Earnings Call Transcript - DSGX Q2 2025

Operator, Operator

Ladies and gentlemen, welcome to The Descartes Systems Group Quarterly Results Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. This call is being recorded on Wednesday, September 4 of 2024. I would now like to turn the call over to Scott Pagan. Please go ahead.

Scott Pagan, Presenter

Thanks, and good afternoon, everyone. Joining me 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 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 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.

Ed Ryan, CEO

Thanks, Scott, and welcome, everyone, to the call. Today, we're reporting record second quarter results, continued strong revenue and adjusted EBITDA growth, and a new business that has joined the Descartes team. We're excited to go over these results with you and provide some perspective about the business environment we see right now. But first, let me give you a roadmap for this call. I'll start by hitting some highlights of the last quarter and some aspects of how our business performed. I'll then hand it over to Allan, who will go over the Q2 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 third fiscal 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 July 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 14% from a year ago, with services up 12% from a year ago. Net income was up 23% from a year ago with adjusted EBITDA up 17% from one year ago. Our headline targets are 10% to 15% adjusted EBITDA growth per year, so it's great to see this performance. Adjusted EBITDA margin was up a percentage point from a year ago to 43%, and we had a unique item that prevented it from being even higher. Our GroundCloud business entered an accelerated hardware replacement cycle with our customers in Q2 to get AI-enabled cameras to them. This resulted in more low-margin hardware sales to customers in the quarter than we were expecting, changing the revenue mix and impacting the margin. The core business and margin is otherwise performing as we'd expect, and Allan can speak to this in more detail later in the call. We also generated $34.7 million in cash from operations in Q2. That amount was impacted by the accounting treatment for $25 million of the $34.2 million of earn-out payments we made in the quarter. Without that $25 million hitting cash flow from operations, we have generated $59.7 million or 85% of adjusted EBITDA, in line with how we would expect the business to perform. At the end of the quarter, we had over $250 million in cash, and we were debt-free with an undrawn $350 million line of credit. This is after we used about $13 million to acquire BoxTop Technologies and paid $34.2 million in earn-outs on previously completed acquisitions. 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 that can otherwise be reinvested back to improve the business for our customers and stakeholders. We consider where to invest based in part on the returns we can generate on our invested capital. We intend to grow our business 10% to 15% a year through a combination of organic and acquisition activities. When our business generates 14% revenue growth and 17% adjusted EBITDA growth over a year, we believe our business is performing well. The organic growth in our total revenues in the quarter is about 9%, and so we're pleased to have contribution from acquisitions and the organic business. In addition to the BoxTop acquisition we announced in June, we also completed two acquisitions in Q1, and I just wanted to comment a bit about each of their contributions since joining. We combined with OCR in March of this year, OCR are experts in sanctioned party screening and export compliance. These are areas that complement our existing global trade intelligence offerings, but OCR makes us even stronger by adding AI capabilities to our toolkit for our screening solutions and advanced export compliance technology that can serve some of the biggest companies in the world. And this is an area of increasing complexity for our customers where they need technology partners who are actively investing in helping them meet their compliance obligations. Let me just offer a couple of recent examples to demonstrate the challenges our customers face. First, historically, the sanctioned party list has included the names of individuals and organizations that have been sanctioned by one or more government organizations. However, recently, that has shifted in two ways. First, governments have realized that some individuals and organizations are quick to change their legal names to sidestep sanctions. That has been met by some governments now requiring screening by a particular physical address rather than legal name, recognizing it may be more difficult to change physical locations. This new screening mechanism is something that Descartes OCR is ahead of the market on, so our customers are ready to meet this obligation. Second, historically, the sanction lists were published by governments. But recently, U.S. authorities have also included lists published by nongovernmental organizations in the scope of what our customers are expected to screen, something that Descartes OCR is also ahead of the market on. As this new sanction approach leads to a number of new sanctioned parties that are being added because of ongoing conflicts in the Middle East and Russia, Ukraine, and organizations using forced labor in their operations, we've got a rapidly changing complex landscape for our customers to comply with. OCR has been a good contributor since joining and is tracking ahead of our plans. We're pleased with the commonality of purpose we have and are thrilled to provide a home for their team here at Descartes. It has also expanded our international footprint with operations in India and a blue-chip multinational customer base. Welcome again to the whole team from OCR, and thanks to everyone on making our combination a success for our customers. Our second acquisition in Q1 was Thyme ASD. Thyme ASD has two parts to their business. First, they do European customs and security filing solutions with particular strength in Ireland; secondly, they track assets for airlines. Since the acquisition, we really hit the ground running. We've already worked with some of the existing Thyme ASD customers to expand what we can do for them. Together, we've gone to our customers to help them meet the new ICS2 security standards, and we've rapidly got our organizations together to ensure we're getting our customers the best of our combined solutions. The initial contribution is ahead of plan and trending positively, and further welcome to the whole Thyme ASD team. For our business focused on growth, having new acquisitions deliver great value to customers and be ahead of plan is a testament to all the work of our combined teams. Our corporate development team also does a great job of finding businesses that we know our customers will be excited about and fit them into our culture. In Q2, they were able to identify another great one. In June, we combined with BoxTop Technologies for about $13 million. BoxTop was an existing Descartes partner and a logical combination. 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 broker-forwarder solutions. Our integration started immediately with an immediate focus on Descartes, Thyme, BoxTop solutions working for the European SMB forwarder community. Though it was only part of Descartes for part of Q2, its initial contributions were ahead of plan, and we've got a good running start in Q3. Welcome to the entire BoxTop team. Collectively, we've had good acquisition contributions and success in identifying businesses that are a good fit for our business and customers. With our capital position, we intend to continue to explore the acquisition market. Global logistics and supply chain market conditions have been difficult for our customers, and it's also brought challenges to smaller or early-stage logistics technology businesses. There are lots of potential acquisition targets for us, but even more work to intelligently evaluate those opportunities. We're confident in our team, and we'll continue to dig in to effectively and efficiently deploy our capital. As I referenced, the challenging logistics and supply chain market conditions, I just wanted to hit on some things that we're seeing. First, U.S. truck volumes continue to be lower than normal and well below pandemic levels. With the increased volume during the pandemic, we saw an increase in capacity, and with volumes coming down, we're seeing that capacity exit the market with many small providers leaving and some large providers like Yellow and U.S. Logistics forced to exit. We've countered lower volumes by improving our tracking efficiency, where we're now able to track north of 87% of the loads our customers are involved with. We believe this tracking efficiency to be best-in-class, and we continue to monitor these volume trends. Market parcel volumes have seen some growth, but UPS and USPS are seeing pressure on revenues per parcel. This revenue pressure has most parcel carriers looking at pricing, service offerings, and potential cost reductions. So our marketing flux is even harder for shippers to keep track of the best prices and services. Our shipping management solutions will continue to be important in this market as a result. Third, U.S. ocean import volumes were very high in July, the third highest as tracked and a 26-month high. There wasn't a big increase in port wait times with this increased volume. Ocean imports from China were at a record high; higher ocean volumes have sometimes contributed to higher follow-on truck volumes, so we'll monitor that as well. We're also keeping an eye on potential labor disruption in the South Atlantic, Gulf Coast ports, and the continued recovery of port capacity at the Port of Baltimore. Fourth, labor challenges are a theme right now. As I mentioned, there is still a labor agreement in progress with various ocean port workers. There was a recent disruption in rail with labor negotiations, and several air carriers are dealing with pilot negotiations. Each of these items can impact the flow for our customers. I spoke about the challenging sanctioned compliance environments for our customers, but shipping has also been complicated with a volatile tariff environment. There's been active imposition of new tariffs recently, in particular, on AI-enabled chip technology and electric vehicle components. There's also uncertainty about how the tariff environment will be impacted by the U.S. election cycle; it's an active time for our customers, and we're seeing more inquiries than normal from our customers for health care. Generally, the high inflationary, high-interest rate environment has been tough on our customers, but with some countries providing rate relief with inflation being controlled, we're monitoring the impact on volumes. We've designed our business to be able to succeed in challenging business conditions. 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 to consistently deliver. Descartes has done that again this quarter. So let me just summarize as I hand it over to Allan to give the full financial details of the quarter and the year. 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 $250 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 that ensures that our customers have a secure, stable, and growing technology partner that can help them with their challenges well into the future. I thank all Descartes team members for everything they've done to contribute to a great quarter, and with that, I'll turn the call over to Allan to go through our Q2 financial results in more detail.

Allan Brett, CFO

Thanks, Ed. As indicated, I'm going to take you through our financial highlights for our second quarter, which ended July 31. We are pleased to report record quarterly revenue of $163.4 million this quarter, an increase of 14% from revenue of $143.4 million in Q2 last year. While revenue from new acquisitions, including the recently acquired OCR, ASD, and BoxTop businesses contributed nicely to this growth, similar to the past number of quarters, growth in revenues from our existing solutions were the main drivers in growth this quarter when compared to last year. Our best guess is that growth in sales to new and existing customers, or organic revenue growth, came in at about 9% in the second quarter. Looking further at our numbers, our revenue mix in the quarter continued to be solid, with services revenue increasing 12% to $146.2 million or 89% of total revenue, compared to $130.7 million or 91% of total revenue in the same period last year. Services revenue was also up nicely sequentially, increasing just over 6% from the first quarter of this year as we continue to help our customers expand with new services. License revenue came in at $1.4 million or 1% of revenue in the quarter, consistent with the second quarter of last year. Professional services and other revenue came in at $15.8 million or 10% of revenue, up from $11.3 million or 8% of revenue in Q2 last year. For us, other revenue includes hardware revenue. And while it's generally quite small each quarter, we had an unusual increase in hardware revenue in our GroundCloud business this quarter. During the second quarter, as Ed mentioned, our GroundCloud business entered an accelerated hardware replacement cycle to implement new AI-enabled camera technology, and this resulted in approximately $2.5 million of additional low-margin hardware sales being recorded late in the second quarter. Gross margin for the second quarter came in at 75% of revenue, down slightly from a gross margin of 76% of revenue that we realized in the second quarter last year, and this is mainly a result of the unusual lower-margin hardware sales in the GroundCloud business that I just mentioned. Looking at our cost base, operating expenses increased by just under 11% in the second quarter over the same period last year, and this was primarily related to the impact of recent acquisitions, including the OCR acquisition completed earlier in the first quarter of this year. Excluding the impact of these recent acquisitions, we had minor increases in labor-related expenses, including stock-based compensation as we continue to carefully invest in our people and our business. We also experienced an unusual bad debt of approximately $500,000 this quarter as one of our logistics service provider customers, U.S. Logistics, declared bankruptcy during the second quarter. So as a result of both revenue growth, offset slightly by the operating cost increases just mentioned, we continue to see strong adjusted EBITDA growth of 17% to a record $70.6 million in the second quarter, up from the same quarter last year. As a percentage of revenue, adjusted EBITDA came in at 43.2% of revenue, up from 42.3% of revenue in Q2 last year. While this ratio is up from the second quarter, I want to note that we've integrated and improved operating ratios from several recent acquisitions. We should mention that our adjusted EBITDA ratio was actually down slightly from the 44.3% ratio that we recorded in Q1 this year. This slight drop in the second quarter in EBITDA margin can almost entirely be attributed to the unusual $2.5 million of low-margin hardware sales realized in the quarter, as well as the one-time increase in bad debts mentioned earlier. As a result of the above, net income under U.S. GAAP came in at $34.7 million or $0.40 per diluted common share in the second quarter, an increase of 23% from net income of $28.1 million or $0.32 per diluted common share in the second quarter last year. Looking at our operating results for the first half of the year, revenue came in at $314.8 million, an increase of 12.4% from revenue of $280.0 million in the first six months of last year. Adjusted EBITDA for that period came in at $137.6 million or 43.7% of revenue, up 16.3% from $118.3 million or 42.3% of revenue last year. Net income for the first half of this year increased by almost 21%, coming in at $69.3 million or $0.80 per diluted common share compared to $57.5 million or $0.66 per diluted common share in the first half of last year. With these solid operating results and strong accounts receivable collections, we continue once again to have strong cash flow from operations, recording an additional $34.7 million in operating cash flow in the second quarter. However, as we mentioned earlier and I have mentioned several times in the last few quarters, during the second quarter, we've also had to make some larger payments on earn-out arrangements related to some recent acquisitions, and the current accounting rules require that we record any portion of those contingent consideration payments that is above our initial estimates made at the time of the acquisition through our cash flow from operations instead of showing them as an investing activity. Simply put, because these acquisitions have gone better than our original estimates, we were required to record $25.0 million out of the total earn-out payments of $34.2 million made in the quarter as a reduction to our cash flow from operations. Excluding this unusual accounting treatment of these higher earn-out payments, our cash flow from operations would have been $59.7 million or 85% of our adjusted EBITDA in the second quarter, right in the range where we would have expected. For the six months year-to-date, again, excluding the impact of these unusual earn-out payments, operating cash flow would have been $123.4 million or 90% of our adjusted EBITDA, up 22% from $100.9 million in the first half of last year. We should mention, as always, going forward and subject to unusual events and quarterly fluctuations, we expect to continue to see strong cash flow conversion and generally expect cash flow from operations to be between 80% and 90% of our adjusted EBITDA in the quarters ahead. Overall, we are once again pleased with our quarterly operating results as strong organic growth and solid performance from our recent acquisitions resulted in a 14% growth in revenue and a 17% increase in adjusted EBITDA for the second quarter. If we turn our attention to the balance sheet, our cash balance increased by approximately $14 million from the end of the first quarter in April. While we generated strong cash flow from operations, we also used $34.2 million of our existing cash balances to complete contingent consideration payments on two past acquisitions, while also using $13.7 million to complete the BoxTop acquisition that we announced earlier in the second quarter. As a result, as Ed mentioned, we currently have $253 million of cash available, as well as a $350 million line of credit available to us to deploy towards future acquisitions. So we continue to be well capitalized to allow us to consider all opportunities in our market, consistent with our business plan. As we look to the second half of our fiscal 2025, we should note the following: After incurring approximately $3.4 million in capital additions in the first half of the year, we expect to incur approximately $2 million to $3 million in additional capital expenditures for the balance of this year. As mentioned earlier, we recorded approximately $2.5 million of incremental low-margin hardware sales in the second quarter as part of the AI camera replacement project in our GroundCloud business. We currently expect to record a similar amount of around $2.5 million of additional lower margin hardware sales in Q3 of this year as we complete the majority of this hardware replacement cycle this quarter. After paying $34.2 million in earn-out payments on past acquisitions in the second quarter, we currently expect that we will not make any more additional earn-out payments in the second half of this year, while we currently anticipate making cash earn-out payments of approximately $1.5 million in FY '26. As we communicated last quarter, we purchased 95% of the shares of ASD in the first quarter of this year. As part of the deal structure, we have the option to purchase the remaining 5% of this business by the end of this fiscal year. We expect to spend $3.6 million to complete the acquisition of this remaining 5% of the ASD business in the fourth quarter of this year. After incurring amortization costs of $32.4 million in the first half of the year, we expect amortization expense will be approximately $33.1 million for the second half of the year, with this figure being subject to adjustment from foreign exchange changes and future acquisitions. Our income tax rate for the second quarter came in at approximately 28% of pretax income which is slightly higher than our estimated blended statutory tax rate of 26.5%. Looking into the second half of this year, we currently expect that our tax rate will continue to be in the range of 25% to 30% of our pretax income or somewhere on either side of our blended statutory tax rate. However, as always, we should state that our tax rate may vary and fluctuate from quarter to quarter based on one-time tax items that may arise as we operate internationally across multiple countries. And finally, after incurring stock-based compensation expense of $10.1 million in the first half of the year, we currently expect stock compensation will be approximately $10.9 million for the balance of this year, subject to any forfeiture of stock options or share units. And with that, I'll now turn it back over to Ed to wrap up with some closing comments and our baseline calibration for Q3.

Ed Ryan, CEO

Great. Thanks, Allan. We've done three acquisitions so far this year that we believe will contribute more to our calibration as we become more experienced and operating them together. We're mindful of some weakness in U.S. domestic truck that I mentioned earlier, but also mindful of some recent signals of potential recovery of volumes. We keep these things in mind as we set our calibration for the quarter. Our business is designed to be predictable and consistent. We believe that stability and reliability are valuable to our customers, employees, and our broader stakeholders. To deliver this consistency, we continue to operate from the following principles. Our long-term plan is for our business to grow adjusted EBITDA 10% to 15% annually. We grow through a combination of organic growth and acquisitions. We take a neutral party approach to building 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 August 1, 2024, using foreign exchange rates of $0.72 to the Canadian dollar, $1.08 to the euro, and $1.28 to the pound, we estimate that our baseline revenues for the third quarter of fiscal 2025 are approximately $141 million, and our baseline operating expenses are approximately $87.5 million. We consider this to be our baseline adjusted EBITDA calibration of approximately $53.5 million for the third quarter of fiscal '25 or approximately 38% of our baseline revenues as of August 1, 2024. We continue to expect that we'll operate in an adjusted EBITDA operating margin range of 40% to 45%. Our margin can vary in that range, given such things as revenue mix, like we saw with hardware this quarter, foreign exchange movements, and the impact of acquisitions as we integrate them into our business like we previously saw with GroundCloud. We expect the GroundCloud hardware replacement cycle will continue in Q3, so that revenue mix may impact margins slightly again this quarter. We've got lots of exciting things planned for our business. It remains a challenging economic supply chain and compliance environment for our customers, but we believe our proven track record of execution, solid capital structure, and customer focus will help us serve them well. Thanks to everyone for joining us on the call today. As always, we're available to talk to you about our business in whatever manner is most convenient for you. And with that, operator, I'll turn it back to you for questions.

Operator, Operator

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

Faith Brunner, Analyst

Hi, guys. This is Faith on for Dylan. Can you just remind us, as you're talking about some of the different macro puts and takes, your transactional exposure, you guys continue to operate well despite some of the headwinds that you called out? So maybe could you just help us think about the banded range of outcomes that are possible as volumes either pick up or decline more substantially?

Allan Brett, CFO

Sure. Our transactional revenues represent roughly 31% of overall revenue and are generally stable performers. While there are fluctuations when volumes rise and fall, these numbers are fairly consistent compared to most transactional businesses, especially considering the minimums we have in place. During normal conditions, including minor variations in ocean, air, truck, and rail markets, I would say these figures remain fairly steady compared to most transactional businesses.

Faith Brunner, Analyst

Okay, great. And then just one more quick one. You guys called out you have three acquisitions to date you talked earlier about having that 3% to 6% target every year. Any color on the outlook for the second half of what you guys may be looking at or the broader M&A landscape?

Ed Ryan, CEO

Yes. We see a pretty good environment for acquisitions. I think over the last year, people's expectations for what they should sell their companies for have come down into what we would consider a reasonable level in a lot of cases, and you can see us get more acquisitions done this year, and I expect that to continue for the foreseeable future.

Operator, Operator

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

Paul Treiber, Analyst

Thanks very much, and good afternoon. Just a couple of clarification questions. First, just on the organic growth, the 9% is that referring to services only? Or does it also take into account the one-time hardware revenue in the quarter?

Allan Brett, CFO

Yes, Paul, your line is a little crackly, but the 9% is the estimated organic growth in the total business.

Paul Treiber, Analyst

Okay. And then secondly, for the baseline for Q3, does that include the $2.5 million that you expect in low-margin hardware? Or is it excluded not be in addition to the baseline?

Allan Brett, CFO

It's a great question. It includes some element of that hardware. We do have some orders already for some that we know will be delivered in Q3. We're estimating that the total amount will be $2.5 million, but we don't have all those orders yet. So it is included for what we know about at this point in time or what we knew about for August.

Paul Treiber, Analyst

Okay. And then just lastly for me, just on the ASD acquisition, the remaining 5%, the cost of it, I think you mentioned it's $3.5 million. It seems like there's quite a premium there. Can you just walk through the structure of that acquisition and some of the moving parts there?

Allan Brett, CFO

Yes. Essentially, we acquired 95% of that business in the first quarter because the sellers preferred to defer a portion of it. We are committed to purchasing the remaining 5% before the end of our fiscal '25, and there will be no additional premium. The figure I provided aligns with the remaining 5% of that business.

Ed Ryan, CEO

Thanks, Paul.

Operator, Operator

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

Stephanie Price, Analyst

Hi, good afternoon. Just on the hardware piece with GroundCloud. Just wondering if you can give a bit more detail there and how confident you are that the refresh should be mostly complete in fiscal Q3. I think you mentioned that, Allan.

Allan Brett, CFO

Yes. I mean what happened here is we started providing AI cameras and we offered a deal up for our customers where if they signed up for a two-year deal, we included a new AI camera in it. We did that mostly to protect our existing customer base. And the good news in that was we had a lot more customers than just our existing customer base take advantage of it and sign new contracts with us. So we were pleasantly surprised with the reaction to that in the market. And we're estimating that it will be largely over this coming quarter, but I'm not positive to that. I hope for great news if it continues, and we kept signing up more customers. But best we can tell right now, we should be done with most of that in the existing quarter. What we've done here has been pleasantly surprising to us.

Stephanie Price, Analyst

Great. And then just on M&A, you mentioned that smaller businesses are being challenged by the freight environment. Just curious what you're seeing on the larger deal side as well?

Ed Ryan, CEO

I believe they face challenges as well. When I made that comment, I was primarily referring to our customers, but it also applies to acquisitions. There was a period a year or two ago when expectations were set too high, which may not have been realistic over time. I'm observing the same issue with larger businesses. We review these larger businesses when they come up for sale. However, there are dynamics that sometimes leave us dissatisfied, especially when private equity firms group together businesses we had previously evaluated. We believed we had dodged a bullet not bidding the first time, thinking they might have overpaid initially. Now, we're being asked to pay more for those businesses going forward, which is often frustrating for us. We don't always agree with their assessments, leading to situations where we consider larger businesses, but our interest may not be as strong.

Raimo Lenschow, Analyst

Hey, perfect, thank you. Two quick questions. Ed, on the puts and takes, like on the truck side, that seems like late cycle to me because they had the last kind of mile in a way, like not the last mile, but you know what I mean?

Ed Ryan, CEO

Yes.

Raimo Lenschow, Analyst

If you look at previous cycles, like am I kind of overthinking this now or what have you seen historically on there? And then, Allan, if you think about free cash flow or operating cash flow, this quarter was the one number that came in slightly below where the rest of the performance was really strong. Can you kind of speak to the puts and takes there and probably seasonality? Thank you. Congrats from me as well.

Ed Ryan, CEO

Hi, Raimo, yes. So no, I don't think you're overthinking. I think you're exactly right. Truck tends to follow some of the other modes, in particular, ocean and air, that tend to drive a lot of truck volumes. So we were encouraged, and I mentioned briefly in the opening remarks that ocean volume was very strong at the end of the quarter. I am optimistic that that's going to flow into truck volumes in the coming months. That's normally what happens, and I hope to see that. I think you're spot on.

Allan Brett, CFO

Yes. And Raimo, on your question about cash flow. So as we mentioned in the prepared comments, we had a little unusual event this quarter, which we've been mentioning for the last couple of quarters would happen. On our larger earn-out payments that we had, we made a couple of payments in the quarter, those payments turned out to be larger than the initial estimates we made at the time of the acquisition, and U.S. GAAP rules require us to take any of those additional payments that we made above and beyond the original estimates and put those through cash flow from operations. So there's a hit, a $25.0 million hit to cash flow from operations. If you exclude that for the quarter, our cash flow was just a notch under $60 million or adjusted cash flow from operations. About 85% of our adjusted EBITDA, and that's right in the range of what we'd expect. Typically, we expect anywhere from 80% to 90% of our adjusted EBITDA to become operating cash flow with that one adjustment, which is a very unique item. We're right in the middle of that range. So hopefully, that explains. It's a very unique one-time item that should not hit us to this extent in the quarters going forward.

Raimo Lenschow, Analyst

Okay. Makes total sense. Congrats. Thank you.

Ed Ryan, CEO

Thanks, Raimo.

Operator, Operator

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

Ed Ryan, CEO

Great. Thanks, everyone, for your time this evening. We look forward to reporting back to you on our Q3 results in December. Otherwise, have a great evening.

Operator, Operator

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