On Wednesday, Descartes Systems Gr (TSX:DSG) discussed first-quarter financial results during its earnings call. The full transcript is provided below.
This content is powered by Benzinga APIs. For comprehensive financial data and transcripts, visit https://www.benzinga.com/apis/.
View the webcast at https://edge.media-server.com/mmc/p/w6uvr7d7/
Summary
Descartes Systems Group reported record quarterly revenues of $193.6 million, a 15% increase year-over-year, with record net income up 34% and adjusted EBITDA up 20%.
The company emphasized strategic investments in AI and a recent acquisition of Idelic to enhance their fleet management solutions.
Despite global shipping challenges due to geopolitical tensions, Descartes maintained strong growth across core business areas such as Global Trade Intelligence, E-Commerce, and fleet management.
Management highlighted the strength of their logistics network and proprietary data as key advantages, with plans to further leverage AI to enhance operational efficiencies and customer value.
The company remains financially robust with $377 million in cash, no debt, and a $350 million undrawn credit line, positioning them well for future M&A and share repurchases.
Full Transcript
OPERATOR
Good afternoon ladies and gentlemen and welcome to Descartes Systems Group Quarterly Results Conference call. At this time all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press 0 for the operator. This call is being recorded on June 3rd, 2026. I would now like to turn the conference over to Scott Pegan. Please go ahead.
Scott Pegan
Thanks and good afternoon everyone. Joining me on the call today are Ed Ryan, CEO and Ed Gardner, CFO and I trust that everyone has received a copy of our financial results press release that was issued earlier today. Portions of today’s call other than historical performance include statements of forward looking information within the meaning of applicable securities laws. These statements are made under the safe harbor provisions of those laws.
These forward looking statements include statements related to our assessment of the current and future impact of geopolitical, trade and tariff and economic uncertainty on our business and financial condition Descartes Systems Group 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, the approval and 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 Systems Group 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.
Ed Ryan (Board Member)
Thanks Scott and welcome everyone to the call. Today we are again reporting record quarterly financial results coming off a strong financial year. Last year in Q1 we were ahead of our plan which gives us even more room to make AI and other investments in our business. These are great results that I’m looking forward to walking through in more detail. However, first let me give you a roadmap for the call. I’ll start by hitting some highlights of last quarter.
I’ll provide some comments on how the numerous events in the world are impacting our business. I’ll then hand it over to Ed Gardner 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. We’ll then open it up to the operator to coordinate the Q and a portion of the call. Let’s get into Q1 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 record performance in each of those areas. Total revenues were at record high 193.6 million, up 15% from a year ago. Record high Services revenues were also up 15% from a year ago. With our continued focus on generating recurring revenues. Record net income was up 34% from a year ago. Record income from operations was up 35% from a year ago. Record adjusted EBITDA was up 20% from a year ago. Our adjusted EBITDA margin is at a record level of 46%.
We generated $75 million in cash from our operations, up 40% from a year ago. So strong record results across all these key metrics. At the end of the year we had $377 million in cash and we were debt free with an undrawn $350 million line of credit. We remained well capitalized, cash generating, growing and ready to continue to invest in our business. We have a normal course issue bid that allows us to purchase up to 8.6 million shares before December 2026.
We’ve made some purchases since last reported and I’ll allow Ed to give you those details in a minute. But especially in light of how the business performed last quarter, we are optimistic about Descartes future and the normal course Issuer bid is a tool we could use to make further purchases. I want to touch on four areas that helped this business perform well this quarter. The first is Global Trade Intelligence, which is one of the largest contributors to our services revenue and had a strong growth in the quarter compared to where it was a year ago.
That’s pretty intuitive if you think about what’s happened over the past year. It’s become increasingly challenging and unpredictable to determine how to ship goods from point A to point B especially if they need to cross borders. We’ve seen strong growth across the four core areas of our business or of the global trade intelligence business. The first is tariff and duty content. We believe we have one of the best real time sources of global information.
This past year there have been huge and frequent swings in the tariffs and duties, particularly from large shipping or importing nations like China and the United States. As we said before, if tariffs and duties are changing, that’s usually a pretty good sign for this part of our business. The second is the sanctioned party screening business where we continue to be a leader in sanctioned party screening and we continue to see strong growth here as we help our customers navigate an increasingly complex sanctioned party environment stemming from the global the current global geopolitical landscape.
Third, we have the Foreign Trade Zones or FTZ. These are facilities where goods can be imported and stored and processed on a tariff free basis until they’re ultimately released from the facility for consumption in the domestic market where the facility or zone is with all the tariff uncertainty for imports in the United States, more and more companies have been pursuing this option for their business. It has proven to be a particularly lucrative strategy for those who deferred paying any of the recent Section 301 tariffs that were invalidated by the Supreme Court.
By not paying the tariffs, these importers do not now need to go through the delayed process of trying to obtain refunds. So stronger grower so far and with continued uncertainty about the legality and amounts of tariffs one that we expect many companies will continue to pursue with our technology leverage for the operation of the the foreign trade zone. And the last one, number four is DataMine. Companies have adopted a myriad of strategies for dealing with tariff uncertainty.
Whether it’s different sourcing strategies, consideration of classification of goods or even shipping routes, the best companies are doing as much research as they can to help guide their strategies. And that’s where Data Mine comes in. Comprehensive research tool to see how others are dealing with importing challenges. This continues to see good traction and is a good grower. Second area of growth for us was the E-Commerce entries. We continue to see overall growth in consumers embracing E-Commerce.
Even with the elimination of the tariff exempt type 86 de minimis program, imports have continued to grow. Coming into the United States, we have a premier solution for handling E-Commerce imports in the United States using our net CHB system with particular strength in high volume and high velocity requirements for helping key brokers meet the demands of importers. And these volumes are contributing well to our revenue growth. The third area is fleet performance Management and Routing we have market leading solutions to help customers manage their fleets of vehicles.
In particular, we have routing and scheduling solutions that help companies figure out the most efficient way to make deliveries and reduce hours and miles driven to do that. There’s always good demand for these solutions. However, the demand increases in periods where fuel costs increase, running your fleet becomes more expensive and customers look to our solutions to reduce the amount of fuel they’re using to make deliveries. Cost consciousness for fleet owners is even higher given the inflation that exists in driver wages.
This wage inflation is driven in part by driver shortages. New US Regulations have made it more difficult to qualify to be a driver and the final one is transportation management where MacroPoint continues to be strong for us. MacroPoint provides real time visibility to shipments. Brokers and shippers tell us the loads they want tracked. It’s our job to get the tracking information from onboard systems, transportation management systems, and using our application or old fashioned calls to drivers over past quarters, we’ve enhanced our system to have AI agents that interact with drivers to encourage adoption of our tracking app, helping us reach
a segment of the market that was previously difficult to reach at scale. These agents have helped contribute to a higher percentage of shipments tracked than our peers, which in turn drives more people to our network. We’ve also released some new agents that help brokers manage current workflows on shipments, which I’ll speak to further in a few minutes. So those were the principal contributors to growth. We were able to help our customers in a challenging freight environment.
We generally saw overall shipment volumes down in a quarter, with the biggest contributor to that decline being the war in Iran. Here’s a quick summary by Mode of Transportation so in ocean the war in Iran effectively closed the Strait of Hermuz and choked shipping in the region. Shipments of oil, fertilizer and aluminum were among the most impacted imports to the United States. This disruption has had a volatile impact on rates and shipping, with many avoiding the region because of the security risk and costs of war risk insurance.
This has resulted in longer sailing times, reduced schedule reliability, increased fuel usage and costs, increased insurance premiums, and additional congestion at transshipment hubs. The fuel cost impact has spread beyond the Middle east with European Far east sailings seeing 25% rate increases. Spot rates for Far east sailings continues to be high, causing many shippers to rethink their strategy for balancing contract rates and spot bookings. So overall very challenging ocean shipping market at the moment.
Next is air cargo, which has seen some mixed impact. The war in Iran temporarily closed certain airspaces to flights, with some estimating a temporary 20% decrease in available capacity. It also presents an ongoing security risk. Fuel costs and availability have also made it a pricier mode of shipment. However, there have been some positives for those who shipping struggling and economic conditions volatile. Many have elected to leverage their air mode to move goods quickly and or on short notice.
There continues to be strengthening the shipment of semiconductors and AI infrastructure which are more appropriate for the air mode given the high value weight ratios and time sensitivity. E commerce continues to thrive and air benefits from that. Because of short fulfillment cycles, some inventory restocking strategies have shifted to smaller, more frequent orders which switches inventory to air from ocean. Overall, despite the volatile impact of geopolitical tensions, air cargo has been relatively strong road transportation so fuel and driver costs and driver shortages are having the biggest impact on US domestic trucking.
Smaller carriers are struggling and it’s pushing some capacity out of the market, but not enough to counteract the increase to shipping rates caused by fuel costs. So overall we saw trucking volumes down 4% year over year. With that overview of transportation modes, the general theme is a tough and costly market to ship in. Our customers are increasingly relying on us and technology to deal with this complexity and uncertainty. A key to our One of the keys to our customers managing a more complex world and rising resource costs will be leveraging artificial intelligence technology.
Our customers are looking to us to be a leader in AI to help them plan for and operate the future. I spoke about this last quarter, but here are some of the reasons they’re confident in our success. We are a critical logistics network relied on by the world. We connect hundreds of thousands of companies. We solve complex inner enterprise problems for them that they can’t solve on their own with their within their own enterprise. We have scale. We process billions of transactions a year.
We deliver a reliable and stable solution at scale. We’re trusted by our customers. We help them with compliance, a function that is risky to handle solely internally without leveraging a specialist. We have workflow and domain expertise for complex logistics processes. We have unique proprietary data that can deliver fuel that can fuel better answers. Better answers mean increased operational efficiencies. We have a long record of investing in new technologies and businesses to enhance our service offering.
We’re financially stable and operate our business for the long term. We have a broad portfolio of solutions that are ideal for those who need integrated logistics and workflows and processes every day. We’re advancing on our use of AI technologies for our customers. We’ve designed our AI agent layer that will accommodate external and Descartes agents accessing the functions and data on the Descartes Global Logistics Network. That layer orchestrates agents and the skills they call it enforces policy so it says who can do what and whose data and under what approval.
It captures audit and observability so that every action is traceable and explainable and it manages the economics, the usage, cost, attribution and billing. We believe there’s lots of value to be delivered to our customers using AI agents. I mentioned the MacroPoint engine before, however, we have a whole suite of transportation management agents including calling drivers for location checks, gathering proof of delivery information for billing purposes, arrival and departure confirmation, getting truck rates to help with carrier selection, getting insurance certificates for carriers.
We have similar agent development and agent development and other pillars including agents gathering service time information and fleet management, research, age and data mine enhanced denied party screening to manage false positives, just to name a few. These agents are automating workflow and work. They’re designed to automate repetitive tasks that don’t need the creativity of a human and to surface new opportunities for humans to consider new strategies and opportunities.
Some of the agents are sold to our customers while others are designed to increase adoption velocity or traffic over the global logistics network. We believe that AI agents, whether they’re ours or third party agents with permission to access our network, will play a big role in future efficient supply chain and logistics operations. Because of that, we anticipate we’ll continue to increase our level of investment in AI technologies. Some of that will come from increased usage of existing AI tools within our business to build out our AI agent layer, from building and designing new agents, from enhancing the functionality that we have in our existing
customer applications, from rapidly accelerating the interoperability of our solutions for making our network more secure and reliable, and from delivering a better customer experience. However, we also anticipate that our MA strategy will include detailed consideration of how potential partners will enhance how we’re using AI to help our customers. This past quarter we completed the acquisition of Adelic which brings new AI powered technologies to our fleet management customers.
IDELIC helps our customers with managing the safety of their drivers. They have proprietary database of over 40 billion miles of data and telemetry on hundreds of thousands of historical accidents which can then be leveraged to identify drivers or practices that may require further training or remediation to prevent future safety issues. That data is something that non Descartes systems aren’t trained on and allows us to provide better safety insights to our customers and when combined with Descartes industry leading routing, planning and execution technology, this enables us to deliver a complete cutting edge fleet performance management solution
that uniquely incorporates driver behavior and safety signals into our robust operational data set. A big welcome to the Idyllic team and we’re excited about what they can do for our fleet management customers. I provided an overview of our approach with AI technologies and some of our investments. However, we’re planning a comprehensive description of everything that Descartes is doing with AI in our In Person Innovation Forum to be held in Chicago October 6th through the 8th of this year.
This is a big event we invest in to provide our customers and partners access to our people, our latest developments and plans and give an opportunity to provide direct feedback on where we are and where we’re going. It’s been a few years since we’ve done an in person event of this scale, so we’re very excited to host everyone and share how excited we are about our future. Please see our website for registration details. So in summary, a strong Q1 with additional AI investments and a new acquisition.
I’m excited about how the business is performing and the opportunity we have in front of us. So with that, I’ll now turn the call over to Ed Gardner to go through the financial results in more detail. Ed thanks Ed.
Ed Gardner (Chief Financial Officer)
As Ed mentioned, I’ll be walking you through our key financial highlights for the first quarter of fiscal 2027. We’re pleased to report record quarterly revenues of 193.6 million, an increase of approximately 15% from revenues of 168.7 million in Q1 of last year. Our revenue mix in the quarter continued to be very strong, with services revenue increasing 15% to 180.5 million from 156.6 million last year in the first quarter. Services revenue represents 93% of total revenue this quarter, which is consistent with Q1 last year.
Removing the impact of both the recent acquisitions as well as a positive impact from changes in FX rates, we would estimate that our growth in services revenue from new and existing customers, that is our organic growth, would have been just over 9% this quarter when compared to the same quarter last year, and this is up from approximately 8%. Organic growth in Q4. Professional services revenue and other revenue, including hardware revenue, came in at 11.5 million or 6% of revenue, slightly down from 11.8 million in Q1 last year, while license revenues came in a bit higher this year at 1.6 million versus 0.3 million last year.
Collectively, our professional services and other revenue combined with our license revenues was up 8% this year and together remain approximately 7% of our total revenues. Gross margin came in at 78% of revenues, up from 76% in Q1 of last year. The increase in gross margin for the quarter was primarily due to operating leverage for more organic growth and services revenue. Turning our attention to the bottom line as a result of solid revenue growth, improved gross margin as well as controlled growth and operating expenses, adjusted EBITDA came in at a record $89.8 million in the first quarter, or approximately 46% of revenue, up 20% from adjusted
EBITDA of $75.1 million in the first quarter last year. From a GAAP earnings perspective, net income for the first quarter came in at $48.5 million, up 34% from net income of $36.2 million last year. With these operating results and strong collections from customers, cash flow generated from operations came in at $75.1 million or 84% of adjusted EBITDA, up 40% from operating cash flow in the first quarter last year. Overall, as Ed Ryan mentioned earlier, we’re extremely pleased with our operating results in the quarter.
If we look at the balance sheet, our cash balances totaled $377 million at the end of April. As I just mentioned, we generated operating cash flow just over $75 million in the quarter. Offsetting that was approximately $30 million in capital deployed on two tuck and acquisitions and approximately $21 million on share buybacks under our normal course issuer bid. As we look ahead, we remain well capitalized and ready to continue to work on potential M&A activities in our space.
And a couple of more points as it relates to the remainder of fiscal 2027. Going forward, we expect to continue to see strong operating cash flow conversion north of 80% of our adjusted EBITDA. Of course, subject to unusual events and quarterly fluctuations, including adjustments related to future earn out payments that exceed our estimates made at the time of an acquisition. After incurring approximately 2.6 million in capital additions in the first quarter, we expect to incur approximately 4 to 6 million in additional capital expenditures this coming year, mainly related to IT equipment purchases.
After deploying approximately $21 million on share buybacks in Q1.27 we also note in our shareholder report that we purchased an additional 196,800 shares during May 1 and June 2 and we may see additional purchases under the Normal Course Issuer Bid program moving forward. After incurring an amortization expense of 17.3 million in Q1 this year we expect the amortization expense will come in at $53.5 million for the remainder of fiscal 2027, with this figure being subject to adjustment for foreign exchange changes and any future acquisitions.
We estimate that payments of contingent consideration for earn out arrangements for the balance of this year could be up to approximately $9 million, subject to any necessary adjustments resulting from the final earn out calculations. Our income tax rate in the first quarter came in within our expected range at approximately 26% of pre tax income, in line with our blended statutory tax rate of approximately 26.5%. For the remainder of fiscal 2027, we’re expecting the tax rate will be in the range of 25 to 30% of our pre tax income, which means it will be something on either side of our blended statutory tax rate.
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 and finally, after incurring stock based compensation expense of 7 million in the past quarter, we currently expect stock compensation to be approximately 24 million for the remainder of fiscal 2027, subject to any forfeitures of stock options or share units. I’ll now turn it back over to Ed Ryan to wrap up with some closing comments and our baseline calibration for Q2.
Ed Ryan (Board Member)
Hey, thanks Ed. As I mentioned earlier, continues to be challenging shipping market in large part because of the Iran war’s impact on moving goods and tariff uncertainty that is ongoing. Expect that to be challenged throughout our Q2. There are also three new things impacting the market that I thought it should flag. First is tariff refunds. Earlier in the year, the Supreme Court invalidated the Section 301 tariffs that had previously been imposed by the US Administration and required the tariffs that have been paid be refunded.
That refund process is now in progress, with some customers reporting that they’re in partial receipt of funds. Whether businesses receive these funds directly, depending on whether they were paid directly or via broker, they may very much provide money for investments that weren’t contemplated when the tariffs were in place. So there may be the potential for new technology investments opportunities for us with U.S. importers. The second is broker liability.
The U.S. supreme Court has been unusually active in things that impact shipping. Recently they determined that a freight broker may have liability for the negligent selection of unsafe carriers. This makes it very important for freight brokers and others selecting carriers to ensure that they’re doing due diligence while hiring trucks to drive loads for them. We’re able to help our customers with that using our transportation management systems and more specifically our MyCarrier portal solution that performs checks on the suitability of potential carriers.
Separately, we expect that there will be pressure on smaller brokers in the market as they consider the cost of performing auditable diligence and increased insurance requirements. So something that may ultimately impact the number of brokers that are in the market going forward. And the third is New China regulations. There’s new regulations from China designed to counteract what they consider to be proper extraterritorial jurisdiction of the regulations of other countries.
For international shippers with supply chain operations with ties to China, this could mean needing to navigate a web of conflicting regulations between China and other countries. For example, a US Regulation against forced labor may prohibit US Entities from doing business with certain entities, while a Chinese regulation may prohibit a Chinese organization from complying with the US Regulation that China considers to be extraterritorial. So just flagging an area of increased complexity for our customers going forward, and one that will require even more attention to the importance of global trade compliance solutions.
So it’s a challenging macro environment for shipping with new things that come in to make it an even ever changing landscape for our customers. We keep this in mind as we think about how our business is financially positioned and calibrated. In our Quarterly Report, we’ve provided a comprehensive description of baseline revenues, baseline calibration and their limitations as of May 1, 2026. Using foreign exchange rates of 74 cents to the Canadian dollar, 1.
7 to the euro and $1.36 to the pound. We estimate that our baseline revenues for the second quarter of fiscal 2027 were approximately $169 million. Our baseline operating expenses were approximately 102 million. We consider this to be our adjusted our baseline adjusted EBITDA calibration of approximately 66.5 million for the second quarter of fiscal 2027, or approximately 39% of our baseline revenues. As at May 1, 2026, We’re currently operating above our expected adjusted EBITDA operating margin range of 40 to 45%.
Our margin can vary in any period, given such things as revenue mix, foreign exchange movements and the impact of acquisitions as we integrate them into our business. For now, we’re keeping our target range as 40 to 45%. However, we’ll monitor how we’re performing over the coming quarters to consider winning whether any upward adjustment is appropriate. These remain uncertain times for our customers. It’s a challenge for them to know what they can rely on in this global trade environment.
Our Goal is to continue to show our customers and other stakeholders that one thing they can rely on is Descartes. Thanks to everyone for joining us on the call today. And as always, we’re available to talk to you about our business in whatever manner is most convenient for you. With that operator. I’ll now turn the call over to you for the Q and a portion of the call.
OPERATOR
Thank you, ladies and gentlemen. We will now begin the question and answer session. To ask a question, you may press a star followed by the number one on your telephone keypad. If you’re using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star followed by the number two. One moment, please, for your first question.
And your first question comes from the line of Dylan Becker with William Blair. Please go ahead.
Jackson Begley
Hey guys, this is Jackson Begley on for Dylan Becker. You know, Ed Ryan, I think, you know, what’s interesting is we’ve got so many different things going on with geopolitics, excuse me, and just changing supply chains overall. I mean, could you maybe try to contextualize, you know, at what point would that actually turn into a headwind for Descartes instead of it really driving interest on the platform? Anything you could say about.
Is there a point where the complexity gets too much and it starts to become a headwind for your business?
Ed Ryan (Board Member)
Well, I think it’s not so much that the complexity gets to be too much. Most of the complexity helps us regardless of how much there is. The more there is, it tends to be the more they use our software. What we’ve seen in the past probably as well, if you look back, if the complexity gets so much that it starts to harm the economy, we go right along with the economy pretty well.
I mean, the economy’s down, people are shipping less stuff and we don’t do as well. And you saw that with the tariffs last year, the US Put a whole bunch of tariffs in place. They were surprising to everyone. No one knew what was going to happen next. There was a lot of uncertainty day to day and what was going to happen. And it caused people to freeze.
And I think with everything that was going on with AI at the time and today, you know, we didn’t end up in a recession because there were lots of good things going on in the economy as well. But make no mistake, people weren’t shipping stuff as fast as they could have because they weren’t sure what to do about these tariffs. Tariffs that were now subsequently invalidated and all for not in effect.
No one ended up having to pay these rates or in theory, no one will end up having to pay them. And at the same time, you know, that complexity caused them to slow down their shipping decisions. And while we were benefiting on the one side from tariffs and duty rate provision, we were suffering along with everybody else when there weren’t as many shipments moving around the world. So that’s when it hits us.
I don’t think it’s increased complexity doesn’t necessarily hurt us. It generally keeps helping us no matter how much there is. But if it leads to a depressed economy, it hurts us and everyone else.
Jackson Begley
Got it. I think that makes total sense. Maybe for Ed Gardner. You know, you guys have a really good capital position. You have the line of credit, really good cash position. You know, it seems like there’s multiple areas you could focus on for investment in the business and capital deployment.
I’m just curious how you’re thinking about, you know, the M and A landscape with the depressed valuations we’re seeing, as well as, you know, continuing to invest in the platform. Just curious to get any thoughts on. On how you’re thinking about capital deployment going forward this year.
Ed Gardner (Chief Financial Officer)
Yeah, I don’t think it changes that much from other years. Obviously with the ability to build more stuff faster with AI, that changes the calculus somewhat. Absolutely. When we’re looking at our buy versus build decisions, but the framework remains similar. We’re still looking for great businesses that have some sort of proprietary, unique data and deep domain expertise and very sticky customer base. So we’re looking at capital allocation now. I think we see the opportunity to build more, build faster, produce more for our customers.
And that changes how we look at some of the acquisitions. But there’s still a lot of great targets out there and I’d say we’re very busy and actively engaged looking at them. Maybe just a comment on the valuation side. From a valuation perspective, it’s quite not unusual for the private markets to not necessarily go completely in sync and not necessarily as quickly as the public markets. So as the prices come down, it’s not necessarily at the same pace, but we are certainly seeing them come down a bit and we remain engaged in a lot of opportunities right now.
Lots of discussions. Got it. Super helpful. Thanks, guys.
OPERATOR
The next question comes from the line of Chris Quintero at Morgan Stanley. Please go ahead.
Chris Quintero
Hey guys, thank you for taking my questions here. Hey, I want to ask about the quarter here. Third consecutive quarter of organic growth acceleration. Really great to see, but you all called out some challenges here.
Specifically called out Q2 so could you help clarify, do you expect some of these challenges that you’ve highlighted to impact the growth rate or are these really more opportunities for you to leverage your network to address some of these additional
Ed Ryan (Board Member)
complexities that your customers are seeing? I mean, if you know us, we’re pretty cautious. We probably spend more time telling investors about the risks than we, than most companies do in the software space. But you know, you’re right, things are going well right now and I see a lot of potential for them to continue to go well in the future. But still, I mean, even in this past quarter, this was not, this is a great quarter for us.
We’re, you know, nine, nine and a half percent, something like that, organic growth on services. That’s great. And we were doing that in a down freight market. And so we’re pointing out for the future quarters, I’m pointing out that, hey, we’re still in a down freight market and. I don’t know what’s going to happen exactly either. But we’re doing okay considering and we’re happy about that. But you know, be nicer if everything’s coming up roses.
So yeah, just knowing us, we’re always quick to point out the risks and stuff and make sure that we’re always doing what we said we would do. You see that in a number of the way, many of the ways that we produce our numbers, we’re pretty conservative. So I think that’s what you’re saying.
Chris Quintero
Okay, so mostly just conservatism here, highlighting some of the risks, but obviously the business is doing pretty well here. As a follow up, really great to kind of hear more of the momentum around your AI and agents. How are you thinking about the go to market motion as you start to roll some of these solutions out?
It seems like a lot more software vendors are starting to pursue more of a forward deployed engineer type of model to help sell some of these solutions into customers. So curious kind of how you’re thinking about that on the go to market side.
Ed Ryan (Board Member)
Well, I mean, we think we have a lot of solutions that we can go out and sell to customers and we are starting to get traction doing that. We have a lot of solutions that improve things for our customers internally without them really having to sign up for anything new. You know, if they’re paying me to process the shipment and I have some tool that figures they need to process a new shipment here because they had a problem with an existing shipment and I already have a contract in place to do it, I don’t have to sell them anything New the agent that we, that I mentioned in this, this earlier in the prepared comments, I just get more that that
agent’s job is to get more truckers online. And each trucker I get online is going to pay, you know, is going to, going to be able to help me track a shipment that’s going to get me a couple bucks a shipment. And now that he signed up, every time he gets a shipment, I’m going to be able to track it. So it’s the gift that keeps on giving. And, you know, we have agents calling these truck drivers and you have to call them in the beginning of the call, beginning of the move.
You can’t call them with 20 minutes to go on the move and start asking them to download the mobile app. You have to get to them quickly. And you know, frankly, three years ago, we just weren’t able to keep up, at least not cost effectively. And now all of a sudden we can call the guy, within minutes of him taking off, picks up a load, and we’re calling him right away going, hey, you know, can I track that load for you? Why don’t you download the app and I don’t have to call you anymore.
I was supposed to call you every hour. And if you download this mobile app, I never call you again. And that’s a pretty compelling argument for the truck driver, especially when he knows he’s been tracked by MacroPoint in the past. So it’s a no name to him. And we’re the largest in the industry. And that alone has moved our track rates from 87 or six months ago to 93 and moving higher percent. Well, that’s. Each one of those percentage points is a lot of $2 shipments that end up producing revenue for us.
And so that’s great. I don’t have to do anything, and I’m just helping our customers. And they’re paying more and they’re happy about it because they’re going to track more shipments. And then finally there’s this stuff internally, right, where we build stuff faster, the ideas come out. You heard us talk about this whole AI layer where we can more closely pull people into the network and in an organized way do that. And that saves us money. It saves our customers money.
It makes it easier for them to use their network. It makes us easy. It makes it easier for us to provision services to them that they pay for. And yeah, I know the market thinks, oh, AI is going to harm software companies. I go, I don’t know if I’m a software company. I mean, we have Software, but I don’t know if I’m quite the software company the way everyone else is. We think of ourselves as more of a, you know, network data content provision type of business.
And that means we have a lot of proprietary data that can help customers make good decisions in the future. And frankly, if you look at our network, I know where all the shipments are supposed to be over the next month. So that’s pretty valuable information. When things start getting messed up or screwed up in the supply chain and decisions need to be made quickly, that can save a customer a lot of money. And I can use AI to do that because I have all the data and no one else does.
And I go, I don’t know what people think is going to happen to everyone else, but I’m pretty sure we’re going to benefit from that and we’re excited about it. So I’ll leave it at that. Excellent. Thanks so much, Ed. Thank you.
OPERATOR
And the next question comes from the line of Lachlan Brown with Rothschild Co. Redburn. Please go ahead.
Lachlan Brown
Hey, Ed. Ed, thanks for the question. You mentioned that the Q1 came in ahead of plan, noting the robust organ services revenue growth of greater than 9%. Could you just dive into the drivers in the quarter that led to the delivery above your prior expectations?
Ed Ryan (Board Member)
Well, yeah, and I covered it pretty well in the beginning of the call. This global trade intelligence business did very well, as you might have expected in our E commerce shipment business. Type 80, what was formerly Type 86 filing, has been booming lately. I mentioned on previous calls, you know, we, we had a lot of, we had, we had, you know, 40, 50% of that market.
And when it switched from type 86 to type 1, a lot of our competitors couldn’t handle the speed with which those transactions had to be filed. They just, they weren’t really networks, they were software companies that were making these filings. And when they had to do it a different way, their networks fell apart and had a lot of those customers switch over to us so that we got a lot more market share out of it.
And it’s been a great business for us in the last year and I suspect for a long time to come. Our fleet management business has been doing well as it has for many quarters now. And our transportation management business, led by Macropoint, has been doing great in a down market. They were still picking up a lot of momentum and a lot of new shipments, both signing customers. And that agent that I talked about, that move from 87 to 93% significant.
It’s a lot of money. And even in a down market, we were able to pick up more revenue than ever. So all that’s added up to pretty good news for us. That’s helpful.
Lachlan Brown
Thanks. I wanted to ask. In recent months we’ve seen a few of the larger global logistics players double down on their technology investments and their longer term AI strategies. I was wondering if you could provide some color on what you’re seeing in the mid markets in terms of their pace of AI adoption. How are they responding to these larger players and just any color on what conversations you’re having on how Descartes can support them.
Ed Ryan (Board Member)
As you might expect, it’s very helpful to us. We help the bigger players in a lot of ways, oftentimes our biggest customers. But then the midsize and smaller players have to keep up. And while the big players can build some of the stuff themselves, like the back office systems, the medium and small time guys really can’t do that. And they need tools from people like us that help them keep up.
I would always say to people, customers would say, I want a strategic advantage. We’re using software in my company. And I go, okay, great, here’s a bunch of stuff you could use to do that. But bear in mind this isn’t gonna last forever, right? Every, it used to be, you know, seven years ago, if you had Macropoint, you had a big selling advantage against the broker. That didn’t. Well, you don’t have that advantage anymore.
You have to have it now, right? Everybody has this ability to track a truck and you know, they’re on to the next thing now and that’s good for us, right? We can’t, you know, kind of keep building tools that help people, you know, service the customers properly. And then when everyone has those tools, it becomes table stakes to a certain extent. Extent. And then we have to go give them new tools to, you know, help to make the next advancement.
I don’t know that we’re driven that way by big forwarders all the time. And we probably drive the advancements as much as anyone. But you know, sometimes people could build it themselves. Depends on what we’re talking about. You know, if you talk about network service, they, they don’t and they can’t really build it themselves. If you’re talking about a back office system, sure they can.
They buy some stuff from us, they buy some stuff from other people and they put it together and they, you know, they have their whole back office infrastructure. As soon as they get out to need to communicate with other people, all bets are off. Right. They have to use a network like ours. They’ll never be able to replicate our network.
I think of the big guys, the FedEx and the UPS, the DHL, even the Amazons that like to build a lot of themselves, a lot of stuff themselves, well, they always end up in this situation where like, yeah, sure, but you can’t do it with the network. The number of connections you need to maintain it is not feasible. It’s much more cost effective for someone who’s neutral, like us, to do it for everybody and charge everyone a low rate to do it as a result.
And that’s, you know, that advantage has been the case for 25, 30 years. And I think with AI, it’s even going to be more so most of the small AI players that we talk to that seem to be more like features than companies, you know, they’re coming to us going, hey, can I join your network? And I’m like, well, not really. You don’t have a customer. You know, customer needs to join the network.
If they’re using your software and they want to do it, no problem. But I’m not going to just help you guys, you know, get business by giving you access to our network. Doesn’t work that way. So the whole thing’s interesting and, you know, I think it’s AI is going to, going to even further separate things to our advantage. But that’s how we see the playing field laying out with regard to your question.
Lachlan Brown
Makes sense. Appreciate the call. Thanks, Lacho.
Sam Schmidt
And the next question comes from the line of Stephanie Price with cibc. Please go ahead. Hi there, it’s Sam Schmidt on for Stephanie Price. Thanks for taking my question. EBITDA margins have been tracking towards the top end of Descartes target range for several quarters. How do you think about this going forward? And can you talk a bit about how you’re leveraging AI internally and how you’re tracking progress on those initiatives? Thank you.
Ed Ryan (Board Member)
Sure. Yeah, I mean, we’re up at 46% right now. We said the range is 40 to 45. You know, if you watched us do this in the past, we usually blow through a number a couple quarters before we start to move it up. You’ll see the same here. You know, the things that can affect it are the big things are FX and acquisitions. You know, we’re up at a pretty lofty EBITDA margin now.
We’re not going to find many acquisitions that will be accretive to our EBITDA margin. Not that that’s a problem. It’s just that if I buy some company that makes 25% EBITDA margin and with plans to increase it, that’s great for our shareholders as long as I pay the 25% price for it. But it also drags my 46% if it’s a decent sized company, down to 44%. And I don’t want to up it to a number that we’re going to miss.
And we want to provide consistent answers to our shareholders. And if we tell a number, we were either in that range or we beat that range. And I’m not gonna apologize too much for beating it. We’re only beating it by a point right now anyway. But I don’t want to mislead people with regard to AI in relation to this.
Yeah, we’re seeing we’re way more efficient, or let’s just say we can produce a lot more stuff with the people we have and see how this plays out. But I think right now we’re going, you know, while I see other people laying, you know, employees off, hey, I’m using AI and now I don’t need as many employees. I think we’re inclined to go the other way.
Right now I’m saying I’m using AI and it’s producing a lot of productivity enhancements and I’m using that to produce more software. And, you know, we have that luxury because we’re in the 45% range or 46% range right now. If someone’s in the 25% range and competing with us, you know, they’re at a significant disadvantage, especially if they’re trying to do the same thing we are, which is use our profits to buy more companies.
Well, if you’re making half of my profit, you’re not going to do that as effectively as we are. And, you know, we’re inclined to take the extra right now and produce more software for our customers and make sure that we continue to be a leader in this space as a result. And I don’t know if that changes in the future. Maybe, you know, have to take a look at it over time. But.
But right now I think we have a lot of good ideas and more good ideas than we have time to produce them. So why would I use it to cut any cost? I think I’m using it to produce more stuff because I think that stuff’s going to produce more revenue for us in the future, and we’re excited about that.
Sam Schmidt
That’s good color. Thank you. And then maybe one more for me on market share gains in the quarter. Can you Comment on how those contributed to organic growth and how you’re thinking about opportunities to shape, take share at this point.
Ed Ryan (Board Member)
Yeah, I mean, you’ve heard mention this in previous calls. I don’t want to get into naming competitors and stuff like that, but we, you know, certainly in that TMS space, in the routing space, you know, some of the things where we’re the market leader and times have been tough, you know, over the last year for a lot of companies. But, you know, I have 300, 400 different products to spread it out over, and we’re not materially harmed.
Even when things got tough. I mean, maybe things were tough a year ago. And I went, yeah, they were tough, but we’re still making stomach in that, you know, $90 million a quarter. So let’s not hit ourselves. We’re doing okay. You know, we have competitors out there that when we take business from them, they only have one product. I mean, that’s their. That’s their stuff.
And a lot of these guys are high fliers that have never seen a situation where they were shrinking. And all of a sudden they are. And it causes real problems inside the company. The stock’s not worth what it was. The shareholders are furious, and their shareholders overpaid to be in the business. And their employee stock’s not worth anything anymore. And they can’t believe that they were worth $2 billion at one point.
And all that happened was the growth rate went from 30% down to almost zero, but everything else was still fine. But when, when it went down, you know, they had to stop growing. They stopped growing this stuff, having the money to buy more, you know, buy any more stuff. They had to start cutting costs. And usually the guys that are high flyers are not good at cutting costs, and they really struggle to do it. And they just can’t imagine.
And, you know, all those things add up to help us quite a bit. That whole company gets demoralized when that happens. And, you know, fortunately for us, we’re not in a situation where we’re facing anything like that. Even when times were tough last year, they weren’t that tough for us. Most of the business was still looking up. And I think it’s a testament to the thing that our guys have built.
They built something big that solves a lot of problems and had the chance to succeed in many areas. Even when times are tough, Some of our businesses are doing great. Not everyone has that luxury.
Sam Schmidt
Thanks for taking my questions. Thank you.
Mark Schappel
And the next question comes from the line of Mark Schappel with Loop Capital Market.
Ed Ryan (Board Member)
Hi, thank you for taking my question. I was wondering if you could just walk us through the key puts and takes you observed in the air cargo business this quarter that you referenced in your prepared remarks. And then also with respect to that, you also noted that your trucking business is down about 4% year over year. And what would that decline translate to in your ocean shipping business? Oh, okay, I got you. All right, so let’s talk about the air one first.
You know, the Iran war, especially in the beginning, had a lot of flights not being allowed to fly over Iran or the, let’s say anywhere over that area. Well, you know, you’ve got Emirates there, you’ve got Etihad, you’ve got several of the biggest air cargo carriers that region. And there’s like a third of the map that can’t fly in that direction. And they’re right there. I mean, they’re in Abu Dhabi, Dubai, whatever, you know, so it’s tough for them.
And, you know, they had a lot of flight cancellations as a result, and they started moving planes around trying to get, you know, that’s tough, right? It doesn’t happen right away. And you have passengers that, you know, that are expecting to be on one type of flight, and all of a sudden that flight’s not available anymore and the cargo goes along with it. So, you know, that was a headwind for the air business. At the same time, some of the stuff that we mentioned in ocean, people get into these situations or companies get into situations and they go, oh, there’s a lot of cargo that sits in the middle.
I can fly at air or I can move an ocean, depending on what’s going on. And I think for a while people started gravitating towards air in that situation. Because if I was just describing the air carriers in a bit of a pickle. The ocean carriers were in a much worse pickle. We have to avoid that entire region. Okay, great. Well, the option then is to go around to keep, you know, South Africa, Cape horn, well, that’s 10 more days. And, you know, then they started charging more for the stuff.
Then, you know, if you’re the chipper, you’re thinking, well, geez, the air. The air shipment is usually way more expensive. And now it’s not that much more expensive because the ocean carriers charge a lot of money. And so, you know, that ended up being a little bit of harm to ocean carriage. And.
But also, you know, took some capacity out of the ocean space and helped them raise prices. So maybe they didn’t suffer as Much. And the air carriers were able to pick up some business which is great for them on the truck side. To answer your question, that 4% down probably doesn’t translate that much in the ocean space. Mostly probably related to domestic shipping. I’d be guessing if I told you, but if I had to guess I’d say something like a half a percent.
Nothing big. Yeah, just to clarify on that, we were talking about the truck market in the US not the, not the Descartes truck market or transportation management business.
Mark Schappel
Great, thank you.
OPERATOR
And the next question comes from the line of Kevin Krishnaratnai with Scotiabank. Please go ahead.
Richard
Hey guys, this is Richard on for Kevin. Thanks for taking my questions. So Amazon, they launched Amazon Supply chain services earlier in May. I was wondering does this more fragmentation and multi carrier complexity drive more demand for your solutions or do you see any risk of it potentially displacing parts of the your value chain?
Ed Ryan (Board Member)
No, I mean they’re a big customer of ours and we don’t compete with any, you know, forward or fletching management capability. We don’t, we purposely don’t do anything to compete with them. We’re trying to help them. And you know, we’ve seen over the years we’ve had competitors many times say that they’re going to do something that their customers do as the freight forwarder does and the three PL does and they get killed for it.
And we’ve very aggressively stayed out of that trying to remain neutral and we’re trying to help them all. And Amazon’s a big customer of ours and we do business with just about every freight forwarder in the world. So yeah, that to me is Amazon getting into this business. We already do a lot of stuff with them. I suspect we’ll end up doing more, you know, because we do a lot, especially with the bigger freight forwarders.
Now we tend to get big relationships with them and we’ll see how they, how they get into it. You know, do they buy someone along the way that, that oftentimes helps them get going.
Saw that with Uber, you know, and Uber when they started with like oh, we’re doing all this stuff ourselves and then year end they buy, you know, one of the bigger players in the industry and you know, here we are today, four or five years later and they’re one of our biggest customers. And if you had listened to them seven, eight years ago, you would have thought they would never do business with someone like us ever. And of course they would.
The reason they do is because there’s certain things we do better, faster and cheaper than they’ll ever do. So they would be smart to do it with us. And I think you’ll see the same with Amazon.
Richard
Okay, and can you also unpack a little more about what’s driving some of this strong GTI growth? So how much of the growth is from new customer wins versus existing customers accessing more databases versus pricing?
Ed Ryan (Board Member)
It’s not pricing stuff. Pricing is largely the same. I don’t know if I know the exact breakdown, but it’s customers saying, I need more information, I need more countries, I need more commodities and I want to search more stuff. And that’s largely. They’re doing that because the tariffs are coming in, Tariff changes are coming in. As I would always say. We actually joked about it today before the call. If they never changed, we’d be selling a book.
And because they change every day, we’re selling access to a database. And you know, when Trump comes in with his move and changes everything, I mean, people tend to go into that database a lot more and start looking around and going, what do I do about this and how do I plan to to save myself money? And that’s how it goes for us. And sometimes they’re new customers, a lot of times they’re existing customers that are buying access to more of the database.
We sell it in chunks to them by country, by commodity, and so they buy more and we give them access to more so that they can make better decisions. That’s helpful.
Richard
Thanks for taking my questions.
OPERATOR
Thank you.
Jiang Shao
The next question comes from the line of Jiang Shao with CD Cowan. Please go ahead. Hey guys, thanks for taking my question. I understand GTI has been a strong growth driver this quarter. But earlier this year, key investors concern is your customer might use AI to replicate the same GTI database. So do you think this quarter’s growth effectively de risk that concern?
Ed Ryan (Board Member)
Yeah, I didn’t have a concern about it in the first place. You know, we heard that and said, I don’t think the people that are saying it understand how this works. And I went over it in the last call in some detail. But you know, we have a massive amount of data that we have to collect and it’s from all different countries. And it’s not that easy even to train an AI agent to do it.
If you look at the way that we’ve done it, it is using AI strategies that we’ve built ourselves over the last 15 years. You know, maybe off the shelf tools would help us do it today, but it doesn’t matter. We’ve Built them already. And that’s how we grab the data. Then we have to put the data into a database in a similar format for everyone. We have to make Belgium look the same as the Netherlands, look the same as Japan, etc. And that’s hard.
Then we have to build ways to disperse it to the customers. And, you know, you could just say, here’s the data, but. But it’s much more convenient for them. As if we say, oh, here it is in the Oracle format. So you can, I’ll just throw it right into your database over there seven times a day. And that’s a whole set of things.
And then you have, you know, maybe, maybe one of the more compelling arguments, which is, we don’t charge that much because we do it for everyone. The price per customer is pretty cheap. So there’s no one customer that’s like, oh, for the 50,000 I pay you a year, I’m going to do this myself. Well, that math doesn’t work. I mean, you’re not going to be able to do it better, fast or cheaper than us. And even close.
If I could just give you a little, like, Amazon uses this, trust me, if they could replicate it themselves, they would. Anything they’ve ever been able to replicate themselves with us, they do. This is not one of them. It’s just not feasible. And then finally, you know, if you get it wrong, it’s a real pain in the neck to get your money back. And if you got it wrong because you built your own AI system, the government’s not going to like that answer.
They want to hear that you were trying to do it properly and oh, I built my own AI tool and I was wrong. It’s not compelling argument. And you know, it’s not a compelling argument tariff stuff. And it’s really a bad argument with the sanctioned party stuff. So, you know, people tend to do those things together with us to make their global trade management system work.
And if you add all that stuff up, no one, you know, people said that to us and I kind of laughed. I intrinsically knew that wasn’t what’s going to happen because of the, what I just described to you. It’s just too much to overcome. If someone, if my best friend told me that he was going to do that, I would say, don’t do that. You’re wasting your time. Go with someone, go with the cart.
It’s going to be better, faster, cheaper, and you should go focus on your core business, not on building your own tariff database. It’s not going to Be worth it.
Jiang Shao
Got it. That’s great color. Thanks, Pafalon. Thank you.
Robert Young
And the next question comes from the line of Robert Young with kind of Card Genuity. Please go ahead. Hi, good evening. A couple questions on the AI agent layer you’re highlighting. I’m trying to understand one, how an external party would access that. Is that like a model context protocol to use through like one of the, like Claude or something like that? Or is it something that you’re setting up specifically for your larger customers to access your data?
Ed Ryan (Board Member)
Oh, it’s many ways for our customer. Yeah, sorry. Yeah, it is that. It is ways for our tools and our customers to say, I want some information out of here. It’s a set of protocols that you would use to make calls to the to. To rai tools to disperse data to you quickly and efficiently for use in an application for use, you know, to answer customers who might be on a automated phone call or coming into your website. You might be able to quickly call us and I give you an answer that spits right out to your customer in a split second and you pay for that.
Right. And you said that you put a policy in place that determines what these parties can access, how they access your auditing it. So there’s a monetization strategy that sounds like a foundation for monetization. So is there any additional detail you
can provide around that? Well, think of it like it’s our, our network has these tools. They’re just getting out. They’re going to get a hell of a lot better with a hell of a lot more stuff you can request from it. Our network already does this conceptually, and it lets you get access to a bunch of things.
The ability to get tracking messages, the ability to make a booking, to get a booking confirmation back, to get it, to make a filing to a government, to get a filing confirmation so that your plane can take off. Imagine If I add 1000 more things to that that I can serve up to people and they each cost 25 cents or whatever. That’s how we imagine it working.
Robert Young
Okay, and then last question, just you said that there were some strategies to increase adoption and velocity on the gln with this layer, maybe bring new customers into the network. It feels though you’ve got most of the large customers. And so I’m just curious what types
Ed Ryan (Board Member)
of strategies it’s getting them to do more. Getting them to do more with us. AI is going to bring. And we see this easy for us to see because we do business with all of them. It’s going to bring huge opportunity for them to better service their customers and charge them more. And hand in hand with that same for us. I go, our customers could be providing much more information to their customers about what’s going on in their shipments and.
And get more money for doing it. And because they’re saving them money and finding them more efficient ways to operate. And, you know, as a guy that serves that Apple movement, I may be charging 25 cents for giving this out. They may be charged $10. Right. And the customer. And their customer goes, wow, that was really worth it. And I go, wow, I made a lot of money at 25 cents.
And our customer goes, well, I just made 925 on this idea that kind of Descartes gave me. And now my customer’s happy and they’re paying more money. I go, like, I think we’re going to see more and more of this all over the place. And because of our network, I think we’re in a very, very good position to do it. We’re excited about that. Okay, great questions. Hey, thank you, Robin. Have a great day.
OPERATOR
And I’m showing no further questions at this time. I would like to turn it back to Ed Ryan for closing remarks.
Ed Ryan (Board Member)
Hey, thanks, everyone, for your time today, and we look forward to reporting back to you in September. Appreciate your time today, and we’ll talk to you soon.
Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company’s SEC filings and official press releases. Corporate participants’ and analysts’ statements reflect their views as of the date of this call and are subject to change without notice.
Recent Comments