Descartes Systems Group Inc Q3 FY2025 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 a question-and-answer session. This call is being recorded on Tuesday, December 3, 2024. I would now like to turn the call over to Mr. Scott Pagan. Please go ahead.

Thank you, and good afternoon, everyone. Joining me remotely on the call today are Ed Ryan, CEO; and Allan Brett, CFO. And I trust that everyone has received a copy of our financial results press release that was issued earlier this afternoon. Portions of today's call, other than historical performance, include statements of forward-looking information within the meaning of applicable securities laws. These statements are made under the safe harbor provisions of those laws. These forward-looking statements include statements related to our assessment of the current and future impact of geopolitical, trade and economic uncertainty on our business and financial conditions, Descartes' operating performance, financial results and condition, Descartes' gross margins and any growth in those gross margins, cash flow and use of cash, business, business outlook, baseline revenues, baseline operating expenses and baseline calibration, anticipated and potential revenue losses and gains, anticipated recognition and expensing of specific revenues and expenses, potential acquisitions and acquisition strategy, cost reduction and integration initiatives and other matters that may constitute forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties, assumptions and other factors that may cause the actual results, performance or achievements of Descartes to differ materially from the anticipated results, performance or achievements implied by such forward-looking statements. These factors are outlined in the press release and in the section entitled certain factors that may affect future results in documents filed and furnished with the Securities and Exchange Commission, the Ontario Securities Commission and other securities commissions across Canada, including our management's discussion and analysis filed today. We provide forward-looking statements solely for the purpose of providing information about management's current expectations and plans relating to the future. You're cautioned that such information may not be appropriate for other purposes. We don't undertake or accept any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements to reflect any change in our expectations or any change in events, conditions, assumptions or circumstances on which any such statement is based, except as required by law. And with that, let me turn the call over to Ed.

Great, Scott. Thanks, and welcome, everyone, to the call. Today, we're reporting record third quarter results, continued strong revenue and adjusted EBITDA growth and two new businesses that have joined the Descartes team. We're excited to go over these results with you and give you some perspective about the business environment we see right now. But first, let me give you a word map for the call. I'll start by hitting some highlights of last quarter and some aspects of how our business performed, I'll then hand it over to Allan, who will go over the Q3 financial results in more detail. After that, I'll come back and provide an update on how we see the current business environment and how our business was calibrated as we entered our fourth quarter and we'll then open it up to the operator to coordinate the Q&A portion of the call. So let's start with the quarter that ended on October 31. Key metrics we monitor include revenues, profits, cash flow from operations, operating margins and returns on our investments. For this past quarter, we again had very good performance in each of those areas. Total revenues were up 17% from a year ago with services up 15% from a year ago. The organic growth in our total revenues in this quarter is about 10%. Net income was up 38% from a year ago, with adjusted EBITDA up 14% from a year ago. Our headline targets are 10% to 15% adjusted EBITDA growth per year and we're at 15% over the first 3 quarters of this year. Adjusted EBITDA margin held at the same rate as last quarter at 43%. However, as we talked about last quarter, Q2 and Q3 had unique items that impacted this margin. Our GroundCloud business entered an accelerated hardware replacement cycle with our customers in Q2 to get AI-enabled cameras in place. This resulted in more low-margin hardware sales to customers in Q2 and Q3, changing the revenue mix and impacting the margin. The hardware replacement cycle is now done, so we anticipate this drag on margin won't be there in Q4. The core Descartes business and margin is otherwise performing as we'd expect. Allan will speak to this in more detail later on the call. We also generated over $60 million in cash from operations in Q3 or 83% of adjusted EBITDA, in line with how we would expect the business to perform. At the end of the quarter, we had over $180 million in cash, and we were debt free with an undrawn $350 million line of credit. This is after we used about $22.5 million to acquire MyCarrierPortal and paid $110 million to acquire Sellercloud. We remain well capitalized, cash generating, growing, and ready to continue to invest in our business. Our growth strategy remains one of total growth. We've designed our business to be a profitable business that generates cash and can otherwise be reinvested to improve the business for our customers and stakeholders. We consider where to invest based in part on the returns we can generate in our invested capital. Our plans for our year are based on growing our business 10% to 15% a year through a combination of organic and acquisition activities. Speaking of acquisitions, we've completed five so far this year. We bought OCR and ASD in Q1 and bought BoxTop in Q2. We then combined with MyCarrierPortal and Sellercloud in Q3 and I just wanted to comment on how these acquisitions have fit in and are contributing. So first, we combined with OCR in March of this year. OCR are experts in sanctioned party screening and export compliance, a key part of our global trade intelligence offerings. For clarity, sanctions are when a government puts a restriction on doing business with a particular party, jurisdiction or country, while broader export compliance includes securing the necessary licenses and other permissions to export a particular control item to a person or country. OCR complements our existing strong screening solutions, but makes us even stronger by adding advanced export compliance technology that can serve some of the biggest companies in the world. OCR has hit the ground running for us and is the head of our integration plans. We've added a broad base of industry knowledge in India that is already contributing to our broader global intelligence solutions. We've had some sizable joint wins in each quarter since the acquisition and market conditions are such that it's even more challenging for our customers to comply with the current situation and plan for future rumored restrictions on global trade, in part driven by statements made by the new incoming Trump administration in the United States. For the time ASD deal that we completed in Q1, their business is focused on European customs and security filings with particular strength in Ireland. They also do asset tracking for airlines. This business is also performing ahead of our plans with deliberate work done on integration. We think there are some good potential tailwinds for this business with potential increased scrutiny from Europe on cargo security on airlines, something that may be addressed through additional data and filing requirements and asset tracking. In Q2, we combined with BoxTop, a business we had a track record of working with as a partner long before the acquisition. BoxTop has shipment management solutions for small and midsized logistics service providers the same customer base that makes up a large percentage of our customers for our forwarder and broker solutions. BoxTop's integration and contribution is ahead of plan. It's also well placed to help this customer base as the cross-border trade environment threatens to become more complex. In Q3, we bought two new businesses. The first was our combination with MyCarrierPortal in September. MyCarrierPortal helps U.S. freight brokers with risk management of the thousands of truck carriers that they deal with. Their platform also allows the brokers to evaluate the risk of working with the carrier based on a number of factors, including licensing, past service record, safety, potential fraud risk and insurance compliance. This is a natural fit with our MacroPoint business where we're helping freight brokers track loads and identify potential available capacity. We think this is a natural fit for our business with our best experience with screening and compliance solutions combined with our market-leading domestic truck business. We only had a partial quarter with MyCarrierPortal so far, but already have profit contribution ahead of our expectations due to the hard work of the teams to rapidly get our businesses working together. We were able to get the combination completed before our innovation forum/user group that we held for this customer base in Chicago, and it was great to hear the endorsement of the broker community for this solution, becoming part of the Global Logistics Network portfolio. Welcome to everyone from the MyCarrierPortal team. In October, Sellercloud joined the Descartes family. This is a great addition to our e-commerce solutions, essentially filling a hole that we had in our solution set. Sellercloud focuses on inventory and order management for e-commerce sellers, who are using multiple channels to sell with particular strength with small and mid-market e-tailers. Our existing solutions are focused on the warehousing and shipping of e-commerce orders, but by adding inventory and order management, we can offer a more comprehensive suite to our customers that's flexible as they grow and add new sales channels. We've already seen great post-deal success in getting customers signed up for a combined Descartes Sellercloud solution, so we're optimistic about achieving our growth plans for this business. As with MyCarrierPortal, it's encouraging to hear the industry and customer community confirm the sensibility of our business coming together with Sellercloud and it's also an endorsement of the strong work that our entire organization puts into our corporate development efforts. Welcome to the whole Sellercloud team. We look forward to achieving great things with you together. I mentioned that our customers are facing some big challenges in managing global trade and are facing heightened uncertainty for what the future global trade landscape will be. Let me just hit a few of the items shaping the market environment right now. The biggest source of uncertainty has been the comments from the incoming Trump administration about the potential for the imposition of tariffs by the U.S. on imports from China, Canada and Mexico, as well as other broad-based sanctions. These tariffs and sanctions may force U.S. businesses to restructure their supply chains and logistics operations with the potential for movement of manufacturing and sourcing facilities, changes in trading partners heightened scrutiny and sanctions on particular goods and countries and the potential for retaliatory sanctions and tariffs by other countries. We're already helping our customers with information and planning, and we expect that our global trade intelligence businesses will be very busy over the coming months. We've seen good volumes in Air and Ocean, but have seen fairly flat volumes in U.S. trucking. Ocean, in particular, has seen very high levels with larger amounts of imports into the U.S. and Mexico from China. There's a couple of things we're monitoring for volumes as we enter Q4. First, the seasonal impact of peak holiday buying periods, which we expect will be more visible in air and truck because of their shorter transit times. Second, with the potential for new tariffs. We've heard commentary from many U.S. businesses that they're bringing inventory in early to get ahead of the potential new U.S. tariffs. Progress security issues are front and center, particularly with parcel air cargo in Europe. Earlier this year, there were incidents with explosive devices and parcels that made their way onto European carriers. Some carriers responded by refusing to ship certain parcels containing electronics. Regulators have also intervened requiring more information about cargo shipments on a plane before the plane takes off, including the new requirement of an identification of the underlying shipper of the package rather than just the intermediary shipping package. Our customers are committed to helping ensure that there is cargo security to minimize the chances of catastrophic events, but there's also a burden that our customers are having to bear right now as they reengineer their processes and information gathering practices to help comply with the new regime. Labor uncertainty continues to impact our customers' ability to plan. U.S. East Coast and Gulf ports have had a labor contract that expires again in January. Canadian ports had just dealt with strikes where the government legislated people back to work, and Canada Post is currently on strike impacting many e-commerce deliveries into Canada, all just examples of how our customers have to plan for the reality of labor unrest that will impact their fulfillment operations. I've mentioned this in past quarters, but we're a business designed to meet challenging business conditions in thriving periods of change. We focus on total growth and try to diversify our business. We grow organically and by way of acquisition. We're diversified across all modes of transportation. We provide business value across seven solution pillars. We have over 26,000 customers with low customer concentration. We serve all parties to supply chain and logistics transactions: carriers, logistics service providers, ports, governments, and shippers. We serve customers on a global basis with a global workforce. We believe that all of these levers to our business provide us with many opportunities to help manage our business through prosperous and challenging times. Descartes is a business our customers rely on, that our team can be proud of and that our stakeholders have relied on consistently to deliver. Descartes has done that again this quarter. I'll just finish up my comments by referencing some of our recent marketing activities. A few months ago, we held some Descartes innovation forums. These are essentially user groups that are focused on particular solution pillars. The recent innovation forums focused on private and for-hire transportation management and serving the logistics provider community. These innovation forums for select pillars have greater participation than our pre-pandemic user groups that we held for our entire business as a whole. We've also hosted some recent online events relating to global trade intelligence, trade compliance and tariffs and duties. These also had record attendance. While the increased attendance can partially be explained from our growth of the company, I think the interest we've seen in these events reflects the extreme need for help and information that our customers have right now. Nothing is constant for our customers, and they're having to be very dynamic and radical in meeting the challenges facing their supply chain and logistics operations. Supply chain and logistics roles at our customers' businesses continue to have heightened importance, and the potential upcoming changes to global trade are unlikely to change that. Our mission is to help our customers manage this complexity, and I believe we have the track record, people, solutions, and expertise to help them not just survive, but to thrive. So let me just summarize the handover to Allan to give the full financial details in the quarter and year-to-date. We had record financial results. The business performed well, and we believe that's a good reflection of the value that our customers continue to get from our solutions, the quality and contribution of acquisitions we've added to our business and the hard work that our team continues to put in for our customers. We ended the quarter with more than $180 million in cash, $350 million in available credit and a market opportunity where we can continue to grow the business for our customers, both organically and through acquisition. We remain focused on profitable growth, so that we continue to ensure that our customers have a secure, stable and growing technology partner that can help them with their challenges well into the future. My thanks to all Descartes team members for everything they've done to contribute to a great quarter and a great business. With that, I'll turn the call over to Allan to go through our Q3 financial results in more detail.

Thanks, Ed. I'm going to go through our financial highlights for the third quarter, which ended on October 31. We are pleased to report record quarterly revenue of $168.8 million, up 17% from $144.7 million in Q3 last year. Revenue from acquisitions made in the past year, including MCP and Sellercloud, significantly contributed to this growth. As in previous years, revenue growth from both new and existing customers using our solutions also drove growth this quarter compared to last year. Our revenue mix remained strong, with services revenue rising 15% to $149.7 million, representing about 89% of total revenues in the third quarter. License revenue increased to $3.5 million or 2% of revenue, up from $1.5 million last year, and professional services and other revenue reached $15.6 million, up 22% from $12.8 million last year, making up 9% of total revenue. We also had additional hardware revenue from our GroundCloud business due to the rollout of AI-enabled cameras mandated by FedEx. This added around $3.5 million of low-margin hardware revenue while expanding our base of subscription customers, which should positively impact our subscription revenue in future quarters. However, we expect hardware sales to return to normal levels in Q4 after unusually high sales in Q2 and Q3. We estimate our total organic growth for the business at around 10% for Q3, with organic growth in services revenue at about 7%. Year-to-date, revenue reached $484 million, a 14% increase from $425 million last year, driven by revenue from acquisitions and organic growth. Gross margin was 74.4% for the third quarter, down from 76.3% last year due to low-margin hardware revenues. Excluding these, gross margin would have been similar to last year's third quarter. Operating expenses rose about 14% compared to the same period last year, influenced by the costs from five acquisitions and increases in headcount and marketing expenses. Consequently, adjusted EBITDA grew 14% to a record $72.1 million, or 42.7% of revenue, compared to $63.5 million, or 43.9% of revenue, last year. Although our adjusted EBITDA margins decreased slightly from Q3 last year due to low-margin hardware revenue and lower margins from some recent acquisitions, excluding these factors, the adjusted EBITDA margins would be around 44% of revenue. For the first three quarters, adjusted EBITDA grew over 15% to $210 million from $182 million last year, with adjusted EBITDA ratios rising to 43.4% from 42.8%. Other charges decreased to $1.8 million from $9.7 million last year, mainly due to a prior year's accrual for higher-than-expected earn-out payments. As a result of increased operating profits and reduced charges, net income reached $36.6 million, or $0.42 per diluted share, up from $26.6 million, or $0.31 per diluted share, last year. The income tax expense for the quarter was $11.9 million or 24.5% of pretax income, slightly lower than our blended statutory tax rate of 26.5%. For the nine-month period, net income was $105.9 million, or $1.21 per diluted share, compared to $84.1 million, or $0.97 per diluted share, last year, reflecting higher operating profits. Cash flow from operations for the quarter was $60.1 million, or 83% of adjusted EBITDA, up from $56.1 million last year. Year-to-date, operating cash flow has increased 17% to approximately $184 million, or 88% of adjusted EBITDA. We expect strong cash flow conversion going forward, projecting cash flow from operations to be between 80% and 90% of our adjusted EBITDA in future quarters. Overall, we are pleased with our quarterly results, as our recent acquisitions and ongoing growth in services and license revenue led to solid adjusted EBITDA growth in Q3. Regarding our balance sheet, our cash balances were $181 million at the end of October, down from approximately $253 million at the end of Q2. The decrease is mainly due to $133 million spent on the MCP and Sellercloud acquisitions, partially offset by cash flow from operations. We currently have $181 million in cash and an unused $350 million credit facility for future acquisitions. For the final quarter of fiscal 2025, we expect to incur about $1 million to $2 million in additional capital expenditures. We plan to use approximately $3.6 million to buy the remaining 5% of the ASD business, bringing our ownership to 100%. We do not anticipate making any earn-out payments this quarter. Amortization expense is expected to be around $18.1 million in Q4, subject to foreign exchange adjustments and future acquisitions. Our tax rate for the first nine months was about 25.9%, slightly below our blended statutory rate. For Q4, we expect our tax rate to be close to our statutory rate, ranging from 24% to 27%. Our tax rate may fluctuate due to one-time items. Lastly, after incurring stock-based compensation expense of $14.6 million for the first nine months, we expect it to be approximately $5.4 million in Q4, subject to any stock option or share unit forfeitures. I'll now turn it back to Ed for closing comments and our Q4 baseline calibration.

Great. Thanks, Allan. We've done five acquisitions so far this year and two since our last call. We believe these acquisitions will contribute more to our calibration over time as we become more experienced in operating them together. As we look at our calibration, we're mindful of some weakness in U.S. domestic truck volumes, but also mindful of factors that may contribute to a recovery of volumes, including shipping in advance of the imposition of new tariffs. We're also mindful that the accelerated hardware replacement cycle of GroundCloud is complete, and we don't anticipate any incremental hardware volumes above the ordinary course. Our business is designed to be predictable and consistent. We believe the stability and reliability are valuable to our customers, employees and our broader stakeholders to deliver this consistency we continue to operate from the following principles: Our long-term plan is for our business to grow adjusted EBITDA 10% to 15% annually. We grow through a combination of organic growth and acquisitions. We take a neutral party approach to building and operating solutions on our Global Logistics Network. We don't favor any particular party. We run our business for all supply chain participants, connecting shippers, carriers, logistics service providers and customs authorities. When we overperform, we try to reinvest that overperformance back into our business. We focus on recurring revenues and establishing relationships with customers for life, and we thrive on operating a predictable business that allows us forward visibility to our revenues and investment paybacks. In our quarterly report, we've provided a comprehensive description of baseline revenues, baseline calibration and their limitations. As of November 1, 2024, using foreign exchange rates of $0.72 to the Canadian dollar, $1.09 to the Euro and $1.29 to the pound, we estimate that our baseline revenues for the fourth quarter of fiscal '25 are approximately $144.5 million and our baseline operating expenses are approximately $89.5 million. We consider this to be our baseline adjusted EBITDA calibration of approximately $55 million for the fourth quarter of fiscal 2025 or approximately 38% of our baseline revenues as of November 1, 2024. We continue to expect that we'll operate an adjusted EBITDA margin range of 40% to 45%. Our margins can vary in that range, given such things as revenue mix like we saw with hardware these past two quarters, foreign exchange movements and the impact of acquisitions as we integrate them into our business. We believe the GroundCloud hardware replacement cycle has completed, so we will see some relief to adjusted EBITDA margins coming out of that. We've got lots of exciting things planned for our business. It remains a challenging economic supply chain and compliance environment for our customers, but we believe our proven track record of execution, solid capital structure, customer focus will help us serve them well. I want to thank everyone for joining us on the call today. As always, we're available to talk to you about our business in whatever manner is most convenient for you. And with that, operator, I will now turn it over to you to handle the Q&A portion of the call.

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

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

Thank you, Faith. There's been a lot of discussions around this topic, both in the media and with our customers. Firstly, the usage of our Global Trade Intelligence Solution has increased as customers seek to understand the potential impacts of tariff changes. While the actual outcomes are uncertain, we've seen parallels to the previous administration, where threats were used as negotiating tactics, but it remains unclear what will actually occur. This heightened interest in our solution is beneficial for both us and our customers as they navigate these complexities. Additionally, although we haven't seen any significant movement towards early shipping yet, our customers are expressing that it may become a strategy in the near future. We will keep a close watch on developments, as they will continue to rely on our network for shipping goods.

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

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

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

Every customer that ships multiple products across multiple countries is a potential target for our solutions. If you're dealing with just one product and one SKU being shipped to a single country, you may be able to manage tariff rates on your own. However, as the number of SKUs increases and as companies typically ship to ten or even over a hundred countries, it becomes essential to have access to this information. There are numerous ways to gather this data, and it needs to be accessible throughout your organization, from the initial stages to daily operations, ensuring that you are paying the correct rates. This has created a significant opportunity for us. We've integrated various solutions into a single accessible data set that can be utilized within applications we provide or seamlessly integrated into systems like Oracle, SAP, or NetSuite. This allows companies to standardize country data and format it to be usable by those systems. This unique offering sets us apart from our competitors and positions us as leaders in the market. Many companies still have not adopted these systems, but we are witnessing a rise in interest, especially among midsized and smaller businesses that previously thought they didn’t need such solutions but now realize their importance. As e-commerce grows, these companies often face challenges when they accidentally ship to the wrong locations or countries, leading them to recognize the necessity of compliance with tariffs and duties. This is how they can avoid fines by informing the government that they have invested in a solution from us to prevent future mistakes. This presents a clear opportunity for our business. We have successfully acquired reputable companies in this sector, placing us in a strong leadership position that we are enthusiastic about.

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

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

Hi, good evening. Allan, this question is for you. Regarding the mergers and acquisitions that Descartes has completed this year, how should we consider the timeline for integrating these acquisitions and the trend of margins returning to typical levels?

Yes, every acquisition is unique. We have considerable experience in this area. Our strategy will include seeking both cost synergies and revenue synergies, although the latter generally takes longer. However, as Ed mentioned, we are already observing some promising results from certain deals early on. Each acquisition requires time, but we believe there is always a model to enhance margins, predominantly through growth and likely a mix of growth and cost management, to align the margins closer to our company average. It is quite common for us to acquire businesses that may not currently operate at the margins we aim for, but we will strive to elevate them to that level. Some will require a few quarters, while others may take a couple of years. The timeline varies based on the specifics of each deal.

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

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

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

Hey, thanks, Lachlan. At the top of my head, I don't know the exact volumes, but it's substantial. We have a number of carriers that we do a lot of business with in either Canada United States or Mexico or in a lot of cases, all three. And they have to go do cross-border shipments, which result in customs silence and things in that nature. I don't know what's going to happen. I've heard lots of different theories about what's going to happen if 25% tariffs go into place. My gut is that it's not going to be quite that simple. It's probably going to be negotiated to certain commodities and things of that nature. I don't know whether it will be to the truck line. It could increase that I could see a world where people ship stuff into one place and then trying to get in the United States some other way to avoid China. I could also see these tariffs slowing it down because we would not ship as much stuff that way. So let's put it this way. When I think of it at a higher level, there's a whole bunch of consumers out there that want stuff, and there's manufacturing facilities that need stuff to produce their goods. Those goods are going to have to still get there. And I don't know how they're going to get there, but I do know that we're going to probably help our customers do it whenever these rules change or come down. And you've heard us say that in the past that we help our customers deal with complexity. And this is exactly what we're talking about. There's a lot of changes being discussed right now. People have to think quickly about what they're going to do when these new changes come into place. And we provide a lot of the tools that help them figure that out. And then a lot of the tools that would help them actually execute on it when they do. So customers are not thrilled about this by any stretch. But they have to deal with it. And when they do, we hope to be there to help them figure out how to do it as efficiently as possible.

Thank you for including me. Ed, you mentioned that trucking is still not quite there yet. Can you remind us how the value chain works? Is it just a waiting game, or what factors are influencing that compared to other areas?

There are many factors influencing trucking. One key point we've discussed in previous calls is that when Ocean Air activity increases, it typically leads to more truck movements both at the origin and the destination. Local demand in the respective countries also plays a role. Reflecting back on 2022 and 2023, these years were notably challenging for trucking. While there is a slight recovery happening now, we're still not close to pre-2022 levels. Feedback from trucking companies indicates a modest uptick, but it's far from robust. If we see an increase in international shipments as I mentioned earlier, truck volumes could rise accordingly. Other economic factors can also contribute to this situation. The high interest rates have negatively affected truck volumes, but as these rates decrease, we might see consumer spending increase, leading to more products that need trucking services. Overall, the trucking situation is slightly improving, but conversations with trucking companies and freight brokers reveal that they aren't particularly satisfied at the moment; they are just managing to get by.

Yes, that makes sense. Regarding the increased regulation or tariffs, how are customers preparing for that? Do you see it as a significant amount of pre-investing, or is it more of a reactive response? How do you think this will create opportunities for you?

Thanks, Raimo. I appreciate it. Our customers are right now looking to see what their tariffs are. I think they don't necessarily talk directly to us about this, but I think you'd see in some circumstances, they're starting to get lobbyists to try and get their tariffs excluded from whatever changes are going to occur as a result of any of these trade negotiations. And as we get closer to it, they'd start to hear what people are going to do and then start to think about whether that is going to impact them or how much it's going to impact them. And is there any other way to ship the goods around the world, so that they don't have to have these tariffs. I think some of them are going to think about shipping stuff in advance to make sure that they have more product in countries so that they have an advantage over the competitors for some period of time because they get products in before the tariffs change. So I think all kinds of things like that, and our systems help with some of that, not all of it, but some of it. And obviously, if the rates change, the real thing they're going to do with us is use our systems and our databases to rate these shipments as the new rates change quickly and they want to make sure they get the rates right.

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

Yes. I don't want to say too much because we can never predict what will happen. A year ago, we refrained from making any deals due to unsatisfactory prices. However, as conditions have started to improve, we have been able to agree on more potential acquisitions, resulting in us completing more acquisitions recently. The current environment feels favorable for these types of transactions, but I can't predict the future. When asked about our typical acquisition pace, we respond that we don't have a set pace. We acquire companies we believe are good deals and refrain from purchasing when they are not. I don't see that philosophy changing. We want to be ready to pursue favorable acquisitions both financially and in terms of integration. We invest significant effort in ensuring we efficiently manage these processes. If we don't find appealing opportunities, we believe it's best not to make any acquisitions. We'll see what the future holds. We are optimistic about what we've achieved so far this year, which is why we've successfully completed five acquisitions. We'll find out if that momentum continues; if it does, great, and if it doesn't, we'll maintain our current business operations as usual.

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

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

I don't anticipate any changes from the Trump administration that would impact our calibration. We are uncertain about future developments. Our customers will likely require assistance in navigating certain issues, and we aim to support them. There are various potential actions our customers might take, but we don't have clarity on those yet. We haven't incorporated these factors into our models. From what I've heard, it seems we may need to provide our customers with more support than we did three months ago. This should benefit us, but our primary focus will be on delivering excellent service, and the financial results will follow from that.

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

When we monitor the cross-sell percentages, we're currently at about 65% to 70%, which I consider a strong figure. Each acquisition comes with its unique expectations about outcomes. Typically, it leads to selling additional products to our existing customers. Some products see significant sales volume, while others, which may be larger deals, don't sell as frequently but are worth more. Additionally, some of these companies are quite large, contributing substantial revenue, while smaller companies, despite their impressive growth, start from a lower base. Essentially, we evaluate each company we acquire, the expectations we have going in, the return on invested capital we aim for, and whether we achieve those goals. If unexpected opportunities arise, we try to adapt to capitalize on them over time. We've experienced instances in the past decade where we anticipated modest success, only to find ourselves scoring much higher than expected. We strive to remain flexible when such opportunities present themselves while ensuring we stick to our initial expectations and obtain the return on invested capital we sought from the company, regardless of any unexpected developments. This explains our approach to these situations.

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

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

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

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