentum as we enter the new fiscal year. I'll provide some more perspectives later on the current trade environment, which is to hit what we saw this past quarter. There were some slight general increases in volumes across air and ocean modes, which we attribute to some imports being expedited ahead of potential tariffs and the general holiday flow. But I wouldn't characterize it as significant or across the board in all industries as it appears that many businesses continue to evaluate how to best proceed in the current trade environment. Our global shipping report that we put out every month noted that we saw some of the highest January ocean shipping numbers and almost record numbers of imports from China ahead of tariffs. But again, this was ahead of the new tariffs put in place and the Chinese Lunar New Year slowdown, so good volumes for Q4 were certainly helpful. It's a challenging business environment for our customers. Our primary purpose is to be able to help our customers meet these types of business challenges. Our own business has been designed to weather significant changes to the global and domestic trade landscape. We focus on total growth and have diversified our business across international and domestic supply chains. We grow organically and by way of acquisition. We're diversified across all modes of transportation. We provide business value across 7 solution pillars. We have over 26,000 customers with customer concentration. We serve all parties to supply chain and logistics transactions, carriers, logistics service providers, ports, governments, and shippers. We serve customers on a global basis with a global workforce. We believe that all of these levers to our business provide us with many opportunities to help manage our business through prosperous and challenging times. Descartes as a business, our customers rely on, that our team can be proud of and that our stakeholders have relied on to consistently deliver. Descartes has shown again with our results this past quarter and year. So let me just summarize it as I hand it over to Allan to give the full financial details in the quarter and year-to-date. We had good financial results, the business performed well, and we believe that's a good reflection of the value that our customers continue to get from our solutions. The quality and contribution of our acquisitions we've added to our business and the hard work that our team continues to put in for our customers. We ended the quarter with more than $230 million in cash, $350 million in available credit and a market opportunity where we can continue to grow the business for our customers, both organically and through acquisition. We remain focused on profitable growth so that we 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 the entire Descartes team for everything they've done to contribute to a great quarter, year and business overall. With that, I'll turn the call over to Allan to go through our Q4 financial results in more detail.

Thank you, Ed. I will now discuss our financial highlights for the fourth quarter and the year ending January 31, 2025. We are pleased to announce quarterly revenues of $167.5 million, which is an increase of over 13% from last year's Q4 revenue of $148.2 million. Our revenue mix this quarter remained robust. Despite facing adverse effects from foreign exchange, service revenue rose by over 15% to $156.5 million compared to $135.7 million in the same quarter last year, accounting for 93% of total revenues, up from 92% in Q4 last year. Excluding the impact of our recent acquisitions and currency fluctuations, we estimate that growth in service revenue from both new and existing customers was about 6% compared to the same quarter last year. Professional services and other revenue, which includes hardware, totaled $10.7 million or just over 6% of total revenue, a slight decline from $11.1 million or 7% of revenue in the same quarter last year, mainly due to a small decrease in hardware revenue this quarter versus last year. As previously communicated, hardware revenue fell by more than $3.5 million from Q3, where we completed a replacement program for certain AI-enabled cameras in our GroundCloud business. Additionally, after a significant license revenue quarter in Q3 of approximately $3.5 million, license revenue dropped to $300,000 in this quarter, down from $1.4 million in last year’s Q4. For the year, we achieved record revenue of $651 million, an increase of just under 14% from $573 million the previous year, despite the impacts of foreign exchange rates. Services revenue for the year totaled $590 million, representing 91% of total revenue, an increase from about $521 million last year, with contributions from acquisitions and growth from new and existing customers. Gross margin for both the fourth quarter and the year was 76% of revenue, consistent with last year’s fourth quarter and annual margins. Operating expenses for the fourth quarter and the year increased mainly due to the five acquisitions completed this year, including the OCR acquisition early in FY '25, with an overall increase of just under 12%. Thanks to strong revenue growth and gross margins, adjusted EBITDA reached a record $75 million in the fourth quarter, accounting for 44.8% of revenue, which is an improvement of over 14% from $65.7 million or 44.3% in the same quarter last year. After experiencing a dip in adjusted EBITDA margins in Q2 and Q3 due to lower margins from increased hardware revenue, we saw a recovery in our adjusted EBITDA margin during the fourth quarter driven by organic growth and a return to lower hardware revenue. Similar strong adjusted EBITDA growth resulted in a record $284.7 million or 43.7% of revenue for fiscal 2025, an increase of 15% from $247.5 million or 43.2% of revenue last year. Additionally, to streamline operations and reduce redundancy, we completed a restructuring plan during the fourth quarter, reducing approximately 45 personnel or just under 2% of our workforce. This plan is expected to save about $4 million annually and incurred charges of just under $800,000 in Q4. From a GAAP earnings standpoint, net income for the fourth quarter was $37.4 million, an 18% increase from last year’s Q4 net income of $31.8 million. For the year, net income reached $143.3 million or $1.64 per diluted common share, up almost 24% from $115.9 million or $1.34 per diluted common share last year. Despite these strong operating results and customer collections, cash flow from operations was $60.7 million or 81% of adjusted EBITDA in the fourth quarter, down from $63.4 million or 96% of adjusted EBITDA in last year's Q4, excluding the effects of earn-out payments made on prior acquisitions in both periods. For the year, cash flow from operations, also excluding these higher earn-out payments, was $244.3 million or 86% of adjusted EBITDA, an increase of 11% from $220.3 million or 89% of adjusted EBITDA last year. Overall, we are pleased with our results for the fourth quarter and fiscal 2025 as we observed revenue growth that enabled us to achieve a 15% increase in adjusted EBITDA while improving our adjusted EBITDA margin to 43.7% of revenue, along with significant cash flow growth for the year. Our balance sheet shows cash balances of $236 million at the end of January. For the year, excluding earn-out payments, we generated operating cash flow exceeding $244 million. This was offset by roughly $290 million invested in new acquisitions and an additional $34 million paid towards notes from past acquisitions. With over $236 million in cash and an undrawn $350 million line of credit, we are well-capitalized to pursue acquisition opportunities consistent with our strategy. Looking ahead to fiscal 2026, we expect to incur between $6 million and $7 million in capital additions, following approximately $6.8 million spent this past year. We anticipate a slight increase in amortization expense to $71.2 million for fiscal 2026, subject to fluctuations from foreign exchange rates and future acquisitions. After making approximately $34 million in earn-out payments last year, we anticipate an additional $3 million in FY '26. Our income tax rate for the fourth quarter was about 23.3% of pretax income, leading to a yearly tax rate of 24.2% for FY '25, which is lower than our statutory tax rate due to the reversal of certain uncertain tax positions. For FY '26, we expect the tax rate to range between 24% and 28% of pretax income, somewhat around our blended statutory tax rate of approximately 26.5%. Lastly, we are projecting stock compensation to be approximately $15.1 million for fiscal 2026, subject to any future equity grants and potential forfeitures of stock options or share units. Now, I will hand it back to Ed to provide our baseline calibration for Q1.

Hey, great, Allan. These are difficult conditions for our customers. Some of the recent changes include U.S. tariffs on imports from China, Canada, and Mexico, which range from 10% to 25%. Earlier today, the White House announced a one-month exception for automakers complying with the USMCA. Canada and China have responded with their own tariffs, and Mexico plans to start imposing tariffs later this week. The U.S. is also set to impose reciprocal tariffs to address perceived trade imbalances and may target the EU as well. The de minimis tariff exemption for low-value imports was temporarily lifted. The U.S. administration is considering changes to the USPS and is revisiting its sanctions related to the war in Ukraine. The International Longshore and Warehouse Union has reached a labor deal, reducing uncertainty in labor relations. Proposed U.S. port fees apply to vessels that are not made in the U.S. Ships are starting to operate again in the Red Sea, and there’s new ownership of the Panama Canal ports. These rapid changes create uncertainty for our customers, who are unsure how long tariffs will be in effect. This uncertainty complicates decision-making for businesses. They are grappling with how to adjust their supply chains, trading partners, and deal with increased scrutiny and potential sanctions. Descartes has navigated challenging business environments before, like in 2008, and we aim to do so again. We are well-positioned because we are diversified across domestic and international logistics, with strengths in domestic transportation, routing, scheduling, transportation management, and last-mile e-commerce solutions. Our global trade intelligence capabilities enable us to assist customers in navigating tariff management, sanction lists, and the complexities of export licensing. We have a global reach backed by a strong logistics network, and our growth strategy involves both organic growth and acquisitions. We have sufficient capital, with over $235 million in cash and $350 million in undrawn credit. Our focus remains on helping customers, who are uncertain about how these market changes will affect them. Different industries will react differently to these changes. Some may pass increased costs to customers, others might compromise profits to stay competitive, while some might exit their markets. This unpredictability makes forecasting difficult for both our customers and us. Descartes aims to grow adjusted EBITDA by 10% to 15% annually, which will come through various activities. Given customer uncertainty, our quarterly growth patterns this fiscal year may differ from previous years, even though our annual growth goal remains intact. We are aware of how global trade and currency challenges might impact our final quarterly results. Our annual report covers baseline revenues and their limitations. As of February 1, 2025, we estimate baseline revenues for the first quarter of fiscal 2026 to be around $145 million, with operating expenses of approximately $89.5 million. This gives an adjusted EBITDA of about $55.5 million for the first quarter, equating to approximately 38% of our baseline revenues. We expect to maintain an adjusted EBITDA margin of 40% to 45%, though margins may fluctuate due to revenue mix, currency shifts, and acquisitions. Our customers face significant challenges and rapid changes. We strive to be a reliable partner, helping them navigate the complexities that hinder their business decision-making. Thank you for joining today’s call. We are always available to discuss our business in whatever way is most convenient for you. I’ll now turn the call back to the operator for questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Your first question comes from Dylan Becker of William Blair. Your line is already open.

Hey, Ed, Allan. You kind of hinted at this on the tail end of your remarks, Ed, but wondering what obviously global complexity and uncertainty is going to look like for Descartes this year? I mean, if anything, that's probably the new certainty and it's driving a lot of decision questions, I'm sure, from customers. There's a lot of variables. Some may be speculative in nature at this point in time. But how should we think about kind of a simplified netting out? Because historically, complexity has served as a net positive for Descartes.

Yeah, we think it will be here as well. But for our customers, there's a lot of uncertainty and things are changing and changing back quite frequently just in the past month or two. Obviously, I mentioned we operate our Global Trade Intelligence business is a big beneficiary of people needing to pay close attention to this information. So that's great for us. To the extent it affects trade flows, we can benefit and suffer right along with our customers depending on what it does to their business as they move stuff across borders and the challenges they may face when they do that. There's net positives in there for us. There's net negatives if they reduce the amount of goods that they ship across borders. You probably heard it in my prepared remarks, we don't really know what's going to happen next. We just want to be prepared to help our customers where they need help, and we want to be prepared to manage our business consistently where we need to pay attention to things that are changing. So I think we've done a very good job in that in the past. I'd expect us to continue to do a good job of that. We're pretty conservative. That's why I'm bringing all this up on the call. But the big answer to this is we don't know what's going to happen next, and I don't think anyone else does either.

Sure. Yeah, I think that's totally fair. And to your point, probably a good place to be, at least for an area of customers to continue to lean into and look for some level of clarity, if there is any. Maybe on the AI front, right, you do have a substantial data set that you can leverage and help kind of drive some efficiency despite some of this uncertainty. I guess, maybe how are you guys thinking about incremental areas for external monetization connection points throughout that data as well as maybe, Allan, anything you guys are seeing internally in your ability to kind of deploy and manage and service your customers that can drive incremental kind of operating leverage across the business? Thanks.

Thanks, Dylan. Yeah, we're seeing a ton of opportunity with AI. I've mentioned a bunch of them on previous calls, both in our own internal operations and development, customer support, and marketing ability for us to be more efficient in delivering services and also provide better service to the customers, which is all great news. In addition to that, we have the ability for AI in our actual products to deliver, and that's probably what we're most excited about in the long run. I mentioned a bunch of them on previous calls and the global trade intelligence pillar and the transportation management pillar and the fleet management pillar. But just some examples, we have an AI model for improved party screen, the DTI pillar. We've seen significant productivity improvements over the last six to eight months as we're doing that and rolling out to customers. We've released a beta chatbot for the data mine service to interact with our trade data, which will help customers gain better usability of that information. In the fleet pillar, we're using machine learning models to improve ETA calculations, which then in turn, improves the customer's planning process. So there's lots of examples of this in the business and keep coming up with new ones almost every day. We've separated out an AI team that's able to go in and help any of the pillars with ideas that they have. And so I think this is going to be a big business for us in the long run. If you think about it, people are increasingly putting IoT devices out in the field to tell you what various trucks, planes, ships, and engine components, tires, et cetera, all these things that are reporting back to us about what's going on in the field. And right at the same time, AI comes out and gives us the ability to go through that information very rapidly and help our customers make better decisions. I think 10 years from now, that's going to be a very big part of our business. So we're excited about that opportunity.

Very helpful, thanks, guys.

Your next question comes from John Campbell of Stephens Inc. Please go ahead.

Hey, good afternoon.

Hi.

On the margin front, there is still a lot of uncertainty. However, looking at the overall situation, the revenue mix shift clearly benefited us this quarter and is likely to continue. The cost reduction plan you've implemented will yield some savings next year, along with a couple of acquisitions. In the past, those acquisitions have helped improve margins over time. It appears there are favorable conditions as we approach the next fiscal year. Much will depend on the revenue pattern and its consistency. If we assume the typical revenue cadence remains intact, it looks like margins could exceed the high end of your current target of 45%. I understand you want to see a few quarters of results and some resolution before confirming this, but I’m interested in your perspective on the margin range and how we should view it for this year.

Let me take this one. So John, if you watched us in the past, we usually bump up against even a couple of times through that range before we adjust it up. We're pretty cautious about this kind of stuff, and there's a couple of reasons. One, foreign exchange can change it quickly. You're seeing that right now. The foreign exchange movement going on at the moment that's strengthening U.S. dollar, which changes the numbers around. We don't really care so much. We run the whole business but it's out there and it would affect the percentages that we provide to you. Two and maybe more importantly, most of the businesses that we buy and you know we're pretty acquisitive and a lot of good deals are going on right now, and if there's a lot of uncertainty in the market and we're a stable business or at least a lot more stable than other companies in our industry, we might be in a very good position to buy companies. And when we do, oftentimes, those companies don't have nearly as high an EBITDA margin as we do. So for me to tell you that it's going to keep going up, I would have to assume that all things are going to stay the same, and I don't believe they will. We buy a business that makes 25%, 30% product margin with the expectation that we're going to grow it over time to more of our levels. But the day we buy it, it drags our EBITDA margin down considerably, and we always have that in the back of our mind when we're putting out these numbers. So now it's possible that we'll bump up against it again. It's possible that we'll go over it. I'm not going to apologize for that when it happens. But at the same time, I want to be conservative when we're putting it out there. It's very possible we go buy some other businesses, and that temporarily drags our EBITDA margin down. And that's a good thing in our mind. But I also don't want to miss a number that I told you would take.

Yeah, totally makes a lot of sense.

Let me add one more thing. Over time, we have a core business that becomes increasingly profitable as it grows, meaning it has a low incremental cost. As our business expands, we believe that we can continue to increase profitability, assuming other factors remain constant, which we know they usually don't. The core business has relatively fixed cost components, so as revenue rises and costs remain stable, that leads to consistent growth in profitability. However, certain factors like acquisitions could potentially lower those numbers, which is why we are taking a cautious approach.

That's helpful. You hinted at this, but regarding mergers and acquisitions, there's a lot of market uncertainty out there. If you’re starting to feel it, I can only imagine what smaller players are experiencing right now. Could you discuss whether this uncertainty is affecting the multiples? Have you noticed any changes? Additionally, are new opportunities coming to you organically or being presented to you?

We've seen it over the last year and you see that's helping us get deals done. We've got five deals done this year. We think we're in a pretty good position to get more done in the future. At the same time, I think the real question you're asking is, am I seeing it right now because of the uncertainty that's going on in the last month? And the answer to that is no, it doesn't go that fast. It'd be a couple of months before people go, boy, this is going to be a problem. Maybe I should sell my business for less. There's usually a lag, and I wouldn't be surprised if there were this time, if, in fact, things turn out not positive that they're going to. If the world runs into trouble, we're probably going to fare better than most. And some of those companies are going to be in a position where they feel like they have to sell and that's going to affect the purchase price, and that will be good for us.

Excellent, thanks, guys.

Your next question comes from Stephanie Price of CIBC. Your line is already open.

Thank you. Just circling back on the tariff discussion. You mentioned 2008 in your prepared remarks. Can you dig into that historical precedent a little and just talk a bit about what the typical consumer behavior was in those volatile times and if you're seeing the same thing this time around?

I can only discuss what happened in 2008, and I haven't observed much yet regarding current prices. I am curious about what will occur if prices rise. In 2008, everything came to a standstill around October, shopping slowed down during Christmas, and the following year, we were close to a depression. We definitely saw a decline in consumer spending. If you've been with us for a while, you likely heard me mention that our shipment volumes fell by approximately 8% that year, which still surprises me when I think about it, as it could have been much worse. People still need to buy essentials like food and diapers. While they might not purchase luxury items, they continue with their daily lives, assuming they still have jobs. If they don't, their spending habits change more significantly. However, during that time, most individuals retained their employment, which explains why the decline was only 8%. Even if someone cuts back on other purchases, they still need to buy basic items. The cost to transport those essentials remains the same. So, while our transaction numbers went down by 8%, they didn’t drop by 30% or 40%, which is not the situation we are in now. Currently, it feels like there is considerable uncertainty, which could make people hesitate before deciding on their next steps. Looking back at that period, it wasn’t enjoyable, but it allowed us to make some excellent acquisitions at favorable prices over the next few years as a result of that recession. I am uncertain about what we are facing now, but if we are going into a recession, it may not be pleasant. On the other hand, we might find ourselves doing well through this period. When we reflect on this time later, we may see it as a catalyst for the next phase of growth at Descartes. Our perspective on this situation might differ from that of most businesses because of our unique position and operations, as I explained in my prepared remarks. Those are my thoughts on the matter.

That's good color. Thank you. And then just on MacroPoint, you also mentioned that in the prepared remarks. Can you talk a little bit more about the growth you're seeing there, the growth rate of the business? And what sort of additional investments you're looking to make in the business?

We are continuing to perform exceptionally well in the brokerage space, positioning ourselves as a leader and also making significant strides in the shipper space due to our tracking capabilities. While our competitors only track about 55% to 60% of their shipments, we are able to track between 85% to 90%. This means that when you give a shipment to track, there’s a high chance our competitors won't be able to provide any tracking information. This is critical in a high-volume broker market where tracking as many shipments as possible is essential. Our strong network of truckers has greatly benefited us, especially compared to competitors who operate more like software companies while we function as a network. As a result, we are attracting customers from these competitors and entering the shipper market, which we had not focused on as much in the past. However, we are shifting our attention there and believe that shippers will value our superior tracking rates as we expand into this area. We are also making investments to enhance our software for large retailers and manufacturers, and I expect to see significant progress in this direction over time.

Great. Thank you very much.

Thank you.

Your next question comes from Paul Treiber of RBC Capital Markets. Your line is already open.

Thanks so much. And good afternoon. You mentioned the uncertainty in the environment and potentially that customers could pause what they're doing to evaluate that. The professional services in the quarter and license revenue were lighter than the previous quarter. Is that related to seasonality or did you begin to see some of that pause impacting the revenue there?

No, no. In fact, let me frame that. We're mostly looking at the services number at the time, and that recurring number is the way that we drive our business. I'd like to have no professional services revenue, meaning that everyone can just get our software and use it right away. I don't think it's ever going to be that simple. In some of the software packages, some of them are complex, but not all of them. And they need people to go in and install them and make sure that they get what they're paying for. And we want to be there to do that for them. But I'm not as focused on those two numbers. I mean, we want growth in recurring revenue, and we sell professional services so that we can install our products that need to be installed over a period of time that are still a little more complicated to run. The licenses, I'd rather themselves recurring now software fees, but some customers have old deals with us where they're able to get license fees that they do. But now, we're price-selling as well as we've sold in this past quarter, so no, nothing there.

And shifting and looking at service revenue, Allan mentioned, I think it was 6% organic or constant currency or organic service revenue growth. I think it was down a little bit from the prior quarters. Any moving parts there to call out just in terms of the comparison to the last couple of quarters?

Nothing significant. It all pertains to the volumes from various smaller customers, and I realize that the percentages, whether it's 6%, 6.5%, 7%, or 7.5%, seem minor. For us, it may even be more. We're primarily interested in their continued growth. There can be numerous small factors influencing that, many of which are beyond our influence. It is crucial for us that this growth continues. We have consistently communicated our goal to increase EBITDA by 10% to 15%, and that remains our focus. At the same time, we recognize that increasing revenue is also essential. Percentages like 6% and 7% are acceptable to us. Keep in mind, the people running this company have been here for 30 years, and I have witnessed growth rates as low as 1% or even 0.5%. Therefore, numbers like 6%, 7%, or 8% are quite encouraging to me.

And then just a bigger picture question. You mentioned there's a lot of interest in your global trade intelligence products because of the tariff uncertainty. How much is that, first of all, getting you in the door? And then once you're in the door, is it opening up the discussion around broader digital transformation of supply chains?

Yeah. Sometimes, I mean, the biggest driver of that is our network, right? So people sign up for a network and then we start now that you're on the network, here's what else you can do. That's certainly the biggest way and the best way that we get people in the door and sell them more stuff. But yeah, it happens from time to time with global trade intelligence. People get in trouble. They get fined. Their lawyers say, hey, how do you prevent this from happening in the future? And they said, we didn't know we weren't, that's not a good answer. And they refer them to us and we'll help them with sanction parties. People have global trade issues were they overpaid or underpaid. And if you underpay, there's a big fine, and if you overpay, it takes a long time and a lot of work to get your money back. It's kind of odd that way. So more and more people, especially as the tariffs are changing every day, tend to look to us for our DTI solutions. We're now the biggest in the business, and certainly, we think the best. And it's absolutely a way in the door for us. Probably the second or third biggest lane, biggest way being the network. So it's nice to be in a position we're in right now, with all the tariff talk, to be able to help our customers deal with it and come up with more innovative solutions to help them deal with it more accurately and more efficiently. But there's a lot of other stuff we do. And if customers come in and buy that, we'd love the opportunity to show them all the additional things that we can do for them.

Thanks for taking the questions.

Thanks, Paul.

Your next question comes from Kevin Krishnaratne of Scotiabank. Please go ahead.

Hey, there. Good evening. Maybe kind of on back to Paul's question, can you remind us again the sort of structure of your sales team? How big is sort of the upsell/cross-sell team? I can imagine you're probably getting a lot of inbounds, but talk about how you might be being proactive in looking at your realistic customers, looking at what products they've got and just trying to help educate them on what they should be buying that. And maybe you can also talk about some of the feedback from your innovation forum that you've had with customers.

Yeah. So I think our sales force is around 300 now. And they're all able to cross-sell and they're all able to sell the stuff. We break them into two groups, MRDM, manufacturers, retailers, distributors, mobile service providers, and then the other group being logistics and transportation providers. And they're all doing both, really. They're all selling new products to new customers and more often cross-selling. It's probably 65%, at times up to 70% cross-sell. We have 26,000 customers, and that results in a lot of cross-selling. We used to have pretty low cross-selling numbers 15 years ago, but we really focused on it. And as we've gotten bigger, it's become a very big part of what we do. Innovation forums, we had one in D.C. and a couple of Chicago a few months ago. Very well received. Coming out of the pandemic, we used to have one big user group. With a lot of different kinds of companies, they are doing a lot of different things and a lot of different tracks. And after the pandemic, where we weren't able to have the user group, we decided to start doing it this way, which is a little more focused and we can go in and maybe, partially for our own people's time and partially for the customers, to make sure we're very focused on them while they're there. We've broken it into smaller chunks and around the country that do it in different locations where maybe more of the users are. So we had a lot of success doing it. I think customers get a lot from us. We certainly get a lot from them. If you've heard me mention before, a lot of our ideas about what to buy next and what business to get into come from them and come to them specifically at these forums. And maybe the most important thing and I mentioned on the call earlier today, they get to talk to each other, right? Because they're all solving problems and similar problems in different ways, and they get to hear how other people are doing it. And I think their businesses benefit from that. It makes it a somewhat unique event for customers to come to and get great information. So we're excited about it.

Got it. My second question is about de minimis, which you mentioned. I know it's been a topic of ongoing discussion. Can you explain how potential changes in that area might affect your business? On one hand, I think about the positive aspects, such as e-commerce possibly benefiting you. You also have a business that operates in that space. On the flip side, if de minimis is eliminated entirely, could it lead to improved prospects for more traditional customs brokers, who are also your customers and use your tools? I'm just trying to think about the implications.

You expressed it quite well. We are uncertain about what will happen. The de minimis may decrease, disappear, or remain unchanged. We handle a significant number of de minimis transactions, which incur very low fees. We also conduct many regular customs filing transactions that have higher fees because they pertain to entire containers. It really depends on the outcome of the rule. We believe that if the de minimis lowers, we may lose those low-fee transactions but gain a substantial number of new customs filings at higher fees since they are more complex transactions. The ultimate impact is unclear. If a customer consolidates a particular commodity into one container, that results in a single customs filing instead of possibly hundreds. Conversely, if they include multiple types of packages in those containers, it could lead to many customs filings, which would benefit us significantly. I need to assess not just the rules but also how our customers will respond to them. Spending too much time worrying about it may not be necessary, as it could turn out to be advantageous for us. We'll just have to wait and see how the government's decisions unfold.

Got it. Okay, great. That’s it for me. I’ll hop back in queue. Thanks, guys.

Thanks.

Your next question comes from Cole Couzens of Wolfe Research. Your line is already open.

Hey, guys. This is Cole on for Scott Group. I know you called out some pull forward ahead of tariffs in the quarter. Is there any way to quantify how much that helped you guys? And unrelated, maybe coming out of the Chinese New Year, what kind of activity are you seeing so far to start the year?

I don't think it helped in a significant way, but I can't provide a detailed answer regarding the time period you're inquiring about, as it's not part of our current report. I don't see any major changes. If you refer to our monthly global shipping report, it will offer some insights. However, to keep it concise, the situation appears to be similar to previous years at this time.

Okay. And there's been a lot of uncertainty about the potential charges on Chinese-built ships and shipping companies. And how do you guys see that kind of playing out as we go into 2025?

I don't think it's going to be a big deal for us. Almost every container ship in the world, minus the Jones Act ships that are here in the United States going to Puerto Rico, Alaska, and Hawaii are foreign-built. So if they're going to charge for foreign-built ships, every ship bringing containers to the United States pretty much from another country. In fact, every ship from another country, I believe, will be in a foreign-built ship. So I don't know what to say about that other than I don't think that's going to matter much to us, but it will certainly matter to our ocean carrier customers.

Okay. And if I could squeeze one last question in. Obviously, EBITDA growth was strong in the quarter and then for the full year. And I know you guys said that quarterly patterns might be a little bit different here in 2025. Can you expand on what exactly you meant by that? And I know you're focused on continued 10% to 15% EBITDA growth going forward. But maybe there's a lot of uncertainty right now. Kind of what's your confidence that, that can continue kind of into fiscal 2026?

We are confident in delivering our goals in 2026. We included a caveat because we consider ourselves cautious operators. If we observe any changes in the business, we will adapt accordingly. At this moment, we are not making changes because we cannot predict what will happen next. Should issues arise that negatively impact our business, we will need some time to address them. Conversely, if things improve for us, we won’t have to worry. We wanted to communicate the uncertainty we are currently facing, indicating that while we may not make adjustments on a quarterly basis, our intention is to do so annually. This reflects our longstanding approach to managing the business. When challenges arise, we respond effectively, and if conditions are favorable, we are content with maintaining the status quo. We simply want to inform everyone of our strategy moving forward.

Okay, thanks. I’ll turn it back.

Your next question comes from John Shao of National Bank. Your line is already open.

Thanks for taking my questions. So there are some articles online about the tariffs on Canadian software that technically doesn't sound realistic. So what's your take on this?

I don't have a lot of comment on it. I don't think it's charged now. We don't know what's going to happen in the future, but look, a lot of our stuff's down in other locations so I don't know if that's going to be part of the issue or not. But we don't believe it's going to have any impact on us at the moment.

Okay, got it. And Ed, you also mentioned a couple of drivers of organic growth in your prepared remarks. But I'm just curious about the other side of the balance. Any example of your business that might potentially be under pressure if the trade environment starts to get worse from here?

I can't say for sure that this will happen, but if fewer items begin to ship internationally due to high tariffs and certain products are pushed out of the market, that could be a possibility. If that occurs, we will face challenges like everyone else who relies heavily on shipments. Since my compensation is linked to those shipments, less movement across the border means a decrease in transaction volume for us. This is where we would feel the impact. Other than that, everything seems generally favorable for us. We're experiencing increased complexity, which we've discussed before, and we're certainly dealing with more complexity now. However, I believe this will ultimately benefit us regardless of the circumstances. The focus on supply chain and logistics will lead to increased investment in those areas to address the challenges. Typically, investments are directed toward technology, which provides significant returns. So, in the long run, I remain very optimistic. In the short term, if fewer goods start moving across a specific border due to rising tariffs, and since my earnings depend on handling those goods or processing related transactions, we will experience a temporary challenge like everyone else. We are not exempt from that. Nonetheless, I believe this situation could ultimately turn out to be very promising for us, as it aligns with our strengths.

Thanks for the color. I’ll pass the line.

Your next question comes from Mark Schappel of Loop Capital Markets. Your line is already open.

Hi, thanks for taking my question. Ed, during your prepared remarks, you called out areas of your business where you saw strength in the quarter, particularly MacroPoint, global trade intelligence. Could you just talk a little bit about maybe parts of the business that were not quite as strong in the quarter?

I don't know if we had any areas that were, what I would call, weak. Shipment processing was maybe a little slower than normal. You can see that in the trade flows but made up for in other areas like MacroPoint. That's shipment processing business that was doing very well at the same time, had anything that we thought was doing badly at the moment. We put up pretty good growth numbers and most of the stuff was performing pretty well. Global trade intelligence was doing better than normal because of what you see going on. But I didn't really have anything that was, I would say, down significantly.

Great. Thanks. And then as a follow-up, could you just comment a little bit about what you're seeing on the pricing front? Are customers becoming more aggressive trying to get price concessions? Are you seeing some of your competitors giving up something on the pricing front?

Not really, no. Pricing issues tend to crop up more when you get into a deeper kind of recession environment. We're not in that and then stress right at the moment. I think our customers are mostly focused on how to deal with these tariff issues and what changes it, brings our business, and they're probably trying to buy more stuff from us. And usually when they're trying to buy more stuff from us, they're not sticking it to us on price. They're trying to figure out how to get to the best software to solve the problem that they're having. So at the moment, we're not seeing that.

Thank you. That’s all for me.

Thanks.

Your next question comes from Steven Li of Raymond James. Your line is already open.

Thanks, hey. Any thoughts on Amazon getting into LTL? And if it impacts your customers, does it hurt you in a similar way or are there offsets?

We do a lot of business in Amazon. It's probably good to have more competition there. And no, I mean, as with all the LTL providers, we see a bunch of them go out of business, we usually pick them up with the other one. So I think you might end up seeing the same thing here.

Okay, okay, helpful. And on your calibration your baseline revenues and operating expense is very similar to last quarter. Can we expect Q1 to be similar to Q4 in terms of revenues and EBITDA?

You mean absolute numbers or percentages?

Yeah, actual numbers, yeah.

Yeah, Allan may step in and give you more here, but I believe there's a headwind of FX going on right now that may end up making the absolute numbers closer than they normally are. I don't know that they're going to be. They will be higher, but Allan, I don't know if you have anything to add to that.

Yeah, Steven, there's certainly an FX headwind that's sitting in those numbers. You see it in the exchange rates that we gave you in calibration that definitely are different from Q3 and what we experienced in Q4. So keep that in mind. At the same time, I think back to Ed's points earlier, it's an uncertain set of times so I think our calibration reflects some level of that uncertainty.

Got it. And Allan, I've got you on. You said services plus 6% constant currency organic. What would that number be for overall revenues, constant currency and organic?

Yeah. We had lower license revenue. We had slightly lower hardware revenue in the professional services and other bucket, so slightly less than that. The FX headwind was over $2 million year-over-year and sequentially. So we certainly had some compression there that was purely FX, but overall growth is slightly lower than that 6%, just given the lower numbers in license and revenue.

So something like 5?

In that range, yes, Steven.

Your next question comes from Robert Young of Canaccord Genuity. Your line is already open.

Hi. On the trade intelligence, you said lots of demand, especially recently. And the biggest driver, I think you said at the current network, so existing customers, and you really focus on cross-sell. Is there any metrics or maybe even a rough idea that you can share with us on penetration there and whether you expect that penetration obviously to move forward pretty quickly in this environment to look so complex?

Well, I expect us to keep picking up new customers there, expect us to keep selling more stuff to existing customers there. And probably something that may not be so obvious, more and more people will buy that never needed it before. There's more and more e-commerce businesses popping up that need this information. We tend to pick up a lot of the new guys. So I don't see any real end in sight to that growth.

If you look at the 26,000 customers, I may imagine there's a lot of really small ones, freight brokerage and stuff. Like do all of those customers, is there a use case for all of your customers to use trade intelligence? Or is this something more just in the larger customers where they'd be that complex?

Yeah, it's mostly midsized and larger guys. If you have one product that's going to one country, you can probably watch the tariff rate yourself. If you have 10, maybe you can go watch it yourself. When you start having 50 that go to 50 countries, 500 that go to 50 countries, there's no way you're going to do that properly yourself. And those are the people that need to buy it. So not every customer needs to do it. A lot of our customers only do domestic. But as soon as they start buying or start making some product that goes to a lot of different countries, they end up needing the solution to solve the problem or they end up paying the wrong rate, and that's a real problem for them.

Yeah, thanks for the color.

Thanks, Robert.

Your next question comes from Lachlan Brown of Redburn Atlantic. Your line is already open.

Hi, Ed. In the interest of time, I'll just keep it to the one question. Allan mentioned the reduction of the 45 personnel in the fourth quarter in his remarks. Just the areas of the business that these reductions came from?

Yeah, Lachlan, it came across the business. When we look at our business, we do this all the time. We're constantly assessing our business. We just looked across the business. And for the most part, these are role eliminations as we streamline our business and something you can expect from Descartes on a fairly regular basis but spread out across the entire business.

There are no further questions at this time. I would hand over the call to Ed Ryan for closing remarks. Please go ahead.

Hey, everyone. Thanks very much for your time on today's call, and we look forward to reporting back to you on Q1 results in June of this year. And otherwise, we look forward to seeing you guys out on the street with your customers. So have a great day. Thank you.

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