Earnings Call Transcript - DSGX Q3 2023

Operator, Operator

Good afternoon, ladies and gentlemen, and welcome to the Descartes Systems Group's quarterly results conference call. This call is being recorded on Tuesday, December 5, 2023. I would now like to turn the conference over to Scott Pagan. Please go ahead.

Operator, Operator

Thank you, and good afternoon, everyone. Joining me remotely on the call today are Ed Ryan, CEO; and Allan Brett, CFO. I trust that everyone has received a copy of our financial results press release that was issued earlier. Portions of today's call other than historical performance include statements of forward-looking information within the meaning of applicable securities laws, and these statements are made under the safe harbor provisions of those laws. These forward-looking statements include statements relating to our assessment of the current and future impact of geopolitical and economic uncertainty on our business and financial condition; Descartes' operating performance, financial results and conditions; 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.

Edward Ryan, CEO

Thanks, Scott, and welcome, everyone, to the call. We're coming off a great third quarter with record financial results, solid organic growth, and strong operating margins. We’re eager to discuss these results with you and share our perspective on the current business environment. To start, I’ll highlight some key metrics from last quarter and provide insights into our performance. Then, I’ll hand it over to Allan for a more detailed review of our Q3 financial results. After that, I’ll return to update you on the current business landscape and how we’re positioned as we approach Q4. Finally, we'll open the floor for a Q&A session coordinated by the operator. Let’s begin with the quarter that ended on October 31. We closely monitor revenue, profits, cash flow from operations, operating margins, and investment returns. In this past quarter, we saw exceptional results in all these areas. Total revenues increased by 19% year-over-year, with service revenues rising by 18%. Adjusted EBITDA grew by 17% compared to last year, with an adjusted EBITDA margin returning to 44%, aligning with pre-acquisition levels for GroundCloud. We also generated $56 million in cash from operations, which is 86% of adjusted EBITDA. At the quarter's close, we had nearly $280 million in cash and were debt-free, with $350 million in unused credit available. We are well-capitalized and capable of continued investment in our business. We experienced solid organic growth in our core service revenue, driven by similar factors to those in previous periods. The areas with the most significant growth were real-time visibility, global trade intelligence, and routing and scheduling solutions, so I’ll briefly elaborate on each. Starting with real-time visibility, tracking the location of goods transported on third-party assets like ships, planes, and trucks can be challenging, especially when shipments are arranged through intermediaries. To enhance visibility, we have built a network that sources information from various assets and stakeholders, presenting it in actionable ways. Knowing where shipments are and their expected arrival times is crucial for customer service and operational efficiency. Our visibility and transportation management solutions, such as MacroPoint, provide essential support to customers. We are securing more visibility contracts and seeing high demand for our offerings due to three main reasons. Firstly, our solutions excel at tracking loads, allowing us to track a larger percentage of loads than our competitors. Customers compensate us based on the number of loads we track, so we strive to connect with as many carriers and intermediaries as possible for location data. Our self-connect tools enhance coverage across networks, and our customer success teams assist in complex cases. This effort has led to tracking more loads, generating better data, satisfying customers, and driving robust business growth. The second reason is that visibility is integrated into many of Descartes’ solutions. While some customers engage us solely for visibility, many others benefit from embedded visibility that aids in transportation management decisions such as tender planning and consolidations during shipment execution. We believe this offers a more comprehensive service than our competitors. Lastly, our reputation as a reliable and growing partner reassures customers. They value working with Descartes as a larger public company with a strong record of financial stability and extensive experience providing secure cloud services worldwide, making us a preferred provider in the real-time visibility market. The second growth area we are witnessing is in global trade intelligence solutions. Current geopolitical turmoil impacts supply chains and logistics, forcing goods to reroute away from conflict zones and complicating trade relationships due to sanctions and changing tariffs. Our customers seek assistance navigating these challenges, and our solutions address three key areas: competitive intelligence through our Datamyne solutions, real-time tariff and duty data for informed shipping choices, and compliance tools to ensure shipments adhere to legal restrictions. The final area of strong growth is our routing and scheduling solutions, helping customers optimize their vehicle fleets rather than relying on external carriers. We believe we offer the premier routing and scheduling solutions on the market, responding to customer pressure for efficiency due to cost constraints, labor shortages, and environmental concerns. Customers are also focused on enhancing the delivery experience for consumers by providing specific delivery windows and real-time visibility. We’ve sustained good organic growth despite broader macroeconomic challenges in supply chain and logistics. While lower transportation volumes were anticipated, the actual decline was not as severe as expected. Our supply chain messaging and customs filing segments experienced some reductions in transaction volumes, but these align with our expectations. Overall, our business is structured to thrive amidst fluctuations in transportation volumes, and the strong performance of our less volume-sensitive areas, combined with new customer acquisitions, has fueled our organic growth. This growth has also benefited from successful recent acquisitions, some of which exceeded our expectations for performance. Let me briefly mention two noteworthy acquisitions. The first is GroundCloud, whose safety and compliance solutions have been integrated into our offerings over the past eight months. GroundCloud assists in identifying safety incidents and provides targeted video training for drivers, while also helping companies manage delivery obligations with subcontractors like FedEx. Following integration, our adjusted EBITDA margin rebounded back to 44% in Q3, and we see significant cross-sell opportunities within our existing customer base. The second acquisition is Localz, which enhances the delivery experience by allowing customers to track vehicles in real-time during final mile deliveries. Localz has been successfully incorporated into our routing solutions, and we’re pleased with the initial performance and demand for these combined offerings. In summary, we achieved record financial results this quarter, reflecting the continued value our customers derive from our solutions and the dedication of our team. We closed the quarter with nearly $280 million in cash, $350 million in available credit, and a promising market opportunity to further grow our business through both organic efforts and acquisitions. We remain focused on achieving profitable growth to ensure our customers have a stable and reliable technology partner to tackle future challenges. I want to thank all Descartes team members for their contributions to a successful quarter and positioning our business for future success. Now, I’ll hand it over to Allan for a detailed overview of our Q3 financial results. Allan?

Allan Brett, CFO

Thanks, Ed. As indicated, I'm going to take you through our financial highlights for our third quarter, which ended on October 31. We are pleased to report record quarterly revenue of $144.7 million this quarter, an increase of 19% from revenue of $121.5 million in Q3 last year. While revenue from acquisitions completed in the past 12 months contributed nicely to this growth. Similar to the past several quarters, our growth in revenue from new and existing customers from our existing solutions was the main driver in growth again this quarter when compared to last year. Looking at our revenue details further. Our revenue mix in the quarter continued to be very strong, with services revenue increasing 18% to $130.4 million compared to $110.1 million in the same quarter last year, representing approximately 90% of total revenues in the third quarter. Removing the impact of both the recent acquisitions as well as the impacts from foreign exchange, on a like-for-like basis, we would estimate that our growth in services revenue from new and existing customers would have been just over 9% this quarter when compared to the same quarter last year and fairly consistent with the first half this year. License revenue came in at $1.5 million or 1% of revenue in the quarter, up slightly from last year, while professional services and other revenue came in at $12.8 million, up 24% to 9% of total revenue compared to $10.3 million or 8% of total revenue in the third quarter last year, as both professional service hours and hardware revenues were higher this quarter. For the 9 months this year, revenue came in at $425 million, an increase of 18% from revenue of $361 million in the first 9 months last year. Gross margin came in at 76% of revenue for the third quarter, down slightly from gross margin of 77% in the third quarter of last year, but very consistent with the gross margins we've experienced since the completion of the GroundCloud acquisition earlier this year. Operating expenses increased by approximately 19.5% in the third quarter over the same period last year, and this was heavily related to the cost impact from recent acquisitions, primarily the GroundCloud business, but also operating costs increased from some additional investments we made in labor and non-labor costs as we managed the organic growth that we continue to see in our business. So as a result of both revenue growth and solid cost control balanced with targeted investments in our business to manage growth, we continued to see strong adjusted EBITDA growth of 16.5% to a record $63.5 million or 43.9% of revenue, up from $54.5 million or 44.9% of revenue in the third quarter last year. We should mention, as a reminder, that while adjusted EBITDA margins are down slightly from Q3 last year to the dilutive impact of recent acquisitions, we did see a sharp increase in our adjusted EBITDA ratio in Q3 over Q2 of this year, increasing from 42.3% of revenue in Q2 to 43.9% of revenue in Q3. This increase is a direct result of the continued operating leverage from organic growth as well as a steady improvement in the margins from our recent acquisitions. For the first 3 quarters of the year, adjusted EBITDA has increased 14% to $182 million from $160 million in the same 9-month period last year. Looking at the other GAAP line items on our income statement this quarter. Other charges increased to $9.7 million, up from only $200,000 in Q3 last year, and this increase was a result of two unique items. First, we accrued an additional $7.8 million in anticipated earn-out payments related to recent acquisitions as these businesses have performed better than our original expectations, and therefore, better than the estimates that were made at the time of the acquisitions. In addition, as part of our ongoing efforts to maintain an effective cost structure, we initiated a restructuring plan early in Q3 at a point of heightened macro uncertainty. The restructuring involved a reduction of just under 2% of our labor force and the closing in whole or in part of four of our offices as we continue to adopt a flexible work model for our employees and realize that we had certain facilities that were not going to be actively used by our employees going forward. We would estimate that the cost savings from these completed restructuring efforts would be in the area of $4 million annually, and the resulting charge to P&L in the third quarter was approximately $1 million. As a result of the increased profits from the growth in the business offset by this increase in other charges, from a GAAP earnings perspective, net income came in at $26.6 million or $0.31 per diluted common share in the third quarter, very consistent with net income of $26.5 million or $0.31 per diluted common share in the third quarter last year. We should also note that the income tax expense for the third quarter came in at $8.2 million or 23.5% of pretax income, which is slightly lower than our blended statutory tax rate of 26.5%, mainly as a result of recognizing certain unrecorded tax benefits from past periods. Net income for the 9-month period year-to-date was $84.1 million or $0.97 per diluted common share compared to $72.5 million or $0.82 per diluted common share in the first 9 months last year, again, with the higher operating profits from our growing business being partially offset with the higher amount of other charges from the earn-out adjustments and the FY '24 restructuring plan. With these solid operating results, strong AR collections and offset partially by the higher cash tax payments we incurred, cash flow generated from operations remain at $56.1 million or 88% of adjusted EBITDA in the third quarter, an increase of 10% compared to $50.9 million of cash flow from operations in the third quarter of last year. For the 9 months year-to-date, operating cash flow has been $157 million or 86% of adjusted EBITDA, up 11% from $142 million in the same 9-month period last year. And we should mention that 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. As a reminder, the additional earn-out payments that we've expensed in other charges in the income statement these past few quarters will be one of those types of unusual events, as these amounts will show as a reduction to cash flow from operations in future quarters when these higher earn-out payments are made. Overall, as Ed said, we are once again very pleased with our quarterly operating results in the quarter as strong organic growth and solid performance from our recent acquisitions resulted in strong growth in both revenue and adjusted EBITDA for the quarter.

Edward Ryan, CEO

If we turn our attention to the balance sheet, our cash balances totaled $280 million at the end of October, up from approximately $227 million at the end of the second quarter in July. This increase in cash is primarily related to the $56 million in cash flow from operations that we generated in the quarter. As a result, as Ed mentioned, we have $280 million in cash available to us as of October 31 as well as our unused $350 million credit facility available to deploy towards future acquisitions, consistent with our business plan. As we look to the final quarter of fiscal 2024, we should note the following: after incurring approximately $4.8 million in capital additions for the first 9 months of the year, we expect to incur approximately $1 million to $2 million in additional capital expenditures in the fourth quarter of this year. At this point, we currently expect that in the fourth quarter, we'll use approximately $23.3 million of our cash to pay additional contingent consideration on 2 past acquisitions. While this entire $23.3 million estimated contingent consideration to be paid is accrued for in our balance sheet, approximately $12.7 million of this balance relates to the portion of the earn-out arrangements accrued for at the time of the acquisition and will be reflected in cash flow from financing activities, while the remaining $10.6 million expected to be paid will be reflected in cash flow from operating activities as the financial results from these acquisitions have both been better than our initial expectations, and therefore, the earn-out payments are higher than our original estimates made at the time of the acquisitions. After incurring amortization costs of $45.4 million in the first 9 months of the year, we expect amortization expense will be approximately $14.7 million in the fourth quarter, with this figure being subject to adjustment for foreign exchange and future acquisitions. Our income tax rate for the first 9 months of the year came in at approximately 24.5% of pretax income. Looking ahead into the fourth quarter, we currently expect our overall tax rate will again come in below our blended statutory tax rate of 26.5%. And as a result, we'll experience a tax rate in the range of 23% to 25% of pretax income for the year. After incurring stock-based compensation expense of $12.4 million in the first 9 months of the year, we currently expect stock compensation to be approximately $4.4 million in the fourth quarter, subject to any forfeitures of stock options or share units. And with that, I'll turn it back over to Ed, who will give you some closing comments as well as our baseline calibration for Q4. Great. Thanks, Allan. So we're a month into Q4 and the end of our fiscal year. General areas of our business that benefit from end-of-year holiday sales such as e-commerce and truck deliveries will see an uptick in volumes, and other areas such as ocean transportation are at a seasonal low point as the inventories are already in store. Our forecasting and plans remain relatively cautious, given the general malaise in shipment volumes seen in the previous quarters this year, however, we're also mindful of the press reports with initial positive statistics on Black Friday sales 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 establish relationships with customers for life, and we thrive on operating a predictable business that allows us to forward visibility to our revenues and investment paybacks. In our Q3 report, we provided a comprehensive description of baseline revenues, baseline calibration and their limitations. As of November 1, 2023, using foreign exchange rates of $0.72 to the Canadian dollar, $1.06 to the euro and $1.21 to the pound, we estimate that our baseline revenues for the fourth quarter of 2024 are approximately $127 million, and our baseline operating expenses are approximately $79 million. We consider this to be our baseline adjusted EBITDA calibration of approximately $48 million for the fourth quarter of 2024 or approximately 38% of our baseline revenues as at November 1, 2023. We continue to expect that we'll operate an adjusted EBITDA operating margin range of 40% to 45%. Our margin can vary in that range, given such things as foreign exchange movements and the impact of acquisitions as we integrate them into our business. We've got lots of exciting things planned for our business. It remains an uncertain broader economic and supply chain environment, but we believe our proven track record of execution, solid capital structure and customer focus will serve us 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 now turn it over to you to manage the Q&A portion of the call. Thank you.

Operator, Operator

Your first question comes from Matt Pfau from William Blair.

Matthew Pfau, Analyst

Wanted to ask a question on competition and on the macro. So one of your public competitors had some notable struggles this past quarter, and there's another private competitor that went out of business. Just wondering if you're seeing some of the same headwinds that they're seeing and some of their struggles is having any impact on you competitively.

Edward Ryan, CEO

Thanks, Matt. I mean, I think we saw some of the things that impacted them. We obviously fought our way through it and ended up with pretty good results. The two companies you're talking about may have been in a different position in that things went bad maybe with transaction volumes, and when the customers suffered as a result, and they didn't have any other products or services to make up for it. We obviously were in a different situation and were able to take advantage of that. And sometimes, competitors struggling end up being good news for you because customers turn elsewhere, and it also makes them potentially concerned about who they're doing business with and when you're a strong company like Descartes, that ends up playing in our favor.

Matthew Pfau, Analyst

Got it. And then just on the services revenue that did tick down sequentially, was that driven by some of the headwinds on the transaction side that you cited?

Edward Ryan, CEO

I think so, yes. I mean, we had a very strong quarter but it probably would have been better if some of our customers' volumes were doing even better. It wasn't a horrible quarter. I think people predicted it was going to be a lot worse than it was in terms of our customers' transportation volumes. And we have the benefit of continuing to sign up new customers in the face of that. So we did all right in that period. Probably would have done even better if that part had gone well. And we had a bunch of other parts of our business that I mentioned on the call that were really doing well, so that kind of more than made up for it. So we're happy with the result under the circumstances, for sure.

Operator, Operator

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

Justin Long, Analyst

Ed, can you provide insight into how your transportation volumes performed in the quarter compared to the previous year? Allan, I appreciated your comments on organic growth for the services revenue line, but do you also have an estimate for the total organic growth?

Edward Ryan, CEO

I don't know that I have the exact numbers, Allan, year-over-year, but if you could jump in.

Allan Brett, CFO

Yes. If we discuss organic growth numbers, we achieved just over 9% growth in services and a very similar figure overall for the business. There were some slight negative impacts from foreign exchange that affected the question Matt posed regarding our services revenue decline quarter-on-quarter. However, they were actually neutral when accounting for FX, with approximately 9% growth in both services revenue and total revenue for the quarter.

Justin Long, Analyst

Okay. And any sense on transactional volumes on a year-over-year basis, even if it's just kind of directionally? It sounds like maybe there was pressure year-over-year. Or any additional color you can share there?

Allan Brett, CFO

Yes, there was definitely some pressure year-on-year. We certainly did better with our subscription services for software and databases. But as Ed said a couple of times in the prepared comments, we kind of expected that. Our business is built to deal with those types of fluctuations. Those are not new for us. We'll see those types of things happen from time to time. Quite honestly, we've probably seen weaker transactions in the last 12 months. But overall, what matters for us is the overall blended growth rate, and the business is built to grow, and the 9% overall is more of our focus.

Justin Long, Analyst

Got it. And I guess lastly, Ed, could you just talk about the acquisition pipeline? Curious what you're seeing today versus a quarter ago and your level of confidence that we can see capital deployment pick up the next couple of quarters or so.

Edward Ryan, CEO

Yes. Without getting into too much detail on it, we like the environment we're in right now. A couple of years ago, there were not many companies for sale and the ones that were, in our estimation, were oftentimes trying to charge too much. It made a difficult acquisition environment for us. Things are certainly softening from that perspective and creating opportunities for us to get more deals done in price ranges that we think are good value. More companies are coming up for sale, and as a result and maybe in addition to, companies are coming up for sale with a more reasonable expectation on valuation, and that's creating an environment where we think we're in a very good position to get more deals done in the future.

Operator, Operator

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

Daniel Chan, Analyst

Maybe to follow on that last question. The cash balance continues to grow. You're now at about $280 million, and you do about $200 million of free cash flow a year, which is more than you've typically spent on acquisitions in prior years. So any other considerations for that capital, just given the strong cash balance and the strong cash flows? Or do you think you'll be able to deploy that towards acquisitions over the next few years?

Edward Ryan, CEO

Listen, I mean, we're making more and more money every year and that's great. We only buy companies when we think it's a good deal. And if that means we have extra cash, then that means we have extra cash. We're not going to apologize for that. We absolutely think that the winner in our space is going to continue to be acquisitive, and we absolutely believe that there are many more companies that are acquisition candidates for us. So while we talk about it at our Board level, we'll discuss every quarter, should we have a dividend? Should we somewhat give this money back to shareholders, share buyback, whatever? But at the moment and I think for the foreseeable future, we believe that, that money should go towards acquisitions. And it's not really going to harm us at the moment to have more cash sitting in the bank. It's actually a good thing. Our company continues to make more money. And as we look forward and say, 'Hey, we think we're going to like this future acquisition environment.' Go ahead, I think we'd be smart to hang on to it and be ready to act if a bunch of stuff comes up for sale at the same time. We certainly think we have the team to negotiate, purchase and integrate those types of companies when they come in, and we want to be ready when that happens. So that's why you see us holding on to our cash.

Daniel Chan, Analyst

That makes a lot of sense. Maybe another question on the macro environment. You talked about weaker volumes last quarter. Just wondering whether you saw that extend into the peak holiday shopping season over the last month. We've seen headlines at Black Friday, Cyber Monday volumes.

Edward Ryan, CEO

We are not providing a report for this month, but I have observed some transportation statistics that are unrelated to our transaction volumes, and they appear to be positive. You might also notice similar trends in current news coverage. Reports indicate that Black Friday performed well. Additionally, looking at the transportation statistics we usually monitor over the past month, there were signs of improvement as we approached Black Friday. Overall, this is encouraging news.

Operator, Operator

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

Scott Group, Analyst

Ed, I want to follow up on that last point because I think we're seeing improved import activity and better air freight rates. You're indicating that you aren't reporting on that. To the extent that you are seeing this, would it be reflected in your calibration?

Edward Ryan, CEO

Calibration was done at the first day of the quarter, so technically, no. And my comment about not reporting on it is just saying, 'Hey, I'm reporting on through the end of the quarter, not the first month of the first quarter.' And specifically to your question, our calibration this quarter was done as of the first day of the quarter.

Scott Group, Analyst

Okay, that makes sense. I wanted to get your perspective. A year ago, we discussed just-in-time becoming just-in-case. I'm curious, with much higher rates, is that situation resolved, or are we returning to just-in-time? And is that a positive or negative development?

Edward Ryan, CEO

We'll probably get back to just-in-time inventory management. It's somewhat of an educated guess based on customer feedback, but I don’t have all the details. We've consistently believed that the trend would shift back to just-in-time, despite the previous challenges with inventory. Three years ago, issues with port congestion led to significant costs related to inventory carry and rising interest rates, making companies reconsider their inventory strategies. I think we're starting to return to just-in-time practices, primarily due to high interest rates and space limitations in warehouses. Companies need to accurately predict customer demand, and I believe we're definitely moving back towards just-in-time in most situations.

Scott Group, Analyst

Makes sense. And then just lastly, a nice step-up in the EBITDA margin. Did we see the full impact of some of the cost actions this quarter? Or do we see more of that show up in Q4, and so maybe we see another further step-up in the margin?

Edward Ryan, CEO

Yes, let me let Allan answer that more specifically.

Allan Brett, CFO

Yes, sure. So we did initiate our restructuring plan earlier in the quarter. So for the most part, we've completed it, and the results are in the quarter. There will be a little bit of an impact coming through Q4, given that there will be a full quarter impact for all the changes. But for the most part, Q3 had most of it baked in, if that helps.

Operator, Operator

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

Robert Young, Analyst

The first question was asking about the shutdown of a private competitor. Maybe just another question there. A lot of reports in the news suggested that they really struggled to find a strategic buyer, that there is not a lot of activity out there. And so like is there a big sea change or is there a bigger change in the number of buyers or the interest in the space that puts you in a better position competitively or...

Edward Ryan, CEO

While I understood who they were referring to in the previous questions, I don't think we are a direct competitor of the company that went out of business. They operated as a freight broker with an electronic freight brokerage model, which is not something we would acquire as they were a minor customer of ours. I have seen similar situations numerous times before where a company in the industry claims it will be the automated leader. However, I believe this is misleading. They are essentially a freight broker trying to present themselves as a tech company by promising to be more automated than the competition. Even if they gain a temporary edge, that advantage is unlikely to last because competitors will quickly adopt automation from established providers like us. Eventually, they revert to being just another freight broker without any meaningful advantage. In this case, they raised significant funds to develop their automated freight brokerage, leading to substantial losses that became difficult to manage when conditions stabilized. Consequently, they went out of business, which was not something we were pursuing. It appeared that other competitors may have thought about just taking their customers, but we were merely observing from a distance as they were only a minor account for us, and we were not particularly interested in any of their assets.

Robert Young, Analyst

Okay. Second question for me would be about, I think on the call, you've been talking about maybe offsetting weaker transaction volumes than you expected with maybe better subscription side. And so I was curious, is that consolidation? Is there any other factor there maybe to call out? Are customers...

Edward Ryan, CEO

No. I mean, we have several areas in our business that are thriving. We have transaction volumes that account for a little over 30% of our business which tend to fluctuate. Occasionally, you may see a significant decline, like in 2008, but even then, it was just an 8% decrease. The reason this happens is because most of what we provide still needs to be shipped. In prosperous times, we might be buying luxury items, while in tougher times, we opt for essentials, but the shipping volume remains the same. Even though we might hold off on purchasing items like boats and jet skis for a few years, the necessary goods for living and running households still get shipped, ensuring we maintain that shipping volume. Thus, even during the toughest times, an 8% decrease is manageable. Variations in our business occur periodically, and companies like ours need to be ready for them. Thankfully, our diverse business portfolio means we have other segments performing well. So even when transportation volumes were somewhat weak in the last six to eight months and recovering not as strongly as we hoped, our overall business has continued to thrive. This demonstrates the resilience of our business; even when volumes decline, we continue to perform well.

Operator, Operator

There are no further questions at this time. Please continue.

Edward Ryan, CEO

All right. Great. Thanks, everyone, for your time. We look forward to seeing you in the coming weeks and months and reporting back to you next quarter with the Q4 results. Have a great day.

Operator, Operator

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