The Descartes Systems Group, Inc. Q2 FY2025 earnings call

• Recorded second quarter results with strong revenue and adjusted EBITDA growth. Total revenues up 14% y-o-y, adjusted EBITDA up 17% y-o-y. - Completed acquisitions: BoxTop Technologies in June, OCR in March (complementing global trade intelligence with AI capabilities and export compliance), and Thyme ASD in Q1 (expanding European customs and security filing and asset tracking). - Discussed challenging business environments including logistics supply chain issues, compliance complexities (sanction list changes), and tariff volatility. - Emphasized growth strategy of organic and acquisition-driven growth, well-capitalized position with over $250 million cash and debt-free with undrawn $350 million line of credit.

Total revenues in Q2 were $163.4 million, up 14% from $143.4 million in Q2 last year. Services revenue was $146.2 million, accounting for 89% of total revenue, up 12% year-over-year. License revenue was $1.4 million, 1% of revenue. Professional services and other revenue was $15.8 million, 10% of revenue, up from 8% in Q2 last year. The GroundCloud business had an unusual increase in hardware revenue due to an accelerated hardware replacement cycle for AI-enabled cameras, resulting in approximately $2.5 million of additional low-margin hardware sales in Q2.

• Baseline revenues for Q3 2025 estimated at approximately $141 million, baseline operating expenses at ~$87.5 million, baseline adjusted EBITDA calibration at ~$53.5 million. - Expect adjusted EBITDA operating margin in 40%-45% range. - GroundCloud hardware replacement cycle expected to continue in Q3, potentially impacting margins slightly. - Anticipate ~$2.5 million of additional lower margin hardware sales in Q3. - No more earn-out payments in second half of 2024, anticipate ~$1.5 million cash earn-out payment in FY '26. - Expect to spend $3.6 million to acquire remaining 5% of ASD business in Q4. - Amortization expense expected to be ~$33.1 million for second half of 2024. - Income tax rate expected in 25%-30% range for second half. - Stock compensation expected to be ~$10.9 million for balance of 2024.

• Geopolitical, trade, and economic uncertainties impacting business. - Logistics supply chain challenges such as lower truck volumes, port labor issues, and tariff volatility. - Complex compliance environments including changing sanction list requirements. - Risk of customer concentration and impact of exchange rate fluctuations. - Challenges in integrating acquisitions and managing associated risks.

Q: Can you remind us about transactional exposure and banded range of outcomes as volumes pick up or decline?

A: Transactional revenues are roughly 31% of overall revenue, fairly consistent performers with variations based on volume changes but more consistent compared to most transactional businesses.

Q: Any color on M&A outlook for second half?

A: See good environment for acquisitions with expectations for companies to come down to reasonable levels, expecting more acquisitions to continue.

Q: On organic growth, is the 9% referring to services only?

A: The 9% is the estimated organic growth in the total business.

Q: Does baseline for Q3 include the $2.5 million low-margin hardware?

A: Includes some element of that hardware as we have orders for some to be delivered in Q3 and estimate $2.5 million total, included for what we know at the time.

Q: Walk through ASD acquisition remaining 5% structure?

A: Bought 95% in Q1, committed to purchase remaining 5% before end of FY '25 with no additional premium, number given lines up with 5% element remaining.

Q: Give more detail on GroundCloud hardware and confidence in refresh being mostly complete in Q3?

A: Offered AI camera deal with two-year contracts, more customers than expected signed up, estimating refresh to be largely over in Q3 but not positive, pleasantly surprised by market reaction.

Q: What's seen on larger deal side in M&A?

A: Larger businesses also face challenges, private equity combinations of businesses can lead to overpayment concerns and less interest in some bigger businesses we look at.

Q: On truck side and cash flow?

A: Truck tends to follow other modes, optimistic about volume recovery; cash flow impacted by $25 million earn-out payment above initial estimates, excluding that cash flow was ~85% of adjusted EBITDA, right in expected range.