The Descartes Systems Group Inc. (DSG) Earnings Call Transcript & Summary

Good afternoon. Welcome to The Descartes Systems Group Q2 earnings call. [Operator Instructions] I'd now like to turn the conference over to Scott Pagan. Please go ahead.

Thank you very much. Thanks, and good afternoon, everyone. Apologies for the delay in starting. There was a slight technical issue with getting the press release out on the wire. Joining me on the call today are Ed Ryan, CEO; and Ed Gardner, our CFO. And I trust that everyone has now received a copy of our financial results press release. Portions of today's call, other than historical performance, include statements of forward-looking information within the meaning of applicable securities laws. These statements are made under the safe harbor provisions of those laws. These forward-looking statements include statements related to our assessment of the current and future impact of geopolitical trade, tariff and economic uncertainty on our business and financial condition; Descartes' operating performance, financial results and condition, cash flow and use of cash, business outlook, baseline revenues, baseline operating expenses and baseline calibration, anticipated and potential revenue losses and gains, anticipated recognition of revenues and incurrence of expenses, potential acquisitions and acquisition strategy, cost reduction and integration initiatives, potential share purchases under a normal course issuer bid and other matters that may constitute forward-looking statements. . These forward-looking statements involve known and unknown risks, uncertainties, assumptions and other factors that may cause the actual results, performance or achievements of Descartes 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. Today, we are again reporting record quarterly financial results. We're ahead of our plan in Q2, which gives us even more room to make acquisitions, investments in AI and other investments in our business. These are strong results that I'm looking forward to walking through in more detail. However, first, let me give you the road map for the call. I'll start by hitting some highlights of our last quarter, and I'll provide some comments on some investments we've been making. And then I'll hand it over to Ed Gardner, who will go over the Q2 year-to-date financial results in more detail. After that, I'll come back and provide an update on how we see the current business environment and how our business was calibrated for Q3, and then we'll open it up to the operator to coordinate the Q&A portion of the call. So let's get into Q2. Key metrics we monitor, including revenues, profits, cash flow from operations, operating margins and returns on our investments. For this past quarter, we again had record performance in each of those areas. Total revenues were a record $201 million, up 12% from a year ago. Record high services revenues were up 13% from a year ago and our continued focus on generating recurring revenues. Record net income was up 32% from a year ago, and record income from operations was up 36% from a year ago. Record adjusted EBITDA was up 18% from a year ago, our adjusted EBITDA margin is at a record high level of 47%. We generated over $81 million in cash from our operations, up 28% from a year ago. So strong record results across all of our key metrics. At the end of the quarter, we had over $400 million in cash, and we were debt-free with an undrawn $350 million line of credit. This was before we completed some acquisitions in August, which I'll talk about shortly. We remain well capitalized, cash generating and growing and ready to continue to invest in our business. We also have a normal course issuer bid that allows us to purchase up to 8.6 million shares before December of this year. We've made some more purchases since we last reported, and I'll allow Ed Gardner to give you those details. But especially in light of how the business performed last quarter, we remain optimistic about Descartes' future. and the normal course issuer at the tool we could use to make further purchases. I wanted to touch on a few areas that helped our business perform well this quarter. We'll notice some of them are similar themes to previous quarters. The first is global trade Intelligence. Global Trade Intelligence remains one of the larger contributors to our services revenue. We had good growth in the quarter compared to where it was a year ago. I think it's helpful to understand what's going on with global trade to understand why we've seen more demand from customers in this part of our business. The 3 things going on in the world that are making it more challenging to move goods from point A to point B. The first is tariffs are still changing, and they're often changing rapidly. There's been a lot of active resetting international trade agreements. The setting raising or lowering of tariffs has become a common international tool in recent trade negotiations. Changes have often come with less advanced notice than industry has been used to. It's extremely challenging for businesses involved in international trade to track and manage all of these changes on their own. More and more businesses are relying on global trade management systems powered by the kind of tariff and duty content that Descartes provides. This has been a big demand driver for us. Also, businesses that become more active in researching ways to minimize their tariff burden. They're consulting more and more with trade professionals are using research tools like Descartes state amount tools to understand what business peers are doing. So it has also influenced demand. Further, if you can't reduce tariffs, there's value in deferring your tariff burden leveraging available tariff mechanisms such as farm trade zones has been another area that has increased customer demand for Descartes. The second is customs and export control enforcement has stepped up. Governments, in particular, in the U.S. have committed additional funding to customs and export control enforcement activities. This is in response to the perception that there is a significant noncompliance worth pursuing particularly on sanctioned parties and export controls. Sanction parties are aware of government list entities or individuals with whom it is illegal to trade. These sanctions often come about because of military conflicts, economic disputes or criminal activities. Trading with the prohibited entity can bring large penalties. For that reason, a key part of Global Trade Compliance programs should include detailed, sanction screening for shipments, Descartes sanction party screening business has seen strong demand, and we don't expect increased enforcement to lower that demand. Export compliance is often at the commodity level of shipment prohibitions or licensing on goods exported from 1 country to another. These requirements can be because of militarily sensitive goods or dual-use goods or because of scarce valuable resources in our manufacturing process like semiconductors and ships. Our export compliance solutions, particularly in our OCR solutions have seen heightened demand as enforcement of these rules has increased. And the third is compliance and audit burden has increased hand in hand with the increase in enforcement the obligation to keep detailed after an auditable records on our global trade transactions has increased. So for example, it's not enough to appropriately screen a transaction, but you also need the auditable proof of that screen available in the future for third-party your view. The importance of global trade management systems has shifted from transactional execution to systems of record for trade. This is particularly so with increased U.S. focus on train shipments as a mechanism that is potentially being used to avoid tariffs or sanctions. Transshipment is where goods are routed through 1 or more other countries before the final destination often to avoid tariffs or sanctions that apply to the original country of origin. Customers are compelled to have accurate and detailed records improving country of origin and shipped goods subtle is increasingly challenging in a complex world of international supply chains and multiple internationally sourced component parts in finished goods. We have seen good demand from people seeking new and more sophisticated trade management systems with reputable stable partners that could support future audits. That's been a good demand driver for us as well. A rapidly changing tariff environment increased resources dedicated towards trade enforcement and detailed and audible record requirements extended into the future, a much more complex trade environment. is what we're in today. With the number of changes that have happened in the trade environment over the past 2 years, we found that our customers are no longer waiting to see what's next. Many have accepted that volatility is the new baseline operating condition. Rather than accepting the stability of a trade role in building the standard operating procedure to address that role, we found that our customers are already focused on building agility, flexibility and redundancy into their supply chains. They're preparing themselves to be ready for what they don't know is going to change. That approach has necessitated a higher level of investment and executive attention to supply chain and logistics issues that we've seen historically. We've seen the same trend with shippers booking capacity. More shippers are relying on spot rates and shorter-term capacity contracts. That investment has been supported by onetime tailwind for some in the U.S., some businesses have received sizable tariff refunds from the previous U.S. Supreme Court decision and validating the international emergency Economic Powers Act tariffs. Again, one time in nature, however, a stimulus for some supply chain investments. Second area where we've seen good growth is in our e-commerce entries. We continue to see overall growth in consumers embracing e-commerce even with the elimination of the tariff exempt type 86 de minimis program. Imports have continued to grow coming into the United States. We have a premier solution for handling e-commerce imports into the U.S. using our net CHP system with particular strength in high volume and high velocity requirements. We're hoping key brokers meet the demands of importers and these volumes are contributing well to our revenue growth. We called this out in Q1, but we again saw strength in Q2. The third area is in transportation management. MacroPoint continues to be strong for us. MacroPoint provides real-time visibility to shipments, brokers and shippers tell us the loads they want to track. It's our job to get the tracking information from onboard systems, transportation management systems using our application or old-fashioned calls to drivers. Over past quarters, we've enhanced our system to AI agents that interact with drivers to encourage adoption of our tracking app, helping us reach a segment of the market that was previously difficult to reach the scale. These agents have helped contribute to higher percentage of shipments track than our peers, which in turn drives more people to our network. We're also competitively differentiated because we are tracking data from both phones and onboard devices. So we're able to compare those data sets and of our customers' discrepancies that may exist as they consider which carriers they'll use in the future. One of the particular strengths of our transportation management offerings is the combined solution that we can provide. We have full enterprise grade transportation management system for shippers and brokers real-time tracking of a shipment and fraud protection/carrier screening with my carrier portal. This combination has been well received by the market, especially for brokers we need enhanced carrier screening tools in light of the U.S. Supreme Court acquisition, imposing liability on brokers for recess selection of onsacarriers. A good growth driver for us with the potential for further growth, which was a key consideration for our recent investment in Thai, which I'll talk about later. And the last is fleet performance/management and RA. We have to help customers manage their fleets of vehicles. In particular, we have routing and scheduling solutions to help companies figure out the most efficient way to make deliveries and reduce hours and miles driven to do that. There's always good demand for these solutions. However, the demand increases in periods like now or fuel cost increase. Running your fleet becomes more expensive and customers look into solutions to reduce the amount of fuel they are using to make deliveries. Cost consciousness for fleet owners is even higher given the inflation that exists in driver wages. This wage inflation is driven in part by driver shortages, new U.S. regulations have made it more difficult to training qualified be driver. This demand in our business was supported by 2 recent investments we made at the end of Q1. We combined with Adelic. Adelic is an AI-powered driver safety and performance management system. This was a timely investment as the U.S. court focused attention on driver safety and liability and accidents. This is our first full quarter with Ydelicand is prepared -- has paired well with our [indiscernible] solution to provide an excellent tool to enhance safety oversight of our existing traffic customers. Then in the last month of Driven joined our Descartes team. Latin America has been a key expansion target for our routing solutions. There's a lot of opportunity for growth with our existing solutions portfolio, plus access to a broad-based delivering information in the region. We're joined by a great team with experienced delivery solutions in high-density urban environments. Driven was only here for about 3 weeks of Q2. but it has met well with our team, and we're looking forward to great things to come in Q3 and beyond. So overall, these are the items that contributed strong growth and demand in Q2, that performance, we were able to continue to make investments in our business. One of our -- one of the principal areas of investment continues to be in artificial intelligence technologies -- and with that, let's talk about AI. We're investing in AI because it enables automation as supply chains and logistics becomes more and more complex. Managing sources of data, physical resources, human resources, payments, tariffs, duties, compliance, sanctions, fuel costs, vessel capacity, warehouses. All these are becoming too complex for humans to manage on their own. In making our investments, we have some core beliefs in mind about how AI will change our business over time. Our solutions will be used by AI through APIs and agents more than by users and with rows, our solutions will be used to generate outcomes for customers rather than to be licensed for access. Our solutions will be used to identify and prevent potential problems as much as to solve existing problems. We believe that human oversight of decisions made by technology will still be critical. That the data on our network, we will provide critical context to both fuel and human and AI decisions. And finally, that our broad solution set integrate to provide our customers with a single source for unrivaled outcomes. We've been very active in the designing our infrastructure, workflows and commercial models to adapt to these inevitable changes. We've designed our agent control plane for agents to access our products. We've made it skills from our products available to agents via MCP and the agent control panel. We're undertaking comprehensive data growth -- data graph to bring useful network effect context to decisions, and we're designing a uniform workbench, entry points for agents and humans to access the Descartes Global Logistics Network skills. We're very busy and tremendously excited by the value we can deliver to our customers using these AI capabilities. Our customers are also asking us for AI that removes work. They're more interested in outcomes than workflows. With that in mind, we're developing and deploying AI agents, including agents that classify HS codes, model duty exposure and sourcing shifts. Agents that diagnose customs and regulatory filing rejections and suggest remediation, agents to predict late loads and proactively rebooked doc appointments, agents that rate and book across transportation modes, agents to forecast e-commerce demand, balance stock and rate shop sanctioned party screening triage to clear false positives, agents that screen for double brokering and identify fraud, agents that dynamically schedule to get delivery rates back on track. And finally, fleet safety coaching. These aren't aspirational. Our customers are seeing real benefits from AI agents already. As I've been mentioning previously, our MacroPoint business is actively using agents to call drivers for location checks, gather proof of delivering information for billing purposes, get arrival and departure confirmation, get truck rates to help with carrier selection and get insurance certificates for carriers. This helps our customers track import or Lowe's. We have AI agents that enable tracking on 26% more loads than they did in Q1. As we deliver more value to customers, we can pay on delivering more outcomes. This has been a real benefit to us in the quarter and all due to AI. AI is an exciting part of our present and future. We're planning a comprehensive update on what we're doing with AI at our in-person innovation form to be held October 6 through the 8th in Chicago. We're planning on showing practical and real examples of how our customers will get value from outcomes leveraging AI. This is a big event where attendees to interact with customers, partners and Descartes team members a great event to learn from the carton and others, but also to provide feedback on how we can help deliver more value. We're very excited to host everyone and share how excited we are about our future. Please see our website from our registration deals and details, and we look forward to seeing you there. So in summary, strong Q2 with additional AI investments, 2 acquisitions that impacted Q2 and plans for more investments. I'm excited about how the business is performing and the opportunity we have in front of us. With that, I will turn the call over to Ed Gardner to go through the financial results in more detail.

Awesome. Thanks, Ed. As Ed mentioned, I'll be walking you through our key financial highlights for the second quarter and year-to-date results. We're pleased to report record quarterly revenues of $201.1 million this quarter, an increase of approximately 12% from revenues of $179.8 million in Q2 of last year. Our revenue mix in the quarter continued to be very strong, with services revenue increasing over 13% to $188.6 million from $166.8 million last year in the second quarter, with services revenue representing 94% of total revenue this quarter, removing the impact of both the recent acquisitions as well as a positive impact from changes in FX rates we would estimate that our growth in services revenue from new and existing customers that is our organic growth would have been just north of 9% this quarter when compared to the same quarter last year, which is similar to Q1 of this year. . Professional services and other revenue, including hardware revenue, came in at $12.4 million or 6% of revenue, slightly down from $12.8 million in Q2 last year, while license revenues were minimal similarly to last year. Collectively, our professional services and other revenue, combined with our license revenues was approximately 6% of our total revenues. Gross margin came in at 78% of revenue for the second quarter, up from 77% in Q2 of last year. The increase in gross margin for the quarter was primarily due to operating leverage from our organic growth in services revenue. Turning our attention to the bottom line. As a result of solid revenue growth, improved gross margin as well as controlled growth in operating expenses, adjusted EBITDA came in at a record $94.4 million just under 47% of revenue, up 18% from adjusted EBITDA of $80.2 million in the same quarter last year. From a GAAP earnings perspective, net income for the second quarter came in at $50 million, up 32% from last year. With these operating results and strong collections from customers, cash flow generated from operations came in at $81.3 million or 86% of adjusted EBITDA, up 28% from operating cash flow in the second quarter last year. Looking at our operating results for the first half of the year, revenue came in at $394.7 million, an increase of 13% from revenue of $348.6 million in the first 6 months of last year. For that same period, adjusted EBITDA came in at $184.1 million or 46.6% of revenue, up 19% from last year. Net income for the first half of this year also increased, coming in at $98.5 million or $1.13 per diluted common share, up from $74.3 million or $0.85 per diluted common share in the first half of last year. So overall, a great second quarter to complete a great first half of the year. If we look at the balance sheet, our cash balances totaled $401 million at the end of July. As I just mentioned, we generated operating cash flow of just over $81 million in the quarter. Offsetting that was approximately $30 million in capital deployed on the Drive acquisition and approximately $24 million on share buybacks under our normal course issuer bid. Also worth noting that since the quarter ended, we spent approximately $220 million on the acquisitions of Tai and extensive. And as we look ahead, we still remain well capitalized and ready to capitalize on potential M&A activities in our space. A couple more points as it relates to the remainder of fiscal 2027. Going forward, we expect to continue to see operating cash flow conversion north of 80% of our adjusted EBITDA, of course, subject to unusual events and quarterly fluctuations, including adjustments related to future earn-out payments that exceed our estimates made at the time of an acquisition. After incurring approximately $4.6 million in capital additions in the first half of the year, we expect to incur approximately $2 million to $4 million in additional capital expenditures this coming year, mainly related to IT equipment purchases. After deploying approximately $45 million on share buybacks in the first half of the year, we may see additional purchases under the NCIB program moving forward. After incurring amortization expense of $35.4 million in the first half of this year, we expect amortization expense will come in at $37.5 million for the remainder of fiscal 2027, with this figure being subject to adjustment for foreign exchanges and any future acquisitions. We estimate that payments of contingent consideration for earn-out agreements for the balance of this year could be up to approximately $9 million, subject to any necessary adjustments resulting from the final earnout calculations. Our income tax rate in the first half of the year came in within our expected range at approximately 26% of pretax income in line with our blended statutory tax rate of approximately 26.5%. For the remainder of fiscal 2027 we're expecting the tax rate will be in the range of 25% to 30% of our pretax income, which means it will be something on either side of our blended statutory tax rate. However, as always, we should add that our tax rate may fluctuate from quarter-to-quarter from onetime tax items that may arise as we operate internationally across multiple countries. And finally, after incurring stock-based compensation expense of $14.8 million in the first half of the year, we currently expect stock compensation to be approximately $15.5 million for the remainder of fiscal 2027, subject to any corporate stock offerings or share units. I'll now turn it back over to Ed Ryan to wrap up with some closing comments and our baseline calibration for Q3.

Thanks, Ed. It's still a challenging shipping market. International trade flows continue to adjust to a changing tariff landscape. Elevated fuel costs and driver shortages have impacted domestic trucking, continued Middle East unrest has extended sales impacted capacity and increased prices. El Nino weather events are creating transportation challenges through historical waterways. There are new restrictions on selling to the Panama Canal and there are port delays causing backups in offloading cargo. Even where the volumes of shipments are down because of the challenging regulatory and trade environment, we continue to see good demand from our customers to deal with the additional complexity and move goods. So we still see good demand in the face of pressures on volumes. This is particularly so with lower value shipments which on a country-by-country basis have moved from tariff-free, rapid process shipments to full compliance and customs authority review of shipments. On the plus side, we've seen some tailwinds on to shipment volumes from increased movement of AI infrastructure equipment. Slightly impacted a strong month of August for ocean shipments. August ocean imports into the U.S. were the third highest month -- monthly volume ever. We've got a couple of recent acquisitions that also impact how we look at the rest of the year. The first was Tai an excellent complement to our existing transportation management business for freight brokers, Tai is leveraging AI within their broker workflows already. and consistent with our own AI investment goals as a system of record, tierings additional broker transaction data to provide context to shipments on the global logistics network. An exciting addition that complements our existing business drives our AI goals forward and brings a very talented team at Descartes. Shortly after we bought time, we made a second investment into extensive formerly known as 3PL Central. Extensive provides warehouse management solutions to over 1,200 third-party logistics providers who are often managing fulfillment on behalf of e-commerce sellers. This fills a gap for us on what we were previously able to offer to 3PLs and is consistent with our approach to WMS where we focus on e-commerce and high-velocity warehouse movements. It also furthers our AI goal by bringing a rich set of omnichannel fulfillment data on over 150 million orders to the Global Logistics Network. We'll address this further in the next quarter, but we -- it may be worth noting that a small portion of extensive business sits outside the 3GLWMS core offering and is an area of the business where we expect some revenue attrition early next fiscal year. Our focus is on growing the 3PL WMS portion of the business, and our team is really excited about the opportunities that we'll have as a combined business. We've already seen outreach from some of our existing 3PL Descartes customers looking to learn more about extensive, so very promising right out of the gate. So it's a challenging macro environment for shipping with new things that come in to make it an ever challenged changing landscape for our customers, also 2 new investments in the first half of the quarter that will partially contribute in Q3. So we have limited operating history with either business at this stage. We keep this in mind as we think about how our business is financially positioned and calibrate. In our quarterly report, we provided a comprehensive description of baseline revenues, baseline calibration and their limitations. As of September 1, 2026, after the Tai and extensive acquisitions and using foreign exchange rates of $0.72 to the Canadian dollar, $1.16 for the euro and $1.35 to the pound. We've estimated that our baseline revenues for the third quarter of fiscal 2017 were approximately $181 million. Our baseline operating expenses were approximately $111.5 million. We consider this to be our baseline adjusted EBITDA calibration of approximately $69.5 million for the third quarter of fiscal 2027 and or approximately 38% of our baseline revenues as at September 1, 2026. We're currently operating above our expected adjusted EBITDA operating margin range of 40% to 45% and our margin can vary in any period, given such things as revenue mix, foreign exchange movements and the impact of acquisitions as we integrate them into our business. For now, we're keeping our target range as 40% to 45%, particularly in light of the other stages of integration for Thai and extensive. However, we'll monitor how we're performing over coming quarters to consider whether any upward adjustment is appropriate. These remain uncertain times for our customers. It's a challenge for them to know what they can rely on in this global trade environment. Our goal is to continue to show our customers and other stakeholders that 1 thing they can rely on is Descartes. 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 the call over to you to manage the Q&A portion of the call.

[Operator Instructions] With that, your first question comes from the line up Chris Quintero with Morgan Stanley.

Maybe first on Tai, really interesting acquisition there. I know you already have made some acquisition in this kind of broker TMS kind of space. So curious from your perspective, what about Tai is really additive and complementary to the rest of the portfolio there?

We think their software is best-in-class. We think that their AI capabilities are far ahead of their competitors. They obviously have a great growth rate -- and we thought they would be a great fit with some of the other tools that we bought in that space in the past, MacroPoint and Aljex my carrier portal, et cetera. So -- we're looking forward to it. We heard great things about them before we bought them, and those things appear to be true to us now that we have. So we're excited about that. .

And then maybe if you take a step back and look at the overall M&A philosophy. Obviously, these are some bigger deals than what you've done recently. But curious, any change around your M&A philosophy? And what gives you confidence around the integration and synergies you can get from these bigger deals here?

Well, we see less people showing up in the deal, and therefore, we see the prices coming down as they have in the public markets usually the private markets follow in turn, and we're starting to see that right now. And I think that played a role in being able to get these deals done. And I think player role in some of the future deals you see. We went through this once before in '08, '09, '10 -- and I don't know if the times are as bad right now, but there's a lack of confidence in software companies right now that's probably helping us get acquisitions done in harming all public companies and therefore, private companies in that sector. for the foreseeable future. So as 1 of the guys that's flushed with cash, we -- and also believes in our space, we look around and say, "Hey, we think we're going to be winners in AI. What are the companies out there do we believe will also be winners in AI and how can we come together with them at a reasonable price to get things done. An attitude like that and being in a position like that back in '08, '09, '10 in we thought really benefited us in the last 10 years as we bought stuff for very reasonable prices that ended up being big contributors to our business, and we'd like to see that be repeated again here.

Your next question comes from the line of Dylan Becker with William Blair.

Appreciate it did a nice job here. Maybe, Ed, I think you had defined -- this transitioning to a system of action, and you called out a number of interesting agentive use cases, but how do you think about kind of the opportunity more broadly to pair your network data with workflows and intelligence to make those decisions actionable how that kind of drives more value for customers moving to outcome-based pricing. The kind of areas you see that first resonating maybe more broadly and obviously how that kind of supports your conviction in aggregate platform differentiation over time.

We think AI is going to change everything. And that comes from our guy if you've known me for a while that it doesn't believe that all the time. Things like blockchain, people were telling me it's going to change the world. I don't know, we didn't agree. And we're open about say-so drones, I had to answer that question for years. And AI comes along and then we go, hey, I think this is going to be everything just like in 1999, if you said, what's your Internet revenue if I've given you a number, it would have sound silly 5 years later when everything was Internet revenue. And I believe the same is going to be true here. we started to try and break out AI revenue. We talk about AI as if there was some separate thing that was going to happen in the business that we think it's going to be everything in the business 5 years from now. We think it's going to rapidly and significantly enhance our ability to make our customers' lives easier, more efficient and as a result, help them make more money and service their customers better. And we believe it's going to be a part of everything we do very quickly. and we're headed there. And we believe we have a great shot because of the data that we have in our network and all the customers we have and all the functionality we provide them to put this together and make it work better than it does today in ways that you might not even be able to match it today as these things start to compound on each other. So we already have guys around here that are starting to see the future as we're building more things and going, oh, my god, if I put this in and this together, this could change everything for our customers. And we're starting to see that, and we're getting excited about it and trying to get there as fast as we can. Acquisitions like Tai are all part of that.

All right. That's really helpful. And then maybe 2, you called it out on kind of the tariff dynamic. You're starting to see some customers kind of get those refunds. At the same time, obviously, continues to kind of evolve. But I guess just how your conversations with customers progressing how they're thinking about deploying the refunds that they received into technology capabilities, just maybe kind of netting out some of the puts and takes and how they're helping -- or how they're thinking about navigating kind of the dynamic backdrop.

We're hoping to get it back in a lot of cases. I don't know that we've talked about what they're doing with it. The investments they're making in AI, I mean, the payback is so fast when they're doing something with us, we're giving the ROIs that are almost immediate because we charge transaction prices, right? It's charging to do something that you would add have a person spend an hour doing and I'm charging $0.25 for doing it. that's a pretty immediate payback. You don't need to be saving up to do that. And we think of it more like that. I'm not looking at the refunds like give that back to me. In fact, in a lot of cases, they're probably supposed to be giving it back to their customers. So we tend to not talk about that refund other than to help them get it back. .

And your next question comes from the line of Cole Couzens with Wolfe Research.

I saw the 9% -- or heard about the 9% services organic growth in the quarter. Can you talk about how much of that is underlying market trends versus share gains? .

I don't know if I have an exact breakdown. I mean, I can tell you that the -- there's not been a lot of growth in trucks and air volumes. There's been a little bit in ocean. So I would say we're selling a lot more stuff right now. Our sales force is doing really well, and we're selling a lot more things to customers. A lot of it AI kind of related stuff. And some of it's taking stuff from customers. I don't know. If I had to guess, I'd say it's 1/3 of its share gains from competitors and the rest is probably not so much transaction related, but just selling more of our tools to our customers, which may drive more transactions, but not necessarily becoming in the industry to have more transactions to get there. .

Sure. And then maybe looking forward, I know you've talked a lot about how the complexity of the shipping environment is kind of helping you guys at the moment. How do you foresee things playing out through the end of the year and into next year? If there is some sort of de-escalation at any point or even without it, is there any insight into how you expect things to trend talking about the worse just organic growth trends, like what's the outlook going forward? Does it seem like it's going to continue to be challenged? Did you exit in a better place -- just any insight as to I mean, look, we're real with 9%.

Thanks. We're happy with 9%. I don't know what the growth rate is going to be in the future, but I do know we -- 2 very good quarters a year ago in Q3 and Q4, so we're up against the challenge to provide the same growth rates just because the quarter really picked up. We'll see what we can do here. Lock in 9% for the rest of my life, I would take it right now. That's a great number for us, especially when we're trying to grow 15% EBITDA to have 9% organic growth in pockets great. I hope we can keep that up. Could it get better? Of course, it could. I mean we've seen it a couple of times in the last 10 years around the pandemic, get much better than that even. I don't want to count on that. And it doesn't feel like it's -- business is turning down right now, but like it's going quite well. So I don't know will that turn around 1 day, I'm sure it will, but I don't see it in sight right now. So we're happy about that, and we're trying to continue to run a good business and not get ahead of ourselves, knowing that we don't know what's going to happen a year from now.

And your next question comes from the line of Stephanie Price with CIBC.

Congrats on the 2 big deals recently. Just curious in the current M&A environment. If you're more interested in the growth year kind of names in the pipeline or opportunities that are maybe a bit cheaper but need to be restructured. It sounds like you got 1 of each in this quarter, and just curious how you're thinking about it here?

Well, we'll do either. We certainly over the years -- 15 years ago, we used to do a lot more fixer uppers. We started to buy growth year assets and have to pay up for them, but we found a lot of success in doing that. Now in this environment, we're looking probably first and foremost, looking for stuff that we think is going to help us grow and looking to pay a better price than we may have had to pay a couple of years ago because what's happening in the market, and we see what's happening in us because of AI and see what happened to the rest of the market because of AI. I don't believe that the reaction they're having to us is indicative of what's going to happen in the long run. I think we're going to benefit from AI. And the bet right now is that us and every other software company at the time, it's going to suffer from it. And I don't know about everyone else, but I think we're in pretty good shape because of it. And in fact, I think we're going to benefit from it significantly. So we're looking to pick up assets that we think are going to do the same. And it would be nice if they had growth, and it would be nice if I could pay a reasonable price for them because I don't like where we're trading at right now. And so I don't want to have to pay up for someone else. And the fact that we're trading at a lower multiple than we were historically helps us in making an argument someone else today, your company may not have been worth what you thought it was. And that helps us get a deal time, tie and extensive post, we probably wouldn't have been able to get done a couple of years ago because the multis they wanted we did not believe it. And because of what happened in the market in the last year, we were able to get a deal on itself from when we thought it was fair. And so we did that.

So in that kind of environment, would you be willing to take on leverage to if you continue to see compelling M&A opportunities? And what kind of -- do you have a target leverage ratio that you'd be to fill up to?

I'm sure we take on leverage to do it. It would depend on the asset. We'd have to -- obviously, we have to say on leverage do we have to factor that into the calculation and whether it's worth it. So it has to be something we think it's a good deal. But we've always been comfortable going up to 3x. We've done it a couple of times and paid it off very quickly. We make a lot of money right now, and we're making $100 million a quarter. That's -- that's a lot of money to spend on acquisitions. So if we happen to get something big enough that we needed to lever up to do it, we would go up to 3x to do it, and we'd probably spend our time paying it off pretty quickly. .

And your next question comes from the line of Lachlan Brown with Rothchild & Company.

Project the recent acquisitions will likely carry lower margins in that 40% to 45% range. Maybe just what impact should we expect these deals to have on adjusted EBITDA margin in the short term? And any color on the duration of the cost synergy ramp.

I'm going to pass this to Ed but I would just say that they don't make as much money as a percentage of revenue as we do. So it's going to take it down. I don't know how much more I want to say about it. .

Yes. Look, I think it's -- we still don't know exactly where they'll settle. That's something we'll work on as we get through the integration. But -- and there is there's always a bit of work whenever we combine with someone. It's rare that we find someone that's got the same margins in on day 1, but we look to have a path to get there as they scale. And I think the there'll likely be an impact this quarter. But as you can probably see as you take a look at the calibration compare 1 quarter to the next, it's not a massive impact.

And I thought that was an interesting comment made by expeditors recently that AI is contributing 50% of the growth in U.S. net imports. You've obviously delivered quite robust organic services growth of 9% great over the last couple of quarters. So I guess my question is, how much of a tailwind is the AI supply chain being the GLN network and if so, is there any outlook on the visibility here?.

Well, you heard me mention it in my prepared remarks, so enough to get nothing mentioned. I wouldn't go buy in the stock ever. It's -- but it's been helpful to our customers and there for help with us.

And your next question comes from the line of Kevin Krishnaratne with Scotia Bank. .

Thanks for all of that commentary on the various agent solutions sounds really interesting. I had a sort of a 2-part question on talent. As you start introducing more and more of these solutions, does that require any change in the go-to-market, maybe having more technical sales, sales engineers with AI experience. Just wondering anything to comment there on customer education. And then second part is, you yourself are a company with a wealth of knowledge and logistics and supply chain expertise, that's a hot area and companies are looking to build competencies there, whether that's forward-deployed engineers.

Let me just get to the first question as I'm not as fast as us. So as far as sales reps going, I don't think the sales reps are going to be out talking about the -- all the things that AI does at any kind of technical level. I think it's going to be delivering -- talking about delivering functionality and solutions that the customers might not have imagined were possible because we're using AI. And I don't need to explain the technology to them. I never did. And I think, no, we have salespeople that are here a long time. We go to great lengths to make sure we keep our good salespeople. And that means that there are all experience and understanding logistics and supply chain I just heard someone -- 1 of our sales managers around here saying we win most deals because we know more than the other guys about what our customers do for a living. And that's what we need to know to walk in and explain to our customer, how we're going to solve a new problem using AI and the technology behind it is it's not going to be described in any great to -- so that's the answer to the first question. Can you ask your second question again? .