Earnings Call Transcript - DSGX Q1 2026

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, June 4, 2025. I would now like to turn the conference over to Mr. Scott Pagan. Please go ahead.

Scott Pagan, Moderator

Thank you, 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 tariff and economic uncertainty on our business and financial condition; Descartes operating performance, financial results and condition; cash flow and use of cash; business outlook; baseline revenues, baseline operating expenses and baseline calibration; anticipated and potential revenue losses and gains; anticipated recognition and expensing of specific revenues and expenses; potential acquisitions and acquisition strategy; cost reduction and integration initiatives; and other matters that may constitute forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties, assumptions and other factors that may cause the actual results, performance or achievements of Descartes to differ materially from the anticipated results, performance or achievements implied by such forward-looking statements. These factors are outlined in the press release and in the section entitled Certain Factors that May Affect Future Results in documents filed and furnished with the SEC, the OSC 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 J. Ryan, CEO

Okay. Thanks, Scott, and welcome, everyone, to the call. Today, we're reporting strong first quarter revenues and annual adjusted EBITDA growth consistent with our plans in very challenging and uncertain market conditions for our customers. We're excited to go over these results with you and give you some of our perspective on the current business environment. But first, let me give you a road map for the call. I'll start by hitting some highlights of last quarter and some aspects of how our business performed. I'll then hand it over to Allan, who will go over the Q1 financial results in more detail. After that, I'll come back and provide an update on how we see the current business environment and how our business was calibrated for Q2. And we'll then open it up to the operator to coordinate the Q&A portion of the call. Let's start with the first quarter that ended April 30. 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 these areas. Total revenues were up 12% from a year ago with services revenues up 14% from a year ago. Income from operations was up 9% from a year ago with adjusted EBITDA up 12%. Our adjusted EBITDA margin was up 1 point from a year ago to 45%. We paid $115 million plus some restructuring costs to acquire 3GTMS, an acquisition I'll speak to later. We also generated almost $54 million in cash from operations in Q1, in a quarter where we also had payments to restructure 3GTMS immediately at closing. At the end of the quarter, we had more than $175 million in cash, and we were debt-free with an undrawn $350 million line of credit. We remain well capitalized, cash generating, growing and ready to continue to invest in our business. We had a few things that were the primary drivers of growth in our business, and I'll talk about each of these now. The first was in our transportation management area. First area of strength was in our transportation management pillar, in particular with our MacroPoint real-time visibility business. With so many challenges with goods that are moving across borders, solutions that help companies with more efficient domestic transportation moves have seen strong demand. We believe that we have the highest quality tracking service in the market with a very high percentage of loads able to be tracked through our network through our consistent focus on interacting with carriers and other transportation management systems to get status updates. We're even leveraging AI technologies to help our customers track an even greater percentage of their loads. As we ended the quarter, we were seeing some of our strongest months ever in the MacroPoint business against the backdrop of declining domestic truck moves in the United States. The recent MyCarrierPortal acquisition also has been a great addition to the transportation management solution stack. There's been a lot of media and market attention on cargo theft and fraud with criminal networks supporting systems by creating fake carriers and accepting delivery loads to steal cargo and/or get payment. MyCarrierPortal helps identify this type of fraud by helping customers evaluate the legitimacy of carriers they're doing business with. We recently held a webinar with the California Highway Patrol to talk about cargo fraud, and it was one of our highest attended events ever. MyCarrierPortal has been a great addition to the portfolio, allowing us to further distinguish ourselves in the transportation market. We also made another addition to our transportation management portfolio where we combined with 3GTMS in the latter part of this quarter. 3G has a traditional domestic transportation management system on a modern cloud architecture. With so many challenges in the international trade, making an investment in domestic transportation was logical for us. 3G also has strength in parcel shipping, which is an excellent complement to our existing shipping solutions. Overall, the acquisition provides some great functionality to our existing customers and allows 3G customers with access to our real-time visibility and fraud prevention solutions. 3G did require some restructuring to put it on a path to the margins that Descartes prefers to operate at, which used some of our cash from operations in the quarter to get the business better positioned. In particular, with the acquisition happening near the end of the quarter, it meant that 3G didn't contribute much to our Q1 adjusted EBITDA and will require some operating history before it's fully integrated into our normal calibration. Overall, transportation management grew well in a challenging environment. In the U.S., in particular, there's still a declining number of freight brokers and domestic truck moves. However, with our ability to become more efficient at tracking shipments and further distinguishing ourselves in the market, we've been able to grow with more track loads and more customers. Second area of strength was our Global Trade Intelligence business. Tariff changes have been coming fast and furious, increases, decreases, pauses, commodity-specific tariffs. It's been a very busy time for our tariff group. Our customers are adjusting almost daily to a new tariff environment, and they need to know that they've got a timely and accurate information source to make their decisions with. In addition, our customers are researching how other companies are handling the changes, so our Datamyne research tools are in high demand so that no customer gets left behind. Our best marketing tool is every mention of tariffs in news headlines, so it's an area of strength in the quarter. The third area was customs and regulatory compliance. These are primarily customs and security filings related to shipments crossing borders. A couple of things contributed to growth here. First, there were some newer import control system requirements in the EU that have driven demand for solutions to comply. Second, we saw some lumpy filing blips in the market as people rushed imports to get ahead of the pending tariffs or alternatively to take advantage of temporary tariff reprieves. This part of our business is strong as long as shipments are moving. However, one area of the business that has seen a bunch of change is the import of small packages in the United States, otherwise known as de minimis shipments. The U.S. had a filing mechanism called Type 86 that allowed low-value shipments under $800 to come into the United States on a tariff-free basis. That exemption and final mechanism was used most often by Chinese e-commerce retailers who were selling into the United States. The U.S. has stopped the availability of that exemption for China, meaning there are tariff duties that now need to be paid on those shipments. So in that business, we saw an influx of activity in Type 86 before the tariff exemption disappeared on May 2 after the quarter. Since then, there seemed to be a temporary pause from some larger foreign e-commerce vendors as they determined how to best import goods to the United States under the new procedures and then a resumption of imports under a more traditional import measure, Type 11 or Type 1 filings with tariffs being paid in these cases. We can handle those traditional import processes and high volumes so we saw good demand from e-commerce vendors to move to our alternative filing solutions, including some large competitive wins from other vendors. So those were the areas that had the largest impact on our growth in the quarter. However, the broader macro environment was very challenging for our customers. At its heart, the global trade environment has caused uncertainty for customers, often paralyzing their decision-making. We saw shipment volumes down in various modes of transportation, particularly in the U.S. to China trade and West Coast ports. We saw e-commerce vendors who import from China struggling with sourcing and/or whether to pass tariff changes on to their end customers. We saw the broader market struggling with the potential broader inflationary impact of tariffs on the U.S. economy. We saw several domestic economies looking at recessionary economic statistics. With that uncertainty in the global trade market and the economy in general, we took steps in May to reduce our costs by completing a restructuring that impacted about 7% of our workforce. We did this to put ourselves in the best position to grow during this challenging environment. Those who follow our business over past years will know that we take our commitment to continue adjusted EBITDA growth very seriously. These cost reductions were to prepare our business for any further challenges our customers may face in this uncertain market. We restructured our business from a position of strength, and our company is now in a position to grow consistent with our plans and to be flexible enough to address challenges with our customers that they may face from global trade and/or economic conditions. We did it because a similar approach has helped us weather past challenging business environments. We did it because it's what our stakeholders would expect us to do. We restructured our business to be even stronger in the future. We are doing what you'd expect Descartes to do. In Q1, we posted strong double-digit annual growth in revenues and adjusted EBITDA, consistent with our 10% to 15% annual adjusted EBITDA growth plan and consistent with the ramp-up we previously communicated that we expected to see over the year. We grew by acquisition by expanding our transportation management portfolio. We reduced our cost base to mitigate against potential future economic risks. We did exactly what you'd expect Descartes to do. I'm excited about where our business is. Q1 shows that we're on the right track for our plans for the year. My thanks to all the Descartes team members for everything they've done to contribute to a great quarter and a great business. And with that, I'll turn the call over to Allan to go through our Q1 financial results in more detail.

Allan J. Brett, CFO

Okay. Thanks, Ed. As indicated, I'm going to walk you through our financial highlights of our first quarter, which ended on April 30. Revenues came in at $168.7 million in the quarter, an increase of approximately 11.5% from revenues of $151.3 million in Q1 of last year. Revenue from the acquisitions completed in the back half of last year as well as the acquisition of 3GTMS completed earlier in the first quarter contributed nicely to our revenue this quarter, while growth from new and existing customers also contributed, including revenues, revenue growth in our global trade intelligence solutions and our MacroPoint freight visibility solution. Consistent with past quarters, our revenue mix in the quarter continued to be very strong, with services revenue increasing 13.6% to $156.6 million and coming in at 93% of revenue in the first quarter. License revenues were again minor at less than 1% of revenue in the quarter, while professional services and other revenue came in at $11.8 million or 7% of revenue, down 9% from $13.0 million in the same period last year, mainly due to a decline in safety training activity in our GroundCloud business. In Q1 last year, we had a sharp increase in the safety training revenue. This is because most of our GroundCloud FedEx carriers need to recertify their training every 24 months, so this revenue stream tends to be quite lumpy with increases every other year and this being an off year for our safety training services. Outside of GroundCloud, professional services revenues were generally flat with the first quarter of last year. In addition, there was also a slight decrease of just over $0.5 million in revenue this quarter from foreign exchange changes. As despite its more recent weakness, the U.S. dollar was stronger against the euro, the Canadian dollar and the British pound in Q1 compared to the same quarter last year. We estimate that our growth in services revenue without the impact of recent acquisition or foreign exchange changes would have been approximately 4% in the first quarter. Gross margin for the first quarter came in at 76.4% of revenue this year, down very slightly from gross margin of 76.6% realized in the first quarter last year. With continued operating leverage, our operating expenses increased less than the increase of sales, growing by approximately 10.4% in Q1 over the same period last year, primarily related to the impact of acquisitions that were completed in the back half of last year. As a result of the higher revenues and our continued operating leverage on expenses, we saw adjusted EBITDA grow by 12.1% to $75.1 million or 44.5% of revenue in the quarter, which was up from $67.0 million or 44.3% of revenue in the first quarter last year. From a GAAP earnings perspective, net income came in at $36.2 million, up 4% from net income of $34.7 million in the first quarter last year, and this is despite higher amortization costs and other financial charges related to our recent acquisitions. Cash flow generated from operations came in at $53.6 million or approximately 71% of adjusted EBITDA in the first quarter, down from operating cash flow of $63.7 million or 95% of adjusted EBITDA in Q1 last year. Cash flow from operations was negatively impacted this quarter as we saw a slight increase in our days sales and receivable from an incredible 29 days of sales at the end of the fourth quarter back to 32 days sales and receivables at the end of Q1. Cash flow from operations was also impacted by some one-time acquisition-related charges related to the 3G acquisition as well as the payment of prior year annual bonuses. As we had indicated on our conference call at the end of the fourth quarter and as I mentioned earlier in the call, there is a lot of uncertainty out there in the global trade market, especially for our customers as they try to navigate these challenges. So we remain very pleased with these operating results against this uncertain freight market environment. If we look at the balance sheet, our cash balances totaled $176 million at the end of April, down from cash balances of $236 million at the end of January as we used approximately $112 million of our cash balances to complete the 3G acquisition while we continue to generate additional positive cash flow from operations. As a result, we still have the $176 million of cash as well as $350 million available for us to draw under our credit facility for future acquisitions. We continue to be very well capitalized to allow us to consider all acquisition opportunities in our market, consistent with our business plan. As we look towards the balance of our fiscal 2026, we should note the following: after spending approximately $1.9 million in 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 as our business will continue to be non-capital-intensive. After incurring amortization costs of $19.1 million in Q1, we expect amortization expense will be approximately $60 million for the balance of the year, with this figure being subject to adjustment for foreign exchange changes and future acquisitions. Our tax rate in Q1 came in at 24.4% of pretax income, slightly lower than our expected range of 25% to 30%, and this was mainly a result of a few smaller tax benefits and recoveries realized in the first quarter. Looking at the balance of the year, we currently expect our tax rate will trend much closer to our expected range in the next few quarters, meaning that our tax rate for the year is likely to end up in a range of between 24% and 28% of pretax income, so somewhere either side of our blended statutory tax rate of 26.5%. However, as always, we should add that our tax rate may fluctuate from quarter to quarter from one-time tax items that may arise as we operate internationally across multiple countries. After incurring stock-based compensation expense of $4.4 million in the past quarter, we are currently expecting stock compensation to be approximately $20 million for the remainder of fiscal '26, subject to any forfeitures of stock options or share units. As we have previously mentioned in the past few quarters, we have estimated that the payments of contingent consideration for our earn-out arrangements for the balance of this year will be approximately $2.3 million, subject to any necessary adjustments resulting from the final earn-out calculation. Going forward, subject to unusual events and quarterly fluctuations, we expect to continue to see solid cash flow conversion and expect our cash flow from operations to be between 80% and 90% of our adjusted EBITDA in the quarters ahead. And finally, as Ed indicated earlier in the call, given the economic and global trade uncertainty that many of our customers are facing, we have taken the steps to reduce our cost structure by reducing our global workforce by approximately 7% and eliminating various other operating expenses. As a result, we will be recording a restructuring charge of approximately $4 million in Q2 this year and would highlight that once completed, we would anticipate annual cost savings of approximately $15 million from our Q1 operating expense run rate. Quite simply, we remain committed to managing our business to grow our adjusted EBITDA by 10% to 15%. That remains our objective for the current fiscal year despite the unique and tougher global trade environment we operate in. So with that, I'll turn it back to Ed to provide our baseline calibration for Q2.

Edward J. Ryan, CEO

Thank you, Allan. As I mentioned earlier and in the previous quarter, our customers are facing challenging business conditions. Recent developments include record high tariffs between the U.S. and China, even with a temporary agreement in place; allegations regarding violations of that agreement; increased U.S. tariffs on steel imports; changes in tariffs with the EU; legal challenges concerning U.S. tariffs; warnings that temporary tariff relief could end if new trade agreements aren't concluded soon; heightened tensions in Ukraine and associated sanctions; and a new Postmaster General at the U.S. Postal Service which could lead to policy changes. That's quite a lot to handle. While our customers are able to adapt to change, the uncertainty around these changes is far more daunting. It becomes difficult for them to make long-term decisions without clear expectations of how the future will unfold, resulting in challenges for us as well. We are beginning to notice that this uncertainty is affecting shipping volumes in what appears to be a volatile market. Domestic truck volumes are still low, air shipments had seen a modest growth trend but are now under pressure, and ocean traffic has undergone significant changes with a decline in trade with China, affecting some ports negatively while benefiting others. Our monthly global ship report, which tracks U.S. ocean imports through data from U.S. Customs and Border Protection, shows a decrease in container imports for May, which fell 10% from April and 7% year-over-year. Notably, imports from China plunged by 21% from April and 7% compared to May of the previous year. Descartes has successfully navigated challenging business conditions before, and we plan to do so again. We believe that our diverse logistics offerings, particularly in domestic transportation, position us well in this current landscape. We're strong in areas such as routing, scheduling, transportation management, e-commerce, and last mile delivery. Our Global Trade Intelligence division is exceptionally well-suited to assist customers navigating complexities related to tariffs and compliance. We are globally diversified and have solutions that can adapt to various international trade scenarios. Additionally, we have strategically reduced our cost base to prepare for potential revenue uncertainty. Our growth model balances acquisitions with organic growth, and we view changing market conditions as opportunities to expand our customer solutions. With over $175 million in cash and a $350 million undrawn line of credit, we are well-positioned financially and continue to generate cash. Ultimately, our success hinges on our ability to support our customers, who remain uncertain about the market's impact on their businesses. We take this into account when evaluating our financial outlook. In our quarterly report, we provided a detailed overview of our baseline revenues and their limitations. As of May 26, following our cost reduction initiatives, we estimated our baseline revenues for the second quarter of fiscal 2026 to be around $150.5 million, with baseline operating expenses close to $92.5 million. This results in a baseline adjusted EBITDA of approximately $58 million or about 39% of our baseline revenues. We expect our adjusted EBITDA to operate between 40% and 45%, with variability due to revenue mix, foreign exchange fluctuations, and the integration of acquisitions. It is a time of uncertainty for our customers, and our aim is to demonstrate that Descartes can remain a reliable partner. Thank you for participating in the call today. We are always available for further discussions about our business, and I will now hand it over to the operator for the Q&A session.

Operator, Operator

Your first question comes from the line of Dylan Becker from William Blair.

Jackson Geoffrey Bogli, Analyst

It's Jackson Bogli on for Dylan Becker. So I was just curious about the workforce reduction. And if there's any additional color that you would give on maybe what areas that was cut out of? And how you're thinking about going forward, those levers that you'll see in the business?

Edward J. Ryan, CEO

Thanks, Jackson. Yes, it was generally across the board and across the board, not only for functional areas but geographically. It was about a little under 200 people in our business unfortunately. And we did it to give ourselves a healthier business going forward and put ourselves in a position where we can continue to make the kind of margins that the market has come to expect from us in running our business on a daily basis. Things like AI have helped us maybe make some of these cuts a little easier. But at the end of the day, we thought it was the right thing to do and to prepare for the uncertainty that I just talked about.

Operator, Operator

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

Paul Michael Treiber, Analyst

Just a question on organic services growth. You mentioned it was 4% this quarter and I think last quarter was 6%. You did a good job calling out some of the stronger growing areas of the business. But what did you see that were headwinds or what segments were softer that were a drag on organic services growth this quarter?

Edward J. Ryan, CEO

As you might expect, it was a lot of the uncertainty that's going on led to big movements in transaction volumes. You're right, some of the areas, I mentioned some of the customs filing and security filing areas that we do okay in, but certainly, ocean was down. Truck continues in a bit of a depressed state. We did all right on MacroPoint but maybe some of the other areas within truck messaging, not as well. And I think that's a result of the tariffs that people aren't sure what to do and they freeze. And 31% of our business or so is that transaction revenue. And of course, we have underlying minimums that are our backstop against that. But the customers weren't getting down at their minimums. They were just doing a little less than they used to. Overall, we're pretty happy with how we performed, given I don't know if you heard on our last call, we probably had even more uncertainty coming into that call. That stuff's changed since then. And we thought the company performed pretty well during that time and made up for some areas that were getting hit with some areas that we're doing pretty well like the MacroPoint and the content businesses that I talked about at the beginning of the call.

Paul Michael Treiber, Analyst

That's helpful to understand. Have you seen a change in either renewal rates or, I guess, conversion of sales pipeline as a result as well?

Edward J. Ryan, CEO

Not much, actually, although we might anticipate that could happen if this keeps up. We've continued to have good sales momentum with the subscription deals that we have always done pretty well at. That continued to keep up. I think we haven't seen customer defections or people spending significantly less money with us or trying to change the terms of their contract. But we got to see what happens in the economy. Those things happen when the economy turns down. Haven't seen yet where the economy is going and probably a lot of it has to do with how quickly does this end? Does the U.S. negotiate into a lot of these tariff situations with the countries where they just delayed them 90 days? Do they delay another 90 days or something like that? What happens with the China negotiation? Things like that are the balls that are up in the air that having us say we're not sure what's going to happen next. And in the meantime, you know us as conservative operators. We got to weather the storm and cut our costs and try to run our business as efficiently as we can under the circumstances.

Paul Michael Treiber, Analyst

And then just lastly, just on 3GTMS, contributed, I think, $2.4 million in the quarter. Is that a normal runway rate to assume going forward? And then can you just confirm that it's not reflected in the baseline?

Allan J. Brett, CFO

No. From a baseline perspective, Paul, we've been typical with us with acquisitions, I mean, we're getting to know that business, we're getting to know the renewal rates and the renewal times, etc. So we've incorporated conservatively incorporated that into the baseline right now. So it is reflected in baseline. Again, pretty typical as we get to know businesses more. We've owned that business for 2 months now. So we'll perfect that. I think we said that in the prepared remarks that it is, for the most part, reflected in baseline calibration.

Operator, Operator

Your next question comes from the line of Raimo Lenschow from Barclays.

Raimo Lenschow, Analyst

Ed, you've seen downturns before. How do you compare what you're seeing at the moment with the other ones like 2022, 2023, earlier like...

Edward J. Ryan, CEO

At the moment, things don't feel too bad, but there's a lot of uncertainty. People are unsure about what will happen next. During the pandemic, although the immediate future was unclear, many prepared for a worst-case scenario, and things turned around faster than expected. In 2008, people prepared for the worst because it truly was a dire situation for about a year until government intervention helped stabilize the economy. Currently, it's difficult to define our situation; are we in a recession or on the brink of one? The ongoing tariff discussions add to the uncertainty, leaving our customers unsure of their next steps. While shipping continues, not everything moves to and from the U.S., and there are other global shipping routes from which we benefit. The U.S. still plays a major role in the worldwide container and shipment volumes. We are acting as expected in this environment, being conservative and managing our operations to remain profitable. As we've mentioned, we operate with a growth model and see potential opportunities in challenging times. We aim to use our profits to acquire competitors who may not be as well-positioned as we are. We're observing the situation like everyone else and striving to manage our company effectively. Right now, things aren't looking desperate, at least not yet. If I had to guess, I don't believe it will worsen to the levels of past downturns, but I can't say that for certain.

Raimo Lenschow, Analyst

You reacted relatively quickly with the changes to the cost base, and while it's always unfortunate to see solid growth impacted, could you share what motivated that decision to act now instead of waiting?

Edward J. Ryan, CEO

Thanks, Raimo. Yes, that's just how we operate. You saw us take similar action early in the pandemic. In May, we had to reduce our workforce by 5% because our revenue fell by the same percentage. This response is similar; we are facing significant uncertainty in the market and realize we need to take action. While we can't control revenue at this moment, we can manage our costs. It's crucial for us to remain profitable and aim for 10% to 15% EBITDA growth each year. This commitment is our primary promise to shareholders, and we intend to honor it. We want to position ourselves to emerge from this situation stronger than others, so when they face challenges, we can acquire valuable assets, just as we did during the 2008 crisis and, to a lesser extent, during the COVID crisis.

Operator, Operator

Your next question comes from the line of Stephanie Price from CIBC.

Stephanie Doris Price, Analyst

Ed, I was hoping you could talk a little bit about the appointment of the new Chief Commercial Officer. I'm just curious if you're expected to make additional changes within the sales organization.

Edward J. Ryan, CEO

No. I mean, we've built work here 5, 6 years now. We're very comfortable with him was being groomed for this move anyway. And timing may have been a bit of a surprise to us, but I think there's a lot of faith in our company that he's the right guy for the job. And happy for him that he's getting to step up. And for the most part, he's running a large part of the sales force leading into this anyway, and now he's taken over the whole sales force. So I think for the most part, you're not going to see a whole lot of change in our sales effectiveness.

Stephanie Doris Price, Analyst

Great. And then just on the consolidation that we're seeing within the space. Obviously, WiseTech announced the acquisition of E2open. Just curious what your thoughts are around the competitive environment here and how you see it evolving over time?

Edward J. Ryan, CEO

Yes, I think this reflects the current market conditions. I've mentioned for some time that prices are decreasing, and people are more inclined to accept a price range that we consider fair for a company. The WiseTech-E2open deal exemplifies that trend. We evaluated that acquisition a while back but concluded it wasn’t a suitable match for us. We wish WiseTech well in their endeavors. While we don't directly compete with those two companies, we believe we are well positioned with significant cash reserves and considerable debt capacity, allowing us to pursue additional acquisitions in the future as prices stabilize. We are in a stronger position than many to capitalize on these opportunities. When we identify potential acquisitions that closely align with our interests, we want to act quickly to integrate them into our Global Logistics Network.

Operator, Operator

Your next question comes from the line of John Shao from National Bank.

Meng Shao, Analyst

I understand there's a bit of noise around international freight volume at this point because that one could be potentially volatile. But how should we think about the domestic freight volume, especially the correlation between domestic, international? Any trends or any considerations you may share with us, given that it sounds like you're doubling down investment in domestic?

Edward J. Ryan, CEO

Yes. I mean we're exposed to both and the tariff changes in the international space are between the U.S. and the rest of the world, but not other parts of the world or other parts of the world. So they're still 2/3 of our international business, it's in normal shape at the moment. We've been in a fortunate position to do very well in domestic despite maybe that market being a weaker market for the last 1.5 years to 2 years and hope to continue that. And also as we expand overseas and domestic markets overseas, I think we have a real opportunity to take the dominance that we've enjoyed here in North America over the last couple of years. Kind of growing in the face of decreasing transaction volumes in domestic transportation. We continue to grow that business because we've been able to pick up business from our competitors because we think we have a stronger offering. And we're looking forward to bringing some of that overseas in the coming years.

Meng Shao, Analyst

Got it. And in terms of the organic growth, considering some of the tariff pauses after Q1, so how should we think about organic growth profile for Q2 and maybe going forward? Do you think it's going to be similar to the current level?

Edward J. Ryan, CEO

The short answer is I don't know. We'll have to see what happens. And I'm probably saying I don't know more than I normally have to say it right now in the last couple of months, and we'll just have to see. I mean we plan on running our business to perform well either way. We're very focused on making money, and we plan to make the kind of money that we've always promised people that we would make despite whatever happens to the revenue. If you remember back 10, 12 years ago, we were growing 10% to 15% every year with 1%, 2% and 3% organic growth. So even at 4% versus not as well as we were doing 1.5 years ago, and I think everyone might be able to see why. We're hoping that, that turns up. We're hoping that these tariff situations get settled and people can eliminate some of the uncertainty in their business and start to move forward and make decisions and that will help our revenue growth there. In the meantime, we're planning to run our business that we can still keep making money at the clip that we've always promised people that we would.

Meng Shao, Analyst

I have one last question. I'm trying to understand how your cost reduction aligns with your goal to increase EBITDA by 10% to 15% each year. Is the anticipated cost savings already factored into that target, or is it additional to the target?

Edward J. Ryan, CEO

No, it was an effort to make sure that we are in a position to hit those targets. It may become incremental if the growth rates go up, as some of these tariffs get settled and people get back to shipping stuff like they normally did. We may end up doing better because of it, but we made these decisions to make sure we're in a safe position to continue to do 10% to 15% growth in EBITDA like we've always said we would.

Operator, Operator

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

Cole Alexander Couzens, Analyst

This is Cole Couzens on for Scott Group. Just a quick question on de minimis. Is there any way that you guys can frame up how much of your transactional business is air freight? And do you have a sense for how much of that is tied to de minimis? And I know you hit on it a little in the prepared comments, but can you expand more on the activity you're seeing now that de minimis has gone away?

Edward J. Ryan, CEO

I don't believe we've broken that down specifically. However, I can share that we have performed quite well despite the challenges. Considering the situation, we were informed that de minimis filing with China, which accounted for most of our business, was no longer an option. The cessation of Type 86 filings impacted a small portion of our quarterly revenue, but it was still significant. We had been doing well in that area before it vanished on May 2. In response, we've made adjustments and have benefitted from the changes. We also maintain leadership in Type 1, Type 2, and Type 11 filings, which many companies have transitioned to. Initially, some of these firms paused operations, uncertain about their next steps, similar to Shein and Temu. However, once they resumed shipping, we were prepared while some competitors were not. This allowed us to capture additional business from those competitors that struggled with the increased volume in the new transaction types, which we had already adapted to. Surprisingly, this situation has turned out favorably for us.

Cole Alexander Couzens, Analyst

Okay. Great. Maybe just more broadly with the rest of the transactional air and ocean business, kind of can you describe what you saw following the 90-day pause? And maybe is there any indication from shippers at this point as to what's to be expected after the pause or is it just way too uncertain at this point?

Edward J. Ryan, CEO

No one can predict what will happen after the pause, and that includes us. Before this situation, there was a trend of customers trying to make purchases before tariffs were implemented. We noticed a shift from West Coast ports to East Coast ports, with a significant decline in West Coast volume and an increase in East Coast volume. However, that trend seems to have subsided now. The statistics for May showed lower activity across the board in ocean freight, while air freight has remained stable. Domestically, it appears we are experiencing a freight recession, but we've managed to perform well and have gained a considerable amount of business from our competitors during this period. We believe we provide excellent service through MacroPoint and, with our extensive network, we have successfully attracted customers from some of our competitors, which is positive news for us.

Operator, Operator

Your next question comes from the line of Lachlan Brown from Redburn Atlantic.

Lachlan Brown, Analyst

GTI solution's been a growth driver for this business at the moment. Are you able to provide any details on the growth that you're seeing with? Sorry, if I'm not clear. Are you able to provide any detail that you're seeing within the tariff and duty sub base? And then just to offer any commentary on the performance of the other side of the global trade intelligence solutions like sanctioned parties and bills of lading.

Edward J. Ryan, CEO

The sanctioned parties is largely business as usual. We've been doing very well there. But really, the strength in that business has been on the tariffs and duties portions where the rates are changing all the time. We're seeing very good growth rates there year-over-year. I think we're somewhere almost approaching 20% right now. And I expect that's going to continue as long as tariffs are in the news every day. People are going to be looking for more access to that database. A little bit to our surprise and pleasant surprise is the Datamyne business that's also in that content area has done very well as people have started to look in that database a lot more aggressively to try and figure out what to do next. And that's been a pleasant surprise for us. So when these transaction volumes have gone down and you'd say, 'Geez, it's all bad news for Descartes', I'd go, 'Well, some of the areas are actually doing all right based on what's going on because we've got a broad solution set that help people in a lot of areas, even when some of the shipment volume's down.' So that's why you see us put up what I'd say is decent results in the face of very uncertain environment where people are frozen and not shipping as much as they did just a few months ago.

Lachlan Brown, Analyst

That's very clear. And on the 3GTMS acquisition, I appreciate it's early days, but could you talk to the integration process and how you're thinking about the cross-sell, upsell opportunity? And also if you could provide any detail on the pricing structure if it's volume-based or recurring subscription and if there are plans to unify with the pricing model of the other TMS systems?

Edward J. Ryan, CEO

It's primarily a subscription business, and we're still in the early phases of integration. As I mentioned earlier, we needed to align their cost structures with ours, which led to a restructuring right from day one after the acquisition. This is something we've done in the past with other acquisitions like MacroPoint and Visual Compliance to ensure they operate similarly to us. We did incur a cash charge for that, which is purely an accounting matter, but I believe it will help us run that business more profitably in the long term and facilitate quicker integration with Descartes. When it comes to integrations, we move quickly, incorporating them into our business operations, and that process is already underway. I've seen them already selling 3G along with MacroPoint and MyCarrierPortal bundled together on several occasions, which indicates to me that the acquisition will be successful. We're looking forward to that.

Operator, Operator

Your next question is from the line of Richard Chu from Scotiabank.

Richard Chu, Analyst

This is Richard in for Kevin today. I was wondering if you could talk a bit more about the acquisition pipeline. If you look across roughly your half dozen or so areas of logistics/supply chain industry that you cover, are there any areas that are standing out as a particular area of focus or interest? Can you talk about valuations and competition with peers or private equity, which might also be looking to make some acquisitions?

Edward J. Ryan, CEO

The acquisition market is currently favorable for us. Over the past year and a half, we've made significant progress and I expect that trend to continue. Prices are decreasing, and unlike what you mentioned earlier, we aren't seeing private equity firms participating as much as they used to. They're pulling out of deals frequently or opting to sell companies rather than acquire new ones. A private equity friend of mine once mentioned that they're either buying or selling, but not doing both simultaneously. Right now, they're primarily focused on selling, facing pressure from investors who want to retrieve their money. When private equity does engage in deals, they’re not as assertive as before, which creates opportunities for us. High interest rates impact them far more than they affect us. We're generating profits and using our cash flow to acquire companies, while they relied on higher leverage to buy, often at risky multiples. We typically wouldn't exceed a 3x leverage, which they usually consider too low. However, with interest rates rising into the high single digits, the landscape shifts. Our profitability allows us to save cash for future acquisitions without the same concerns. We want to remain proactive if pricing continues to decline or if the economy worsens. Our goal is to maintain our margins and continue growing, even in a challenging environment, which is reflected in the actions we've discussed. Historically, we've performed best during tough times when tough decisions need to be made. Our seasoned management team has successfully navigated difficult scenarios before. When challenges arise, some teams may argue over cost cuts, but here, we have a unified group who understands the necessity of these measures. We're committed to excelling through this period, so we emerge stronger than our competitors, positioning ourselves well for growth when conditions improve, as we've experienced in 2008 and 2020.

Richard Chu, Analyst

Got it. Also, I was wondering is there any way to give us a view of the breakdown of your customers or revenue base by SMB versus enterprise? And are you seeing any changes, positive or negative, in this current macro on the SMB portion of the business?

Edward J. Ryan, CEO

No, I don't know if I could break it down, but I can tell you that things haven't gotten that bad. We are still seeing customers signing contracts and paying their bills. Our larger customers have been consistently paying, and even the small and medium-sized customers are meeting their obligations. Most of our smaller clients pay with credit cards, so they have to settle their bills. For medium-sized clients, that might be where we would notice a change if conditions worsened, but we haven't seen any signs of that yet.

Operator, Operator

The next question comes from the line of Robert Young from Canaccord.

Robert Young, Analyst

The comment you made about MacroPoint, the real-time visibility driving some share gains, just given your coverage and the demand you're seeing there. I was curious if you could expand on that, maybe dig into that a little bit if that's what's going on.

Edward J. Ryan, CEO

There's a bit of that happening. The main factor is we are acquiring more third-party logistics providers and freight brokers as they consolidate. We engage with nearly all the major 3PLs and freight brokers in the country. As some of the smaller and mid-sized companies shut down, they're being acquired by larger customers like Robinsons, Conways, and Convoys, which has benefited us. They come back to us because we provide superior data. Our tracking rates are nearly 90%, while our competitors are only in the 50s. If you want to track all your shipments and only manage to track half through your visibility solution provider, that is not sufficient. However, when you send shipments through us and track 90% of them, you're likely to be satisfied and think, 'This is a reliable partner.' Therefore, when another small company is acquired, they usually transition to us, or if you are renegotiating contracts with several players in the visibility sector, you often direct most of the business to the provider that performs best, and that is us.

Operator, Operator

The last question comes from the line of Mark Schappel from Loop Capital Markets.

Mark William Schappel, Analyst

Ed, I was wondering if you could just comment on the sentiment you're seeing from CIOs with respect to moving forward with large TMS upgrades or expansions. And are you seeing TMS upgrades actually being crowded out by other IT initiatives?

Edward J. Ryan, CEO

We have consistently observed that logistics and supply chain initiatives have become a top priority for organizations, especially over the past decade and more specifically in the last five years since the pandemic. So far, we haven't seen any significant shifts in this trend. If the economy were to decline, there might be changes in our sector, but nothing has happened yet. Our subscription sales have been performing well; while we didn't achieve a record quarter, we were close to the high end of our sales over the past two years, which is encouraging. However, if we enter a recession, things could change. In the past year, we've heard many customers mention that they've canceled several IT projects, but they haven't canceled ours, highlighting its importance. That does concern me because a downturn could potentially affect us too, but as of now, that hasn't occurred.

Operator, Operator

There are no further questions at this time. I'd like to turn the call over to Mr. Ed Ryan for closing comments. Sir, please go ahead.

Edward J. Ryan, CEO

Great. Guys, thanks for your time. Look, I'll be out in the street in the coming weeks. We look forward to seeing a lot of you. And otherwise, look forward to reporting back to you on our Q2 here in September this year. Thanks, guys.

Operator, Operator

This concludes today's conference call. Thank you very much for your participation. You may now disconnect.