Descartes Systems Group (TSX:DSG) Q4 2021 Earnings Call

0:00 Welcome to the DCAR quarterly results call. My name is Adrienne, and I'll be your operator for today's call. At this time, all participants are in listen-only mode. Later, we'll conduct a question-and-answer session. During the question-and-answer session, if you would like to ask a question, please press star and 1 on your touch-down phone. Please note this conference call is being recorded. I'll now turn the call over to Scott Pagan. Scott Pagan, you may begin.

0:27 Thanks, 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 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.

1:32 These forward-looking statements involve known and unknown risks, uncertainties, assumptions, and other factors when they call the actual results, performance, or achievements of day carpet different 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 Securities and Exchange Commission, the Ontario Securities Commission 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. We caution that such information may not be appropriate for other purposes.

2:17 We don't undertake or accept any obligation or undertakings released publicly in the updates or revisions to any four limiting statements to reflect any change in our expectations or any change in events, conditions, assumptions, or circumstances on which any such statement is based, except as required by law. With that, let me turn the call over to Ed.

2:38 Hey, thanks, Scott, and welcome everyone to the call. We had an excellent second quarter financial results, and we have had a strong first half of the fiscal year. We'll walk you through those shortly. However, first, let me give you a roadmap for this call. I'll start with a summary of the financial results and some factors contributing to our performance. I'll then hand it over to Allan, who will go over Q2 financial results in detail. I'll 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 right to it. In Q2, we had record revenues of $104.6 million. Ahead of our plans for the quarter and year to date, we had record income from our operations of $26.1 million. We had net income of $23.2 million.

3:26 We had adjusted EBITDA of $45.9 million. Again, well ahead of our plan for the quarter and year to date. Adjusted EBITDA margin as a percentage of revenue was 44%. Cash provided by operating activities was $46.4 million. or 101% of our adjusted EBITDA for the quarter. These are the financial numbers that we track for our business. They were all very good for Q2. They were ahead of all of our plans. There's some Descartes-specific reasons why we performed well in Q2. We've continued to see some strength in our business, helping our customers with Brexit. Travel and marketing expenses have stayed low as pandemic recovery to attend in-person events has been slower than we originally planned. We've even had some expense recoveries from events that were canceled.

4:14 And to the comparable quarter from a year ago, it was right in the middle of the pandemic when we were restructuring the business to address revenue uncertainties. So we're comparing this year's results to a challenging quarter a year ago. We've also completed three acquisitions in the first half of the year that have contributed well. But there's three other areas that contributed to our overperformance that I wanted to highlight. Many of our logistics service provider customers are doing very well right now. Second, many of our shipper customers, manufacturers, retailers, and distributors are facing extreme supply chain challenges, which are most efficiently managed with logistics and supply chain technology solutions. And third, our employees continue to work very hard in trying and remote conditions to ensure that our customers continue to get the high quality service that they expect.

5:03 So let me provide some color in each of these areas. A good portion of our client base are logistics service providers. These are mostly vessel owner operators, ships, planes, trucks, etc., and intermediaries that help people make bookings on vessels, freight forwarders, 3PLs, NBOCCs, etc. They buy services from us like shipment tracking, customs and security filing, booking assistance, electronic messaging, and rate management. Many of these services are priced on a transactional basis. Generally, the stronger their businesses are doing, meaning the more shipments that are moving and the more vessels that are moving, The Better Our Business Does. Right now, logistics service providers are doing very well and pretty well every mode of transport.

5:48 In the ocean industry, there's very little capacity on vessels. There are container shortages and space shortages. This has caused pricing for ocean moves to be extremely high, depending on commodities and timing, up to seven times higher than we typically see. This is a very profitable time for ocean carriers and intermediaries. In air, capacity has increased greatly from a year ago. Air carriers have seen the return of some passenger traffic resulting in additional capacity for cargo in the belly of planes. This capacity is in addition to capacity created over the past 18 months as carriers retrofit passenger planes into cargo freighters. Add on top of that, the air cargo has become a viable mode for high velocity e-commerce shipments, and it is a time where air carriers have seen strong demand and are catching up with the capacity to meet it.

6:39 Truck movements, particularly in the U.S., are strong as well. It's a very competitive market with particular pressure for carriers because of driver shortages. However, for carriers with scale who can compete for drivers and meet the massive e-commerce and last mile delivery demand, these are very good business conditions. This is particularly so for those specializing in small package goods and otherwise last mile delivery. Rail has become more competitive as well. As trucks seize additional regulations on the horizon, including state-by-state regulations relating to fuel use, drivers, hours of service, and the move to electronic trucks, rail may become more and more a viable alternative for cross-state moves that were traditionally exclusively serviced by trucks.

7:24 These are the favorable business conditions that a good chunk of our customers find themselves in. They rely on us to help them process additional transactions and enhance the service they can deliver to their own customers, particularly on the shipment visibility side. In Ocean, our customers look to our recent combinations with portraits and containers to see how we're committed to helping their business modernize, and are using their own current overperformance as an ideal time to invest in technology. In AIR, our booking, messaging, and tracking services, including for small package and postal tracking using Velocity Mail and container tracking using our core services, are relied on as mission critical. For truck, we have a vast menu of services that we offer, including our macro point tracking and capacity matching solutions to help with the ever-increasing truck shipment volumes we're seeing.

8:13 In rail, our customers are relying on us for intermodal visibility and asset tracking. Our carrier and logistics intermediary customers have been through some tough times over the pandemic, particularly in the air cargo world. However, business conditions appear to be bouncing back, and most of our customers on this side of the shipment ledger appear to be seeing strong tailwinds to their businesses. So while these may be good times for carriers, this is a time of extreme supply chain challenges for our shipper customers. These are generally manufacturers, retailers, and distributors. They use us for a variety of solutions, including global trade management, transportation management, fleet management, and customs and security filing. Generally, shippers are dealing with shortages. There's a shortage in vessel capacity. There's a shortage in shipment containers.

8:59 There's a shortage in port availability. There's a shortage of drivers for private fleets. There's a shortage in key supply components, such as chips for many electronics, that's impacting industries from technology to appliance to auto manufacturers. There's also a shortage of warehouses suitable for high velocity e-commerce moves. Extreme times often call for extreme measures. We've seen shippers try and forward book as much shipment capacity as they can get their hands on. We've seen shippers like Home Depot buy their own ships just to get that capacity, and we've seen other companies doing the same in air. IKEA is buying its own shipping containers and chartering ships to help with their shipments. We've seen manufacturers hoard components in anticipation of shortages, and we've seen importers in anticipation of shortages start their lead times for shipments for the end of holiday period as early as spring.

9:51 Often extreme conditions can be a catalyst for larger investments in technology to help meet those challenges. We've seen strong demand, particularly for our solutions that help with global trade and transportation management. As you've probably heard me say in the past, our strength is in helping customers navigate supply chain and logistics complexity. Well, this is a very complex time. Right now, our shipper customers are looking for technology help. Existing customers are using our solutions more than ever to examine alternatives and manage shipments they can secure. New customers are looking at technology investment at a time where supply chain and logistics technology is no longer needed for their business to be ready for the future, but is needed for their business to be able to compete and survive right now. So to sum up, we've benefited in Q2 from seeing good technology demand from the shipper community and are seeing this continue so far in Q3.

10:43 There isn't a business out there that hasn't had to adapt during the pandemic, and I don't think those changes will be temporary. I think all businesses will operate differently based on the lessons learned during the pandemic. For us, we've always been very fortunate to have passionate, hardworking team that cares about helping our customers. We're also a business where it wasn't unusual to be working remotely. Much of what we do is helping customers move goods from one remote location to another, and we provide technology solutions that help our customers manage those shipments remotely. Our team interacts with people all over the world in all types of different businesses. Being remote is nothing new for us here at Descartes. As the pandemic started, our team shifted to non-office work fairly seamlessly. If we were going to help our customers manage shipments from remote locations, we need to be ready to do the same. I think our results this quarter are a good reflection of how effective our team has been during this process.

11:38 That's not to say it's been easy. Our team has dealt with similar challenges to many workplaces caused by 18 plus months of health and business uncertainty. But I'm very proud of how the Descartes team has pulled together, and all Descartes stakeholders should be equally proud of the job done. Our Descartes team has also done a great job of welcoming new team members to our business, even when there aren't opportunities to meet in person. For example, near the end of the quarter, we brought on several new team members as part of our acquisition of Green Mile. Green Mile specializes in mobile route execution solutions with particular historical strength and real-time visibility for the final mile of deliveries for food and beverage distribution companies. This is an important combination for us because it complements our existing routing solutions, enhances our mobile last mile visibility capabilities, and solidifies our position as one of the leading global routing and scheduling technology providers for private fleets. In addition, Green Mile has a strong presence in Brazil and Florida helping us expand our team and strengthen our operations for the Latin American markets.

12:42 Special welcome to all of our new Descartes team members from Green Mile and thanks to the job that all Descartes team members have done in helping Green Mile with their remote integration into our company. So those were some key contributors to our success in Q2, a strong and resilient Descartes team that is eager to help our customers and new Descartes team members, a strong business environment for our logistics service provider customers, and an environment ripe for technology investment from our shipper customers. All of this has contributed to us being ahead of our financial plans for the first half of the fiscal year. I'll now turn the call over to Allan to go through our Q2 results and more to tell. Allan?

13:21 Thanks, Ed. As indicated, I'm going to walk you through our financial highlights for our second quarter, which ended on July 31st. We are pleased to report record quarterly revenue of $104.6 million this quarter, An increase of 25% from revenue of $84.0 million in Q2 last year. While revenue from new acquisitions contributed nicely to this growth, similar to the first quarter, growth in revenue from new and existing customers, including from Brexit-related custom filings in the UK, were the main drivers in growth this quarter when compared to last year. We should also note, as Ed indicated earlier, that the second quarter last year was a weaker comparable period as we had a negative impact from lower transactional volumes early last year with the onset of the pandemic.

14:10 In addition, we should be clear that there's a benefit to revenue from foreign exchange of just over 3 million as compared to Q2 last year as the U.S. dollar was weaker to each of the Euro, the Canadian dollar, and the 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 24% to $93.5 million or 89% of total revenue compared to $75.3 million in the same period last year. Service revenue was also up nicely sequentially, increasing 6% from the first quarter of this year. Licensed revenue came in at $1.2 million, or just over 1% of revenue in the quarter, fairly consistent with the second quarter last year, while professional services and other revenue came in at $9.9 million, or 10% of revenue, up 34% from $7.4 million, or 9% of total revenue in the same quarter last year.

15:12 Revenue for the first half of the year was $203.4 million, an increase of 21% from revenue of $167 million Thank you for joining us. and this was primarily related to the impact of recent acquisitions, but also from additional labor costs as we continue to invest in our business.

15:58 These cost increases were partially offset from some savings that we continue to see in our business, such as the continued lower travel expenses, marketing and facility costs related to the pandemic. As a result of both strong revenue growth and strong cost control, net income came in at 23.2 million or 27 cents per diluted common share, up 121% from net income of $10.5 million or $0.12 per diluted common share in the second quarter last year. If we look at adjusted EBITDA in the quarter, we experienced growth of 35% to a record $45.9 million or 43.9% of revenue in the quarter, up from $34.0 million or 40.5% of revenue in the second quarter last year. As a reminder, while we had a positive impact from revenue on FX, the impact of foreign exchange on our adjusted EBITDA was once again quite minor as we remained fairly naturally hedged on both an EBITDA and cash flow basis.

17:02 For the six months year to date, adjusted EBITDA came in at $87.4 million or 43% of revenue, up 30% from $67.0 million or 40% of revenue last year. With these strong operating results and strong AR collections, cash flow generated from operations came in at 46.4 million, or just over 100% of adjusted EBITDA in the second quarter, up 36% from operating cash flow of 34.1 million in Q2 last year. For the six months here to date, operating cash flow has been 87.3 million, or right at 100% of adjusted EBITDA. Going forward, subject to unusual events and quarterly fluctuations, we expect to continue to see strong cash flow conversion and generally expect cash from operations to be between 85% and 95% of our adjusted EBITDA in the periods ahead.

18:02 So overall, we are once again pleased with these quarterly operating results in the quarter, as strong organic growth and solid performance from our acquisitions resulted in a 25% growth in revenue and, more importantly, a 35% growth in adjusted EBITDA for the quarter. If we look at the balance sheet, our cash balances totaled $128 million at the end of July, down approximately $10 million from the end of the first quarter in April. While we generated $46 million in cash flow from operations, as I mentioned, we also used approximately $55 million of our cash balances in the second quarter to complete the acquisitions of both Portrix and Green Mile. As a result, we still have almost $130 million in cash, as well as $315 million and many more. As we look at the balance of fiscal 2022, we should note the following.

18:50 After incurring approximately $2.5 million in capital additions in the first half of the year, we expect to incur approximately $3 to $4 million of additional cap expenditures for the balance of the year. After incurring amortization costs of $28.8 million in the first half of the year, we expect amortization expense will be approximately $29.8 million for the second half of the year, with this figure being subject to adjustment for foreign exchange changes as well as future acquisitions. Our income tax rate in Q2 came in at approximately 11% of pre-tax income, lower than our statutory tax rate, and this was mainly a result of recognizing certain benefits from previously unrecognized tax losses carried forward. As a result, our tax rate for the first half of the year came in at approximately 15% of pre-tax income.

19:55 Looking into the second half of the year, we currently expect that our tax rate will continue to be in the 15% to 20% of pre-tax income range as a result of the expected reversal of valuation allowances on certain additional tax losses carried forward, as well as the reversal of some uncertain tax positions taken in previous years. We should note, however, that in future years, we currently expect our tax rate will return to our more typical range of 25 to 30% of pre-tax income. And as always, we should state that our tax rate may fluctuate quarter to quarter from one-time tax items that may arise as we operate internationally across multiple countries. And finally, after incurring stock-based compensation expense of $5.2 million in the first half of the year, We currently expect stock-based comp will be approximately $6 million for the balance of the year, subject to any forfeitures of stock options or share units. And with that, I'll turn it back over to Ed, who will wrap up with closing comments and our baseline calibration for Q3.

20:54 Hey, great, Alan. Thanks. 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. We continue to operate consistently from consistent business 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 that overperformance back into our business. We focus on recurring revenues and establishing relationships with customers for life, and we thrive on operating a predictable business that allows us forward visibility to our revenues and investment paybacks.

21:47 As I mentioned off the top, we performed ahead of our plans in Q2. Consistent with those 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, There are several areas of investment that we're focused on right now, but let me speak to three specific ones. The first is front-ended distribution. One of our fundamental tenets about growth is to not just grow, but to grow profitably. For us, that has always meant a very cautious approach to expanding our distribution capabilities. We don't want to add business that's either not good for Descartes or not good for our customers. We're looking to enhance our distribution capabilities with people who can help understand the complex environment that our customers are in, the complex supply chain and logistics challenges that they face, and how our solutions can help with these challenges. So that's an area we're investing in, in our sales and distribution organization, with the goal of continuing to drive organic growth in the future.

22:51 We're already in the process of restructuring our sales organization to be less geographic focused and more solution and customer focused. We expect to continue to add resources to this organization over the coming year and at a faster pace than we have in the past The second is customer implementation and success As we look to organic growth for the future, some of our best opportunities are with businesses that we already have relationships with We have over 22,000 customers and a broad portfolio of solutions We have great opportunities to help our customers be successful with the help of our solutions We continue to invest in our solutions and we'll also be looking to invest in customer success resources that can work with customers about effective use of our solutions with the result that additional transactions can flow over our network and we can strengthen our relationships with customers to reduce attrition.

23:42 Also, we'll be looking at adding implementation resources to accelerate the time to get our customers active with our solutions and help us grow. And the third is acquisitions and integrations. We intend to continue to be acquisitive. For us, the quicker we're able to get deals done and the products integrated, the sooner we can help our customers leverage multiple Descartes solutions to help their business. With that in mind, we're going to look at investments in corporate development and more broadly within our organization to help us combine teams faster and accelerate product integration into the global logistics network. We considered these investment goals as we set our calibration for Q3. In our quarterly report, we provided a comprehensive description of baseline revenues baseline calibration, and their limitations. As of August 1st, and using foreign exchange rates of 80 cents to the Canadian dollar, $1.19 to the euro, and $1.39 to the Great Britain pound, we estimate that our baseline revenues for the third quarter of 2022 are approximately $95 million, and our baseline operating expenses are approximately $59.5 million.

24:50 We consider this to be our baseline calibration of approximately $35.5 million for the third quarter of 2022, or approximately 37% of our baseline revenues as at August 1, 2021. Last quarter, we indicated that the targeted adjusted EBITDA operating margin range for our business is 38% to 43% for fiscal 2022. In Q2, we were at 44%. We're not looking at changing our targeted range, but we will 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 for the balance of the year will be to grow both organically and by acquisition. We've completed three acquisitions this fiscal year and expect to continue to be active in the acquisition market. We still believe there are acquisitions that meet our financial and strategic criteria.

25:45 In past calls, I've talked about market tailwinds that have been helping us. Our results this quarter reflect those tailwinds. We don't have a good idea as to how long those tailwinds will continue. Earlier this summer, we thought that business was trending towards getting back to normal times as we saw successes with vaccination efforts. However, the late summer in North America has seen setbacks in recovery as the Delta variant of the coronavirus has proliferated. Given that, we think our continued cautious and prudent approach to investment and calibration is the best thing for all of our stakeholders. 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.

26:36 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 by phone or virtual meeting and we hope sometime sooner than later in person. And with that, I'll turn the call over to the operator for the Q&A portion. Operator? Thank you. We'll now begin the question and answer session. If you have a question, please press star then one on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key.

27:14 If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. And our first question comes from Matt Pfau from William Blair. Your line is open.

27:28 Hey, guys. Thanks for taking my questions and great results. First, I just wanted to follow up on that comment about the Delta variant. So just to be clear, in your business, have you seen any change in customer behavior or anything else as the Delta variant has started to impact the U.S.?

27:49 I mean, not really. It's probably the same things you see in the news. You know, I think a lot of them are planning to open up offices and things of that nature, and they – probably stopped those plans like a lot of the big businesses you've seen were planning on opening September 1st or right as a school year got underway here in the U.S. and a lot of them have probably dashed those plans or delayed those plans. But, you know, otherwise their businesses continue to keep moving strong. You can see that in some of the capacity crunches here in the various modes of transportation.

28:27 Got it. And then wanted to follow up on the comments around investment and customer success. Correct me if I'm wrong, but selling back to your customer base has always been a very big portion of your revenue growth. So what's changing now? What's different? What's sort of driving the investments that you're making there?

28:49 I think some of the things we mentioned in the beginning of the call, our customers are doing better than ever. They're looking for more technology to solve those problems. And if you think about some of the stuff I've mentioned on the last calls, the whole world just figured out over the last 18 months during this pandemic that logistics and supply chain was a whole lot more important than they thought it was. And that puts demands from the consumers and companies on our customers, the logistics service providers, and, you know, they turn to technology providers to help them solve that problem. Unfortunately for us, you know, we're one of the main people that they've turned to.

29:30 Okay, got it. And does that also then correlate with the Salesforce changes you're making in terms of ability to sell more to existing customers?

29:40 Oh, for sure. I mean, when we're thinking about it, we're thinking, you know, where is their high customer demand right now and, you know, where... are our salespeople being overwhelmed by the number of leads coming in and trying to get more people in place to continue to meet the demands of our customers. Okay.

30:00 Got it. Thanks, guys. Appreciate it. I'll pass the line.

30:04 Great. Thanks, Matt. And our next question comes from Justin Long from Stevens. Your line is open.

30:12 Thanks, and congrats on the quarter. I wanted to ask about organic growth. Just curious how organic growth trended in the quarter relative to your expectations. It seems like there continues to be some outperformance there. And if that's the case, Ed, I'd love to get your thoughts on how much of this outperformance is coming from cyclical tailwinds and this stronger for longer freight cycle versus secular tailwinds. And I know that's something that might be hard to quantify, but would love to just get your take anecdotally.

30:45 It's a bit of a guess. I think we're seeing it in both areas and maybe to the point where we've been surprised by it a little bit. We thought it was going to be good and maybe even a little better than we thought. I don't really know how long it's going to continue for, but as I mentioned at the beginning of the call, a lot of our customers are doing well. A lot of our customers are facing challenges and they're using us to meet those challenges and at the same time, you know, They're getting a lot of shipments that they've got to manage, or in the shipper's case, making a lot of shipments that need to be managed. That's how we make money. The more shipments in the supply chain, the more shipments are being processed by our global logistics network. All those things have been pretty good for us and maybe even a little better than we expected.

31:33 Based on your calculation, what was organic growth in the quarter?

31:40 I don't know that I have an exact number. I don't know if you want to take a stab at it. As I've mentioned in the past, it's a tough number for us to get perfect.

31:46 Yeah, as Ed mentioned, we run the business, pulling in the acquisitions, integrating them very, very quickly. But roughly speaking, when you look at Note 3 in the financial statements, the pro forma note, roughly in the neighborhood of 15%, 15%, 16% if you exclude FX impacts and acquisitions. It's a rough number.

32:31 Is there any kind of headwind that we should be mindful of on a sequential basis? I'm just trying to understand what would prevent EBITDA margins from staying around the level we saw this quarter and the next couple of quarters ahead.

32:46 Well, I don't see tailwinds, but that doesn't mean that they won't exist. FX, as you know, can always be a tailwind to it. It can also be a headwind to it. We try to call it out either way. Just so people understand, you know, what component that that was. You know, the travel, you know, being out of our veins right now is helping that a little bit as well. I suspect that we won't be traveling a ton just given what's going on with the variants right now. So I don't know if that's going to come into play the rest of the year. But, you know, maybe in the long run we could get back to traveling and that might have us incur a little bit more of expense, but probably not massive.

33:28 and so on.

34:00 Understood. I'll leave it at that. I appreciate the time.

34:02 Thanks. Thanks, Justin. Appreciate it. And our next question comes from Paul from Scotia Capital. Paul, if you're on mute, could you unmute your phone? Sorry about that. Hey, Ed. Just on the sales reorg, can you give us a sense of How significant this reorg is in terms of disruption? Obviously, the calibration lines up as if there should be minimal disruption. And then maybe just putting the comments into context, if I look back, you've kept sales historically at about 12% to 12.5% of total headcount, and you haven't really outgrown it materially.

34:53 Should we be thinking of your comments of just investing and you're not pushing extra hard on the accelerator or is this, no, this is something different. This is like the sort of step up we saw in 16 and 17 in sales.

35:08 So I was going to object to your word reorg right out of the gate because that was a strong word. You know, we're supplementing our sales force and maybe changing the way that it goes to market a little bit, but it's, I would hardly call it a reorganization. Probably more supplementing some of the things that we do with additional talent to help us understand markets better and make sure we're really focused on is when our guys walk into customers, we want them to really understand what those customers do for a living so that they can diagnose and prescribe solutions to the customers. And we're looking for people with strong logistics and supply chain backgrounds that can help us do that. 12% is probably a halfway decent number for the time being.

35:56 We're growing, so I think you can see growth in a bunch of areas. I don't think you're going to see a massive change in the headcount. I think it's probably some strategic stuff that helps us round out our sales force. We're pretty happy with our performance at the moment, and we're just looking to do things to help them. Absolutely, that makes sense and puts better context on it, thanks. The only other thing I wanted to trace through tonight as well was just on recovery and T&E. I was looking back through comments you've made over now, I guess it's been over a year we've been in this. Just in terms of how much permanent removal of T&E we should think about, obviously you just tempered it and said, hey, nobody's on the road really in a big way, but I'm thinking out a couple of years, how much do you think you've maybe altered the model to a new normal? Thanks.

36:52 I don't know. Yeah, thanks, Paul. Appreciate it. I don't know the answer to that question. I have a guess. My suspicion is it will eventually come back as the pandemic wanes. I don't know the answer to that question either, exactly how is this pandemic going to go away. I thought I did six months ago. I thought the vaccines were going to kind of kill us off, kill it off, and we'd be – Thank you for joining us. My guess is that it will come back to some extent.

37:45 It probably won't ever come back to the same percentages that it was. The whole world just figured out that they can operate more efficiently. And, you know, that could be one of the blessings coming out of this pandemic if we look back at it 10 years from now. Just, sorry, one last clarification that sort of ties to that as well along the same topic. Maybe you or Ellen could talk to how much office space have you maybe permanently exited or is it just sort of planned runoff that we should think that there's a benefit there where you've maybe shifted some of the smaller offices out of the mix. Thanks, guys.

38:19 I don't think there's a ton of office space that's come out yet. I think you will see us over time start to look at the office space as leases renew and say, hey, do we need that much space there? Maybe if all of our employees aren't coming in every day, maybe we change the dynamic of the office and have more meeting rooms and more hotel-type office space and less, you know, a situation where everyone has a desk that, you know, in the future might not be used every day and, you know, could be kind of a waste of space. So remains to be seen. You know, I think our business was a lot more prepared to go into this than most and that 30, 40 percent of our employees, even before the pandemic, worked from home frequently. And I think, you know, that number is going to go up considerably.

39:05 And when it does, our office costs are going to go down. Not a whole lot of that's hit our books yet, though. Make sense. Thanks. Thanks, Paul. And the next question comes from Raimo Lenshaw from Barclays. Hey, guys. This is Frank. I'm for Raimo. I had one on profitability. So just given that you executed so well against the new race, even range, and actually beat the top end of that, what was the main driver of the outperformance this quarter? Was it more of a surprise in the top line, or was it the continued cost efficiencies?

39:40 A little of both, but probably more driven by our revenue being higher than we anticipated, which is great. I think we have always been conservative on the cost line and just conservative operators of business and not looking to spend ahead of revenue. And that creates opportunities like the one we're seeing here, where you get a little more revenue in and Thank you for joining us this morning. I think you're going to see us continue to be acquisitive.

40:30 We're always looking at a lot of acquisitions. You've heard us talk about some of the areas that we're interested in in the past. A lot of it just depends on who comes up for sale. I can say I want to buy in a particular area, but that doesn't matter unless I can find a company that's willing to sell to us in that particular area. What I think of some of the things I've seen, you saw us make a bunch of moves in the e-commerce or e-commerce related space over the last six or seven years. Things turned out to be great for us. At the same time, the pandemic highlighted the strength in e-commerce and a lot of the acquisitions that we would have looked at over the last 18 months went up considerably in value, making them a little less interesting to us. That gives you a little color on some of the types of things that we consider as we're doing it. I'd love to buy a bunch of e-commerce companies right now, but Thank you for joining us.

41:49 I think they'll see that continue into the future. Really helpful. Thanks, Ed. Hey, thank you, Frank. And the next question comes from Paul Treiber from RBC.

42:02 Thanks very much and good afternoon. Just a high-level question on the customer demand that you've been seeing. I mean, obviously it's been significant in light of all the industry challenges, but it's also somewhat surprising because you think that customers would have solutions already in place. So the question is, you know, how penetrated do you think your customer base is, or more broadly, you know, globally, how penetrated do you think logistics, automation, technology, and software are here?

42:30 Oh, I think we're still in the early 80s. And, you know, one set of technological advances begets the next, right? You know, I mean, think of the investment we made in MacroPoint a bunch of, you know, was it four years ago or so now? You know, that technology didn't exist 12 or 13 years ago. It just wasn't a possibility and then all of a sudden everyone has mobile smartphones in their hands and ideas like MacroPoint, you know, can exist. I see the same thing going on right now with IoT with everyone putting sensors in everything right now. You know, we're in the very early innings of that, of people saying, oh, if I can track where different things that are going on with this truck or different things that are going on with this pallet or different things that are going on with this container, what other decisions can I make? And, you know, All those decisions involve people making software to do something about it, and that's what we do for a living.

43:23 One, I think this is a never-ending game, and two, I think we're in the very early innings of it. We keep coming up with new good ideas. Acquisition targets of ours keep coming up with new good ideas, and our job is to figure out how to put all these pieces together and make sure we build the winning team when we're trying to do that.

43:43 And in the follow-up question, but just on distribution, is it possible or have you been pivoting your products to be more self-service as opposed to going through the traditional enterprise sales process of RFP and whatnot? Is it possible to drive higher tax rates in cross-selling but with more of a hands-off sales effort if it's embedded into your products? in terms of additional features, in terms of just driving the higher attachment.

44:20 Oh, for sure. I mean, it may not be obvious on the outside, but it's certainly working inside here. It's obvious. We're already doing a ton of that. Customers are now, you know, in the last five years, customers have gone from having to not just take a simple process right in the beginning, having to call us to buy something and now able to just buy it, bother in our products online, sign up for it, and many more. Thank you for your time, Ed.

45:35 As you mentioned, Ocean and their carriers and forwarders just have tremendous pricing power right now. Do you see opportunities to generate additional pricing for your business?

45:50 No, we don't think of it that way. I never like when a partner of ours is reaching their hand into our pocket and I try not to do the same with our customers. I mentioned customers for life on here. We want these guys to like us and we want them to keep doing business with us forever. And if that means when they're doing well that I keep doing the same thing for them at the same reasonable prices, I think that makes me a long-term strategic partner of theirs that's going to do business with them for a long time. Same when things aren't going well. I kind of expect the same back from them. We might suffer with them if their transaction volumes go down, but I don't expect them to come back and ask for additional discounts. I'm suffering right along with them.

46:36 We take a long-term view to these things. Maybe if we were not a standalone company or if we were owned by a private equity firm or some kind of outside investor with a shorter-term horizon, we'd think of it differently. But we are public and we do have a long-term horizon on this. Most of us have worked here our entire lives and plan on working here the rest of our lives. And we'd like to have a happy customer base that thinks we're good guys to deal with the whole way through. Raising our prices because they're in a good position is, in my mind, not a good way to do that.

47:07 Okay, got it. And then with Green Mile, you mentioned South America as an opportunity. Can you just maybe big picture, how big is South America for you guys today, and what is the growth opportunity you see in the region?

47:23 It's relatively small for us, and I think there'll be some good growth opportunities there with Green Mile and... Some of the other acquisitions that we've done over the last couple of years. At the same time, that's not the only reason we bought GreenMile. We think GreenMile solutions are applicable all over the world. And, you know, they were focused on South America and maybe a little bit on North America. And we thought, you know, we know a lot more customers all over the world that could use that solution. And that's part of why we thought it was a good acquisition opportunity for us. You know, partially to expand to South America, but also to... to really grow our business and take their business around the world and make that a much bigger company than it was before we bought it.

48:06 Just taking a step back, maybe which regions do you feel like you're the least penetrated in where you've got the biggest opportunity for either organic or inorganic growth?

48:17 You know, South America, Australia, you know, maybe Africa subcontinent are areas where we think we see a lot of potential growth. Southeast Asia I see that happening right now manufacturing is moving out of China and moving to Southeast Asia we're going right along with it I think you're going to see us continue to expand in that part of the world as well we say global logistics network we think it is and as the world becomes one logistics and supply chain entity we think that's what's going to happen to us as well Thank you guys Hey, thanks, Scott. And our next question comes from Robert Yang from Canaccord.

49:03 Hi, good evening. An update on Brexit would be helpful. It was a driver in the quarter. Is there any cadence the rest of the year? I think you'd said before that there was some phased rollout, maybe some, you know, it wasn't mandatory until the year end, which might create some last minute. Maybe an update on that.

49:21 Yeah, sure. Thanks, Robert. We absolutely think we're going to see more from it. We think we have the bulk of the recurring revenue now. We'll certainly see some more implementations and some stragglers come in at the end, but we're very pleased with how it's gone so far. We think it's going to expand a little bit more and turn into a real nice business for us. Kudos to our team that worked on that. We thought we were in a good position going into it, and We were in a fortunate position that we were very prepared for it, and I think a couple of our competitors didn't take it as seriously and weren't as prepared as we were, and we ended up really doing very, very well as a result. So I appreciate all the hard work that our team put into making sure we had the best solution in the market, and I think the results are showing in our numbers now.

50:13 Okay, and then the second one, just a little bit higher level around... New customers and expansion. A lot of things you're talking about through the call seem to be drivers of new customer ads, maybe more than previous years. If you could talk about the size of the customer base, you're over 20,000. The last question was about there's still a lot of room for penetration. Maybe just talk about the trend in new customer ads over the last year and where you

50:41 think that's going to go. I think we've always been pretty good at getting new customers. If I I think back, you know, 10, 15 years ago, the knock on us was we didn't do a good enough job of cross-selling. And I think that's now become our strength over the last 10 years. We really focused on it. We got good at it. And now I think we're very good at it. And we've maintained our ability to get new customers in. You know, 15 years ago, we probably had 4,000 or 5,000 customers. Now we have 20-some thousand customers. We keep getting better at cross-selling, though, which is helpful because we're an acquisitive company. So, you know, We have to be good at cross-selling, right? I buy some company with 500 freight forwarders, customers, and I have 5,000. And if we're going to be the best we can be, we have to be able to go around to the other 4,500 customers and get a bunch of them to sign up for the new service that we just bought.

51:32 And I think over the last five to 10 years, we've gotten pretty darn good at that. At the same time, I don't think we've given up anything in the new customer sales area where we were always kind of strong at going out and getting new names. Thank you for joining us today.

52:17 The difficulty or the ability to cross-sell? Is there a challenge there?

52:20 Oh, I think it's done specifically to improve it, right? What we're talking about there is specifically our ability to understand better and better what our customers do for a living and how to then diagnose and prescribe new solutions to them, right? It's the ability to understand their business as well as they do so that when we walk in the door, we're coming up with ideas for them that really work. And we think we're pretty good at that. We want to get better at it. And we think that's going to be a long-term driver of our success. Okay.

52:55 Thanks for taking the questions.

52:57 Okay. Thanks, Robert. And our next question comes to Daniel Chen from TD Securities.

53:02 Hi, guys. So you mentioned there are capacity constraints in the logistics networks. Just wondering whether we should expect the congestion to put a cap on the network traffic going over the GLN Offset by higher customer wins given the congestion. So any comment on how you think those factors will interplay as it relates to your top-line growth opportunity would be helpful.

53:23 Well, sure. I mean, there's always a cap on it, but I think it's probably good news for us in the long run that there's capacity crunch right now. I think that's going to drive people to get more capacity in the future. And also, too, it's one of the things I described in the beginning of the call is to is to come up with more creative ways to better utilize that capacity. Both of those things play into our hands. One, the latter here in the short term and the former over the long run, right? As carriers say, let me get more ships, as planes or as airlines say, let me get more planes and ULDs and things of that nature, that creates an opportunity for us to have more shipments over the long run, which is great.

54:06 Okay, thanks. And given the strong demand environment, any change to the size of the deals you're winning with customers now? Thank you.

54:14 Sure, thanks, Dan. Yeah, I've noticed over the past couple of years our deal sizes continue to go up as we have an expanded footprint to sell to them. We used to be able to go in and solve a certain size problem, and as As the breadth of our organization gets bigger, as the breadth of our solution sets get bigger, we can go in and solve bigger problems for customers. We have more people. We have more products. We have more domain expertise. A bigger company with a bigger set of problems can use us to solve those problems. That's been great for us. In the last couple of years, I've definitely noticed our deal size has gone up. I just look at the Thank you. We have no further questions. I'll turn the call back over for final remarks.

55:26 Great. Thanks, guys. Appreciate your time today and we look forward to reporting back to you on Q3's results in a few months. Have a great day. Thank you, ladies and gentlemen. That concludes today's conference call. Thank you for participating. You may now disconnect.