Good afternoon, and welcome to the Descartes quarterly results call. My name is Brandon, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the call over to Scott Pagan, and you may begin, sir.

Thanks, and good afternoon, everyone. Joining me on the call today are Ed Ryan, CEO; and Allan Brett, CFO. And I trust that everyone has received a copy of our financial results press release that was issued earlier today. Portions of today's call, other than historical performance, include statements of forward-looking information within the meaning of applicable securities laws. These statements are made under the safe harbor provisions of those laws. These forward-looking statements include statements related to our assessment of the current and future impact of the COVID-19 pandemic and Russia, Ukraine context on our business and financial condition; Descartes' operating performance, financial working conditions; Descartes' gross margins and any growth in those gross margins; cash flow and use of cash, our application to commence a normal course issuer bid and potential purchases pursuant to such bid; our 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 achievement 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 the section entitled certain factors that may affect future results in documents filed and furnished with the Securities and Exchange Commission, 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 early into the future. We caution 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 of 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, I'm going to turn the call over to Ed.

Great. Thanks, Scott, and welcome, everyone to the call. We kicked off the new fiscal year right with record financial results. These were our best results ever across a host of different metrics. I'll hit some highlights for you. But first, let me give you a road map for this call. I'll start with highlighting some aspects of our financial results, speak to current business conditions and identify where we're making investments to grow our business. I'll then hand it over to Allan, who will go over the Q1 financial results and some corporate finance matters in more detail. I'll then come back and provide an update on some corporate matters and 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 started by looking at Q1. We had record high revenues of $116.4 million, up 18% from a year ago. Net income was $23.1 million, up 26% from a year ago. Adjusted EBITDA was a record high of $51.2 million, up 23% from a year ago, and this was with a $500,000 drag compared to FX rates from a year ago or $300,000 from FX rates last quarter. We generated (sic)[ $44.4 million ] in cash from operations or 87% of our adjusted EBITDA. Our adjusted EBITDA as a percentage of revenue was 44%. All of these metrics were ahead of our plans, so a very strong financial quarter for us. At the end of the quarter, we had $211 million in cash, and we're debt free with an undrawn $350 million line of credit. We remain well capitalized, cash-generating, debt-free and ready to continue to invest in our business. So I'd like to address 3 areas. One, why we did well this past…

Thanks, Ed. As indicated, I'm going to walk you through our financial highlights for our first quarter, which ended on April 30. As Ed mentioned, we are pleased to report record quarterly revenues of $116.4 million this quarter, an increase of 18% from revenues of $98.8 million in Q1 last year. While revenue from our recent acquisitions, including NetCHB and Foxtrot, contribute nicely to this growth, growth in revenues from new and existing customers was once again the main driver of growth this quarter when compared to the same quarter last year. In addition, we should mention that there is a decrease in revenue from FX this quarter as the U.S. dollar was stronger compared to the euro, Canadian dollar and British pound when compared to the same period last year. This resulted in almost a $2 million negative impact on revenue from Q1 when compared to Q1 of last year. Excluding FX, revenue growth would have been closer to 20% in Q1 over Q1 last year. Consistent with past quarters, our revenue mix in the quarter continued to be very strong, with services revenue increasing 16% to $102.8 million or 88% of total revenue, compared to $88.3 million in the same quarter last year. Service revenue was also up nicely sequentially, increasing over 3% from Q4 last year. License revenues came in at $2.3 million or 2% of revenue in the quarter, up from license revenues of $1.3 million in the first quarter last year, while professional services and other revenue came in at $11.3 million or 10% of revenue, up 23% from $9.2 million in the same period last year as a result of increased professional service engagements. Gross margin for the first quarter was 76% of revenue, consistent with the first quarter of last year. Operating expenses…

Great. Thanks, Allan. Before I hit calibration, I just want to hit on some other areas of corporate development for Descartes. We were very pleased to release our first ever ESG report in early May. It's posted on our website, and I'd encourage you all to read it and provide us with feedback as we look at our continued progress on ESG matters. The report identifies many areas where we've progressed so far, such as our positive environmental impact, including helping customers reduce carbon emissions, paper use and fuel consumption, our role in helping customers meeting their own social and governance initiatives, including compliance with economic and trade sanctions, our commitment and investments in data privacy and security, our efforts in developing a diverse capable employee team working in a healthy and rewarding work environment and our commitment to admirable business conduct and ethics. In addition, we'll be hosting our virtual Annual General Meeting of shareholders on June 16 at 10 a.m. The materials for the meeting are available on our website and have otherwise been provided to shareholders. Among the matters being considered, we've nominated 2 additional directors for election at the AGM, bringing the Board to 10 directors. If all nominated directors are elected, our Board will have diverse representation with 60% of the directors identifying as female or a visible minority and 40% of the Board being [ female ] directors. So now on to calibration. Our business is designed to be predictable and consistent. We believe that stability and reliability are valuable to our customers, employees and our broader stakeholders. To deliver this consistency, we continue to operate from the following principles: our long-term plan is for our business to grow adjusted EBITDA 10% to 15% annually. We are going through a combination of organic growth…

[Operator Instructions] From William Blair, we have Matt Pfau.

Great quarter. Ed, I wanted to first ask on the acquisition strategy. So when you look at potential targets in your pipeline, have valuation expectations changed at all? And are you seeing more of a willingness to sell within those targets?

I think with our smaller tuck-ins, it's business as usual. I don't think they're as impacted by the public markets as maybe the larger acquisition candidates that are maybe deals run by bankers with private equity firms involved. So business as usual for us for the normal course acquisitions that we're all doing. Some of the larger ones, what we've seen so far is what I would expect to see when the public markets turned down, which is with those deals get stalled. They come up with every excuse in the world as to why they're stalling the deal or delaying or not getting the book out or whatever they want to say. But I think at the end of the day, it boils down to, they see what's going on in the public markets, and they're afraid if they go out them right now that there -- that they're going to get a much lower valuation than they initially told their clients. So I think that's why they're in a bit of a whole pattern. This is what we saw and it passed tech downturns as well. Let's see what happens in the coming months, if it continues for any amount of time. I'd expect that some of those deals will come out and they'll come out at a much lower valuation. But there's a little bit of game going on right now for people to try to figure out what's going to happen and the strategy as to whether they go out now or wait, depends on how desperate they are to sell.

Got it. And then just maybe it'd be helpful if you could sort of frame how you would think about the impact of a potential recession on Descartes business. If we go back to the Great Recession, your business has evolved quite a bit since then. And then during COVID, there was obviously a drop-off in volumes, which had some impact. But if we were to enter a softer macro here. How do you think about the impact on your business and your ability to manage through that?

So I think we're pretty well positioned for it. And first of all, we're coming into it with a lot of tailwinds right now. The supply chains are still clogged up. China's just -- in the past couple of days that they're opening back up, that's going to put more shipments back into the pipeline. And I think we're seeing that on our networks, which is good news. If the world turns into a longer global economy -- global downturn, we'll probably start to see at some point in the future in shipment volumes as well. We don't see it today, but maybe if it continued for a long time or happen and then continued for a long time, we'd certainly start to see with everything else. At the same time, last recession, a big recession in '08, we probably fared a lot better than most, and I expect that might happen even more so this time because we're a much more diverse company now, a lot more products and a lot of different reasons that people buy those products that aren't all driven by individual shipments. So we'll see what happens. I don't know any better than anyone else what's going to happen to the world economy, but I like our chances compared to our competitors and a lot of other companies out there. And maybe most important, if the world takes a downturn and every company's valuation gets it, we're not acquirers. So when I look back at '08 and '09, and I think how did that work for us? I go, well, it was painful when we're in it. But at the end of the day, we picked up some of the best acquisitions we've ever gotten at some of the best valuations we've ever gotten during that couple of years, while that recession was taking hold and people were coming out of it. So in a certain sense, we'd look forward to that environment.

From Stephens, we have Justin Long.

I wanted to start with a question on organic growth. Allan, any best estimate you can share on organic growth in the quarter when you adjust for acquisitions and maybe FX as well? And Ed, I think on the last call, you talked about the budget baking in 4% to 6% organic growth for the full year. Is that still your expectation after what you've seen fiscal year-to-date?

I'll take the first part and let Ed talk to the way we build our business plan. Organic growth, as you know, we consolidate the operations of the acquisitions we make. So we don't have a specific number, a detailed number. But roughly speaking, if you look to note 3 in the financials with the pro forma disclosure with the acquisitions. If you take that note, if you consider the fact there's a currency headwind of just under $2 million, our organic growth, would I'd estimate somewhere between 12% and 13% in Q1 over Q1 last year, so double-digit organic growth is what we're seeing. To your point on the 4% to 6%, the way we build our business plan, Ed, do you want to comment there?

Yes, sure. Thanks, Justin. We always say around here, we plan for the worst and hope for the best. And when we say 4% to 6%, that's how we plan to operate our business and when it's higher than that like it is right now, we're happy about that. And the other thing that we say here is that we're going to take the excess above the 10% to 15% growth in EBITDA every year and plough it back into our business to try and help grow future results. So I recognize right now, we're well above that and that may continue. But if it does, you're going to see us continue to do the same thing, which is to plough it back into our business and try and make it a better place for the long run for our customers and our shareholders.

Okay. Great. And I guess building on that, you have over $200 million of cash, net cash today. Can you talk about your target for the balance sheet over the next few quarters, let's call it, over the remainder of the fiscal year-end, especially in the context of the potential for share buybacks? How are you thinking about targeted leverage by year-end?

Well, we have to see what happens, right? When we're acquisitive, we bought companies. You never know what we're going to be able to get and we'll operate as such, right? I mean we plan on making a lot of money every quarter and continue to grow the amount of money that we make every quarter and put it in the bank and use it to make investments. Now in most cases, I think that investment is going to be to buy companies as we always have done. We just have to see what happens, what companies come along. You never know how big they're going to be and how much they're going to charge on whether we're going to think that's a good deal. What we're evaluating everyone at the best of our ability and trying to make the best decision we can. And I think that the same thing applies for the Normal Course Issuer Bid, right? We see what's going on in the tech market. We wanted to open up that option for ourselves in case the market took a downturn and we overthink that that's the best place to put our money. Not to say that we're doing it or not doing it just to say that we have an option to move quickly if we want to.

From Wolfe Research, we have Scott Group.

Ed, you were talking about maybe a little bit more of a conservative approach with the calibration. It's not like a pretty sort of normal sequential improvement in the calibration and, obviously, the organic growth is so strong. So I just want to make sure I'm understanding the sort of what you're seeing. Are things actually starting to slow as you see it in your business? Or is it something that you just think may happen? And if it's going to happen, which of the products you think are most likely to see it?

No, I see nothing in our business right now. It's slowing down. I read the newspapers and see what people are saying about what might happen in the economy, but we don't have any indication of that in our business at the moment. So I don't know what you're just going to bring, but I think we're pretty well positioned if things do take a downturn and probably in a good position, given our cash and our ability to generate income going forward to take advantage of it if things do turn down, right, to pick up assets at lower prices than we've been asked to pay over the last 5 or 6 years, and we think a lot of these private companies are selling for more than their worth, and that's been frustrating to us. If the economy takes a downturn, we're looking forward to that opportunity. And at the same time, I don't see that right now in our business at all.

You guys were helpful with the currency headwind to revenue. Is there a way to think about the currency impact to the bottom line to adjusted EBITDA?

Yes. Sure, Scott. It's Allan here. Ed mentioned in his notes that we are fairly naturally hedged in that area. We operate in multiple currencies. When the U.S. dollar is strong to the Canadian dollar, it actually benefits us. It hurts us against the euro and the pound. Those things -- when I say that at the EBITDA level, so those things tend to offset each other a little bit. That said, we do watch currency. We had just under $2 million impact on the top line, a minor impact on EBITDA. It was a small negative. So we just continue to watch it and make sure that we don't go off that natural hedge too far. So think of it as fairly muted at the EBITDA level, not immune to it, but fairly muted.

Okay. And then Ed, I know there's already been a couple of questions about M&A. But like as you -- as it stands today with where the stock is, what do you think is more likely, executing on the buyback or doing M&A?

I think we're always going to be acquisitive or at least for the foreseeable future, we're -- we believe the winner in our space is going to consolidate the space and put the assets together in the best way, and we plan on being that guy. And I don't have any [indiscernible] at all that it will be a trade-off of one versus the other. We're going to keep acquiring companies, and yes, we'll keep the NCIB out there if we can -- if we see an opportunity to do some of that as well and like that investment will be there, too.

From Barclays, we have Raimo Lenschow.

This is Jeremy on for Raimo. So I wanted to ask about NetCHB. And as you mentioned, it's the first quarter of contribution. Could you just speak a bit to like how the integration is going overall? And maybe some color on how the customs business is trending?

Thanks, Jeremy. Yes. No, it's great. And it's easier than most for us because they're in the exact same business we're in with the Type 86 filings, and we're 1 and 2 in the market, and we just came together. And that's been great for us. We were able to go out and pick up even more customers just in a very short period of time here. And we have maybe medium-term plans to be able to consolidate some of the data processing pools around Type 86 filing and save ourselves some money in the long run. So we're real pleased with the acquisition. We thought we were going to be real pleased with it. Like a lot of acquisitions, we're pretty sure it's going to work and we were with this one for sure that it's going to work well before we pull the trigger on it. And so far, it's proven out to be that and maybe even a little more, so we're happy about it.

From Laurentian Bank, we have Nick Agostino.

I guess just one quick comment just to say, Ed, thanks for the prepared remarks to sort of provide a lot of color on the business, so I appreciate that. So my 1 question is just there's lots of talk about onshoring production as a result of the pandemic. And I'm just wondering if that situation were to happen, should we see, I guess, a change in the mix as to how product is transported maybe, say, more rail and trucking versus shipping or ocean and air? If that would happen, how does that impact your business vis-a-vis, just maybe the different pricing for each mode of transportation? Would it be positive, negative, neutral? Any color there would be appreciated.

Thanks, Nick. First, I don't know that I completely buy that. I understand it might happen in a few industries and I understand it's an interesting thing to talk about on the news. But compared to the world's shipping volume, I think the products that are going to be near shore, so to speak, are a relatively small portion of that. At the same time, just understand that most products get shipped around the world. Their parts get shipped around the world multiple times to ultimately get manufactured somewhere. And so there's a lot of shipping that goes into making just about everything that we are all looking at right now. I'm looking at the bunch of desk chairs and computers and stuff like that. You probably all looking at similar stuff. There's a lot of manufacturing and a lot of shipping that goes into that. And once it's made, it has to get shipped all over the world. So when I hear that concept of we're going to make stuff locally to build, I go okay, first of all, I don't buy that that's going to be the bulk of the world's production. I think it's going to be a relatively small fraction of it. Second, I think there's still going to be a ton of shipping all over the world to do that. And if you move the location of where it's made, you're going to still have to ship it all over the world just from a different location. Certainly, when stuff made closer to an ultimate customer is -- the shipping changes for it. There's more truck and there's less ocean and air. But most products aren't made that way. They're made somewhere and then they're shipped all over the world. What I do see happening…

Okay. I appreciate that color. I will say, tied to your comment there, I think we saw today Apple announcing production, I think, out of Vietnam trying to move away a little bit from China. So I think they're already echoing your view. So I appreciate that, and I'll pass the line.

Yes, my pleasure, in fact, I need to just comment on that because that's the start of this, right? And it used to be -- in fact, if you listen to past calls and I talk about yoyos just to pick the silly product example. That's what started in China 20, 25 years ago, right? You started -- the manufacturing that went there first was the simple stuff. And then people started to get more sophisticated in production in China, and they started to move more and more sophisticated stuff over there to the point where they were manufacturing iPhones there and computer chips and things of that nature. And now you're -- that Apple move we're starting to see, they're doing that in Vietnam. And they're probably going to start to do in other jurisdictions as well as China becomes more expensive and they try to diversify their production capabilities.

From Canaccord Genuity, we have Robert Young.

I was hoping to ask a little bit about the China shutdowns [ that happened ] there, a couple of big ones in Shenzhen and Shanghai kind of across the 2 quarters. And then I'm sure you're considering part of it in the calibration, but I was wondering if you could just maybe summarize the positive and negative puts and takes around that type of an event. I'm sure there's a lot of companies, your customers are looking at alternate strategies, but then there's volume impact and I'm just trying to get a sense of, as that progresses, how does it impact you?

I think it impacted our customers because they -- some of the products that they wanted to produce, they got shut down in China. Now if you noticed in the paper in the last day or 2, they're opening back up right now. So I think they're still going to a zero-COVID approach, but they're opening things back up, and I think you're going to start to see in the coming days and weeks as plants start to open back up. We did not see that in our network. You can see the results that we just turned in. They're excellent, as good as we could have hoped for. And I think we didn't see the impact of China having some problems and some shutdowns, one, because it didn't go on for that long; and two, maybe more importantly, there was such a backlog coming into it that the carriers -- and remember, we get paid by the shipment for stuff carriers carry, and they were already full. So what it did was probably help buy down some of that backlog that we had out there for months. But I think you're going to see it go right back up right now. And that's what I think there's going to be -- the backlogs will increase if what I'm reading in the newspapers is true. With China opening up and that there's still a backlog right now, and if those plants opening back up, it's going to be a lot more orders going in to fulfill shipments that didn't get ordered 3, 4, 5 weeks ago because the plants were shut down. It's going be interesting dynamic. I don't know exactly what's going to happen, but you just heard my guess, and we'll just have to see.

Okay. That's really helpful. And then just maybe a quick summary of what you're seeing out there in the pricing environment with your logistics customers as you said in the past that, I mean, they're doing really well. The pricing environment is very strong for them. Are you still -- are they still enjoying that environment? Is it changing?

I think so. I mean the days you were hearing now were like November, December last year, you were hearing 4x the ocean freight. I think it's come down from there, but it's still elevated for sure in all modes, certainly air's and truck. We don't charge based on their prices, so it doesn't matter to us so much. It's helpful for us when they run a healthy and profitable businesses, and I think they continue to do that right now. They're all having a pretty good time of it at the moment because there's only so much capacity and that lets them raise their prices up. And when they're in a good position, that usually is helpful to us.

Right. More technology budget?

I think so. I think when people get more money in their pockets, they go, what should I do with that? And one of the things -- you even hear us talking about in our business. One of the things you do with that and say, let me invest it to make this a better business in the long run. And one of the main places people make investments is in technology. And there's not a head of supply chain in the world right now that's not able to walk into a CEO and say, I want to spend more money to improve our supply chain. That question used to -- was answered with like get out of my office. And here we are 5 years later, and it's, sure, whatever you want to spend. It's a huge problem, and we need to do something about it. And so that really helps guys like us that sell technology to them, which is seen as one of the most cost-effective ways to make an investment in your supply chain.

And we have no further questions at this time.

Great. Thanks, operator. Thanks, everyone. We look forward to reporting back to you on Q2 in September. And otherwise, have a great night.

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