Descartes Systems Group Inc 2027 Q2 Earnings Call

Thanks, and good afternoon, everyone. Apologies for the delay in starting. There was a slight technical issue with getting the press release out on the wire. Joining me on the call today are Ed Ryan, CEO, and Ed Gardner, CFO, and I trust that everyone has now received a copy of our financial results press release. 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 of revenues and incurrence of expenses; potential acquisitions and acquisition strategy; cost reduction and integration initiatives; potential share purchases under a normal course issuer bid, 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 are cautioned that such information may not be appropriate for other purposes. We do not 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. With that, let me turn the call over to Ed Ryan.

Hey, thanks, Scott Pagan, and welcome everyone to the call. Today, we are again reporting record quarterly financial results. We are ahead of our plan in Q2, which gives us even more room to make acquisitions, investments in AI, and other investments in our business. These are strong results that I am looking forward to walking through in more detail. However, first, let me give you a roadmap for the call. I will start by hitting some highlights of our last quarter, and I will provide some comments on some investments we have been making. Then I will hand it over to Ed Gardner, who will go over the Q2 year-to-date financial results in more detail.

After that, I will come back and provide an update on how we see the current business environment and how our business was calibrated for Q3. Then we will open it up to the operator to coordinate the Q&A portion of the call. Let us get into Q2. Key metrics we monitor including revenues, profits, cash flow from operations, operating margins, and returns on our investments. For this past quarter, we again had record performance in each of those areas. Total revenues were at a record $201 million, up 12% from a year ago. Record-high services revenues were up 13% from a year ago and our continued focus on generating recurring revenues. Record net income was up 32% from a year ago, and record income from operations was up 36% from a year ago. Record adjusted EBITDA was up 18% from a year ago.

Our adjusted EBITDA margin is at a record high level of 47%. We generated over $81 million in cash from our operations, up 28% from a year ago. Strong record results across all of our key metrics. At the end of the quarter, we had over $400 million in cash, and we were debt-free with an undrawn $350 million line of credit. This was before we completed some acquisitions in August, which I will talk about shortly. We remain well-capitalized, cash generating, growing, and ready to continue to invest in our business. We also have a Normal Course Issuer Bid that allows us to purchase up to 8.6 million shares before December of this year. We have made some more purchases since we last reported, and I will allow Ed Gardner to give you those details.

But especially in light of how the business performed last quarter, we remain optimistic about Descartes' future. The Normal Course Issuer Bid is a tool we could use to make further purchases. I wanted to touch on a few areas that helped our business perform well this quarter. You will notice some of them are similar themes to previous quarters. The first is global trade intelligence. Global trade intelligence remains one of the larger contributors to our services revenue. We had good growth in the quarter compared to where it was a year ago. I think it is helpful to understand what is going on with global trade to understand why we have seen more demand from customers in this part of our business. There are three things going on in the world that are making it more challenging to move goods from point A to point B.

The first is tariffs are still changing, and they are often changing rapidly. There has been lots of active resetting international trade agreements. The setting, threatening, raising, or lowering of tariffs has become a common international tool in recent trade negotiations. Changes have often come with less advance notice than industry has been used to. It is extremely challenging for businesses involved in international trade to track and manage all of these changes on their own. More and more businesses are reliant on global trade management systems powered by the kind of tariff and duty content that Descartes provides. This has been a big demand driver for us. Also, businesses have become more active in researching ways to minimize their tariff burden. They are consulting more and more with trade professionals or using research tools like Descartes Datamyne tools to understand what business peers are doing. So it has also influenced demand.

Further, if you cannot reduce tariffs, there is value in deferring your tariff burden. Leveraging available tariff mechanisms such as foreign trade zones has been another area that has increased customer demand for Descartes. The second is customs and export control enforcement has stepped up. Governments, in particular in the U.S., have committed additional funding to customs and export control enforcement activities. This is in response to the perception that there is a significant non-compliance worth pursuing, particularly on sanctioned parties and export controls. Sanctioned parties are where government lists entities or individuals with whom it is illegal to trade. These sanctions often come about because of military conflicts, economic disputes, or criminal activities. Trading with a prohibited entity can bring large penalties. For that reason, a key part of global trade compliance programs should include detailed sanction screening for shipments.

Descartes' sanction party screening business has seen strong demand, and we do not expect increased enforcement to lower that demand. Export compliance is often at the commodity level of a shipment, prohibitions or licensing on goods exported from one country to another. These requirements can be because of militarily sensitive goods or dual-use goods, or because of scarce valuable resources in a manufacturing process, like semiconductors and chips. Our export compliance solutions, particularly in our OCR solutions, have seen heightened demand as enforcement of these rules has increased. The third is compliance and audit burden has increased. Hand-in-hand with the increase in enforcement, the obligation to keep detailed, accurate, and auditable records on all global trade transactions has increased. For example, it is not enough to appropriately screen a transaction, but you also need the auditable proof of that screen available in the future for third-party review.

The importance of global trade management systems has shifted from transactional execution to systems of record for trade. This is particularly so with increased U.S. focus on transshipments as a mechanism that is potentially being used to avoid tariffs or sanctions. Transshipment is where goods are routed through one or more other countries before the final destination, often to avoid tariffs or sanctions that apply to the original country of origin. Customers are compelled to have accurate and detailed records proving country of origin on shipped goods, something that is increasingly challenging in a complex world of international supply chains and multiple internationally sourced component parts in finished goods. We have seen good demand from people seeking new or more sophisticated trade management systems with reputable, stable partners that could support future audits. That has been a good demand driver for us as well.

A rapidly changing tariff environment, increased resources dedicated towards trade enforcement, and detailed and audible record requirements extending into the future, a much more complex trade environment is what we are in today. With the number of changes that have happened in the trade environment over the past two years, we found that our customers are no longer waiting to see what is next. Many have accepted that volatility is the new baseline operating condition. Rather than accepting the stability of a trade rule and building the standard operating procedure to address that rule, we found that our customers are already focused on building agility, flexibility, and redundancy into their supply chains. They are preparing themselves to be ready for what they do not know is going to change. That approach has necessitated a higher level of investment and executive attention to supply chain and logistics issues than we have seen historically.