Earnings Call Transcript - DSGX Q1 2023

Operator, Operator

Good afternoon, ladies and gentlemen, and welcome to The Descartes Systems Group quarterly results conference call. This call is being recorded on Wednesday, May 31, 2023. I would now like to turn the conference over to Scott Pagan. Please go ahead.

Scott Pagan, Moderator

Thanks very much, and good afternoon, everyone. Joining me 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 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 and economic uncertainty on our business and financial condition; Descartes' operating performance, financial results and condition; Descartes' gross margins and any growth in those gross margins; cash flow and use of cash; business outlook; baseline revenues, baseline operating expenses and baseline calibration; anticipated and potential revenue losses and gains; anticipated recognition and expensing of specific revenues and expenses; potential acquisitions and acquisition strategy; cost reduction and integration initiatives; and other matters that may constitute forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties, assumptions and other factors that may cause the actual results, performance or achievements of Descartes to differ materially from the anticipated results, performance or achievements implied by such forward-looking statements. These factors are outlined in the press release and in the section entitled certain factors that may affect future results in documents filed and furnished with the Securities and Exchange Commission, the LSE 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. Welcome, everyone, to the call. We had a very strong first quarter to start the year with record financial results. We're excited to go over those with you and give you some perspective about the business environment we see right now. But first, let me give you a roadmap for the call. I'll start with highlighting some aspects of how our business performed in the last quarter. I'll then hand it over to Allan who will go over the Q1 financial results in more detail. I'll then come back and provide an update on how we see the current business environment and how our business is calibrated. After that, we'll open it up to the operator to coordinate the Q&A portion of the call. So let's get started by looking at the quarter. Key metrics we monitor include revenues, profits, cash flow from operations and return on our investments. For this past quarter, we had record performance in each of those areas. Total revenues were up 17% from a year ago with services revenues up 21%. Net income and earnings per share were up 27% and 26%, respectively. Income from operations was up 19%, while adjusted EBITDA was up 13%, with a slight forex headwind. And we generated almost $49 million in cash from operations, representing 85% of adjusted EBITDA. At the end of the quarter, we had $182 million in cash and were debt-free with an undrawn $350 million line of credit. We remain well capitalized, cash-generating, debt-free and ready to continue to invest in our business. We believe a company like ours is well-positioned to continue to thrive in market conditions like these. As I've said in the past, our investment strategy is heavily influenced by what our customers are looking for from us. An excellent example of that is our recently announced acquisition of Localz, where we continue to deploy capital for leading technology and services for our customers. Localz is headquartered in Australia and specializes in helping customers with final mile deliveries. Specifically, they provide an Uber-like tracking experience to the end recipient of a delivery, allowing them to be able to see the real-time progress of the delivery over the final miles. Localz also provides customer self-scheduling deliveries and a click-and-collect solution to help with the fulfillment of online purchases. Localz' customer base is mostly in Asia Pacific and Europe. Our focus is to integrate Localz' leading technology stack into our routing and scheduling solutions and make it available through our distribution channels on a worldwide basis. We've already been active in welcoming the Localz team in and had them interacting with our Australian partners and customers. So we're off to a great start. Welcome to the entire Localz team. Localz complements our continued investment in final mile deliveries this calendar year. Our February investment in GroundCloud had a partial quarter of contribution to our results and added a robust solution to help independent final mile delivery companies manage their operations with particular specialization for service providers who are performing the bulk of their deliveries for large transportation brands such as FedEx and Amazon. What really distinguishes GroundCloud is its specialization and attention to driver safety by delivering easily digestible driver training video content to drivers' mobile devices. Our customers' focus on ESG issues and risk minimization, which include workplace and driver safety, are good demand drivers here. Our focus is on the integration of the safety technology with our broader routing and scheduling solutions and we anticipate that the go-forward revenue mix will trend more towards Descartes' revenue mix over time where nearly 90% of our business comes from higher-margin recurring revenues. While our acquisition engine continues to deliver, our organic operations were the principal contributor to a very successful quarter of growth. I just wanted to highlight a few areas that performed well. The first is real-time visibility. This is an area that we've talked about in the past quarters and continues to be strong. A large part of the logistics market is people moving shipments on other people's assets, whether they be planes, trucks, rails or ships. There also may be many intermediaries involved, including freight brokers, third-party logistics providers and customs brokers. With all those assets, modes of transportation and parties involved, answering the question of where is my shipment is not an easy one. It's also an important question as people have realized over the past few years how vulnerable their businesses are to a dysfunctional supply chain. Our MacroPoint solutions have continued to be market leaders in this space and see strong growth, especially with our integration to our Global Logistics Network, which enables us to easily cross-sell MacroPoint embedded directly into a number of Descartes solutions. The second is final mile delivery solutions. The same factors that have driven our recent acquisition investments in final mile delivery and the desire for shipment visibility have also driven growth in our organic route optimization operations. Regardless of whether you have your own fleet of delivery vehicles or are contracting out, the recipients' delivery experience is now part and parcel of the product sale. We continue to see strong demand from our customers for technology that enhances the customers' experience, whether it be in the scheduling or delivery process. The third area is e-commerce. We've certainly seen headlines about how e-commerce is not growing as fast as it did during the pandemic. However, those headlines often miss the key: it's still growing. E-commerce continues to be an increasingly prevalent way of purchasing and e-commerce deliveries flow as a consequence. We've made historic investments to help our customers with this trend, and we continue to see strong volumes in the quarter that contributed to our organic growth. And finally, we have Global Trade Intelligence. This was another strong quarter for our Global Trade Intelligence pillar with some key drivers. You may have seen an increased presence of our data being used by leading publications like The Wall Street Journal to do market analysis, showing the value that customers get from our data mine solutions. We're also continuing to see strong demand for sanctioned party screening as a consequence of continued geopolitical tensions, including from the war in Ukraine and U.S.-China tensions, so a good contributor to growth in the quarter as well. So let me just summarize as I hand it over to Allan to give you the full financial details in the quarter. 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 and the hard work that our team continues to put in for our customers. We ended the quarter with $182 million in cash, $350 million in available credit and a market opportunity where we can continue to grow the business for our customers, both organically and through acquisition. We remain focused on profitable growth so that we can continue to ensure that our customers have a secure, stable and growing technology partner that can help them with their challenges well into the future. My thanks to all Descartes team members for everything they've done to contribute to a great quarter and continuing to have our business in an enviable position for future success. I'll now turn the call over to Allan to go through our Q1 financial results in more detail. Allan?

Allan Brett, CFO

Thanks, Ed. As indicated, I'm going to walk you through our financial highlights for our first quarter, which ended on April 30. We are pleased to report record quarterly revenues of $136.6 million this quarter, an increase of just over 17% from revenues of $116.4 million in Q1 last year. While revenue from our acquisitions in the past 12 months, in particular, GroundCloud and XPS, contributed to this growth, growth in revenue from new and existing customers was again the main driver in growth this quarter when compared to last year. Consistent with past quarters, our revenue mix in the quarter continued to be very strong, with services revenue increasing 21% to $124.1 million, or 91% of total revenue compared to $102.8 million, or 88% of revenue in the same quarter last year. Services revenue was also up nicely sequentially, increasing over 9% from $113.4 million that we recorded in Q4 last year. License revenues came in lower at only $1.0 million, or 1% of revenue in the first quarter, down from license revenues of $2.3 million in the first quarter last year. While professional services and other revenue came in at $11.5 million, or 8% of revenue, up 2% from $11.3 million in the same period last year. In addition, we should mention that there was also a decrease in revenue from forex this quarter. As consistent with the past few quarters, the U.S. dollar continued to be stronger compared to the euro, the Canadian dollar and the British pound compared to the same period last year. This resulted in an over $2 million negative impact on revenue in Q1 when compared to Q1 last year but only had a very small impact on our profitability as we continue to be fairly naturally hedged to the various currency movements. Removing the impact of the recent acquisition as well as the negative impacts from forex that we just mentioned, 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% in the quarter when compared to the same quarter last year, pretty similar to the results we experienced in Q4. Gross margin in the first quarter came in at 76% of revenue in the first quarter this year, consistent with gross margin realized in the first quarter last year, as the operating improvements that we continue to see in the business were offset by lower gross margins realized in the recently acquired GroundCloud business. Our operating expenses increased in the first quarter. This was primarily related to the impact of the acquisition of GroundCloud but also from additional labor-related costs, primarily in sales, marketing and the R&D areas as we experienced the higher run rate costs from the staffing investments we made throughout the past 12 months. As a result of the higher revenues, offset by the increase in sales, marketing and R&D costs, we continue to see our adjusted EBITDA growth of 13% to a record $57.7 million, or 42.2% of revenue in the quarter, up from $51.2 million, or 44.0% of revenue in the first quarter last year. As we had indicated at the end of Q4, the addition of the GroundCloud business, while profitable, came to us with much lower adjusted EBITDA margins out of the gate than the rest of our business. The lower margins in that acquired business, as well as a lesser extent, lower license revenue recognized in the quarter, had a negative impact on our adjusted EBITDA ratio in the first quarter, very much as we expected. From a GAAP earnings perspective, net income came in at $29.4 million, up 27% from net income of $23.1 million in the first quarter last year. With these strong operating results, cash flow generated from operations came in at $48.9 million, or approximately 85% of adjusted EBITDA in the first quarter, up 10% from operating cash flow of $44.4 million, or 87% of adjusted EBITDA in Q1 last year. Note that Q1 is typically a seasonally lower cash flow quarter mainly due to the timing of several tax and bonus payments that typically occur in the first quarter each year. Once again, we are pleased with the strong cash collections we realized during the quarter. So as Ed mentioned earlier, we are very pleased with these operating results in the first quarter as continued organic growth and a solid contribution from our recent acquisitions 17% growth in revenue and, more importantly, 13% growth in adjusted EBITDA for the quarter. If we turn our attention to the balance sheet, our cash balances totaled $182 million at the end of April, down from cash balances of $276 million at the end of January as we used our positive cash flow from operations to complete both the GroundCloud and Localz acquisition. As a result, we still have over $180 million of cash as well as a $350 million undrawn credit facility available for future acquisitions. So we continue to be well capitalized to allow us to consider all acquisition opportunities in our market, consistent with our business plan. As we look toward the balance of fiscal 2024, we should note the following. After spending approximately $1.2 million on capital additions in the first quarter, we expect to incur approximately $4 million to $5 million in additional capital expenditures for the balance of this year. After incurring amortization costs of $14.7 million in Q1, we expect amortization expense will be approximately $45 million for the rest of the year, with this figure being subject to adjustment for foreign exchange changes and future acquisitions. Our income tax rate in Q1 came in at 22.3% of pretax income, slightly lower than our blended statutory tax rate, and this was mainly a result of a few smaller tax benefits and recoveries realized in the first quarter. Looking into the balance of the year, we currently expect that our tax rate will trend much closer to our expected range of 25% to 30% of pretax income in the next few quarters, meaning that our tax rate for the year is likely to end up in the range of between 23% and 27% of pretax income. However, as always, we should add that our tax rate may fluctuate from quarter to quarter based on one-time items that may arise as we operate internationally across multiple countries. Also, after incurring stock-based compensation expense of $2.9 million in the first quarter, we currently expect stock compensation to be approximately $13.6 million for the remainder of fiscal 2024, subject to any forfeitures of stock options or share units. And finally, going forward, subject to unusual events and quarterly fluctuations, we expect to continue to see strong cash flow conversion and generally expect cash flow from operations to be between 85% and 90% of our adjusted EBITDA in the quarters ahead.

Edward Ryan, CEO

Thanks, Allan. With the second quarter underway, we remain confident in our business while being mindful of the broader economic conditions, including high interest rates, ongoing conflict in Ukraine, and various recessionary pressures that might affect the freight market. Some companies have started to respond to the impacts they are experiencing. Therefore, we are maintaining a cautious approach amid this uncertainty. Supply chain and logistics remain essential for our customers regardless of economic factors. I would like to highlight some areas our customers are monitoring that influence the current market. Firstly, U.S. ocean container imports are increasing but are aligning more closely with pre-pandemic levels. Public data from our data mine service shows that ocean imports have been rising month on month since February, more in line with pre-pandemic levels rather than the heightened levels of 2021 and 2022. We will be monitoring this growth in the coming months, with May’s figures expected soon. Secondly, retailers have successfully reduced excess inventories. Recently, there was a decrease in ordering from retailers as they addressed surplus stock, with some skipping replenishment cycles, which affected freight demand. However, we have heard positive feedback from customers about their efforts to move this excess inventory, suggesting a return to more normalized ordering cycles may be on the horizon. Thirdly, freight prices have dropped. Abnormal replenishment cycles affected freight demand, impacting spot markets across various transportation modes. This is good news for shippers but less favorable for logistics carriers and intermediaries, as lower prices may not correlate with shipment volumes but result in tighter margins. In terms of Descartes' business, the number of shipments is more vital. We experienced strong volumes in the first quarter and will keep tracking shipment volumes across our Global Logistics Network. Fourthly, port delays have reduced significantly. After the pandemic caused considerable backlogs, ports have now caught up and are processing volumes at pre-pandemic levels, which is crucial for considering lead times for orders. Fifthly, shipments from China have increased. While China dealt with COVID shutdowns and resource challenges longer than many other regions, we observed a pickup in sourcing from China in April, and we will be watching to see if this trend continues. Sixthly, fuel costs are lower than they were a year ago. Diesel and other fuel prices have decreased, providing some relief to carriers and intermediaries despite challenges from reduced freight prices. Seventhly, there are funding issues for early-stage logistics companies. The tech sector has faced recent challenges regarding capital availability for earlier-stage companies, including those in logistics and supply chain, which may have to consider strategic alternatives without access to further funding rounds. We will monitor this as we evaluate our acquisition strategy. Lastly, ESG considerations are influencing supply chain and logistics decisions. Customers are seeking detailed information from their trading partners to meet and report on their ESG goals, and we are seeing legislation in various countries requiring companies to adopt solutions for monitoring and reporting compliance regarding forced labor, environmental impacts, and restricted parties. These are insights from our customers that inform our business strategies for the quarter. We aim to maintain a predictable and consistent business, as stability and reliability are valued by our customers, employees, and stakeholders. To achieve this, we adhere to several principles. Our long-term goal is to grow adjusted EBITDA by 10% to 15% annually through organic growth and acquisitions. We take a neutral position in building solutions on our Global Logistics Network, serving all supply chain participants by connecting shippers, carriers, logistics service providers, and customs authorities. When we exceed expectations, we reinvest back into the business. We focus on recurring revenues and establishing lifelong customer relationships, thriving on predictable operations that provide visibility for our revenues and investment returns. In our first quarter report, we detailed baseline revenues, calibration, and their limitations. As of May 1, 2023, based on certain foreign exchange rates, we estimate baseline revenues for the second quarter of 2024 at about $120.5 million and baseline operating expenses at around $76 million. We anticipate a baseline adjusted EBITDA of roughly $44.5 million, or about 37% of baseline revenues. We expect to maintain an adjusted EBITDA operating margin between 40% and 45%, with potential variations due to foreign exchange fluctuations and acquisition impacts. We previously highlighted that GroundCloud would affect our margin during integration, and we believe we've made significant progress on that front without further margin impact expected beyond Q1. We have many exciting plans ahead for our business. Despite the uncertain economic environment, our history of execution, sound capital structure, and customer-centric focus will help us succeed. Thank you all for joining us today. We are always available to discuss our business in whatever way is most convenient for you. I will now turn the call over to the operator for questions.

Operator, Operator

Your first question comes from the line of Raimo Lenschow from Barclays. Congratulations on another solid quarter. Ed, considering the current cycle we’re in, how do you foresee the situation evolving regarding transportation volumes? Do you think we've moved past the most challenging period? It seems that way to me, but I would like to get your perspective on it. I also have a quick follow-up.

Edward Ryan, CEO

It's tough to tell. Depends on the mode of transportation you're talking about. I mean ocean probably had a weaker point a few months ago. We see it strengthening in the last couple of months. I think truck also had some weaker points over the last couple of months. We didn't see that in our network as much because it was growing considerably, specifically with MacroPoint kind of growing its way out of any volume issues our customers were having. And on the air side, it's continued to perform pretty strong, and it looks pretty good to us today. I don't know what the future brings exactly. I mean it's a mixed news economy at the moment, as I read the paper. But most of our customers seem to be in pretty good shape. I don't hear any of them sounding fire bells or anything like that. And certainly, the volumes on our network continue to be strong, so we're happy about that.

Raimo Lenschow, Analyst

Yes. Okay. Perfect. What are you observing in the field regarding your ability to identify valuable assets at favorable prices? How is the private market perceiving new asset values and valuation levels? Where do we currently stand in that process?

Edward Ryan, CEO

Yes. Thank you. It's certainly coming around right now. We're starting to see, I think, the early signs of change in that market. There's still a decent amount of stuff for sale. You can see we got the Localz deal done. That was probably something that we might have struggled to do a year ago because we wouldn't have been able to agree on price, and we were able to do it in the last few months based on the conditions that the smaller technology companies are facing. I think on the smaller end, where we tend to play, we're seeing more stuff that's impacted more quickly by the economic uncertainty out there and an unwillingness for people to put money into the market. So if they're losing money or not making much money and the people that historically have invested and maybe perhaps over-invested in those areas in the last four or five years have kind of stopped doing that, all of a sudden we're a very attractive choice to people. Our company continues to perform well, and we have a good track record of integrating acquisitions in and making their businesses grow when they get here. So I think that's played well for us, and you can see it in some of the acquisitions that we've done so far. And I think there may be more to come just based on what I'm seeing.

Operator, Operator

Your next question comes from the line of Matt Pfau from William Blair.

Matthew Pfau, Analyst

First, I wanted to follow up on one of the comments you made, and I don't know what the exact wording was, but it was something along the lines of some of your customers have taken actions based on macro impacts they've seen in their business. Has that had any impact on Descartes?

Edward Ryan, CEO

No, I think we have been in a very fortunate situation where I think while customers, particularly big retailers and manufacturers are probably the first place we saw this in the last six months, where they were worried about what the economy looked like and they were probably telling us they were kind of putting their foot on the brake and maybe holding back on some investments, they continue to greenlight their logistics and supply chain investments. So we would hear about them at some of our larger customers, but they were continuing on with their projects because they felt the supply chain and logistics area was an area of focus for them and something they should continue to invest money in, even though they were proceeding cautiously in other areas of their business.

Matthew Pfau, Analyst

Got it. And just to follow up with your comments in terms of the acquisition environment and funding pressures that some private companies are seeing. Have you seen that have an impact in terms of some of your customers perhaps becoming less willing to do business with VC-backed companies over fear of what the longevity is there?

Edward Ryan, CEO

Yes, I think there's some of that going on right now. There's a lot of talk of that in the logistics trade publications and the risk that you might be in doing that. It's not just a risk of whether it will be there or not. It's a risk of is it going to get sold to somebody else who is going to change the direction soon and do I want to sign up for to make a decent-sized investment with someone who might have that happen to them? And the management team that I'm talking to today can't make promises that they can keep for a long time. And I think that's benefited us. We certainly see some of it going on. I think we'll continue to see that happen. And honestly, I think our customers are smart to think that way. I think that is an actual concern. And if you do business with someone that's probably a lot more likely to be around for the long run, you're probably making a smarter decision.

Operator, Operator

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

Paul Treiber, Analyst

I was just hoping, could you elaborate on one of your earlier points about MacroPoint, and that it has been growing even though the truck market in general has been weak. Does that reflect MacroPoint growing share of wallet or penetration within customers? Or are you seeing continued new customer wins?

Edward Ryan, CEO

Both. I mean MacroPoint has done an excellent job of growing, and I think it's come with new customer wins they were taking away from their competitors. It's also come, over the last several years, with companies saying, 'I used to track some of the shipments. I now need to track them all.' And that takes a while for companies to roll out. But I think a lot of companies are starting to say, 'I'm not going to be selective about what shipments I'm going to track anymore. I'm going to track all of them.' And it's just going to be table stakes in their business. And that certainly benefited MacroPoint as they have a large chunk of the industry that's made that decision.

Paul Treiber, Analyst

That's insightful. The other question, just more broadly speaking, despite the freight market perhaps going through a slower period here, your organic growth has been very resilient, much higher than you've averaged in the past. Do you think you're seeing structurally and sustainably higher organic growth than in the past? And then if so, why not take up your long-term 10% to 15% growth outlook, which includes organic growth plus acquisitions?

Edward Ryan, CEO

We're a 'slow and steady wins the race' kind of company. I think we proceed cautiously all the time. If we overperform, that's great news. But I don't know that we see what's going to happen out five, ten years. And so we think, hey, this is the rate that we think this market may grow at. Maybe we're doing a little better than that right now. But we're going to continue to run our company like that. So if something bad happened in the future, we're not dramatically impacted by it. We've seen a lot of people roll by us over the years, screaming from behind them, 'We're going to the moon, and we'll see you later.' And then in the next couple of years, they implode, and we quietly come behind them and pick up all the pieces. And the reason those things happen is because they overinvest in sales and marketing as they start making promises they're going to grow faster than they can in the long run. And when something goes bad, they implode. Everyone gets fired. The customers get forgotten. And they probably get sold to somebody else. And that's a disaster that we don't want to be a part of.

Paul Treiber, Analyst

And just one last question. There's been a lot of enthusiasm in the market recently around AI. How do you see AI impacting the logistics market in your business? And to what degree have you been making investments in AI?

Edward Ryan, CEO

Thank you for your question. AI has been a part of our routing business for many years, even before it became a popular topic. For the past 10 to 15 years, we've been making decisions for our customers that could be considered AI-like, and our team has been operating with that mindset. We're increasingly incorporating AI into our processes. With the influx of IoT devices, we're gathering more data that enables our customers to optimize their freight movement daily. This is an exciting time for us, as our routing systems can provide insights that leave users wondering how we achieved such capabilities. We analyze extensive data over time to assist customers in forecasting scenarios such as traffic conditions and optimal routes. By making millions of decisions daily, we enhance their truck routing efficiency and save them considerable costs, which is fantastic. In our content and classification area, we've begun to leverage AI in the last six to eight months to help customers classify goods faster and more accurately. This assists them in making informed customs filings, potentially reducing their expenses. Additionally, we've noticed within our organization, much like other software companies, that AI can expedite coding processes. Tasks that used to take three days can now be completed in 20 minutes, allowing for easy customization and significant time savings in development and engineering. We are currently experiencing these benefits and anticipate even greater advancements in the future.

Operator, Operator

Your next question comes from Justin Long from Stephens.

Justin Long, Analyst

I wanted to start with a question on organic growth. Allan, I think you mentioned in the services business, organic growth was a little bit over 9%. But could you share what all-in organic growth was in the quarter? And then maybe comment on what you're seeing from a transactional volume perspective on a year-over-year basis.

Allan Brett, CFO

Yes, I'll start with the organic growth one, and Ed may look at or talk to you about the volumes. So just over 9% in the services piece of our business, which is the most important piece, the recurring part of our business. Licenses, I mentioned earlier, were down. We had a weaker license number. It's only $1 million, down from $2.3 million, and a little bit of drop in some nonrecurring areas, including hardware. So 6.5%, 7% growth organically in total revenues because of those drops. So 9.5% from services leading to a 6.5%, 7% overall organic growth in the business.

Edward Ryan, CEO

I mentioned the volumes earlier, but I want to elaborate on some points made by Allan. We operate a recurring revenue business, and our goal is to onboard all our customers to recurring revenue products as quickly as possible. I recognize the small license, hardware, and professional services and training components of our business, but they are not our main focus. Ideally, we would transition everyone to quickly installed recurring revenue products. Therefore, we concentrate most of our efforts on that services line. I understand there is more to the business, but we are pleased that our highest growth is coming from the area we consider the most valuable.

Justin Long, Analyst

Understood. And I guess building on one of the earlier questions, when I think about the services business growing over 9% organically, in this economic backdrop in a freight market that's challenged, and we're hearing about a lot of weakness in volumes from the transportation companies, if this type of growth is sustainable and the framework for organic growth is more in that high single-digit range, can you talk about the headcount requirements to support that and maybe where sales and marketing headcount is today versus pre-pandemic? I'm just curious if you've already ramped enough to support that growth or if we're going to need to see further investment there.

Edward Ryan, CEO

No, I don't think you're going to see us change our approach. Over the past six to eight months, I've described it as taking our foot off the gas and being a bit more cautious. We're still pleased with our growth rates under these circumstances. We're not a company that will invest too far ahead in sales and marketing. We prefer to have the right people available to assist our customers when they need help making purchasing decisions. Therefore, I don't anticipate any significant increases in our sales and marketing efforts beyond our previous cautious approach. We will likely continue to operate in the same manner.

Justin Long, Analyst

Understood. Congrats on the quarter.

Edward Ryan, CEO

Thank you very much, Justin.

Operator, Operator

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

Daniel Chan, Analyst

Ed, you were talking about an expectation for the replenishment cycle to normalize. Just wondering if that is translating into the investments that your customers are making. In other words, are they investing ahead of what may be higher anticipated volumes?

Edward Ryan, CEO

My initial thought is that they are likely considering a longer-term perspective. They experienced the pandemic and realized how crucial supply chain and logistics are to their operations. This realization has led them to understand the importance of communicating better with their customers about supply chain and logistics than they did five years ago, prompting them to invest accordingly. In our conversations with them, it seems they are not focused on how to improve in just the next six months; instead, they seem to be asking how these investments will benefit them in the next five to ten years. While there may be some immediate benefits, such as for those who invested last year or those currently investing ahead of the upcoming holiday season, their underlying strategy appears to be oriented towards long-term growth rather than just addressing the immediate resupply period.

Daniel Chan, Analyst

That's helpful. And then maybe a follow-on question on these VC-backed competitors of yours. Shopify made a big splash by divesting its logistics business to Flexport. And Flexport seems to have some similar solutions to you. Are they a competitor that you see often? And does them taking on the Shopify assets change the competitive landscape at all?

Edward Ryan, CEO

No, no. Flexport is a big customer of ours and a good customer of ours, and we don't compete with them in any way. And nothing about what Shopify did does anything but help us. I mean we were partners with Shopify before this. We're a bigger partner of Flexport now. And we don't compete with them nor do we have any intention of competing with them at any point.

Operator, Operator

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

Robert Young, Analyst

Maybe a quick clarification on a previous question around the replenishment cycle. You said that retailers skipped a replenishment cycle. It didn't seem to impact your numbers at all, and so I'm just curious why that would be. Is there something to understand there?

Edward Ryan, CEO

I believe that we managed to grow even during a cycle that was relatively mild across all transportation modes we operate in. While transportation volumes and prices for our customers dropped significantly from 2021 and 2022 to now, or more specifically over the last six months, the decrease in volumes was not as severe for us. We were able to grow despite these tempering volumes, which may not be as apparent from our customers' perspective. They likely experienced more challenges due to the significant decline in prices and a slight decrease in volumes compared to pre-pandemic levels. However, it's important to note that during the pandemic, our customers were quite profitable, and we also performed well. Once their capacities were maximized, we couldn't handle additional transactions, leading to sharp price increases. Our revenue remained aligned with the high transaction volumes they experienced. As they began to clear their backlogs and prices fell, our business remained relatively unaffected. Their volumes didn't decrease significantly, and our business growth probably compensated for the challenges, resulting in strong performance in our numbers throughout this period.

Robert Young, Analyst

Okay. Okay. And then maybe just a question around the comment you made about pushing as much as possible into a recurring revenue and towards subscription. I think you start off the answer to that talking about volumes, but I think maybe you're talking about license and hardware. But was there an element to that answer you were talking about moving volume, volume-related revenue more into a subscription product? And then I'll pass the line.

Edward Ryan, CEO

We value both our subscription and transaction businesses highly. Interestingly, we believe our transaction business might be even stronger than our subscription business in many respects. Both areas provide us with recurring revenue. When I mentioned earlier, I was talking about license fees, professional services, and hardware sales, which represent a smaller portion of our overall business. We see our subscription and transactional recurring revenue as the heart and core of our operations, distinguishing us from many other companies. So, when I noted that growth is strongest in our services or recurring revenue sectors, that aligns perfectly with our goals. This is excellent news for our business and our shareholders.

Operator, Operator

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

Steven Li, Analyst

Ed, on GroundCloud and the margin impact, it sounds like Q1 would mark the low point. So based on what you've seen so far from GroundCloud, do the margins stay there for a couple more quarters as you digest? Or can we quickly get back to that 43%, 44% range?

Edward Ryan, CEO

Yes, we are very pleased with the GroundCloud investment and believe it has strong long-term potential. Historically, it has operated at a lower margin compared to Descartes, presenting significant opportunities for us. We plan to enhance its performance and align its margins more closely with ours, but we will proceed carefully to avoid any disruptions. A few quarters should be sufficient for us to start improving those numbers. Allan, do you have anything else to add?

Allan Brett, CFO

No, just it's similar to other acquisitions where we've done, Steven. Where the margins start out low, we will work hard to improve those margins. We'll improve them to whatever level we can get them to. And that depends on product line, what the ultimate high point is, but that's what we'll do over time. And I would expect it to go steady, slow and steady with that. We'll improve it much like we did with MacroPoint.

Edward Ryan, CEO

I mean, listen, Steven, we're in this for the long run. And I'd much rather do it right than do it fast. We're trying to make sure we make this a great business for the long run. Like a lot of the other businesses we operate in, we're proceeding cautiously to make sure that we get the margins up. But we're not going to rush through it in any way that harms the business.

Operator, Operator

Your next question comes from the line of Kevin Krishnaratne from Scotiabank.

Kevin Krishnaratne, Analyst

Regarding the shipping strength you experienced in the first quarter, it seems you're now exceeding 2019 levels. Can you discuss whether those same factors persisted into May? Additionally, what are your thoughts on volumes? I understand this is a challenging question, but what are your expectations for guidance this year in terms of whether you foresee volumes exceeding 2019 industry levels?

Edward Ryan, CEO

Thank you for the question. You'll hear about the May numbers when we release them next quarter, so I can't discuss that in detail right now. However, I can share what our customers are saying and some of the trade statistics we've been receiving, which might provide some insights. We noticed February was a low point, but it's trending upward in March and April. We'll see what happens in May, and you can look for trade statistics we'll release in a week or two that may give you an indication. Using April as an example, I'm feeling optimistic about what we might see in May, and we'll assess how the rest of the year unfolds. Like you, I follow the news, and it’s challenging to predict the economy's direction. It doesn’t seem terrible, but it's not great either. I'm pleased that the U.S. is nearing a debt deal, and we’ll see how that develops. Regardless, based on how we operate our business, I believe we have good prospects. We feel we are in a strong position, especially compared to many competitors in our industry.

Operator, Operator

There are no further questions at this time. I will now hand over to Ed Ryan. Please continue.

Edward Ryan, CEO

Hey, thanks for everyone. I appreciate your time on the call today, and we look forward to reporting back on next quarter in a few months. Thanks, and have a great day.

Operator, Operator

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