Prepared remarks
Good afternoon, everyone, and welcome to Descartes Systems Group Quarterly Results Call. I would now like to hand the call over to Scott Pagan. Please continue.
Thanks, and good evening, everyone. Joining me in person on the call today are Ed Ryan, CEO; Allan Brett, CFO; and Ed Gardner, EVP, Corporate Development. 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 future and current 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, timing of management changes, the approval and potential share purchase 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 Ryan.
Thanks, Scott, and welcome, everyone, to the call. Today, we're reporting record strong quarterly revenues and adjusted EBITDA. We're now ahead of our year-to-date plans and focused on a strong end of the year. We're excited to go over these results with you and describe how we're well positioned to help our customers in an environment where they're making many tariff and artificial intelligence investment decisions. But first, let me give you a road map on this call. I'll start by hitting some highlights of last quarter, some aspects of how our business performed and how we're positioned to help customers. I'll then hand it over to Allan, who will go over the Q3 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 we'll then open it up to the operator to coordinate the Q&A portion of the call.
So let's start with the third quarter that ended October 31. Key metrics we monitor include revenue, profits, cash flow from operations, operating margins and returns on our investments. For this past quarter, we again had strong record performance in each of those areas. Total revenues were at a record high of $187.7 million, up 11% from a year ago. Record high services revenues were up 16% from a year ago with our continued focus on generating recurring revenues. Record net income was up 20% from a year ago. Record income from operations was up 24% from a year ago. Record adjusted EBITDA was up 19% from a year ago. Our adjusted EBITDA margin was up 3 points from a year ago to 46%. We generated a record high of $73 million in cash from our operations, up 22% from a year ago. So strong record results across all of these key metrics. At the end of the quarter, we had $279 million in cash, and we were debt-free with an undrawn $350 million line of credit.
That included us using $37 million of our cash in Q3 to acquire Finale inventory, an acquisition that we discussed on our September financial results call. We remain well capitalized, cash generating, growing and ready to continue to invest in our business. Our principal growth drivers in Q3 were largely the same as I've described in detail in past quarters. They are as follows. First, global trade data and intelligence. It remains a chaotic tariff and trade environment for our customers. In the last 90 days, our customers have seen these significant changes. One, a truce on tariffs between China and the U.S., extending the tariff status quo while negotiations continue; two, tariff expansions on metals, copper, timber and furniture; three, tariff relief for foodstuffs; four, new reciprocal trade agreements between the U.S. and countries like Argentina, Switzerland and Malaysia; and five, the implementation and temporary pause and enforcement of BIS 50, a regulation that expanded the number of denied parties that the U.S. entities needed to screen against.
We continue to be a provider of choice for our customers for tariff data, sanction party assistance and research on trade flows. We help our customers keep their business flowing and help them plan for tomorrow. When things are changing rapidly, they rely on us for timely and accurate updates. In Q3, the changing trade environment provided strong demand for our solutions. Second is foreign trade zones. The uncertain trade and tariff environment has many of our customers needing more of our help to find the most efficient way to import goods. One mechanism that's being investigated by more of our customers than ever before is foreign trade zones or FTZs. These are designated spaces for U.S. companies to import goods on a tariff and duty deferred basis, only triggering payment when the goods are removed from the FTZ for shipment into free circulation. There's a detailed regulatory regime to manage these FTZs, including keeping track of everything flowing in and out of the FTZ and regular government reporting.
However, with heightened and uncertain tariffs, it has become an effective way for our customers to manage their imports and cash flow. We've seen higher demand for our FTZ solutions than in previous years, and that was a good driver again this quarter. The third is e-commerce customs clearance. Earlier in the year, the U.S. eliminated the de minimis exemption, which allows foreign companies to ship goods duty-free to U.S. customers where the value of the goods was less than $800. With that exemption gone, foreign e-commerce sellers needed to adapt to a new regulatory structure with new filings and submissions of tariffs. To do this, these sellers and their brokers need solutions that can handle large volumes and velocities of shipments that interact with U.S. customs and get goods cleared quickly to prevent delivery delays. We have market-leading solutions to help these high-velocity importers, and it was a strong driver of growth in the quarter.
The fourth is real-time shipment visibility. Shippers and brokers want real-time visibility into the location of shipments in transit. Shipment tracking is an expected part of the consumer experience. So this is critical information for customers. In the business-to-business environment, shipment tracking allows for better planning on preparing delivery resources, whether they be loading dock doors or human resources unloading trucks. Getting accurate location information isn't always simple, particularly in the truck market as many smaller independent truckers may not have the technology to provide automated location information. However, our MacroPoint solutions are the best at getting tracking information, leveraging carefully designed mobile applications and artificial intelligence agents. This market-leading tracking rate led to continued strong network performance by MacroPoint in the quarter.
So similar revenue drivers to previous quarters have contributed to our record revenue performance this quarter. When combined with the cost rationalization effort we undertook earlier this year, we also had record operating performance. So next, I want to talk about artificial intelligence because it's becoming a bigger and bigger part of our business. I mentioned artificial intelligence helped our MacroPoint business, but I wanted to take a bit more or talk a bit more about how AI impacts Descartes overall. First, let me give some context for when you're thinking about Descartes and AI. Descartes is the network business with a huge network infrastructure. We run the global logistics network. We're built by connecting huge numbers of shippers, carriers, governments and logistics intermediaries together. We are not an enterprise software business. Logistics and supply chain problems are not enterprise problems.
They are inter-enterprise problems and challenges. To solve them, you need data from multiple external sources, and that's what we do. We transmit and house massive amounts of data to help our customers source trusted, clean, formatted and real-time data because that's what's most valuable to them. So the questions I've been getting from shareholders, analysts and others is what's the impact of artificial intelligence on Descartes' business? The answer is that the impact is overwhelmingly positive. I'll talk about this in detail, but in summary, AI increases demand for our data and decision-making tools. Our customers want massive amounts of clean, formatted real-time data to help them make decisions on our own network or to power their own AI investments. Data is the fuel for AI solutions. That data needs to be from a trusted source; everyone knows poor data can lead to poor decision-making and execution.
AI allows us to offer new solutions and services leveraging our network infrastructure and data, and AI allows us to run our network and business more efficiently. Now let me go into a bit more detail. The first GLN data powers AI. AI tools massively speed up the pace of automation for our customers. With AI agents or agentic AI, we expect that most of our customers will eventually be running some form of AI tools to automate processes within their business. These AI tools are powered by data. Businesses that will be the most successful with AI are the ones that can train their tools with enormous amounts of current and clean data. In the supply chain and logistics world, that means that our customers' AI strategies and successes are relying on getting more clean data from their trading partners. Our customers need information about things like the location, schedule and amounts of resources not in their control, including inventory, vehicles, vessels and people.
This is why AI makes Descartes' Global Logistics Network even more important for the customers. The Global Logistics Network helps our customers get massive amounts of real-time data for an enormous number of global trading partners delivered in a clean manner that can power AI tools. The scale, reach and global nature of Descartes' network has never been more important to our customers. Descartes is a network business; we get paid as we help customers get and process more data. We believe that AI is a huge potential tailwind in demand for our Global Logistics Network. The second is that the GLN data includes the collective intelligence of the network. We expect that our customers will use AI to answer questions about how to best run their own businesses, and the power of AI may mean that they'll be able to answer questions that they haven't even thought of asking yet. But some of those questions will be best answered using the collective intelligence of data available on the Global Logistics Network.
Think of it as the difference between predicting the traffic patterns on a particular road using only vehicles in your own fleet compared to being able to get a better answer for traffic patterns using the vehicles of every participant on the Global Logistics Network, where the difference between responding to a shipment delay by limiting yourself to one airline you've worked with, versus every possible alternative with an air carrier available over the Global Logistics Network. Collective intelligence, available over a massively scaled network, matters when you're solving inter-enterprise solutions, and that collective intelligence is another data source that powers AI for our customers. The third area is the GLN fueled AI with real-time information. Further, the most successful businesses will power their AI with current information so that the answers they get aren't stale. For that, our customers really need real-time and constantly updated information from a trusted source dedicated to data, and that's what the Global Logistics Network provides.
We're processing shipment moves and getting location information in real-time. We're quickly updating compliance rules, sanctioned parties, tariff rates, trade agreements and regulations, shipping rates, and schedules. We live, eat and breathe supply chain and logistics at scale. And we believe that's even more powerful business in the AI world. So we believe that just the fact that our customers want to use AI increases demand for the Global Logistics Network, but AI also allows us to make meaningful changes in the services and value we deliver to customers and also in how we make our own operations more efficient and effective. Next area is AI enables new GLN services for our customers. We recently ran an internal employee AI Descartes hackathon with exactly that goal in mind. What are our employees' ideas for using AI to deliver more value to customers or making our business more efficient?
We had overwhelming employee interest and participation with more than 50 new suggestions for projects, and this is in addition to the projects we've already completed or have underway. Generally, we leverage AI for customers in two ways: One, by delivering new automated services that were too expensive or challenging when they were manual; and two, by allowing our customers to leverage the large amounts of data on the GLN to get better or faster answers that can help them manage their business. An example of new automated services include using agentic AI with our MacroPoint business. MacroPoint helps our broker and shipper customers get location information on in-transit shipments. Oftentimes, we can get this information from direct data feeds to vehicle telematics or trucking company transportation management systems. However, there's still a substantial number of small and/or independent truckers that don't have those technological capabilities.
Having a staff of hundreds of people to call these trucks and ask them where they are just isn't economically feasible for our customers. However, with agentic AI, we can work with them to download and use our mobile app or automate inquiries to truckers and get more tracking information for our customers much more efficiently. In just a few short months, we've had more than 300,000 outreaches using our AI agents, resulting in more than 180,000 drivers joining the MacroPoint network. The result is happy customers, more billable truckloads for our customers. So it's a great example of an enhanced service that just wasn't feasible before AI automation came to the table. Some other things that were already got underway for our customers, natural language searches of our GLN data mine U.S. import information and faster results to get competitive intelligence. Automated logic and denied party screening to deal with challenging match scenarios on parties with ambiguous names and addresses.
This allows customers to process large shipment volumes more quickly. Free trade eligibility assessments using AI recommendations based on past practices, helping our customers reduce their tariff bill, automated tariff classification suggestions for goods, using AI agents to interpret lengthy carrier rate agreements and present optimal selection recommendations; and finally, leveraging actual historical delivery service times for particular businesses to allow for better planning decisions. AI also allows us to run our own network more efficiently. AI allows us to make our own internal operations more efficient by automating tasks, minimizing human error, and enabling oversight and analysis that wasn't previously possible. For us, AI can help us with these areas such as enhanced network security as we deploy tools to monitor, target, and even counterattack malicious activity; more intense network performance monitoring to minimize service disruptions; code development by providing engineers with a running start with suggested code and development or maintenance of services.
This is something we're already seeing great benefit in. And finally, automated and self-serve customer service, leveraging the enormous amounts of product documentation that we produce. So AI has a great opportunity for Descartes and for our Global Logistics Network. We believe it will spur further demand for our trusted real-time clean formatted GLN data and the collective intelligence of the network. It's already allowing us to deliver additional value to our customers with enhanced services, and it's helping make our business more efficient. We believe that the inter-enterprise scaled network infrastructure of our business puts us in a much better position to benefit from AI than legacy or emerging point or enterprise technology solutions. To sum up before I hand it over to Allan, Q3 was a very strong quarter for us. Trade and tariff uncertainty fuel demand for many of our services. We saw AI have a meaningful impact on our service delivery to customers and we completed an acquisition of our e-commerce pillar that's already contributing, an excellent job all around by our Descartes team.
I'd like to touch on one other item outlined in our press release today, and that is that we're planning on a CFO transition after the end of this fiscal year. Allan has decided that after more than 30 years as a public company CFO, including 12 at Descartes, he wants to take steps towards retirement. So Allan will be handing things over to Ed Gardner in March 2026, consistent with our established CFO succession plan. Allan is going to stick around in the business as an adviser to help us with the CFO transition and also more generally to keep helping our business grow. It continues to be a great privilege to work with Allan. He cares for the business a ton, which I think is reflected in his desire to stay involved with the business going forward. We're also thrilled to have Ed Gardner ready to assume the CFO role, someone that I've worked with for more than 20 years, and Allan has worked with over his entire 12 years at Descartes.
Ed has a ton of financial experience with our business and the many acquisitions that we brought on board and will likely already be a familiar face to many shareholders and analysts. With Allan and Ed's long working relationship together, we expect a seamless transition in March. So those are our plans for the future, but we still have Allan in the saddle until March. So now I'll turn the call over to him to go through our Q3 financial results in more detail. Allan?
Thanks, Ed. I appreciate those words. I will now go through our financial highlights for the third quarter, which concluded on October 31. We are pleased to announce record quarterly revenue of $187.7 million this quarter, marking an 11% increase from $168.8 million in Q3 last year. Revenue growth was boosted by acquisitions made in the last 12 months, including 3GTMS and Finale inventory, but we also saw significant growth in services revenue from both new and existing customers. Our revenue mix this quarter remained robust, with services revenue growing 16% to $173.7 million from $149.7 million in the same period last year, representing about 93% of total revenues for the quarter. We estimate that organic services growth, on a foreign exchange-neutral basis, was around 7% in Q3, up from about 4% in each of Q1 and Q2 this year. While we experienced reasonable strength in our transaction volumes during Q3, the primary growth in services revenue came from our global trade intelligence segment, as well as the e-commerce customs filing business and our transportation management solutions, including the MacroPoint trade visibility solution.
As anticipated, the strong growth in services revenue was partially offset by a decline in license revenue, which came in at $1.7 million or 1% of revenue for the quarter, down from $3.5 million in Q3 of the previous year. Professional services and other revenue totaled $12.1 million or 6% of revenue, down from $15.6 million last year due to approximately $3.7 million of low-margin hardware sales in last year's comparable period. We expected these lower license and hardware sales and continue to focus on growing services revenue across the business. For the first nine months of this year, revenue reached $536 million, an 11% increase from $484 million last year, driven by both acquisitions this year and organic growth in existing solutions. Services revenue grew approximately 15% compared to the same nine-month period last year. Gross margin for Q3 was 77% of revenue, up from 74% in the third quarter last year, primarily due to low-margin hardware sales from last year's figures.
Excluding those hardware sales, gross margin would have slightly improved compared to the same quarter last year, due to the continued leverage from revenue growth driven by new and existing customers. Operating expenses rose about 11% during Q3 compared to the same period last year, largely due to costs stemming from acquisitions made in the past year, which were partially offset by the benefits of a restructuring plan implemented in Q2. Consequently, due to effective cost control and the operational leverage gained from both acquisition and organic revenue growth, we achieved adjusted EBITDA growth of 19% to a record $85.5 million, which is 45.6% of revenue, compared to $72.1 million or 42.7% of revenue in Q3 last year. Over the first three quarters, adjusted EBITDA rose 15% to $241 million from $210 million in the same period last year, while adjusted EBITDA margins increased to 44.9% from 43.4%.
In our GAAP financials, net income was $43.9 million or $0.50 per diluted common share for Q3, which is an increase from $36.6 million or $0.42 per diluted common share in the same quarter last year. The income tax expense for Q3 was $14.5 million or 24.8% of pretax income, slightly lower than our blended statutory tax rate of 26.5%, mainly due to recognizing some previously unrecorded R&D tax benefits. Net income for the first nine months of the year amounted to $118 million or $1.35 per diluted common share, compared to $106 million or $1.21 per diluted common share in the same period last year, reflecting higher operating profits. Given these operating results and strong accounts receivable collections, adjusted for higher cash tax payments, cash flow from operations totaled $73.4 million or 86% of adjusted EBITDA in Q3, up from $60.1 million or 83% of adjusted EBITDA in Q3 last year.
In the first nine months, operating cash flow increased by 20% to about $190 million or 79% of adjusted EBITDA, up from $159 million last year. During these nine-month periods, cash flow from operating activities was impacted in the current year, with amortization expenses expected to be about $21 million for the fourth quarter, subject to adjustments for foreign exchange rates and future acquisitions. Our income tax rate for the first nine months was approximately 24.1% of pretax income, slightly below our statutory tax rate of 26.5%. For Q4, we expect our tax rate will be close to our blended statutory tax rate, likely in the range of 24% to 28% of pretax income, though this may fluctuate quarterly due to one-time tax items as we operate internationally. Additionally, we've incurred $14.8 million in stock-based compensation expense during the first nine months, and expect this to be around $6 million in Q4, subject to any forfeitures of stock options or share units. That's the financial update. As Ed mentioned, we are preparing for a smooth CFO transition, and I look forward to working with Ed Gardner on this.
Thanks, Allan. These continue to be challenging business conditions for our customers. From a tariff and trade perspective, I outlined earlier, some of the things that have happened over the past 90 days. Looking forward, the U.S. Supreme Court is considering the legality of many tariffs with no identified timeline for resolution. Customers are also adjusting to new commodity-specific tariffs, and given the speed with which they were implemented, remain uncertain about additional tariff changes they may see in Q4. And there remains ongoing geopolitical tensions impacting trade, whether it's tensions in the Middle East impacting trade lanes, the ongoing war in Ukraine impacting it and its resulting trade sanctions or the potential uncertainty in understanding how consumers will behave in this economic environment, and the early returns seem positive. This buying reaction will have a big impact on general economic activity and shipping related to inventory replenishment in 2026.
For Descartes, we've grown during challenging business conditions in the past. Our plan is to continue to do so now. Some of the things that we believe continue to put us in a good position to do that include we're particularly strong in global trade intelligence. We believe we can provide a ton of help to our customers in an environment where people are looking for information or help managing tariffs, continually updating sanctioned party lists, bursting for competitive intelligence, dealing with increased export licensing complexity and implementing new duty deferred foreign trade zones. We're diversified globally. We've got domestic transportation solutions that can be used around the world and where there's shifting international trade relations, we have an established global logistics network that can be leveraged by our customers. Our network model and processing of large amounts of clean, formatted real-time data put us in a great position to capitalize on AI opportunities.
We have a total growth model. We have an extensive track record of acquisition activities to complement organic growth. Changing market conditions often provide us with even more opportunities to add solutions for our customers and grow by acquisition. Finally, we're a well-capitalized cash-generating business. At Q3 quarter end, we had $279 million in cash and a $350 million undrawn line of credit. In our quarterly report, we provided a comprehensive description of baseline revenues, baseline calibration and their limitations. As of November 1, 2025, using foreign exchange rates of $0.71 to Canadian dollar, $1.15 to the euro and $1.32 to the British pound, and including the estimated contribution from the acquisition of Finale inventory, we estimate that our baseline revenues for the fourth quarter of fiscal 2026 were approximately $161 million, and our baseline operating expenses were approximately $98.5 million.
We consider this to be our baseline adjusted EBITDA calibration of approximately $62.5 million for the fourth quarter of fiscal 2026 or approximately 39% of our baseline revenues as of November 1, 2025. We're currently operating above our expected adjusted EBITDA operating margin range of 40% to 45%. 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 at 40% to 45%. However, we'll monitor how we're performing over the coming quarters to consider whether any upward adjustment is appropriate. We've noticed that there's been uncertainty in public market conditions that have contributed to lower than historical valuation multiples for many logistics and supply chain technology companies including Descartes. Considering how Descartes is currently performing, we remain optimistic about our ability to achieve our long-term financial plans.
However, it's uncertain how public markets will trade for the foreseeable future given everything going on in the world. With that uncertainty, we believe it's prudent and in Descartes' interest to apply to start a normal course issuer bid to have the option to purchase Descartes shares in the open market over the next 12 months if and when we think it makes sense. Having the normal course issuer bid mechanism available to us will allow us to react quickly and appropriately to differing public market conditions. 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 the one thing they can rely on is Descartes. Thank you 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 now turn it over to you for the Q&A portion of the call.
Questions and answers
Your first question is from Chris Quintero from Morgan Stanley.
Allan, congrats on a fantastic run here and best of luck in your next part here of your life journey. I wanted to double-click on the organic growth rate, specifically around the transaction volumes. Allan, I think you said reasonable strength. So what did you exactly see there? Was there an improvement in the volumes? Or was it kind of largely a stabilization? How would you describe the volume component here?
A significant portion of the increased volume came from our competitors. The trade sets for ocean and truck were relatively stable, but we managed to achieve growth in those areas because we offered solutions that were more appealing to customers compared to some of our previous competitors who had limited success. This allowed us to gain traction in areas like the Type 86 filing, where we secured a considerable amount of business in the BIS 50 area due to new government regulations. We were able to strengthen our market position and attract numerous new customers with larger contracts that committed to us for an extended period, especially when we implemented customs filing initiatives. Despite the transportation statistics not being as strong as we would prefer, we still experienced substantial growth in our market position. Additionally, various AI initiatives mentioned earlier are already making a positive impact.
Although I didn't mention it in my prepared comments, MacroPoint achieved an 87% truck rate, which is the highest in the industry by a 20-point margin. Customers still want to track all their shipments, and we didn't rely on AI to raise that number; it has now reached 90%. This shift occurred in just a few months. As a result, we're not only generating more revenue but also keeping our customers satisfied, which leads to them paying us more. Our ability to provide tracking for all shipments has enabled us to outperform our competitors, who have not adapted to the market with these kinds of solutions as quickly as we have.
Got it. Okay. So stable-ish kind of industry volume trends, but you all just really took some market share here in the quarter. I would love to follow up on the AI commentary you gave at, totally makes sense from the macro point perspective, improving that tracking percentage rates. How do you think about the monetization angle of it? Are you charging higher prices? Is there a separate SKU to get some of this agentic capability? How are you thinking about that more broadly?
There are several ways to address this issue, but some key aspects relate to our challenge with employees identifying new solutions. It's about providing more to our customers using the data we already possess. For instance, if a shipment is delayed and we are aware of its expected arrival, we can detect issues with transportation, whether by plane, truck, or ship, indicating a potential problem. We can then identify that problem, devise a solution, and implement it for the customer. I envision a future where we can charge customers for this service, as tasks that once took them hours to handle internally often yielded subpar solutions. In a few years, we might be able to inform a customer that their shipment will be 8 hours late and explain the reasons behind the delay. We might have already resolved the issue and booked them an alternative route, resulting in only a minor delay. To our customers, this would be beneficial, potentially saving them hundreds while alleviating customer dissatisfaction.
In the scenario described, we would have recognized the issue more swiftly than they could have, presented the optimal solution given the circumstances, and successfully rebooked them. They will be willing to pay for this service, especially when they receive negative news but find that the outcome isn’t as detrimental because we utilized AI tools and our network data to devise a superior solution for their needs.
Your next question is from Dylan Becker from William Blair.
Allan, congrats on the retirement, all the best. It's been a pleasure working together. Maybe sticking on the theme of AI with you, Ed, to start. I appreciate all the color on kind of the opportunity for value and monetization to come, but maybe if we think about the implications to kind of a moat and platform defensibility of the network here, maybe there's perception or at least the bottom threat in competition entering the space. It feels like the scaled network that you guys have is a massive differentiator. But wondering maybe how you think about the network as a leg up not only on compounding value but also maybe the complexity of trying to replicate this or something like this from scratch.
I've been in the network business my entire life, and I can give you two examples. Competing with us as a network is nearly impossible unless you have all the connections. No one is going to switch from my network to yours if you only have half of the connections that I do. Companies need people who can address the entire problem, making it very difficult for newcomers to compete from the ground up. The same goes for the data content business; you need to have all the data. You can't just gather some of it and expect to compete with us. It's unattractive to customers. Essentially, you have to invest a significant amount of time and effort upfront to recreate those businesses. Even if you can attract customers, by the time you can monetize it, you could be looking at five to ten years. During that time, the data and connections will evolve. We had the advantage of building our network from the ground up when it all began.
There hasn't been a new network entrant in 20 years, and the same applies to data content as people started collecting it. The challenge is acquiring all the data you need from the start. Our data content businesses are so profitable because we don’t overcharge any individual customer. We’ve amassed all the data over time, and now we just need to keep it updated, which has some costs. However, once you cover those costs, it's a highly profitable business since all new customers contribute pure profit. If you were to start from scratch, you’d be losing money for many years before breaking even. This makes it unattractive for others to re-enter the market. Given all the services we provide and our pricing, it’s simply not appealing for new entrants. They would likely lose a lot of money over a long time before achieving any success, which probably deters people from trying. That’s why we haven’t seen anyone attempt it.
Great. That makes perfect sense. And then maybe switching over to Allan or Ed, if you have thoughts on this as well, too. But on the services, the organic services step up, how should we think about kind of the sustainability of subscription demand given we continue to highlight multiple moving parts and factors driving sustained complexity here. And then if you do think and you segment it out on kind of the volume recovery side, more of a market share story at this point, how we should think about kind of the volume normalization continuing to play out over time as maybe we get a sense of normalcy at some point here in the future.
I think our customers are uncertain about what's going to happen, and that's reflected in the market. When that uncertainty subsides, we might see an increase in volumes, provided the economy is stable at that time. However, we don't have a definitive answer to that. What we do know is that we need to operate our business to achieve growth of 10% to 15% and ideally exceed 15% growth in EBITDA, regardless of the circumstances. That's why we implemented cost-cutting measures earlier in the year. We didn't want to make those cuts, but we are committed to delivering on our promise to shareholders of growing 15% or more each year compared to the previous year. We remain focused on this goal. While there are factors we cannot control, there are many we can, particularly regarding revenue and costs, where we have significant influence. It’s not easy to make tough decisions like downsizing, but we believe it's necessary to manage our business effectively and maintain investor interest, allowing us to acquire more companies when others face challenges because they are unwilling to make difficult choices. This approach sets us apart from many smaller competitors in the industry; it’s simple to pursue high growth, but when difficulties arise, we need to keep the business running smoothly while adapting.
The next question is from Paul Treiber from RBC Capital Markets.
Congrats Allan, on the retirement. Just first question, the U.S. Department of Transportation announced a number of changes to U.S. trucking regulations. How do you see those impacting your domestic trucking business positively or negatively?
I don't think these new regulations will significantly impact us. Typically, when governments implement rules, we assist our customers in adhering to them. It's uncertain how these specific regulations will play out. However, with the need for more precise tracking of trucks and ensuring drivers are compliant and not working excessive hours, companies need software solutions. Our services help manage large fleets effectively, allowing customers to operate more efficiently. By purchasing our software, they can meet government regulations while also saving money, which can offset the costs of compliance. I anticipate more regulations will continue to emerge for truckers, and we aim to be ready to assist them with solutions that not only comply with these regulations but also enhance their operational efficiency, enabling them to bear these new costs.
And then just a second question, just on capital allocation. You did mention valuations are down. You're putting in place the NCIB. It sounds like you see opportunistic opportunities. How do you look at the balance between repurchasing shares and capital deployment on acquisitions, like is there a priority for one versus the other? Does it depend on relative valuations of each?
Well, we see a lot of stuff for sale right now. And we think the winner in this space is going to continue to bring businesses in and make them part of their own business. We think with our network, we're in a very good position to do that. There's lots of businesses that would be better if they operate on top of our network. And I see AI drive it a whole lot more business in that way as well. Almost every AI tool I've seen in the logistics and supply chain space looks like a feature to me. I'm sure there was some guy years ago working at WordPerfect and thinking, well, I've got the best word processor in the market. I've got the legal market all tied up, and all of a sudden Microsoft comes in and goes, and I have Excel, and I have PowerPoint, and I have your email and all the stuff and you go, they can't compete anymore. And I think we're in that kind of situation with the network that we have.
A lot of these businesses are in desperate search of customers, and they will one day be a feature, just like a Word or WordPerfect is a feature as part of the Microsoft suite of tools. I could see these things getting layered onto our network and being a lot more valuable as a result. And so I think you're always going to see us gravitate in that direction. At the same time, we recognized that probably because of AI and maybe a couple of other things that are going on in the market, not much to do with us and other than maybe a misunderstanding a little bit of our business, if there's someone out there saying, 'Hey, Descartes is an enterprise software company,' I'm going like, not really, we're a network, and we're different than those other guys. And if you're thinking you're going to take all the enterprise software guys down a little bit because AI might harm them, you shouldn't be putting us in that same category because we have a lot of things that are probably going to take advantage of AI.
And we still have to deliver; we still have to make those things happen as we always do. But I like our chances. I like the cards that we have in our hands right now a lot better than I do many other people. And I think that's going to continue to result in more and more acquisitions for us. And as long as we see that, we're going to be trying to buy businesses up. That having been said, when our multiple drops to a level that we think is way lower than it should be, and we have some cash on hand, you might see us picking up some stock. Right now, it's out there as a placeholder to make it quicker to do if we wanted to do it. And otherwise, we're going to keep going about our business. And if we believe the market values us properly at some later point, we might not be as focused on it. But right now, we go, hey, it's gotten beat up a lot and maybe in our mind unfairly.
Your next question is from Kevin Krishnaratne from Scotiabank.
I've just got one. Allan, congratulations and thank you. It was a pleasure working with you, and I hope to continue doing so in new roles. You mentioned that e-commerce is benefiting from your organic growth, particularly regarding the transactions with filings. Can you elaborate on what you're observing now that you're enhancing that business, including inventory through Sellercloud? You referred to the holiday season, and it seems things are starting off well. Could you provide more details about the size and growth of this part of your e-commerce business?
I believe it's around 12% now. Allan, please correct me if I'm mistaken, but it keeps growing, and we are acquiring valuable assets that provide solutions to our customers, benefiting them within our network in the long run. Finale is an excellent addition to Sellercloud. Previously, if a customer outgrew Finale, they would leave for another provider. Now, we have the capability for them to transition to our next solution, Sellercloud, which is appealing to us and highlights how many acquisitions occur within the Global Logistics Network. Twenty years ago, we acquired companies hoping they would grow, but primarily focused on cutting costs and managing the business more efficiently than the previous owners. With 26,000 customers and counting, we now view these opportunities as ones where we can’t help but grow these businesses. There are simply too many people in our network interested in them.
A common example I share with shareholders is acquiring a company with 500 freight forwarders who are satisfied, while we have 5,000 freight forwarders. Upon acquisition, I would showcase this new offering to the other 4,500 and gauge their interest. They might not all buy immediately, but they will at least consider it if approached. We maintain strong relationships with these clients, and when we present a new solution, they feel compelled to explore it. Many smaller companies we acquire may not have felt the need to engage before, but once Descartes takes over, they find it necessary to review the offering. Often, they will look and decide to buy, which is positive for us. The e-commerce sector has been thriving. We continue to acquire more assets there, and we have successfully grown all of them. This is an exciting area for us, and I anticipate it will remain a strong growth segment for years to come.
Your next question is from Stephanie Price from CIBC.
It's Sam Schmidt on for Stephanie Price. I had a question around the year-to-date adjusted EBITDA growth that's tracking towards the higher end of that 10% to 15% target growth range. How should we think about growth there going forward?
I think you're going to continue to hear us say 10% to 15%. We've beaten 15% many times over the last 20 years unapologetically. I think we were up almost 30% in one quarter, if I remember correctly 7 or 8 years ago. As our network gets more and more profitable as our revenue picks up at a higher growth rate. When Scott and I started running the business directly 15 years ago, we were growing like 1%, 2%, 3%. And all of a sudden, now we're growing at 4%, 5%, 6%, 7%, 8%, 9%, 10%, depending on what's going on, and I go, it's a heck of a lot easier to get to 15% EBITDA growth with 7% organic services growth because I can leverage that and get that up, get the EBITDA up to 10% or 11% or 12%. And then I add on a couple of acquisitions and all of a sudden, I'm well over 15%. I don't think you're going to hear us say a different number. We think that's a number that we'll always be in a good position to hit.
And we think that if we can keep growing that EBITDA every year, our stock price has to kind of follow along. I was explaining that to one of my kids the other day who is an investment banker now; he is a private equity guy, and I was going, look, I don't know what's going to happen to the stock price over time. Companies like ours are valued at different multiples, and we don't have a ton of control over that month-to-month, but we do make more money every year, and that has to end up showing up in the stock price. And we're pretty confident we can continue to do that. And if we do, it's tough for the stock to not keep going up.
Your next question is from John Shao from TD Cowen.
Allan, congratulations on retirement. Good luck with the next chapter. I just want to ask your customer mentality at this point. I understand they're still waiting for some more clarity. But do you think at a certain point, they're going to develop some kind of fatigue? And as a result, they're more willing to spend regardless of the environment?
Yes, we'll see. I hope that's the case. I think as they get more certainty, they will be willing to spend. And we're seeing in the 60% of our business that's subscription sales. We really haven't seen any slowdown. It popped up significantly in the pandemic, and it's never really stopped. The transaction volumes are ebb and flow. They zoomed up in the middle of the pandemic and zoomed back down again and got back to kind of a steady pace, and then they've been up and down for the last 2 years. But I'd call it like lackluster transaction performance. But our subscription sales have continued. I think most of the world realized that logistics and supply chain was a lot more important than they thought it was in the middle of that pandemic because the customers were telling them that. And the first place you put your money is into technology because that's where you get the biggest bang for your buck and that's where the customer notices the most.
And so I think that's been great for us. It continues to today. And we hope when transaction lines pick up, that we're going to benefit from that. I'm pretty sure we will. And in the meantime, we're running our business as best as we can to try and keep it in 15% EBITDA growth every year and keeping a great solution for our customers so that they always want to use us, and they want to sign more contracts with us. And we spend a lot of time doing that, and I think it's going to pay off.
Yes, that's correct, John. Absolutely. The full impact, we had partial impact in Q2, and now the full impact is in Q3.
Your next question is from Lachlan Brown from Rothschild & Co.
Allan, congrats on an excellent tenure as our CFO. I'll keep it to the singular question. In terms of the strong organic delivery in the quarter, you mentioned you're taking share on market volumes. But how should we think about the contribution from other growth drivers like cross-selling, pricing and new logos? Was there an acceleration of any of those drivers quarter-on-quarter?
Yes, I noted earlier that we're successfully winning business from our competitors. Our cross-selling has increased consistently over the years. Fifteen years ago, it was around 20%, and now it's between 60% and 70%, with potential for further improvement. Earlier, I explained that as we expand our solutions, customers find it hard not to take us seriously. Additionally, we dedicate a lot of effort to ensuring our customers receive what they were promised. I often joke about it, but it's true; we are willing to lose money to fulfill customer expectations. We are focused on profitability, but what matters even more is that our clients receive what they need. There’s only one FedEx in existence, and I feel the same about all our major customers. We want them to perceive Descartes as a company willing to go above and beyond for their success. While our recurring revenue model is a factor, more importantly, we want them to view us as a fair and dependable business partner that makes an effort to meet their needs.
You've likely heard us mention customers for life frequently; that’s our goal. When they are ready to sign their 32nd contract with us, we want them to be eager to sign the 33rd, 34th, and 35th. This shift in focus over the last 20 years has been significant for the company, and we believe it's the correct approach. If I am purchasing from a business, I appreciate their commitment to helping me succeed, even when challenges arise. We strive to be that partner, which we believe contributes to the steady increase in our cross-selling as customers recognize that we genuinely care about them.
Yes, I would just add, Lachlan, that price remains. Similar to other quarters, price is a very small part of that growth in Q3 similar to past quarters as well. So no big change there. We're using price increases responsibly to offset inflationary costs for us, but it's not the main driver of our growth.
Your next question is from Mark Schappel from Loop Capital.
This is Tim Greaves on for Mark. I guess my one will be on the TMS replacement cycle. Are you seeing evidence of that accelerating? And where is Descartes win in versus the legacy TMS competitors?
I don’t think I see it speeding up, but the market is decent for us right now, and we are consistently adding more transportation management solutions. Currently, we have about six or seven of them, depending on the type of customer, whether it's Ford, a broker 3PL, or a large retailer manufacturer. We have effective solutions to address those challenges. We also continue to explore other TMS options and AI features that could enhance our offerings, and I believe we will maintain our leadership position, particularly with midsize companies that have been acquired and lose their talent. We are persistently making acquisitions that enable us to tackle a wider range of issues for customers. Over time, this approach has proven beneficial for us. We offer a variety of solutions and are equipped to address multiple challenges, which reassures clients that we are a reliable presence in the industry and not a target for acquisition by a private equity firm. We are a public company that remains neutral in this sector.
Your next question is from Scott Group from Wolfe Research.
This is Cole on for Scott. We recently saw a competitor announce a change in their pricing philosophy to get away from per user fees. Maybe what percent of your revenue is based on per user pricing versus volume-based or fixed pricing? And how do you think about this evolving in a world where some of the brokers and forwarders are talking about structurally reducing headcount?
Yes, I've heard this argument a bunch of times. There's a bunch of different ways we price. It's not just per user; we have all types of transaction processing charges even in some of our subscription services, per truck, per mobile handheld device, and yes, sometimes per user. I don't think that's going to be a big challenge for us. If they start to have fewer people using the system because they become more efficient, we're going to come up with a different way to extract value. I know the guy you're talking about, and I think they probably shot too high, and there's a lot of problems with customers right now because of that. And I think if you see us start to do that, it's going to be a more reasonable approach too.
And we're seeing some of the forwarders seeing pretty big increases in customs revenue as a result of de minimis going away. Are you guys also seeing that benefit? And how does a big increase in customs filings and customs complexity impact you guys going forward?
You often hear us mention how complexity works in our favor, and that's accurate. Take the Type 86 filing situation, for instance; we've nearly doubled our revenue in that area in just a few months. A year and a half ago, we were quite worried about the potential cancellation of de minimis, which could have led to the loss of that business. However, our sales team developed a new strategy to keep charging for shipments as we did previously. Instead of proceeding with a Type 86 filing, which was being phased out, we switched to a Type 1 filing. We believed this transition was effective, and then we noticed our competitors struggling with the high volume of Type 1 filings from larger players, processing millions of transactions daily. Our network is equipped to handle that level because we've been managing customs filings for major companies like FedEx, DHL, and UPS for years, routinely dealing with millions of transactions. Unlike many competitors who are primarily software companies, we operate a robust network capable of quickly processing these transactions. Consequently, we've seen a substantial number of them transition to us, which has been a significant advantage over the past few months. I'm very pleased with that development.
There are no further questions at this time. Please proceed with the closing remarks.
Thanks, everyone. We look forward to reporting back to you on Q4 in March. And otherwise, if you're looking for one-on-one discussions with us, please reach out to us, and we'll find a way to talk to you. Have a great day, guys.
Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may now disconnect your lines.