The Descartes Systems Group Inc. (DSGX) Q3 2022 Earnings Report, Transcript and Summary

Welcome to the Descartes quarterly results call. My name is Adrian, and I'll be your operator for today's call. [Operator Instructions] Please note, this conference call is being recorded. I'll now turn the call over to Scott Pagan. Scott, you may begin.

Thanks, Adrian, and good afternoon, everyone. Joining me remotely 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 the COVID-19 pandemic on our business and financial condition, Descartes' operating performance, financial results and condition, Descartes' gross margins and any growth in those gross margins; cash flow and use of cash, business outlook, baseline revenues, baseline operating expenses and baseline calibration, anticipated and potential revenue losses and gains, anticipated recognition and expensing of specific revenues and expenses, potential acquisitions and acquisition strategy, cost reduction and integration initiatives and other matters that may constitute forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties, assumptions and other factors that may cause the actual results, performance or achievements of Descartes to differ materially from the anticipated results, performance or achievements implied by such forward-looking statements. These factors are outlined in the press release and in the section entitled certain factors that may affect future results, in documents filed and furnished with the 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.

Thanks, Scott, and welcome everyone to the call. We had excellent third quarter financial results. We'll walk you through those shortly, including some of the reasons for those results, but let me first give you a roadmap for this call. I'll start with a summary of the financial results and some factors that we believe are impacting the supply chain and logistics markets. I'll then hand it over to Allan, who will go over the Q3 financial results in detail. I'll then come back and update on how our business is calibrated, and we'll then open it up to the operator to coordinate the Q&A portion of the call. So let's get to it. In Q3, we had record revenues of $108.9 million, ahead of our plans for the quarter and year-to-date. We had record income from our operations of $27.8 million. We had net income of $25.5 million. We had adjusted EBITDA of $48.2 million, again, well ahead of our plan for the quarter and year-to-date. Adjusted EBITDA margin as a percentage of revenues was 44%. Cash provided by operating activities was $43.3 million or 90% of our adjusted EBITDA for the quarter. These are the principal financial numbers that we track for our business. They were all very good for Q3. They were all well ahead of our plans. Even though we're ahead of our plan, that doesn't mean that these results are surprising to us. We generally do well, as our customers do well, and a large portion of our customer base is continuing to do well. Ocean carriers, trucking companies, air cargo providers, freight forwarders, non-vessel operating common carriers, freight brokers, customs brokers, third-party logistics providers. These are boon times for logistics service providers across the board. As they process more transactions, they are more chargeable transactions on our global logistics network. When our customers do well, they have opportunities to invest in improving their technologies and businesses for the future, often choosing Descartes solutions to do that. Our business is benefiting from other things as well. We continue to benefit from customers needing our help to comply with Brexit rules that are still in flux. E-commerce sellers need help organizing their inventory, selling across multiple channels and shipping their goods. Many of our customers that manufacture and ship across the globe are gearing up for new tariff classification codes, that become effective in the new year, and our travel and marketing expenses are still well below pre pandemic levels. But I wanted to spend some time speaking about some of the broader issues impacting the logistics and supply chain markets, and how we think they could impact our customers and our business. Specifically, I wanted to address supply chain and logistics strains, labor issues and inventory levels. So let's get started first with supply chain and logistics streams. You can browse headlines on any business news site and see the words, supply chain and logistics, more than you would have seen before. The current state of affairs is variously described as a crisis, chaos, a snarl, a mess or a challenge. No matter what words you use to describe things, there are real issues out there right now. They're impacting every participant of the business community, and they have everyone's attention. I'm sure there will be in-depth papers written about this period in history. However, at its heart, production in the Asia Pacific region was severely curtailed for a period of time for issues ranging from the COVID impact on work sites, to energy shortages to port capacity limits. So there was supply chain disruption. The U.S. is the principal destination for many of these goods, and there was no corresponding demand disruption. In fact, there was more demand than ever from the U.S. for goods, especially in light of the economic stimulus impacting consumers. So there was a supply disruption and an increase in demand hitting the market at the same time. This was a recipe to create supply chain and logistics headlines. As Asia Pacific production ramped up, competition was on, to source the scarce goods and to get access to the limited transportation capacity available to move these goods to their destinations. When there's more demand than supply, prices go up. As we saw in previous months, with record high prices for ocean and air cargo moves. And with these increased prices, you see potential profits for logistics service providers and freight cost pressures for importers. If you want to find the potential weak points in a system, then just put that system under some stress or pressure, and that's what we've seen over the past months, with logistics and supply chain. We've seen logistic support infrastructure stressed past its limits, with vessels anchored offshore on the West Coast of the United States and container yards stacked high with containers under emergency orders. We've seen extreme vessel capacity constraints with customers choosing to charter their own vessels or moving goods that they would historically move by ocean or via ocean or via the more expensive air mode. And we've seen vessel carriers turning to a less profitable business, resulting in the elimination of some ports of call or tempered movement of less profitable commodities. All these challenges really show how interconnected and interdependent the supply chain and logistics world really is. They also show how critical the sourcing and movement of goods are, to business and economies as a whole. Supply chain and logistics is not a niche market. These are headline issues. These supply chain and logistics challenges are complicated, multiparty, international issues involving a myriad of people, businesses, technology systems and assets. These challenges are too complicated to be met without the use of technology, and that's where Descartes comes in. We are a supply chain and logistic specialist. We have been for more than 2 decades. We specialize in complicated multiparty international supply chain and logistics challenges. Our customers have relied on us to help them meet this supply chain crisis, and as they succeed in doing so, our business benefits. So to sum up, what you're reading in the news is accurate. There are unprecedented supply chain and logistics challenges for businesses around the world. We believe they will carry on for some time, in part, for resource reasons I'll mention soon. We specialize in helping our customers solve these types of complex issues. We've been successful in helping our customers -- existing customers, and this has benefited our business. We've also been successful in attracting new customers, based on our track record and commitment to continue to invest in innovative technology solutions. This has also helped our business. The second issue is labor issues. Supply chain and logistics market have seen tremendous physical capacity constraint issues. From port constraints to vessel constraints to container constraints and component and inventory unavailability. But another big factor pushing the limits of our supply chain and logistics infrastructure, is human resource availability. For many years now, even pre-pandemic, truck markets have struggled with driver shortages. There has been an ever-increasing demand for more trucks to move goods and hence, a need for more drivers. At the same time, drivers are becoming scarcer, as some age out of the profession, while others either leave or don't enter the driving workforce for issues, including pay levels or quality of life, to high demand for drivers and a driver supply disruption. And this phenomenon is not limited to just drivers, especially with the increase in e commerce activity, warehouse and fulfillment center workers have been more and more in demand. Businesses are struggling to find a balance to get affordable and capable labor, while providing competitive, safe and appropriate work conditions to attract workers. High demand for workers with supply challenges. One of the working condition issues that logistics and supply chains are dealing with, are vaccine mandates. This is an international issue, quite apart from the health impact. We've seen what a COVID outbreak can do, to immediately shut our manufacturing facilities, ports, warehouses and other key parts of the supply chain infrastructure. On a country-by-country basis, we see different levels of vaccine hesitancy and implementing a mandate, may put limits on available workforce needed to operate the various critical roles and facilities for supply chains. Our customers are having to manage these issues carefully, while being mindful of the demands of their business and workforce. And yet another issue impacting labor, is the international longshore and warehouse union contract that expires in July 2022. This contract impacts more than 20,000 U.S. dock workers and workers at other port facilities. In the past, these negotiations have been contentious, and when last negotiated in 2014 and '15 resulted in labor disruption. I mentioned these issues to point out that the current supply chain and logistics challenges that businesses are facing, aren't things that are going to be quickly solved. While there continue to be labor issues impacted by COVID directly or indirectly, we anticipate that there will continue to be challenges in the supply chain and logistics markets. Descartes Solutions can help our customers with at least some of these issues. Our routing and scheduling solutions are designed to help those with their own fleets of vehicles and drivers to efficiently plan and execute routes, to optimize the limited driver resources they may have. More broadly, we have solutions that are designed to limit the amount of wait times, drivers have for pickups and deliveries at dock doors, reducing wait times. And further, our mobile solutions help connect with drivers, to efficiently communicate route instructions, updates and trigger payment. But beyond solutions specifically impacting drivers, our vast network of interconnected parties is ideal for helping customers when there may be labor disruption in the markets. We're already helping customers who are expediting 2022 sourcing in advance of potential port facility disruption from the ILWU contract. In summary, while there is a supply chain and logistics crisis that has arisen as a consequence of the pandemic, we believe there are underlying labor issues in the market that will continue to present supply chain and logistics challenges to the market through calendar 2022 as well. We don't believe it will become easier to source or move goods from point A to point B. We continue to invest in our own business, to make sure we're ready to help our customers meet these challenges. And the third issue is inventory levels. Through the early portion of the pandemic period, we saw runs on various goods, depleting inventory levels. We then saw manufacturing shutdowns in key areas of Asia Pacific that impacted key components, such as computer chips that are used in pretty well anything with an electronic pulse. Demand for components and inventory recovered quickly, much quicker than the manufacturing, being a main contributor to the supply chain crunch the world is seeing now. For retailers, inventory levels as a percentage of revenues were at historical lows. While inventory levels are now starting to recover, there's still a deficiency that needs to be filled. This process has been concerning to all involved in supply chain, with comments about companies moving from just-in-time inventory to just-in-case inventory. We don't know when or if inventory levels will return to historical norms or if they will be even higher, as people look for safety stock. In addition, it's much more common now for our business to have its inventory in multiple locations, as opposed to one central facility or store. Inventory could be direct or dropshipped from a supplier, could be stored with a reseller or sales agent, it could be in various warehouses dedicated to different go-to-market experiences, such as online purchases versus in-store purchase, or even with the customer. In short, businesses are managing not just inventory levels, but an increasingly wider array of inventory locations. As these distribution mechanisms become more complex and involving more external parties, shipment visibility becomes more important. Our customers rely on us to help them manage the massive amount of information relating to their businesses, so they can make their operations more efficient. This is particularly so, as we see increased shipments until inventory levels normalize. In short, we had a very good financial result for Q3 ahead of our plans. Our customers are doing very well in a very strong market, and that's contributed to our success. The supply chain and logistics issues that are being highlighted in the market have shown a light on the importance of what we do for our customers, and I'm thrilled that our team has this opportunity to have broader recognition for the critical work that they do, to help keep the economy functioning. Thanks to every Descartes team member for everything they've done to help get us in this very fortunate position. With that, I'll turn the call over to Allan to go through our Q3 results in more detail. Allan?

Okay. Thanks, Ed. As indicated, I'm going to take you through our financial highlights for our third quarter, which ended on October 31. We're pleased to report record quarterly revenue of $108.9 million this quarter, an increase of 24% from revenue of $87.5 million in Q3 last year. While revenue from new acquisitions contributed to this growth, similar to the first 2 quarters of this year, growth in revenue from new and existing customers, including revenue from new Brexit-related customs filings in the U.K., were the main drivers of growth this quarter, when compared to last year. Looking at foreign exchange rates, we should point out that there was a benefit to revenue this quarter from FX of just under $1 million in Q3, as the U.S. dollar was mildly weaker compared to the euro, Canadian dollar and British pound, compared to the same period last year. Looking further at revenue, our mix in the quarter continued to be very stable, with services revenue increasing 25% to $97.2 million compared to $77.6 million in the same quarter last year, and consistent at 89% of revenue in both periods. Service revenue was also up nice sequentially, increasing approximately 4% from the second quarter of this year. Professional services and other revenue came in at $10.3 million or approximately 10% of revenue, up almost 11% from $9.3 million or 10% of revenue in the same quarter last year, while license revenue continues to be less than 1% of our revenue in each period. Revenue for the 9 months year-to-date was $312.3 million, an increase of 22% from revenue of $255.3 million in the first 9 months last year. Gross margin for the third quarter was 76.5% of revenue, fairly consistent with the second quarter of this year and up from gross margin of 74.3% in the third quarter last year. Gross margin continued to benefit from the strong incremental growth in new and existing customers that we have experienced so far this year. Operating expenses increased by approximately 24% in the third quarter, over the same period last year, and this was primarily related to the impact of recent acquisitions, but also from additional labor costs, as we continue to invest in various areas of our business for future growth. These cost increases were partially offset by the cost savings we continue to see in our business, such as the continued lower travel, marketing and facilities costs relating to the ongoing pandemic, as Ed mentioned earlier. As a result of both continued revenue growth and good cost control, we continue to see strong adjusted EBITDA growth of 32% to a record of $48.2 million or 44.3% of revenue for the quarter, up from $36.4 million or 41.6% of revenue in Q3 last year. For the 9 months year-to-date, adjusted EBITDA came in at $135.6 million or 43.4% of revenue, up 31% from $103.4 million or 40.5% of revenue last year. With these strong operating results and good customer collections, cash flow generated from operations came in at $43.3 million or right at 90% of adjusted EBITDA in the third quarter, up 31% from operating cash flow of $33.1 million in Q3 last year. Year-to-date, our cash flow from operations has increased 38% to $130.6 million or 96% of adjusted EBITDA. However, going forward, subject to unusual events and quarterly fluctuations, we expect to continue to see strong cash flow conversion and generally expect that cash from operations will be in the area of 85% to 95% of our adjusted EBITDA, for the quarters ahead. From a GAAP earnings perspective, net income came in at $25.5 million or $0.30 per diluted common share, up 92% from net income of $13.3 million or $0.15 per diluted common share in the third quarter last year. Overall, as Ed said, we are quite pleased with our quarterly operating results in the quarter, as strong organic growth and solid performance from our recent acquisitions has resulted in a 24% growth in revenue, and more importantly, a 32% growth in adjusted EBITDA for the quarter. If we look at the balance sheet, our cash balances totaled $171 million at the end of October, up approximately $43 million from the end of the second quarter. As a result, we will have -- we have $171 million of cash available to us as well as $350 million available to us under our credit facility, ready for us to deploy towards future acquisitions. So as always, we continue to be well capitalized to allow us to consider all acquisition opportunities in our market, consistent with our business plan. So as we look to Q4 of fiscal 2022, we should note the following; after incurring approximately $3.8 million in capital additions for the first 9 months, we expect to incur approximately $1 million to $2 million more in additional capital expenditures for the balance of the year. After recurring amortization costs of $44.1 million in the first 9 months of the year, we expect that amortization expense will be approximately $14.9 million for the fourth quarter, with this figure being subject to adjustment for foreign exchange and future acquisitions. Our income tax rate in Q3 came in at approximately 8% of pretax income, much lower than our blended statutory tax rate of 27%, and this was mainly as a result of recognizing certain benefits from previously unrecognized tax losses that were carried forward. As a result, our tax rate for the first 9 months of the year came in at approximately 13% of pretax income. If we look at Q4 of this year and into future years, we would currently expect that our tax rate will return back to our more expected range of 25% to 30% of pretax income. As always, we should state that our tax rate may fluctuate quarter-to-quarter from onetime tax items, that may arise, as we operate internationally across multiple countries. And finally, we currently expect that our stock compensation expense will be in the area of $3 million for the third quarter, similar to the level experienced in Q3 of this year. So I'll now turn it back over to Ed, who will wrap up with some closing comments and with our baseline calibration for Q4.

Okay. Great. Thanks, Allan. As I said many times, our business is designed to be predictable and consistent. We believe that promotes stability and reliability, things that we know are valuable to our customers, employees and our broader stakeholders. To deliver this consistency, we continue to operate from the following principles; we plan for our business to grow adjusted EBITDA 10% to 15% annually. We plan to grow through a combination of organic growth and acquisitions. We build and operate solutions on our global logistics network for all supply chain participants, connecting shippers, carriers, logistics service providers and customs authorities. When we overperform, we expect to reinvest better performance back into our business. We focus on recurring revenues and establishing relationships with customers for life. And finally, we thrive on operating a predictable business, that allows us forward visibility to our revenues and investment paybacks. We again performed ahead of our plans for Q3, consistent with our business principles, when we overperform, we look at opportunities to reinvest to make the future of our business more predictable and sustainable. Again, for us, overperformance is an opportunity to invest and make ourselves stronger, not an opportunity to celebrate. Last call, I talked about 3 key areas that we had earmarked for further investments, including plans to increase investments in our front-end distribution, customer implementation and success, and acquisition and product integration. We've made good progress in these areas, but there's still more to come, and we consider these investment goals as we set our calibration for Q4. In our quarterly report, we provided a comprehensive description of baseline revenues, baseline calibration and their limitations. As of November 1st, and using foreign exchange rates of $0.81 to the Canadian dollar, $1.16 to the euro and $1.37 to the pound, we estimate that our baseline revenues for the third quarter of 2022 are approximately $97.3 million, and our baseline operating expenses are approximately $60.7 million. We consider this to be our baseline calibration of approximately $36.6 million for the fourth quarter of 2022, or approximately 38% of our baseline revenues as at November 1, 2021. Last quarter, we indicated that the targeted adjusted EBITDA operating margin range for our business would remain at 38% to 43% for fiscal 2022. In Q3, we were just north of 44%. We're not looking at changing our targeted range, but we'll revisit that in future quarters or next fiscal year, if we continue to overperform. Even with my comments about investing for future organic growth, our focus continues to be to grow both organically and by acquisition. We've completed 3 acquisitions this fiscal year and expect to continue to be active in the acquisition market in the future. We still believe there are acquisitions that meet our financial and strategic criteria. In past calls, I've talked about market tailwinds that have been helping us. Our results this quarter again reflect those tailwinds. We don't have a good idea as to how long these tailwinds will continue. The wider economic recovery continues, but it's unclear what happens next with the pandemic, including potential concerns around the world of the new omicron variant. Given that, we think our continued cautious and prudent approach to investment in calibration is the best thing we can do for our shareholders. This is an exciting time for Descartes. Our business is performing very well. This gives us lots of opportunities; opportunities to invest in our business and make it stronger for our customers, employees and other stakeholders. Opportunities to take what we've worked hard to build and help customers with supply chain challenges, that are major impediments to their business. Opportunities to help our customers to deal with unprecedented demand for their services, and opportunities to combine with businesses that share our vision to create a business with customers for life. Thanks to everyone for joining us on the call today. As always, we're available to talk to you about our business in whatever manner is most convenient for you. And with that, operator, I'll turn it over to you for questions. Thank you.

[Operator Instructions] And our first question comes from Raimo Lenschow from Barclays.

This is Frank on for Raimo. Just one for me on the macro. So as we look back at the initial outbreak and the delta variant, could you point us some lessons learned that give you confidence going forward with the uncertainty potentially coming from new variant?

Thanks, Frank. Yes. I mean, listen, you can see from some of the results today and in the past quarters, we think our business has done very well in the pandemic. A lot of things in the pandemic, we think ended up being tailwinds for our business, as our customers needed help when we were there, to help them. That was one of the thoughts I had, when I saw the new omicron variant come out, is that we may be in a position to do -- continue to do very well in this scenario, because the pandemic seems to put a bunch of challenges on the supply chain, just like I outlined a minute ago, that Descartes may be uniquely positioned to handle. So we don't know what it's going to mean. We don't know any more than anybody else about how the variants can spread around the world and how transmissible it is and how much trouble it can call for people when they get it, but we do think our business is well positioned to help people deal with the challenges in the supply chain and logistics world, that it may create.

And your next question comes from Matt Pfau from William Blair.

I wanted to start out with, first, the outperformance in the quarter, which Ed you cited, was partly driven by your customers doing so well. How do we think about the impact on your business, when the supply/demand balances out a bit and your customers are back to sort of a more normalized environment from an operating perspective?

I think some of the things that are going to -- that are hitting us right now, are going to continue long after that time. I think people have generally realized, and I think you've heard me talk about this in previous calls that supply chain and logistics was a whole lot more important, than they used to think it was. And I don't think that's going to change just when this crisis goes away. I think people are -- that concept is here to stay. I think that to answer your question, this -- this is not going to necessarily be a crisis at some point in the future, but the demand still may remain fairly high. Remember, there's a lot of companies that are trying to add capacity and be able to meet some of the demand challenges. And because our business is based on transactions, in large part and people processing shipments on our network, I think we'll be in a position where, even if the scenario you mentioned occurs, we'll be doing pretty well. A third scenario, which is maybe more what you were getting at, in a downtime, if this turned around a couple of years from now, and it was actually in a kind of a recession mode. Again, I don't know what's going to happen, but if that were to happen, we faced pressures along with everybody else, right? As the number of shipments go down or maybe don't grow as fast as they were growing in the past, we'll face that challenge on. I do think our business is pretty well set up to handle any of these scenarios. We're very good at making money in upcycles as well as downcycles, as you saw in '08 and '09, so there's a lot of good that comes with that for us as well, right? When -- we tend to do bad in those situations, everybody else's as well, and that puts us in a position as an acquirer, where we can go out and get our hands on businesses for a whole heck of a lot less than we might have to pay today, when things are booming.

Got it. And just one more for me on -- specifically around the labor shortages and I guess more tied to the trucking side of the labor shortages, which is something, as you alluded to, is probably going to continue for quite some time and more than likely worsen. Now you do have solutions currently with routing MacroPoint, capacity matching that can help alleviate some problems for customers. But are you seeing any additional opportunities there, where either through acquisitions or organic investment, where you can further increase your product set in that specific area?

Well, I can't comment too much on the future of that, but let me say this. We really like those businesses. Those businesses are all performing very well right now for us. We see that a great opportunity for that to expand in the future, and certainly, we'd be out there looking for businesses that might do that with those beliefs in mind right now. So yes. I'll leave it there.

And our next question comes from Justin Long from Stephens.

Congrats on the quarter. So I wanted to ask about organic growth. I know it's a bit tough to calculate. But based on your math, where did that shake out for the quarter? And if this level of higher organic growth is sustained going forward, at what point do we need to start thinking about adding to the sales and marketing spend? Maybe you can just help us think through the framework there?

Maybe I'll -- let Allan take the first part of this.

Yes, sure. I'll give it a try, Ed, and you can answer after. Yes. So as you know, we don't operate the business in a way. We aggregate all our acquisitions or integrate them right away. But obviously, we estimate organic growth, probably in that mid-teens range this quarter. There's a little bit of FX benefit. but overall, that 15%, 16% range would be about the best guess we could give you on the organic growth. Ed, do you want to take it over from there?

Yes, sure. Your question with regard to -- is it going to cause an increase in sales and marketing expense? Sure. We continue to be able to put up numbers like this and growth rates like this, I think you'd see us continue to make more investment, as I mentioned in the call last quarter. But you know, with the increased revenue growth, I don't -- I would continue to expect us to be able to make more and more money, because we did that. So you've watched us operate for a while. We're pretty prudent operators. We're not going to get out ahead of our skis on issues like this. When we see a need for more salespeople in the market, we'll go out and invest in that. But in the grand scheme of things, I think, without us calling it out, I don't think anyone would notice that in our numbers. It's not a massive expense, compared to the revenue that we bring.

Okay. Got it. And I guess, just looking at your cash balance, it built nicely in the quarter. Cash flow is strong and on the point of investing that -- do you feel like there's more of an opportunity to invest organically in supporting some of this growth, or is there more of an opportunity in acquisitions? Just curious how you would kind of rank order those 2 areas of investment right now?

Well, I mean, with every acquisition that we're looking at, we always find ourselves thinking should we do this ourselves or should we go buy this company that does that. There's some advantages to both. When you're buying a company that does it, especially the way we buy, [ your tendency ] to buy it with a big customer base already that already makes money and maybe we see an opportunity to make it -- add it to our network and make even more money in the future. You also get a big head start, because someone else has built this business for 10 or 15 or 20 years, and we get to start from that point. Obviously, if you build a product -- on the other side of this, if you build a product organically and it ends up being hit, and you end up winning the market for it, you can do quite well. The ROIC on that over time could be phenomenal. But there's some risk in that as well, and that you're building a product that you might not end up being the leader in the market. You may not end up winning. It may not do what the customers want. So there's some risk in that, too. And you've probably seen us over time, take the approach that leans towards acquisitions for entirely new product segments, but with incremental increases to product functionality, we tend to do that internally. We'll buy a company, we'll continue to enhance that product and add new buttons to it, the customers may pay additional money for or clicks that hadn't been imagined in the past, that maybe come clicks in the future that people pay-per-click or $0.25 a transaction, whatever it is. And I suspect you'll see us behave that way in the future. We're still managing to get acquisitions done. We may have to sort through more of them now, because a lot of stuff in our estimation is overpriced, but we still seem to be able to find good acquisitions that we think we can make money on and will be good investments for our shareholders in the future. So as I'd say with us, on many issues, you're probably going to see us behave in the future a whole lot like we behaved in the past?

And our next question comes from Paul Treiber from RBC Capital.

Just in regards to volumes this quarter and you look through the holiday season, do you -- like there's media reports that the managing pulled forward, did you see that help volumes this past quarter, and then when you look forward to next quarter, do you anticipate that the seasonality would perhaps reverse greater than normal there?

It's a good question, Paul. I don't know. I'd be guessing a little bit at it as well. What I do see, is a whole bunch of ships parked off the coast of a lot of ports around the world, and those are shipments that still need to be processed and status messages that we're going to be getting for some good long time to come. So I don't expect to see a slowdown in it, but that's a bit of a guess as well. It looks to me like there's a whole a lot of shipments out there that still need to be processed, and people are going to be concerned about this into the new year. And while some of these ports may get a little less congested over time, it's going to take a while for them to clear out. And then you have the issue that I mentioned in the beginning of the call, with the people moving their mindset from just-in-time inventory to just-in-case inventory. Meaning, I'm going to bring some extra inventory in here, because I'm worried about supply chain challenge. I think that's likely to result in high shipment volumes for the foreseeable future. But again, I don't have a crystal ball. That's my two cents on it. I guess we'll see what happens. But I don't find myself concerned about it right now.

Okay. Great. The -- shifting gears to the pricing. Pricing for your transactions. I know in the past, you've been reluctant to increase price. And also, in the past, you talked about minimums, minimum commitments. With volumes so strong here, are you seeing overages and effectively premium pricing, or conversely, do you typically get volume discounts, you get volume discounts to your customers?

A lot of contracts, we feel a lot of customers have volume discounts in it, as they produce more volume, they pay lower rates, but it's only on the incremental shipments, so it all ends up being extra for us. They get a lower rate, which is great for them, but I also get more money in aggregate, because I don't reduce the prices for all the shipments back to zero, we reduce them for the additional shipments that you're providing above your minimum or above your -- what you normally do. So I think you're going to see us maintain our approach, the inflation got really out of control, maybe we have to rethink that at some point in the future. But the way it is right now, we want to be seen as fair operators for our customers, so we tend to leave our prices fixed as a result. And we raise them where there's good reason to do that, where we have labor costs directly related to it, that could tend to go up over time, where we have costs that increase over time, we tend to raise those rates. But some of the more fixed costs on our network, we tend to leave the same. So that our customers think we're good guys to deal with.

Just lastly, I mean, you touched on labor costs. I know you're adding headcount, but how should we think about salary or wage increases here? And in bigger picture, how have you found attracting and sourcing talent in this environment?

Yes. I mean, we're in the market as well. The big switch, I read about it a lot more in the paper than we have to deal with it here at Descartes, and not that we're completely immune to it, but I think our business is set up, so that if you think about the reasons behind some of the people were switching jobs all over the place, and I go -- a lot of that is because of the work from home environment. People start to say, 'Hey, I can work from anywhere, why do I have to go back into the office,' and they work for a company that's trying to drag them back into the office. Conversely here at Descartes, we've been -- we've got a pretty high rate of work from home long before the pandemic started, and I suspect that number is going to go a lot higher now, that -- as we come out of the pandemic one day. We're not asking our employees to go back to the office. They're welcome to if they like, but they're certainly not getting forced to do that by us. And I think in the long run, that's put us in a situation, where the employees that might be looking to change jobs because of that, don't have that problem here. We're kind of already set up like the workforce that everyone would like to work for right now. That says, hey, as long as you can work effectively, work from wherever you need to, to do that. And that's been our attitude for a long time, and I think it's paid dividends to us here in this challenging environment. So we'll see what happens. But I read about it in the newspaper and I've seen a little bit of it here at Descartes, but certainly not to the extent that I've seen it or heard about it at other companies.

Our next question comes from Paul Steep with Scotia Capital.

Great. Ed, can you just -- maybe one macro one to start with. Maybe talk about what you're seeing through the air channel these days? I know, seems like lots of folks on supply chain sort of backed off for foreign consumers, and not to expect things to be there. Are you seeing much through the air channel in terms of impact on that, or air volume still super strong?

Well, remember, a year ago, air volumes were significantly depressed. They are back to normal and now exceeding, not only the levels pre-pandemic, but they're exceeding what our expectations would have been, if the pandemic had never occurred today. And so that's been good for us. I think I mentioned earlier on in this call, that some people have shifted to air, in an effort to get stuff to market and said, Hey, I'm willing to pay more to get this product to market, because I needed to be there and air maybe the only way I can make that happen. That obviously helps certain types of shippers versus others, right, you've got to have something that's light enough to fly and makes economic sense to do that, use the stuff that have a little higher value. So yes, we're seeing some of that and certainly, our air business is doing quite well right now, and it's good to say that because it was nearly about 2 years since I've been able to say that. So I think it's in good shape, and I suspect it will be for some time.

Great. And then just on the custom side, maybe can you to clarify a little bit. You talked about new tariffs and classification codes coming in as an opportunity. Can you help us size that relative? Like, obviously, it's not the extent of Brexit, but I know most of us likely ended up on our tariff codes...

Listen, yes, I wouldn't be going and adding to the numbers that we give you for calibration for it. It's already in there. And I think it's more like something that's going well. It's another reason for people to buy tariff data or continue to look at tariff data, meaning they buy it from us. It's probably not the reason I buy the stock, but I think it's good news. It's continued demand for a business that is one of our top performers and one of our most profitable businesses. So incremental revenue dollars there tend to fall to the bottom line quickly, and I think that's why we pointed it out, and I think that's good news for us. At the same time, I don't want to overblow it. It's more like the success we've had in that market over the past couple of years, has a good reason to continue.

Got it. And the last one for me. Maybe just talk about where are we at? Obviously, holiday season is not the time when retailers look to rush to add new major operating systems. But where -- how are you feeling about the e-commerce business rolling into next year? Are people finally maybe at the new point of willing to take bigger steps on some of these investments as we head into '22?

Thanks, Paul. Yes -- no, I mean, that e-commerce business was a real high flyer for us last year. It's certainly still performing well this year, but the growth rates that we saw last year, I don't think anyone was under any illusion that they were going to continue forever. They were at a unique time in the pandemic, when no one could go to the store, that caused massive growth rate this year -- last year, and maybe make them look a little more depressed this year, than they were. At the same time, I think, increasingly, more and more companies are realizing that e-commerce is their business, and you see all these mainline retailers going like, hey, am I -- something I probably said for years, but I think it's really now taking hold, which is, retailers that are -- that own stores are going, hey, I need to be just as good at my web presence, as I do at my footprint in the store and they're combining those operations more and more efficiently. And when they do, there's a bigger demand for our products, which is great for us. We were fortunate enough to be able to get into these businesses 6, 7 years ago, and they've been really great performers for us and well timed, because the market, I think, is increasingly realizing what we realized, which is that this has to be ingrained in your business as part of the operation. You need to have a store and you need to have an ability to ship stuff to people and you need to have the ability to do both, and a hybrid of the 2. And you also need to be able to treat your inventory across all the places that you have, and fortunately, for us, we have solutions that do just that. And so we're in the right place at the right time. So we're happy about it.

Next question comes from Scott Group from Wolfe Research.

Ed, can you give us just an update on what you're seeing in the acquisition market? Are you any more or less engaged? Any change in valuations that you're seeing out there?

Well, there's a lot for sale. We think most of the stuff is overpriced. We talk about it, like we have to pick through more deals right now to get the same stuff done to try and find the winners in this, the banks of the world come to us and everything is the greatest business they've ever seen, and it's growing at very rapid rates. We don't always agree with their math, but that's the pitch that we're getting. And so we have to pick through a lot more stuff to get acquisitions done. But you can see we continue to do that and we expect [ the winter ] in this market, we will continue to be acquisitive, and that they'll make smart decisions about what to acquire, not only from a price perspective, but also from a technology perspective, right? We think that our big advantage in this situation, and it particularly becomes a big advantage, when the prices get too high is -- we've been doing this, people that work here have been doing this for 20, 30 years and really know this market like the back of their hand. And that enables us to make better decisions about what's the right thing to buy, than the guys that have been in it for 6 months or 2 years or whatever, working in private equity firms or other companies that are maybe newer to the game. And we do our best to take that advantage, and make sure that we use it to pick the right company.

Okay. And then I know we still have another quarter left in this year, but wondering maybe if you have some preliminary thoughts about fiscal '23? It sounds like you think the environment remains favorable, comps get tougher? Do you think it's another year of sort of double-digit top line, 15% EBITDA growth? Is that a realistic outcome, as you think about next year?

I don't know. I don't see an end in sight to what's going on right now. I don't know what's going to happen a year from now. There's a lot of issues baked into that, what's going to happen with the economy, what's going to happen with the pandemic and probably 10 others that I don't know any more than anybody else about. I could tell you that, we had big growth this year, so it's going to be tougher next year to continue those growth rates. But we'll see, and I think our business is going to continue to be in a good position. What the growth rates will be, we'll have to see as we get there, and we'll certainly let you know, as soon as we do.

And our next question comes from Daniel Chan from TD Securities.

I just want to follow-on, on that acquisitions question. You guys have been able to keep up your level of acquisitions a lot better than some of your other acquisitive companies out there, and you did cite higher valuations. Do you think you're able to do more acquisitions because of the high demand environment driving higher returns, so you can justify that higher multiple, or is there something different in your playbook that's allowing you to keep those valuations in check?

Yes. No. I mean, we don't think of it that way. We don't think of it as, well, my multiple is higher, so I can spend more. Certainly, we're more looking at it like, I want to provide a good ROIC for our shareholders, and we're not going to do the deal if we don't think we can get there. But if we come through a bunch of acquisitions, and they're all saying they're going to the moon, trust me, and that's how they all do it. As soon as they get a banker, that's the pitch. And it's our job to come through them and see where we really believe that. And we try to bring our background and our experience in this market to bear, to try and make good decisions there. I'll go back to like the MacroPoint deal, right, where I look and go -- by all standards, anyone who looked at that, would have gone, wow, Descartes really paid a whole lot more than they've ever paid for anything else, and we kind of looked at it at a time and went, well, we think there's something special about this business. We think it's going to be able to grow significantly and we think that while this price looks expensive today, if you come back a couple of years from now, like we are now. This price that we paid is going to look cheap. And what has I think enabled us to get -- continue to get deals done, is an ability to find those needles in the haystack, by picking through a lot of hay. And we continue to do that, and we're being asked to pay more for something. I'm not justifying that or we're not justifying that based on our multiple. We're justifying that based on the return on invested capital, we think we can get from that business. And if we can -- if we become convinced we could hit these metrics, then maybe that is a business that's worth more, and maybe that is a business that we should pay more for. The other thing I'd add to this is, we spend a lot of time working with companies and not every business is for sale to the highest bidder. Certainly, money is a factor in every deal, but there's other issues as well. A lot of these small founder owned businesses, takes us a long time to convince them to sell their business to us, and we spend a lot of time working with them, convincing them that we are the best home for their baby. And literally, sometimes their kids and their best friends all work there, and maybe they want to retire, but they also don't want to put their family members or their best friends from over the years that they've started this business with, in a bad situation. And we spend a lot of time convincing people and showing people how we're a good steward for this business after you retire. And a lot of times, that gets us in the drivers' seat, in the middle of these acquisitions. So those 2 things combined, I think, allows us to continue to do acquisitions, continue to find good ones, and I don't think -- see that changing right now.

Yes, make sense. Just shifting gears a little bit. You guys got some pretty good real-time insight via your network. Just wondering if you're getting any early insights from the omicron variant? You mean the last 6 days? Yes.

No. No. Even if I were, we couldn't comment on it, because it's not in the quarter that we're reporting on. But no, we don't know too much from it so far and I don't think you're going to -- the virus, if you read the stats on it, it's not really spread that far yet. I think we just had our first case in California today. So I don't expect that you're going to see anything show up in the supply chain anytime soon. That's going to have to -- a whole lot to do with the omicron variant.

Our next question comes from Robert Young from Canaccord.

Allan, I think you highlighted Brexit as the key driver in the quarter, have I heard that right? And so just wondering about an update there. I mean you've talked about last minute, maybe some competitors that aren't up to snuff compared to you or competitors catching up? Can you maybe just refresh us on, how the Brexit impact is through the end of the year and maybe into next year?

Yes. Maybe I'll just start with clarifying the comments. So I think what we want you to understand is that, the growth that we're seeing was more heavily focused from new and existing customers than it was from acquisitions this quarter, and that varies for us, we'll grow by both means. But -- so new and existing customers drove growth this quarter, much like it has for Q1 and Q2. Brexit is certainly part of that, that is a new product offering for us, and it has certainly been helpful in creating part of that growth with new and existing customers. I think that's the extent of it. As far as other comments that Ed made on Brexit. Ed, anything you want to clarify there on the specifics of the Brexit products themselves?

No. I mean nothing's really changed for us. I don't think the dynamic we described last time, and that you brought up there, Robert, is going to change. The path for Brexit is largely set in stone, and we think we did a very good job of getting the customers there. It's a recurring revenue business. So this will be the gift that keeps on giving, right, as we got these customers, we're probably going to be able to keep them and continue to do business with them for a long time. A lot of the sales opportunities now are gone, because most of the people have made decisions already. And so we just look forward to -- like the rest of our customs and compliance businesses operating and maintaining it, to continue to allow our customers to deal with the volumes that they have and have the best system out there to process transactions, which is always our mission.

Okay. And then second question would be, maybe what you said about just-in-time turning into just-in-case. And so I guess, that obviously raises the amount of goods are being moved around. But is there a lagging factor there? Does that extend all of this impact on supply chain volumes for your business?

Well, it would, if it's -- if that theory is correct, we'll have to see. It's the theory right now. I've been in this business for a long time. That's part of why we're proposing it, because we think that's a strong possibility that people have changed that. We've heard our customers talk about changing that. When they do, that means they're going to be shipping more stuff. They used to think I'll just ship stuff just in time, because there's no penalty to be paid in the logistics world. But now all of a sudden, there is. The port disruption, there's traffic, [ Pete ], I better get all the hammers into my warehouses so that I can sell them in the store in 3 months. I used to not worry about that till a month out. And all of a sudden, now I'm going, you know what, I want to have extra inventory there, so I don't run out of stuff. Back in the early days of selling visibility, we would talk about just-in-time like this, right, by saying, hey, no one ever gets fired for having too much stuff in the warehouse. Well, 15, 20 years later, people did get fired for having too much stuff in the warehouse, because the inventory carry costs were too high. And I think right now, with what's going on in the supply chain and some of the disruptions that we've had, people are going back and reexamining that and going, boy, I'm paying an awfully high price for being just in time. And maybe I should create a little more safety stock, so that I don't run out of stuff, because that's the most costly thing that can happen. And that switch back to that mentality, probably means more shipments in the coming months.

And our next question comes from Howard Leung.

I just wanted to follow up on one of the earlier discussions about the transaction-based revenues. When you think about the organic growth, maybe even quarter-over-quarter, since the supply chain issues really came into effect and you think about transactions versus the subscription-based contracts, where do you see more momentum? And when it came down to renegotiations with those transactions or the renewals, did you see any -- what were the discussions there? Were the customers willing to increase the transactions, because they exceed a more demand lasting the next year, or maybe looking at scaling back, if there were supply chain issues?

Yes. Thanks, Howard. So a couple of questions in there. So on the transaction side, I mean it's not -- most of our contracts don't get renegotiated all that often. So it happens. But especially in times when things are booming, people tend to push that aside and just renew for the next year and move on. Certainly, if they have significantly increased volume, they may be coming back saying, hey, I would like to change my contract minimums and get a lower price. We always offer that to our customers. If you're going to do more with us, that's how you get lower prices out of us per transaction. So we see some of that and then it gets -- that's the question that would always be asked. At the same time the subscription business, where we provide people tools that help them make better supply chain decisions, so they can operate more efficiently, there has been high demand for that stuff right now. And those have always been a value-based selling proposition, where we're showing our customers, 'hey, this is how much money you'll save if you use the solutions, and you should buy that from us, because I only charge you a fraction of that savings, and you get to keep the rest.' And demand for those solutions has been high for the last year, since the early stages of the pandemic kind of went away, and people starting to realize supply chain was a bigger deal than they thought it was, and people tend to buy more supply chain solutions right now from us as a result, and their subscription solutions that -- I think that is going to go on for quite some time. I think the transactional stuff is obviously somewhat cyclical, right, it's going to follow the economy and the subscription stuff is probably much more likely to I think, last a lot longer, as the world has maybe seen a shift in thought from supply chains -- an afterthought to us, to supply chain is a strategic capability for us, and we need to have the right tools and technology in place to handle it as efficiently as we possibly can. And that mindset shift I think is going to play well for us in the long-run. I think it's going to be a long-term tailwind for us.

Okay, great. No, that makes sense. And just kind of related to that, when you think about where you're going to target your investments in sales and marketing, is there a particular segment, like the freight forwarders, or the air cargos, or are you kind of targeting across the board, because you're seeing demand, across all customers?

I mean, we break our salesforce into logistics and transportation and manufacturing retailers, the big shippers of the world, and I think we're invested in both. As I mentioned last quarter, we're putting people in place, that really understand the customer bases, so that when we weren't selling to them, we can best diagnose and prescribe to them, to help them solve their problems as best we possibly can. And we think that's a good thing for us to do in the long run, especially as we get bigger and we get more and more salespeople in, to really understand what the customer -- who the customer is, and what they want, and the problems that they're trying to solve, is the best way for us to help them and to sell efficiently.

Right. Right. And then just one last one from me. When you -- I think there is a little disclosure in the MD&A that talks about, here is our anticipation of recurring revenues lost or I guess churned earlier -- I guess, last year, given we're still in the pandemic, it was saying that this fiscal year, this '22, might have higher-than-average churn. I guess, given how strong the results are, is it fair to say that churn might be even lower than what the normal levels are, and how do you think about churn, I guess, going into fiscal '23?

Usually, when things are going well, it's not really a concern, right? Everyone gets focused on the things that I've been talking about on this call. They are focused on, 'how do I get more stuff to help me operate efficiently in these challenging times,' and they don't spend as much time talking with us about, hey, can you reduce my bill by $5,000? Right? There's a run on everything right now, including our time. So when our customers are coming in the door, they are usually going, 'please help me.' Not -- right now, they're going, 'please help me.' Because I have problems that I think you guys can help solve and I want your help to do that. It's probably not that productive to start that conversation off with, oh, and can you reduce my bill at the same time? So I don't think there's a ton of customers handling it that way. I think most customers are just going, can you help me, please?

And that concludes our question-and-answer session. I will turn the call back over to Ed Ryan for closing remarks.

Great. Thanks, everyone. We appreciate all your time today. If you want to schedule meetings with us directly, please reach out to us, either through a bank or directly, and we will be happy to spend time with any of our existing shareholders or analysts that cover us, to help them better understand the story. And we'll otherwise look forward to reporting back to you next quarter. Have a great day.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating, you may now disconnect.