The Descartes Systems Group Inc. (DSGX) Q3 2015 Earnings Report, Transcript and Summary

Welcome to the quarterly results call. My name is Lorraine and I will be your operator for today’s call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions]. Please note that this conference is being recorded. I will now turn the call over to Mr. Scott Pagan. Mr. Pagan, you may begin.

Thank you and good morning everyone. Joining me on the call today is Ed Ryan, CEO; Allan Brett, CFO; and Mike Verhoeve, EVP Legal and General Counsel. 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 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 and expensing of specific revenues and expenses, potential acquisitions and acquisition strategy, cost reduction and integration initiatives, and other matters that may constitute forward-looking statements. 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" and 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 are cautioned that such information may not be appropriate for other purposes. We do not 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 statements is based, except as is required by law. And with that let me turn the call over to Ed.

Thanks Scott and thanks to all of you for joining the call today. We continue to execute to our long-term operating plans and I am proud to be here presenting another outstanding set of financial results for Q3. Business is as usual here at Descartes and another record quarter fuelled by strong operating performance. Our network continues to grow as we grow our existing lines of business and make more solutions like the trade data content offering added through Customs Info available to our community. Since the end of the quarter we have made an investment in the form of Airclic which is key addition to our routing, mobile, and telematics platform. I will come back to that later in the call. So, welcome to the call whether you are a new shareholder for the past six months or you have been with us for a while, we appreciate you joining today. On the call I will start by talking about the highlights from the business this past quarter. I will then hand it over to Allan who will talk through our financial results in more detail. And I will finish off the call by talking about our business calibration and some of the initiatives we see in front of us for Q4 and beyond. So, let's start by going over the financial highlights for the past quarter. We pride ourselves on operating a strong and consistent business and this quarter was no exception with another set of record results. Our revenues continued to grow even in the face of strong foreign exchange headwinds hitting 43.1 million for the quarter, up 11% from Q3 of last year. Using a consistent FX rate with Q2 2015, our revenues would have been about $1 million higher at $44.1 million. Year-to-date revenues were up 14% to 126.6 million. Adjusted EBITDA was up 16% year-over-year to 13.2 million and up 17% to 38.1 million for the nine month period. The negative FX impact on EBITDA for the third quarter as compared to Q2 2015 was less than 200k. We continue to see strong cash generation. Our cash from operations for the quarter was $12 million and for the first three quarters of the year we converted 96% of our adjusted EBITDA into cash from operations. As I have said before we believe one of the signs of a high quality company is the ability of the business to generate cash that it will continue to invest in its business and we continue to do just that. These great results are driven by consistent execution to our long-term strategy. We’ve executed consistently for a long time and we plan on doing more of the same. I will quickly recap our strategy again and walk you through what we do, what opportunities we see out there, and what we are doing to capitalize on those opportunities. So what do we do? We use technology and networks to unite transportation carrier’s, logistics intermediaries, shippers, government agencies, and financial institutions. We execute with a view to being global and neutral network encompassing multiple modes of transportation and logistics function. We invest in innovations and power each logistics stakeholder with data, content, and tools necessary to efficiently and effectively manage the movement of inventory, assets, and mobile workers. And we do it all in a way that allows us to grow the business profitably. We continue to plan for profitable growth and it is on these types of financial results calls where we report to you on a continued profitable growth and manageable pace. We don’t grow revenue for the sake of growing revenue. We want to grow it in a way to create profit in cash. We target 10% to 15% adjusted EBITDA growth per year over the long-term and we will reinvest any over performance back in our business. We grow through a combination of organic and inorganic activities. We continue to expect to be acquisitive but we remain prudent and are absolutely prepared to pass on deals that don’t meet our evaluation criteria. We calibrate our business with a high degree of recurring revenue and are focused on decreasing one time license sales particularly as we look to integrate new acquisitions. We want to run our operations in the 25% to 30% range of adjusted EBITDA to revenues with a focus on cash generation. We are just starting to peak our head above that range however we buy businesses that require some fixing up that’s likely to have an impact on this metric until they are fixed. And we finally may use cash generated and available debt and capital by businesses to expand our networks' geographic presence, our functional footprint, our trade data and content, and our community participants. While we are pleased to report growth let’s talk about the three trends that are driving the growth for us. The first is increased regulation impacting trade and logistics, second is omni channel retailing, retailers willingness and consumers demand to choose from multiple methods of purchase and delivery, and third the conversions of technology in content to help make better logistics decisions. On the first trend of increasing regulation this is a principle driver for our customs and compliance solutions. But it also influences our content solutions and mobile resource management solutions. There are two principle types of customs regulations that are the primary focus for our customers. First is tariff and tax regulations focused on making sure that governments collect late duties and taxes on shipments, we call these fiscal filings. Two, the security regulations that help government ensure that their homeland is protected through the stream of shipments going in and out of its borders. We call those security filings. Eagerly every large trading country in world continues to see changes in its regulatory environment. The world customs organizations come out with a safe framework. Under this framework 180 countries have committed to automate electronic processes for fiscal and security filings but many of these countries are not fully deployed yet or are actually in the early stages of addressing their commitment to think this is a great sign and 180 countries have signed on to do this. It is a part of 45 – right now perspective. On the fiscal side, more and more processes are becoming electronic. Results on the fiscal side of the governments continue to adapt a rule as we see customers looking to replace older systems with partners that can deliver on a multi country solution, which is exactly why we continue to look for opportunities that expand domain expertise in new geographies. And even augment our capabilities in existing markets where we see the opportunity to grow. On the security side, governments are increasingly looking to collect more data and this data generally doesn’t exist in one persons ERP or back office system. And instead often rest with the logistics service provider or across multiple logistics service providers. We believe that the global logistics network which allows multiple parties through a logistics move to collaborate is the best solution to collect, access, and process this information to meet these regulatory requirements. Only a neutral multi-party network can really solve this problem and we expect to benefit from this trend increasingly in the future. I mentioned that other parts of our business are influenced by increased regulation. Our content business is driven by the complexity of international trade and the complex framework of treaties and regulations that exist and that our customers need access to. In our MRM business, global research management business is influenced by regulations like reporting on driver hours of service, vehicle inspection reports, and fuel tax reporting. All in all with an international economy, regulations are rapidly expanding to attempt to promote security, financial fairness and safety. As this new regulatory role emerges we are focused on delivering technology that helps our customers continue to do business under the new rules of the game. Second trend is an omni channel retailing or said in another way customer choice about how things are bought and delivered. This is a continued growth area for us as consumers expectations of delivery chores are influenced by the likes of Amazon and Google, such that traditional brick and mortar retailers are compelled to adapt. Effective delivery technology solutions are made of many parts including an ability for the recipient to schedule the delivery to communing time, the efficient use of delivery resources, and leveraging mobile technologies to eliminate paper and efficiently handle the delivery process. We have talked before about how we believe we are the premier scheduling and delivery route optimization technology in the world. It has brought us some significant recent customers including Home Depot and Seers and as they looked at their omni channel processes. And with our recent investment in Airclic you are seeing us further strengthen our mobile capabilities. Nearly every large opportunity out there in home delivery and even in the B2B delivery segment has a mobile component. While we have some solutions in this area, the addition of Airclic provides additional domain expertise in a way of vertically focussed solutions that address a number of industries. Specifically Airclic makes software that works on handheld that are used by delivery agents that helps them make the interaction between the head office, the delivery man, and the person receiving the delivery whether that be simple signature capture, plain receipts, returns management, or other vertical specific processes. So I will like to welcome the Airclic team. We look forward to working with all of you employees and customers and it is a great acquisition and we real excited about it. The third trend is helping drive growth as the convergence of logistics network transactions and trade data content. Businesses use trade data and content to make decisions about where to ship from, where to ship to, the best shipping route, price and seasonal trends, and other logistics related decisions. Once we have made that decision, we use the network to execute their shipment. Often a fiscal network to have goods transported and a technology network to communicate and transact with the various parties involved because of global logistics network of choice in these situations. We believe that the information to make logistics decisions and the network to execute that decision should come together. In the same way that the Bloomberg terminals that you guys look at, help you research and execute financial transactions, we see a similar trend in logistics. It was with this in mind that we invested in Customs Info and we are really starting to see traction here. We have already kicked off some large prospects and the business continues to grow ahead of our plans. And most importantly our customers and partners are endorsing our neutral network as an appropriate source for both content and communication. We believe there are more opportunities for us to capitalize on this trend and make additional content available for our customers overall network and we hope to share this with you in the coming years. Highlighted the three of the growth drivers we are seeing we believe that they are in very strong position to one of our strong position to capitalize on these trends and in the process to help our customers save money and operate more efficiently. To wrap up, it was another very successful quarter for Descartes and it is due to the effort and support of many people. So I would like to thank our employees for all the hard work they have put in to make sure our customers get results. I would like to thank our customers who continue to place confidence in Descartes as their network of choice, I would like to thank our partners for helping us rapidly expand our eco system. I would like to thank our Board of Directors for their resolve and helping us stick to a consistent strategy, and finally I would like to thank our shareholders for continuing to have confidence in Descartes as a great long-term investment. With that let me turn the call over to Allan who will walk you through some of the details on our financial performance. Allan.

Thanks Ed. Let me quickly walk you through a few of the financial results for the third quarter. As previously mentioned we had record quarterly revenues of 43.1 million this quarter, up 11% from the third quarter last year. As Ed also mentioned this revenue growth was achieved despite some negative foreign exchange movements against us as a result of a stronger U.S. dollar during the quarter. Primarily as a result of a decrease in both the Euro and the Canadian dollar to the U.S. dollar, our revenues declined by almost 1 million this quarter from the third quarter of last year and these same FX movements also caused revenues to be just over 1 million weaker sequentially when compared to the second quarter of this fiscal year. Looking at the gross margin they continued to be strong at 68% of revenue which is consistent with the same quarter last year. With our continued revenue growth and strong cost control, we also continue to see solid adjusted EBITDA growth of 16% to adjusted EBITDA of 13.2 million compared to 11.4 million in the same period last year. And while FX had a significant negative impact to our revenues during the quarter, the negative impact of foreign exchange to our adjusted EBITDA in the third quarter was relatively modest causing less than $200,000 drop in adjusted EBITDA this quarter when compared to the third quarter last year as well as compared sequentially to the second quarter this year. As we’ve mentioned in the past, the Canadian dollar declining to the U.S. dollar actually has a positive impact to our adjusted EBITDA and this has partially offset the negative impact of a decline in the Euro to U.S. dollar during the third quarter. As a result of continued positive adjusted EBITDA and solid receivable collections, cash generated from operations continued to be strong coming in at 12 million in the third quarter this year, up 30% from the same period last year. After deducting 6.3 million of depreciation and amortization, 200,000 of acquisition related costs, 500,000 of stock based compensation, and an income tax expense at 32% of pretax income net income for the third quarter came in at 4.2 million or $0.05 per share up 91% from 2.2 million or $0.03 per share in the third quarter of last year. If we turn our attention to the nine month results year-to-date, revenue came in at 126.6 million up 14% from 111 million for the same period last year. Adjusted EBITDA for the year-to-date period was 38.1 million compared to 32.5 million in the same period last year, an increase of 17%. As Ed previously mentioned for the first nine months of fiscal 2015, cash from operations continued to be strong coming in at 96% of adjusted EBITDA indicating continued strong cash conversion from operations. Finally net income from the nine months ended October 31, 2014 came in at 11.5 million or $0.16 per share compared to 6.7 million or $0.10 per share in the same period last year, an increase of 72%. If we look at the balance sheet, we continue to be very well capitalized. We ended the quarter with 150.3 million of cash or cash equivalents available to the business and even after spending 29.7 million on the recent Airclic acquisition, we continue to have almost 200 million of cash and undrawn acquisition line of credit facility available to the company. As we look ahead to the fourth quarter of fiscal 2015 we should note the following; we expect to occur approximately 800,000 of additional capital additions in the fourth quarter and this is consistent with past trends. We expect that amortization expense will come in between 5.8 million and 6 million in the fourth quarter, this is inclusive of the Airclic acquisition. This figure will be subject to adjustment for FX fluctuations as well as a final determination of the purchase price on Airclic. In addition in the fourth quarter this year we expect to incur approximately 1 million of additional acquisition and restructuring expenses related to the Airclic acquisition as we close and integrate this business into Descartes. And finally we expect stock based compensation will come in between 400,000 and 600,000 for the fourth quarter subject to any forward shares of stock options. So I’ll now turn it back over to Ed to wrap up.

Hey thanks Allan. Alright so let’s talk calibration for Q4. Similar to previous quarters we don’t provide guidance but we use baseline calibration of the key metrics relating to the ongoing health and strength of our business. While we typically provide calibration as of the first day of the quarter...

I am sorry for the interruption, this is the conference operator. The host has requested the participants full name and company. The recording was unclear and the spelling of your names. The line is open please don’t mute it. At this time I cannot hear you, I’ll place you back in queue.

At November 20th of Q4. Our baseline revenues have been impacted by the addition of Airclic which has added 2.2 million of revenue in our calibration for its partial contribution to Q4. We are calibrating the revenues for the Airclic business, we focused on the recurring technology revenues rather than any license or other revenues that were no longer considered recurring. While we expect Airclic to profitably contribute in Q4, we expect it will take some time to reach the general Descartes levels. We should note that our baseline revenue calibration include the decrease of approximately 700,000 in baseline revenues from FX when compared to the third quarter this year. While the FX impact on calibrated adjusted EBITDA is nominal. Our calibration for Q4 assumes exchange rates of $0.88 Canadian, 125 Euro to U.S. dollar, and 159 GBP to U.S. dollar. We are very well capitalized. We have a healthy calibrated business and as Allan mentioned we also have a healthy balance sheet to access and access to capital. We have 153 -- 150.3 million cash at the end of the quarter and we also have a $77 million undrawn acquisition line of credit available with the company. We have a strong acquisition pipeline. With this capital capacity there is still a number of acquisition opportunities to expand the geographic reach, functional capabilities, trade data and content, or community of participants on our network. However, we are not in a rush to deploy capital on deals that don’t meet our stringent acquisition criteria. We are looking for businesses that not only process, leverage, or supply logistics data or content but also businesses that fit culturally with our team at Descartes and have the right financial profile. And as we consolidate we continue to meet focus on integration such that the acquired businesses add value to our overall business. The fact that we have raised money recently doesn’t change how we view acquisitions. We intend to continue to be prudent. Speaking of acquisitions we are really excited about what Airclic brings to the table. We spoke earlier about the demand we are seeing not only in home delivery but also number of other industries for integrated route optimization and mobile solutions. Because mobile means a lot of different things to different people, I will be clear about what we are talking about here. We are talking about mobile solutions that sit on the drivers hand held device, typically a mobile phone or organized device and that helps the driver automate the processes he has to go through at the stop. Airclic has an array of vertically focused solutions for transportation, third party logistics, food and beverage, and retail and healthcare. Together we see a number of opportunities to grow our business. We have already started executing on the go to market strategy and in the meantime we are working hard to integrate the two companies as quickly as possible. Before opening up for questions let's quickly talk about the operating model. As we enter Q4 we are setting our plans for next fiscal year already. It should be no surprise to anyone our operating plans for this fiscal year including Q4 will be the same next year. We are setting up plans through an ongoing target of 10% to 15% adjusted EBITDA growth per year. We continue to target investing over performance on those metrics back into the business. This growth will come through a combination of organic and inorganic activities and acquisitions are not incremental to our plans. Our focus is on recurring revenue and we will continue to deemphasize one time license sales. And finally we will make ourselves available to our shareholders. We have got a great business and continue to spend time and resources to get the word out and we are hoping you do the same. We want to be available to help people learn about our business and for those who are new to the call one of the best ways to learn about our business is at our annual user group, Descartes Evolution. It is great place to come and meet the Descartes team that makes all this happen as well as customers that are using our solutions every day. Our next user group, Evolution 2015 will be returning to the Intercontinental Hotel in Miami, Florida from May 19th through the 21st of 2015. We hope to see you there. Please contact Lori if you haven’t made a reservation yet. So with that let's open it up to questions. Operator?

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. And our first question comes from Phil Huang from Barclays. Please go ahead.

Yeah, thanks, good morning. I wanted to ask you guys a bit about Airclic, just wanted to see if you could provide a little bit more color around what you guys think needs to be done in order to improve this company's profitability profile and how long it might take?

Yeah sure, Airclic is not uncommon from the bunch of other companies that we have acquired over the years. We looked at it, we went -- it operates today a little differently than we would like to see it operate in the long run. And that it was not making much money and we think with the addition of Airclic to what Descartes has, if you think of our customers buying routing technology, routing and scheduling technology and more and more often those sales are also combining a mobile component. We are looking to go our customers want to buy those two things together so that they can do plan versus actual and figure out where their drivers are in relation to where they are supposed to be and manage the whole process that the drivers have to go through at the stop. So we bought the company, we quickly went through a restructuring process to try and get their cost in line with where we thought they should be. And are now going through a process to get the sales forces working together and going out and finding customers so that we can increase the revenue in that business and help them make more money.

Great and that’s helpful. Does any part of this restructuring process involve potentially deemphasizing previous revenues that they’ve been generating, like do you think that the 2.2 million that’s been added to calibration for fiscal Q4 do you see that as a number that will sort of stay the same or do you think it will grow from here or do you think that it will probably decline before it goes back up?

We are putting the 2.2 million in because that’s what we think it should be running at. We definitely at the same time see that there were relationships out there with accounts that weren’t profitable in the long run we would look to either make it more profitable or move out of our business. And that’s probably 50% of the acquisitions we do have some component of that and Airclic was no different. So I think it will be a little of that but we plan for that in the calibration number that we are giving you.

Got it and then a quick one in terms of the pipeline that you see. In this current valuation environment do you think it’s tougher to make acquisitions meet your returns criteria or do you see it might take a little longer to make such acquisitions, maybe you can provide us with what your view is based on the current valuation involvement even in some of the different geographical regions that you are currently looking at?

It probably hasn’t changed much for us in the last year to two years. We are in the higher end, deals let’s say north of 50 million bucks where private equity firms are interested, banks become involved. We see it as people are paying a lot of money and its tougher for us to get stuff done as we kind of stick to our guns about what we think stuffs worth. And if someone is willing to pay too much for it in our opinion we let them go do that. So yes that probably impacts us a little bit at the same time there is a lots of opportunities for us. There is literally hundreds of companies that are on our radar screen to potentially purchase and we try to not to let that get in our way. You mentioned geographic issues as well, it is certainly different in different parts of the world. I am talking U.S. larger deals, at least larger for our standard. It’s definitely a factor there, the smaller deals we are buying from [indiscernible] companies not as much of an issue.

Great thanks very much Ed.

Hey, thank you Phil.

Thank you and our next question comes from Brian Asgus [ph] from Morgan Stanley. Please go ahead.

Hi, thank you and good morning. Thanks for taking my question. I just wanted to dig in a little bit into performance in the quarter by segment and if you look at telematics, routing, the other segments where did most of the contribution in the quarter come from and how do we think about that. I mean I think you had about I mean just little under of a 100 basis points of gross margin contribution or incremental gross margin from the growth, how does each of those contribute to the margin expansion in that story?

Well our networks continue to be more and more profitable every quarter. So when you think about you know if we are focused on EBITDA growth, our EBITDA continues to grow as our network gets stronger. To put it in very simple terms, the next transaction that comes in doesn’t cost nearly as much as the first transaction. And that makes our network more and more profitable. You saw -- we always say we are trying to operate in the 25% to 30% EBITDA to revenue and you saw us creep over that for the first time this quarter. Which is a great sign, at the same time we want to try and invest that money back in the business overtime. I think you largely see that strength coming from our networks operating the way they should which is they continue to get more and more profitable everyday as we focus on operating our businesses efficiently as we can. That’s not to say that there wasn’t strong growth in other areas but they probably are routing and scheduling business as it grows because of the nature of that business with a license or software or service model. The margin tends to stay the same regardless of how much we get.

And on the license growth in the quarter, that was a little surprising. It looks like that there may be some seasonality to it, particularly at the omni channel as you noted in the MD&A or the release, was this an anomalous quarter in that regard or is there something there that is maybe longer-term, maybe if you can help us understand how those customers are thinking about pulling the trigger on licenses as opposed to --?

We would certainly rather they all bought in a recurring model. We try and talk them into that. Sometimes we are more successful than others. The license says you are kind of pointing out can be lumpy. They tend to larger deals so when they come in, they come in and we try to talk to all the customers for their benefit and for ours into a long-term recurring model. But some of them want to capitalize their software expenditures and they have their own reasons for doing that and I don’t fault them for that. I think -- I understand their rationale for doing that and when they come in and say no I want to capitalize on this that means they want to buy license and we sell to them that way. I don’t know that we are trying to do that. So if you are asking if this is going to continue I don’t know but I hope not. I hope those deals continue to increasingly become recurring deals but time will tell.

Okay, thank you. Just trying to see if that -- if the omni channel had anything to do with it but that’s very helpful?

Yes, sorry, I missed that part of the question. For the last year and half to two years omni channel has increasingly become a big part of it and I think you will see that even more with Airclic right. Because if you think about what a customer is doing is they have a customer in a store or on a website or on a phone and that customer is buying and they are trying to give that customer delivery time right on the phone or on the website or in the stores so that they can complete the order and take their credit card and bill them. And delivery is the last step of that process. Now we have always been in that business of scheduling that reservation and having our dynamic planning engine go and figure out the best times to deliver to that customer so that our customer, the big retailer doesn’t have to have as many trucks to make the deliveries because the deliveries are tightly organized. Airclic gives us one more step in that process which is to have the guy who is actually making the delivery have a device in his hand that tells them what to do, tells them how to get to the stuff. When he gets the stuff lets him go and do all the steps to complete the order. Getting the customer to sign off on it, taking a picture of any damage to the particular item, if there is a return being able to manage that return back, take a credit card from the customer right on the spot and swipe it, and we are real excited about our growth prospects in that area because of this acquisition.

That makes sense, thank you.

Thank you.

Thank you. And our next question comes from Michael Urlocker from GMP Securities. Please go ahead.

Hey Mike, how are you doing?

Thank you, I am great, good to talk to you again. Ed, I wonder if you could just describe I guess the state of the business in terms of customs, filings in North America, whether that continues to be an expanding business and whether there is any change in the competitive dynamics there and put that in context of how important is North America to your global revenue business today?

You know the U.S. and Canada were the first two areas to go forward with security filings so it is a big area for us. I am glad you brought it up actually, I probably should have mentioned in the opening comments, the U.S. has just announced the pilot to start requiring security filings for exports as well which is a huge opportunity for us. It is going to probably take a while to come to fruition considering these things going to pilot they tend to take a year or two to actually become a law, mandatory and fines for not doing it and stuff like that. But it is real exciting for us to spend a lot of time talking about internally here in the last couple of months. But all of those customers that do import filings with us are great opportunities for export filings. It is the same types of guys that is going to be -- burden is going to be placed on the carriers and the freight forwarders and we have an awful lot of them doing import filings with us and we like our chances to get them for export filings. Canada has also announced the same initiative. It is a little bit behind the U.S. but I think also we will go just like we did with imports, eight or nine years ago. They will go one after the other and eventually but we believe is the right thing which is you need to know what’s coming in and out of your borders. So that you can make sure that that’s -- that is going to a guy that’s a proper person to receive that stuff and you’re securing your borders. And we are happy to see them take the step and we think it’s a huge opportunity for Descartes. One that will take couple of years probably to turn into a big revenue line item for us but when we are excited about this we kind of like our chances versus everybody else to get that business. Just because of the breadth of customers we already have doing imports with us.

And in terms of the state of the business today before the export filings take in, is it still a growth business and what’s the level of competition in North America?

It’s with all of these customs filing initiatives it tends to be rapid growth and so the initiative goes into place and maybe for a couple months afterwards and then pretty flat after that. It will be -- it will fluctuate that with seasonality and number of days in a month and things like that, that are probably not worth spending too much time talking about. What we find is when someone makes a decision to have someone do their customs filing, they usually don’t touch it after that. We can’t steal them from our competitors, they can’t steal them from us because everyone looks and goes. As long as it is working right now and I feel like I am paying a decent price for it I probably don’t want to mess with it because if I screw it up it's going to be even for 30 minutes it will be a big problem in my business.

Thank you and then I wonder if you care to indulge in a little bit of a look back. It’s been a year that you and Scott have been in the new positions. I think the company has done very well in the year, would you make any observations on how the business or the industry has evolved in this past year or whether there is anything that happened that was unexpected either on a plus or minus?

You know we try to be pretty consistent and Scott and I both have been here at the company for a long time. And even if not as visible to you guys certainly directly involved in a lot of things that are going on. Our company continues to get bigger so we have to do more and more everyday to kind of keep up the growth rates and things like that. And I am real pleased with how our company has responded to that. We certainly are able to digest more acquisitions in the past year. We’ve started to demonstrate, we can do more I think. Late last year we exited two on the same day which is, I don’t think we could have pulled off two or three years prior to that. We also made a bunch of changes inside the company with Allan Brett coming on and Mike Verhoeve coming on as our CFO and our General Counsel respectively and that’s been a real positive change. And I think not only to our employees who probably see it directly but to our customers who get a more responsive Descartes, we’re upping our game. So, thanks for asking and yes, things are going pretty well. We are excited about it.

Excellent, thank you.

Thanks Mike.

Thank you and our next question comes from Richard Davis from Canaccord Genuity. Please go ahead.

Hey, thanks for letting me in the queue. So, all of the questions we get as outsiders trying to model your company right because we don’t have -- you guys haven’t given us your password to your general ledger yet so, makes it harder. But tending that one of the ways that I was trying to describe it to investors and I just want to make sure logically this makes sense. So when you make an acquisition one of the things we’ve been saying is like what, when you buy a company after you fix it up and that could be x number of quarters its totally logical to assume that, that acquired company should grow at a multiple faster than what your existing business is growing simply because you cross sell the business to rest of your network and as that how big so the question is A) is that correct, B) is how much effort do you put into that, and C) how effective have you been on a go forward basis, thanks?

Yes, sure thanks for the question. I wish that were true all the time and the actual answer is it depends on the acquisition. Some of the things we buy or networks where we go okay, they do the same thing that we do. And so from a revenue perspective I don’t know that it is going to make us grow any faster from a revenue perspective. From an EBITDA perspective it’s definitely going to make our EBITDA grow faster which is how we measure ourselves. So from our perspective that is a great thing to have happened. Those other businesses like Customs Info for example where we look and go, that business is growing quite well before we ever met them and we think with our network we can find more people to buy that stuff and just like you said I hope in that scenario we are able to grow faster than we grow other parts of our business. With the Airclic one, this is a business that I wouldn’t say was growing rapidly prior to our meeting them. And like you were suggesting in part of your question, our hope is that when we bring our customers together with their customers that we are going to find more opportunities for our routing solutions in their customer base and that we are going to find more opportunities for our handheld and mobile solutions in our customer base. And so in that case yes, I absolutely do hope that one plus one equals three and that we can bring that to make our business grow more quickly. So it kind of depends on the acquisition, what are we buying and what was the intention of it. Some of them work out exactly the way you said and others are done for another reason, maybe not to grow revenue as much as to grow EBITDA which as our focus, that’s important to us.

Got it, cool, thanks.

Thank you, Richard.

Thank you. And our next question comes from Bhavan Suri from William Blair. Please go ahead.

Hey Bhavan, how are you doing?

Good, guys how are you?

Yeah, very well.

Good, good. I first just wanted to touch on the partner pipeline. You know, last quarter you sort compted you had seen a sort of an acceleration there and uptick you felt really good about it, may be just a little more color on that to start off with?

Yeah sure, so we have lots of partnerships but the big ones that we spend a lot of time focused on and probably more household names are SAP, Oracle, NetSuite, and Info [ph]. And we have got a lot more traction in the last year with all four of them. The acquisition of Customs Info certainly helped with SAP and Oracle. We have had a previous relationship with SAP which was moving along pretty well but with the introduction of our Customs Info into our business it took it to a whole new level. They are obviously continuing to resell our trade data content through Customs Info but it has really helped us in our discussions of using the network. You know they are starting to position our customs network in all of their key sales which is their global customs software solution which would now be sold with our network running behind it. And we are working on them with behind their transportation management system to have our network connect their customers up to all their carriers. That's a work in progress but I see it as a great long-term opportunity. With the workload Customs Info really changed it completely. We got very little interaction with Oracle directly prior to Customs Info. We definitely used to go behind their sales processes and follow them around and say hey, if you bought Oracle's transportation management system you should also use Descartes network. But we didn’t have Oracle saying that. Now with Customs Info we got to know the Oracle guys a lot better, kind of proving to them that hey, we are not really competitive with you in any way and our network could really help your customers get to value kind of value in your transportation management solution. If we could connect them to all of their carriers on day one versus them having to take five, six, seven years to try and do it on their own which always collapsed under its own weight. And so rather than having to follow them around saying hey, Mr. Customer that bought that Oracle solution last year how is it going, let me guess you are not connected to a bunch of carriers yet, maybe we could help. If we can get the Oracle sales reps to say that to them and join the sales process we think that's going to go a lot better for us. And we are having pretty serious discussions with them about that as we speak. In forward -- we obviously, large company but smaller than SAP and Oracle, we are doing the same. Infoway [ph] just rolled a couple of accounts together but not maybe with the senior level C level suite sponsorship as much as sales guys meeting each other on the street and saying hey, we should do this together. But we are now taking those accounts and trying to go back up to the C suite at Info [ph] and say hey, we should do this on a more regular basis. So, more to come on that but we are excited about our prospects there.

And then when you are looking, maybe we will just focus on SAP because it is probably the most mature there and kind of the biggest part right now, when you look at that sales process does -- is that a SAP sales person or do you have a sales person involved once it has been qualified by SAP, so what sort of leverage can we see in that part of the business if SAP is doing it themselves and then is there close rate as a sales cycle, longer shorter than your typical one where you are involved directly?

Well, it depends. On the content side with Customs Info that is already coming along and was before we met them and so you have a number of people at SAP that can go and represent that solution without our involvement. So we are getting calls towards the end of deals that are saying hey, we are about to sell this to customer XYZ and we need a price from you on data content. That makes the sales cycle look short to us. I don’t have any belief that it was a short sales cycle but for us it is. And so that’s great, that’s a mature partner relationship to me. On the network side we are still getting started and he asked do our sales reps still have to go along on the network side, absolutely. We are probably engaged with five or six customers with them right now and our sales reps are directly engaged. They certainly want to change that for their own benefit so that they can go faster. But to do that they have to go through 10 or 15 of them with us so that their sales guys sell this stuff, become familiar with it and hear the sales pitch go down enough that they say I can do this on my own, I can just call Descartes at the end. But that’s not the way it goes right now. So, we are working to get there.

Okay helpful and then just jumping back to the comment you’ve made about safe and sort of 180 countries committed and 45 are live if you want to look at that not just from a number of countries but kind of the guys who are the large guys so, in that 45 I assume that U.S. was involved and possibly China is involved and stuff like that. If you are to segment that by percentage of volume or transactions that were live, how would you think about that market opportunity in terms of what’s left?

I don’t know the exact percentages. I can tell you that a number of the large countries are live which would make sense, right. The guys with the biggest stake in the game go first because they go, hey I need to protect my borders and the bigger countries tend to think of that more seriously than the smaller countries. There are still a number of large countries that are not doing this yet, China for example. It is part of it but also not live on very much of it yet. And because of the 13 pre-fractures in China they tend to do this one by one where you don’t get the whole country out of the gate. And so we’ll wait and see how these things come in. But it’s very encouraging to us that they’ve all signed on to this initiative globally to say we are going to do this. I know it might take five or maybe even 10 years for them to all to actually do it but to me that’s an opportunity for Descartes as we plan on being in this game for the long run.

Okay, great. Thanks Ed, that was helpful.

Thank you.

Thank you and our next question comes from Steven Li from Raymond James. Please go ahead.

Hi, thank you. Hey guys. I am not sure if you have this information handy maybe I can follow up off line but you gave us what you assume for FX for calibration, what is the percentage of your revenues and costs that are denominated in Canadian dollars, British pounds, and Euro?

Yes, I will give you some rough numbers Steven, about 45% of our revenues come from the European region and reasonable amount of operating expenses come from that area as well. So there is a net impact which will be the EBITDA impact from Europe. From a Canadian perspective less than 10% of our sales are Canadian. This quarter 10%, but generally 9% to 8% and more of our operating expenses are coming from Canada. So the Canadian headquarters it’s here new. So we’ve got a little bit of a different scenario in Canada where we have operating expenses as a percentage than we have as far as revenue and that creates a difference in foreign exchange. Is that enough detail or do you want more.

One more thing he was asking was the percentage of Europe, it was 12.40, right.

Yes 45% in Europe and roughly that’s Euro but it’s also there is a bit of British pound in there as well.

Okay and in Canada would you say like 20% of your operating expenses is Canadian dollars?

Between 20% and 30% would be a reasonable number but it’s definitely much higher than our 8% to 10% of revenue.

Alright. Okay, that’s great Allan, thanks.

Thank you and our next question comes from Paul Steep from Scotia Capital. Please go ahead.

Great, thanks. Hey Ed maybe you could talk on Airclic. We’ve gone around it lots and lots and it looks on the surface that the deal maybe paid a little more than traditionally paid for, why don’t you go back and I know you hope for synergies but clearly there was something you saw on the deal and upfront in your initial interactions and what your client feedback was that led you to be comfortable with that, what was the feedback from your joint clients that got you comfy in this deal?

Sure, we think in the long run this is going to be viewed as a relatively an expensive deal for us. But I can see why you say on the surface it looks expensive. And I am glad you brought it up in the context to customers because that’s what got us focused on us in the first place. We noticed over the last three or four years that when customers bought our routing solutions increasingly they want to buy mobile Brink's, Sleepy's, Performance Food Group look at our routing solutions and say I want that. Then they look at our mobile solutions and they say boy, I’d really like to buy this from the same guy but your mobile solutions have not handled sophistications of the delivery process that I have. And when they told us what they wanted to do, we can’t do that anytime soon in the product that we have. In each of those cases, those customers chose Airclic and we started to notice, had in the notice that increasingly Airclic was coming to us saying hey, I need to integrate to you for Sleepy, so I need to integrate to you for Performance Food Group, or I need to integrate to you for Brink's or for Delta Airlines. And these customers that these guys have are the same customers that we have and our customers were telling us it would sure be convenient if I could buy that from the same guy so that I know that these two things work together. Because they are really trying to do these together where this is all driven by I want to do plan versus actual. So I know where my drivers are in relation to where they are supposed to be and they have a handheld solution in front of them that can let them complete the sale at the customer site. And that’s what got us excited about it. When we looked at the numbers we ran, these guys don’t make much money at all right now but what we think if we bring our discipline of operations to it and some of our scale and synergies we might bring to the table we can get them in line with our metrics over the next two years. And we thought if we can do that I think we can make a lot of money on this and that will be good for shareholders so let’s do it.

Great, then the last part of this question that I’ll ask it clearly doesn’t sound like it’s any sort of an initiative to retrofit the base, it sounds like this is a cleaner go to market solution. With that integration that you have done and a couple examples you cited, is that good enough or you already there to point where we are in a go to market situation today?

Yes, we can go to market with it right away. We are going to market with it right away. I mean both their sales force and our sales force were very excited when we told them that this was going to happen, because they went oh, good that’s what the customers want, that’s going to make my job easy. And so I think that’s a great thing. Can we improve that integration, absolutely. Now that it’s all part of the same company we can certainly make it better. Can we go to market with it today. Absolutely.

Great, last one from me, Customs Info, maybe you could talk just a little bit about I term it channel sell through but sell through back into your own base in terms of the effort to go back, any work on that area or is it simply hunting out new accounts on that side?

Yes, thanks. The way we have set it up is we are trying to educate our sales reps about this right now. But it’s a pretty complex thing, right. The Airclic for example process, our sales guys know the sales process already. They know the same customers remember in a lot of the cases we handed that customer with Airclic so that they could do the job. Our sales guy knew how to sell it, they just didn’t have the tool to do that until we bought Airclic. In Customs Info's case we knew that our customers wanted to look at trade and content information at the same time they were executing shipments on our network. But I don’t think our guys were familiar with that process. Over the last couple of months we’ve educated them about that to the point where they can go and identify opportunities for that in our customer base but then we pulling in the Customs Info sales guys into it. Customs Info has a lot of sales people that are very good and that really understand that business, and when we get a customer of Descartes that is using a global logistics network and they say hey, I want to also access trade and duty information while on executing this transaction we quickly bring a Customs Info sales guy along. Now over the next couple of years I hope that all of those people Descartes and the Customs Info sales people learn how to cross sell the fit solutions. And I guess there is one other thing I should mention, in the broker community we do business with a lot of customs as brokers. We sell a complete back office system to, that’s a real opportunity for us with Customs Info as well because they obviously need that tariff and duty information embedded in their system. And the sales guys that we have, they are focused on those solutions, they do understand the data content very well. So they are probably on to it a little more quickly than let’s say our guys that are focused on retailers and manufacturers largely selling our transportation management and writing scheduling solutions or maybe a little less familiar with tariff and duty information than the guys that sell the global logistics network.

Great, thanks guys.

Thank you, Paul.

Thank you and our next question come from Ralph Garcea from Global MaxFin. Please go ahead.

Hi, guys. Thanks for taking my questions.

Hey, thanks Ralph, how are you doing?

Not too bad. Just one for you, I guess on the Airclic again is the focus going to be to sort of cross sell everything else you have in your portfolio into that sort of food and beverage healthcare and retail verticals or do you have any equivalent solution in Europe similar to Airclic or does this travel lot of Europe and you can grow?

Airclic has operations in Europe already because they are a smaller company than Descartes. They have nearly a significant operation in Europe but the product works over there. So we just had those guys over there last week working with our sales force to understand exactly what they are capable of doing and trying to find more opportunities. Interestingly enough Airclics' biggest operation in Europe is in the UK where we happen to have an awful lot of home delivery omni channel retail customers and prospects. And so that’s -- I looked at that so that’s great news because I think we can bring Airclic to the table straight away and that hopefully will result in more sale.

Was it about 10% of their revenue before you bought it, and you can grow that a bit bigger in Europe now?

Europe, it was pretty close to 10%

Yes, right around 10%.

Okay and then for Allan I guess you been there six months, this is probably one of the best quarter I think in the last 10 years, have you done anything differently or is the business getting more linear and you are able to manage it better from a collections perspective?

You know what there is a few things. I think the trends have been in place for a while but we are at 44 days right now. While we stated out there that were 45 to 55 is a reasonable range so we are slightly below that range. Couple of things we continue to buy reoccurring revenue where we can bill in advance that’s key to helping on the receivable side but just strong execution from our AR team. And the recent acquisitions in the U.S. do help as the days outstanding in Europe will be different. It’s not a Descartes phenomenon just a European thing. So as we -- as our revenues percentages shift around a little bit that does help. We still think we could have quarters where it goes up a little bit depending on various issues but yes, strong collections overall at 44 days.

I think if I could just say something about that, the group that does that does a great job and it continues to get better at it every quarter. I hear them say they are going to do a bigger number every quarter and I always kind of go when is that going to stop. It doesn’t seem like it would have to end it at some point and they do a fantastic job. And the other issue where we have said all along is happy customers pay and so as we do a good job of making our customers happy, they tend to pay us quickly because they are happy and that shows up on our DSO numbers which is great.

Okay, thank you.

Thank you, Ralph.

Thank you and our next question comes from Brian Asgus [ph] from Morgan Stanley. Please go ahead.

Hey Brian.

Thanks, just one follow up on Airclic. I just wanted to understand and I think you’ve spoken to how small their customer base is, what’s the sense of overlap with your customer, is that a substantially significant incremental cost of opportunity or is there already some good amount of overlap there?

There is some overlap. I mean they probably have, I mentioned a bunch of them Delta, Brink's, Sleepy, Performance Food Group and there is a handful of others. The majority of their customer base is not a customer of Descartes and the majority of our customer base obviously is not customer of Airclic. So there is lots of opportunity to cross sell but it was comforting to me to see that there are a number of customers across the number of industries that use both of our solutions together already. And that was exciting for us and across it is not only the obvious ones like retail home delivery stuff but like Delta Airlines and Alaska Airlines that use this for cargo handling at the airport. They are grand handling agents are using Airclic software on the ground to scan stuff on and off planes. Those things that they are scanning on and off planes end up in shipments on our global logistics network. So, when I was talking to the Delta people right after the acquisition, I mean they were coming up with four or five different ideas of what this would mean to them and how they could do more things now that we are together. And that was exciting to us.

Great insight, thank you.

Thank you Brian.

Thank you. We have no further questions at this time. I will now turn the call over to Mr. Scott Pagan for closing remarks.

Hey, great guys. Thanks for your time this quarter, appreciate you joining the call and we look forward to reporting back to you next quarter. Have a great day.

Thank you. And thank you ladies and gentlemen. This concludes today's teleconference. Thank you for participating, you may now disconnect.