The Descartes Systems Group Inc. Q2 FY2026 earnings call

Key Highlights - Record quarterly revenues and adjusted EBITDA were achieved. - Total revenues were $179.8 million, up 10% year-over-year and 7% quarter-over-quarter. - Adjusted EBITDA was up 14% year-over-year to $80.2 million, with an adjusted EBITDA margin of 45%, up 2 points from the year ago period. - Cash from operations was $63 million, despite $5 million in personnel departure costs. ### Growth Drivers - Global Trade Intelligence: Demand for tariff solutions remained strong due to the complex tariff environment. - Customs and Regulatory Solutions: Growth from transitioning to new filing mechanisms for de minimis programs in the U.S. and demand for foreign trade zone solutions. - Transportation Management: Strength in MacroPoint tracking solutions (with high compliance rates), 3GTMS, and fraud prevention. ### Acquisitions - In June, acquired PackageRoute to complement GroundCloud. - Just after the quarter ended, acquired Finale Inventory to enhance e-commerce solutions, complementing Sellercloud and providing a comprehensive solution set for e-commerce sellers.

Total revenues for the second quarter were a record high of $179.8 million, up 10% from the year ago period and 7% from the previous quarter. Services revenue was $166.8 million, accounting for 93% of total revenue, up 14% from the year ago period. License revenues were less than 1% of revenue. Professional services and other revenue was $12.8 million, down from $15.8 million in the second quarter of the previous year. Foreign exchange had a positive impact of approximately $2 million on revenue this quarter. Excluding the impact of recent acquisitions and foreign exchange, organic services revenue growth was around 4% in the second quarter.

Q3 Baseline - As of August 1, 2025, baseline revenues for the third quarter of fiscal 2026 were estimated at approximately $157.5 million. - Baseline operating expenses were estimated at approximately $96.5 million. - Baseline adjusted EBITDA was estimated at approximately $61 million. - Expected adjusted EBITDA operating margin range is 40% to 45%, subject to revenue mix, foreign exchange movements, and acquisitions.

Risks - Geopolitical, trade tariff, and economic uncertainty can materially impact business and financial conditions. - Foreign exchange fluctuations may affect financial results. - Market uncertainty can cause customers to delay purchasing decisions, impacting shipping volumes and revenue.

Q: How do you think about the recovery of the transactional side of the business, especially considering de minimis going away?

A: On de minimis, it initially seemed like a wash, but our competitors struggled to process the new filings while we had the scale and scope to handle it, leading to more business. Tariff impact was good this quarter, but uncertainty still exists with ongoing court challenges and appeals.

Q: Can you contextualize the impact of record shipping volumes on organic services growth and softer areas?

A: There was good strength in Global Trade Intelligence, regulatory compliance, and transportation management solutions. Some transactional services were flat or slightly down, but overall organic services revenue growth was around 4% which was good under the circumstances.

Q: Update on restructuring and its progress versus expectations?

A: Restructuring is fundamentally complete. Savings of approximately $2 million were realized in the quarter, and it has worked out largely as expected given the weakness in transaction volumes.

Q: Are customers still tripping minimums on transaction revenue?

A: Not having a lot of discussions about people not hitting minimums. Subscription sales held up due to customers needing information to manage the complex trade environment.

Q: Size of fraud prevention business and potential M&A?

A: Fraud prevention is less than 1% of the business, growing nicely, but still small. Acquisitions in the fraud prevention space are being considered, but it's too early to say definitively.

Q: Biggest surprise of the quarter and what to see for confidence?

A: The pleasant surprise was networks picking back up. What we'd like to see is more certainty for customers to start shipping more again, which would positively impact the business.

Q: Drivers of MacroPoint's strength despite flat trucking volumes?

A: Largely winning market share by having a high track rate (approaching 90%) and focusing on network connectivity, unlike competitors who struggle to track shipments effectively.

Q: AI strategy and acquisition of AI-native technologies?

A: We consider buying profitable companies with customer needs. Focus is on logistics and supply chain AI functionality; we may acquire AI-native technologies if they align with our customer base and are profitable, but also consider internal investment.

Q: Barriers to entry to prevent disruption by AI start-ups?

A: Our network connectivity, certifications, and scale are significant barriers. Competitors would need to match our extensive network and compliance with various regulations, which is difficult.

Q: Offset to service organic growth being flat quarter-over-quarter?

A: 4% organic growth in Q2 was good under the circumstances, and we were concerned it might go down, so the stabilization is positive.

Q: De minimis question on customer switching filings and business size?

A: Customers switched from Type 86 to Type 1, etc., and our ability to handle the large volumes of these new filings better than competitors led to this becoming a bigger business than initially expected.