The Descartes Systems Group Inc. (DSGX) Q2 2016 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.

Thanks and good morning everyone. Joining me on the call today is Ed Ryan, CEO, and Allan Brett, CFO. 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' in documents filed and furnished with the Securities and Exchange Commission, 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 statement is based, except as required by law. With that, let me now turn the call over to Ed.

Great, thanks Scott, good morning everyone, and thanks for joining the call. I hope everyone enjoyed their summer and had a chance to spend some time with their family. Things here at Descartes were busy as ever and we produced another great quarter and we acquired two very exciting companies. I'll talk about that in a little bit. The business continues to grow as network volumes pick up on the Global Logistics Network and we're seeing continued strong demand for our home delivery routing solutions that help retailers cope with the new omni-channel home delivery environment. On today's call, I'm looking forward to discussing these trends in more detail as well as providing some updates on our business. I'm going to hand the call over then to Allan who will talk through some of the financial details and then I'll finish off the call by talking about our business calibration and the landscape that we see in front of us. So with that, let's start by going over some of the financial highlights for the past quarter and the first half of the year. Our primary focus continues to be on growing our adjusted EBITDA. This quarter we had generated $14.6 million in adjusted EBITDA, which is a record for us and an increase of 15% over last year, and for the first half of the year we were up 16% generating $28.8 million of adjusted EBITDA. As we've discussed before, we have a natural FX hedge in our business, so the continuing FX volatility hasn't really impacted our bottom line. On the other hand, FX rates have had a large impact on our revenues on a year-over-year basis. Revenue for the quarter was $45.2 million, which was up 6% from last year. The FX impact on the revenues for the quarter was negative $3.3 million, meaning that using last year's FX rates our revenues would have been $48.5 million, which would have meant growth of about 14%. Revenue for the first half of the year was $89.6 million, which was up 7% from last year. The FX impact on revenues from the first half of last year was negative $7.7 million, meaning that using last year's FX rates revenues would have been $97.3 million, which would've meant growth of about 17%. FX is of course difficult to predict but our business and expense mix allows us to manage through these volatile FX periods with continued growth, consistent with our plans. From a cash flow perspective, we continue to see strong cash conversion metrics. We converted 88% of adjusted EBITDA into cash and ended up generating $12.8 million in cash from operations for the quarter. For the first half of the year, we generated $24.6 million in cash, which represents cash flow conversion rate of 85%. As we generate that cash, we're reinvesting it in our business not only through acquisitions but also on our operations. We do this because we believe that the market for our solutions will continue to grow, and powered by our Global Logistics Network we believe we're in a very strong position to capture an increasing share of that market. So moving on, there's three things that we believe are driving momentum in our business and I'll just take a minute to describe them for everyone on the call. The first is the omni-channel retailing and home delivery business which is driving demand for our routing and scheduling products. We've talked before about how we believe we have the premier scheduling and delivery route optimization technology in the world and we've been doing very well helping our customers navigate the ever-increasing expectations of consumers around how things are bought and delivered. We've also talked about how our investments in mobile technologies are helping us address this opportunity. This quarter we had another big win with the leading electronics retailer in the U.S. who was looking to up their game even more to compete with the Amazons of the world. This retailer is going to be using our state-of-the-art home delivery solutions to enhance their customer experience right from the online delivery, appointment scheduling through to mobile monitoring and delivery through to the customer's door. To understand why we win in circumstances like this and support and understand that we take a unique approach to home delivery, which is why we feel we're the best option out there for retailers. Unlike traditional route optimization systems, our solutions allow customers to look at each and every order incrementally in real-time. This is versus our competitors who make decisions in batches and don't really know if they can fulfil a slot when a customer makes a reservation. We're constantly optimizing the schedule to create the best results for the retailer and their customer, all while using the least amount of resources and trucks. From there, our advanced mobile capabilities allow us to collect and deliver information in real-time, keep the customer notified of any changes in the schedule and automate processes in the delivery location. We think we really have something different here and we expect to keep doing well helping retailers around the world doing this. Basically when our sales guys are walking into a retailer today to talk about home delivery opportunity, just about every major retailer is in some phase of doing that. We think we've got a very good chance of winning every time. I'm not saying we win them all, but we win an awful lot of them. Second opportunity for us is integrate related regulations driving demand for our network and compliance solutions. We've talked about this regulatory environment a lot before. It's constantly changing and we see that continuing for some time to come, and the governments look to secure their borders without slowing down trade, and it gives us an opportunity to add value for our customers. So let's take a couple of minutes to walk through some of the key initiatives we'll see around the corner from various countries. Starting off in the U.S., there is a bunch of stuff going on here. So the U.S. is leading the international chart for creating electronic data sharing framework to secure borders and monitor trade. The two key initiatives that are going on right now are around ACAS, which is Air Cargo Advance Screening. This is a new filing [indiscernible] will make in the U.S. on air shipments. It's now on even broader pilot. It's been going on for about a year in pilot and they just expanded it a few months back, has more participants now, and that pilot is scheduled to wrap up by next summer, and hopefully at that point go into full enforcement. Second area, and this is a big one because it changes the whole dynamic in this trade regulation security filing business, and I've mentioned this in the last call, the U.S. is now starting with export filings. Every initiative we have been involved in up until now has been for import filings, and there are just as many import filings in the world as there are export filings in the U.S., and a bunch of other countries just announced they are getting into exports. The U.S. is kind of kicking this off first and it's called a Vessel Manifest export filing pilot. Right now this information is only gathered on imports today. Now they are expanding it to exports, and the program extended this to understand what cargo is on the vessels that is leaving the U.S. This pilot is going to go on throughout the 2016 calendar year, but we are very excited about it because we think over the next 10 years this creates some big long-term opportunities as the U.S. does it, Canada – you have all announced that they are going to do it as well, and we think this creates a great opportunity for us long-term. We're active technology partners with our customers in each of these pilots. We are actively working on each of these pilots, the U.S. export filing and the ACAS pilots. We're working with those customers to make sure that they understand the proposed regulations, requirements and that they are actually able to fulfil the regulatory requirements using applications that come from Descartes. Moving on from the U.S. to other countries that are also active with new regulations, in Canada there is the eManifest initiative for highway carriers. It's called ACI. It went live in May. Right now there aren't any financial penalties yet, but those are anticipated to start in January 2016. We're already helping customers in this area and are ready to help that might turn their minor solutions as the reality of penalties get closer. Turning to Europe, there is their PRECISE initiative which is a forwarder focused filing like the U.S. ACAS filing, and preparations are beginning right now to start off their pilot phase. And otherwise around the world, other regulations, trade agreements, tariffs, duties and government technology infrastructures are being updated. It's a world of complexity, it's ever-changing and our customers look to us to help them navigate this complexity rather than trying to do it themselves. So this brings me to another hot area for our business which is the network itself. We've felt for some time that we have something special in our Global Logistics Network. We believe shippers and logistics service providers alike should have one place to go, to research, plan and execute their shipments. And to execute them properly and in the compliant but also cost-efficient manner, they need to have all the information and tools at hand in one place, and for us this place is the Global Logistics Network. I've talked before about our network being a little like a Bloomberg Terminal for logistics, a place where customers can make informed decisions about who to do business with, how to classify goads appropriately and submit compliant documentation, how to move goods efficiently and work with a broader ecosystem of parties, and how to do all of that not just cost-effectively but in a way that it can allow our customers to differentiate themselves and give them a competitive advantage in their markets. This is our vision, we get stronger at it every quarter, more customers join us every quarter, and with each new acquisition that network gets bigger and more capable of solving that broader logistics community's needs. We made the network even stronger by partnering with SAP as well. So just to talk a few minutes about that partnership, we recently announced that we have expanded our relationship with SAP. We announced that we're connecting SAP's Transportation Management solutions to our Global Logistics Network. Essentially what this means is that by connecting our network of trading partners, SAP Transportation Management customers will be able to execute and track shipments once they have made a decision about who they are going to move their goods with. This includes helping them with transmissions of customs and security filings, carrier bookings, the status messages and other electronic documents related to executing the logistics move. We've been working together as partners with SAP for a long time and we are thrilled to have them as the main sponsor of our recent User Group Evolution 2015. Our partnership with SAP has grown significantly over the years. It became a lot stronger when we acquired Customs Info which was an existing SAP partner already, and it was strengthened even further a month or two ago when we combined with MK Data as they were also an important SAP partner prior to coming to Descartes. Collectively, Customs Info and MK Data provide key content that helps power SAP's Global Trade Management system. It's great to have this relationship with SAP and we look forward to working together and improve the value that customers can get from our collective solutions, including our recent Denied Party Screening capabilities. So all that brings me to the topic of MK Data. We've been talking a lot recently about making more content available on our network, and on July 20th we made a big step on this front by announcing the acquisition of MK Data, a leading supplier of denied party screening trade data and solutions. So what's denied party screening, just for the people that are new to this. On a basic level, governments around the world maintain a variety of lists of people, organizations and countries that you are restricted or prohibited to do business with. MK Data helps our customers in their efforts to comply with these regulations. They have solutions and content that can be made available in a number of ways, via the Web-site, through their ERP system, global trade management systems, ours or others, and Web-based APIs, or through an assisted screening service. All these solutions are designed to also provide an audit trail of your searches because it's important or show the government that you are trying to comply with these rules, particularly if something goes wrong. And believe me, you don't want to get this wrong. There's big fines, there's potentially criminal convictions for doing business with restricted parties, and the list is changing every day, so customers need a provider that is on top of all this and MK Data is the industry gold standard from our perspective. We have known this company for 10 years. First we became friends with them, then we started reselling their stuff, ultimately culminating us buying them a couple of months ago, but it's a great long-term partner of ours. From the beginning they were a small company that kept getting bigger and bigger and bigger and get better and better in terms of data quality. It's very exciting for us to make them part of the Descartes family now. So anyway, in this area of our business, just to finish up on that reselling topic where we resold MK's data content, has been a high-growth area of business for us and a very profitable area of business too as the content is a high-margin business if you get it right. You have a cost to collect the data. That cost is a one-time fairly fixed cost and you sell it as many times as you can. So the business has the ability to get very profitable as you get more and more customers, and that was certainly part of our interest in the business and something that made us very attracted to them. As I said earlier this has been a high-growth area for us and we expect that to continue. MK has been growing for some time now. Anyway, since the announcement, we've had a lot of positive reactions on the MK Data acquisition from both SAP and Oracle who are both MK and Descartes partners alike. In fact, you may have noted that the SAP press release even references this area of the business relationship. When we look ahead to potential growth prospects, it gets really exciting. We think every Descartes customer has the potential to use this service. We already have a number of large customers that use the MK Data solutions, Customs Info solutions and other Descartes solutions and we think that as we roll this service out further and tie it directly into a number of additional complementary solutions, that the growth of MK Data will accelerate. We're very excited about that. Two days later, on July 22nd, we did another acquisition, we announced the acquisition of BearWare. It was a busy month here at Descartes here in July, and while MK will be a key addition to help us address the global regulatory environment, BearWare helps us address the omni-channel challenge in front of our customers, and in particular the importance of visibility at the carton level in the last-mile delivery process to the storefront. Omni-channel is all about having the right goods in the right place at the right time and the storefront is and will remain to be an important part of that picture. The acquisition builds on our mobile capabilities that we strengthened with the Airclic acquisition and adds a community of customers where the focus is on adding value from the technology to every member of the community, consistent with our approach and vision. Some of BearWare's key retail customers include L Brands or Limited Brands, Restoration Hardware and GNC. They also have some common customers with Descartes, both shippers like Restoration Hardware and service provider customers like Argix, which you may have seen our recent press release on yesterday. So anyway, that's a little bit on BearWare and MK Data. We're real excited about it and we'll talk more about it later, I'm sure in the Q&A period, but it's exciting times here at Descartes from an acquisition perspective. Before I hand the call over to Allan to talk a little bit more about the financials, I'd like to thank the people that made another great quarter for Descartes here possible. So thanks to all of our employees for all the hard work that you put in to make sure our customers get results, thanks to our customers who continue to place confidence in Descartes as their network of choice, thanks to our partners for helping us rapidly expand our ecosystem, and finally I'd like to thank our shareholders for continuing to have confidence in Descartes. And with that, I'll turn the call over to Allan. Thanks.

Thanks Ed. As indicated, I'm going to walk you through our financial results for the second quarter ended July 31. So as previously mentioned, we've recorded record quarterly revenues of $45.2 million this quarter, up 6% from $42.7 million in Q2 of last year. And for the first time in probably over a year we can say that the FX impact on our sequential revenue was fairly insignificant, with an impact of less than $100,000 compared to the first quarter of this year from FX. However, when we look back to Q2 of last year, FX continues to be significant with revenues negatively impacted by $3.3 million on a year-over-year basis. Clearly the U.S. dollar continues to be significantly stronger against most currencies when compared to the second quarter a year ago. And as Ed mentioned, excluding the impact of FX, revenues would have been 14% higher when compared to the second quarter of last year. Gross margin continued to be very strong at 70% of revenue for the quarter, consistent with the first quarter and up from 68% in the same quarter last year. Higher network revenues as well as stronger gross margins from recently acquired businesses continued to drive the improved gross margin. Sales and marketing expenses continue to be stable at $5.2 million, consistent at 12% of sales when compared to the same period last year. R&D expenses came in at $7.5 million or 17% of sales, again consistent as a percentage of revenue with the second quarter of last year. General and admin expenses increased slightly to $5.7 million or 13% of sales compared to approximately $5.2 million or 12% of sales in the second quarter of last year, partially due to costs from the acquisitions completed during the past 12 months. Amortization expense increased to $6 million from $5.3 million in the second quarter of last year and this was also as a result of the addition of intangible assets from our recent acquisitions. Other charges, which primarily relate to acquisition related expenses, came in at just under $400,000 in the second quarter compared to approximately $700,000 in the same period last year. Income tax expense was $1.9 million or 27.1% of pre-tax income versus $1.7 million or 32% in the second quarter of last year. We continue to see a modest improvement in our effective tax rate as we manage our international business. As a result of all of the above, net income came in at $5.1 million or $0.07 per diluted common share in the quarter, which is a strong increase of 42% from net income of $3.6 million or $0.05 per diluted common share in the second quarter of last year. If we reconcile back to adjusted EBITDA, as a result of revenue growth noted earlier as well as continued strong cost control and leverage from our recent acquisitions, we generated adjusted EBITDA growth of 15% to $14.6 million or just over 32% of revenue compared to $12.7 million or 30% of revenue in the same period last year, a strong increase. As Ed mentioned, similar to the past few quarters, while FX had a significant negative impact on our year-over-year revenues, the impact of FX on adjusted EBITDA was relatively small, at less than $100,000 when compared to the second quarter last year. If we look over to the cash flow statement, as Ed mentioned earlier, we invested approximately $91 million this quarter on the acquisitions of both MK Data and BearWare. In addition, we generated cash from operations of $12.8 million or approximately 88% of adjusted EBITDA this quarter, which is very consistent with our long-term average of cash converted from adjusted EBITDA. As a result, we ended the second quarter with just over $47 million of cash and investments available to the business and we also have our $77 million undrawn acquisition line of credit available to the Company. So suffice to say we continue to be very well capitalized. As we look to the balance of fiscal 2016, we should note a few things. Consistent with past quarters, we expect to incur approximately $1 million to $1.5 million of additional capital expenditures in Q3, which primarily include investments in our network infrastructure. We expect amortization expense will come in at approximately $6.0 million in the third quarter, and finally we expect that stock-based compensation will come in at approximately $400,000 in the third quarter. So with that, I'll turn it now back over to Ed to wrap up.

Great. Thanks Allan. So let's start with calibration for Q3. Similar to previous quarters, we don't provide guidance but we use our baseline calibration as a key metric relating the ongoing health and the strength of our business. While we typically provide calibration as of the first day of the quarter, these last couple of quarters, given the current volatile FX environment, we looking at our quarter, we have on our quarter, we can provide that calibration using FX rates in this case as of September 2nd. Our calibration for Q3 assumes exchange rates of C$0.76, €1.11 to the U.S. dollar and 1.54 GBP to U.S. dollar. There's a few new things impacting calibration this quarter and moving forward. Obviously we added BearWare and MK Data this quarter. Most notably the MK business has highly predictive revenues and is highly profitable. It's important to note that as a partner previously where we resold each other's stuff, there's some accounting implications on the combination of results and some revenue elimination, further increasing the margin. This increased level of certainty combined with our continued emphasis on de-licensing the overall business puts us in a position where our baseline calibration margin is rising. This also means that we expect going forward that the gap between our calibrated EBITDA and the actual EBITDA in a quarter will tighten, and we think this is a good thing, this is for sure a good thing. As a quick example of the impact on the business with even more certainty in it from buying a really profitable recurring revenue businesses, in the past – and this is just an example by the way for illustration purposes, so don't pay too close attention to the numbers given to you to illustrate the scenario – but in the past, if we had actual EBITDA results of say $10 million, you may have seen EBITDA calibration saying it was $7.5 million going into the quarter. But with this new predictability of our baseline EBITDA calibration, it would have been closer to $8 million, a much tighter gap than before. So to turn to Q3, as of September 2, 2015, for Q3 we had $45 million in visible recurring contracted revenues or our baseline revenues, we had $32.5 million in baseline operating expenses, and this gave us baseline calibration of $12.5 million for adjusted EBITDA for Q3. Some other key points related to how we're positioned for Q3 and beyond. One, as Allan mentioned a minute ago, we are very well capitalized. We have a healthy business that's well calibrated. We also have a healthy balance sheet and access to capital. We have $47.2 million in cash at the end of the quarter and we also have $77 million undrawn acquisition line of credit available to the Company. We continue to have and see 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. Earlier in the year, I feel like a lot of people were talking about our quiet start to the year on this front, but as I've said before, we have a stringent set of acquisition criteria and we'll only deploy capital on deals that meet this criteria. As a reminder, we're 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. We're thrilled to combine with two such great businesses as BearWare and MK Data in July and we'll keep you posted on the progress of those integrations as we move forward. Looking ahead to the remainder of FY '16, we'll continue to target 10% to 15% annual adjusted EBITDA growth, including for this year. Nothing about our recent acquisitions changes our plans. We'll invest our over-performance back in the business. And as I said before, growth will come through a combination of organic and inorganic activities and acquisitions are not incremental to this plan. But we are increasing the margin rate for the plan, as we plan on operating the business with a little bit of margin. Historically, we have planned to operate the business in the 25% to 30% range for adjusted EBITDA to revenues. Last quarter, as a result, in part at least in the FX environment and our recent strong performance, we upped that range to 28% to 33%. We're now today going to increase that threshold again this quarter, the second quarter in a row we're increasing our operating margin plans and we are now planning on operating the business in the 30% to 35% EBITDA to revenue range. Again, this could vary if we buy businesses that need fixing up which would impact that metric in the short run, but we don't expect that as a result of the recent acquisitions. So going forward, we're going to be in the 30% to 35% range. As we said earlier as part of our calibration plans, we'll focus on recurring revenue and deemphasizing one-time license sales. You can see that we've been saying that for about a year now. You can start to see that showing up on our results now and we're very proud of that. We think that makes for a very good healthy long-term business. Before I open it up to questions, I'd like to draw your attention to a couple of key events on the horizon. Most importantly we have set the date for next year's User Group Evolution 2016. For those of you that were there last year, thanks for coming. I've had a lot of great feedback from analysts and shareholders that attended the event. It gives them a lot of exposure to Descartes and the things we're doing in our business. I'd encourage anyone on this call to go to it. If you want to come, just give us a call or go to our Web-site. You can start to register there. It's a great opportunity to meet with the Descartes employees that build our products and the customers that use them. The next conference will be April 5th to 7th at the Hilton in West Palm Beach, Florida. It's a bit earlier this year than last, so start planning now. Information is already available on our Web-site for the event. Look forward to seeing you there. So there are a couple of key events we're attending this fall that I would like to highlight. In a couple of weeks, we're going to be out at CSCMP in San Diego, and the second is the ICPA Fall Conference in Texas in late October. I think most of you know what CSCMP is. It's the biggest logistics conference out there. ICPA is the International Compliance Professionals Association. This event has a lot of customs professionals and has historically been a big event for MK Data and Customs Info. We'll be at both events with a strong presence and have a lot of solutions for customers and supply chain professionals, and as the regulatory environment heats up, we want to make sure the people know that we are there to help them. We also have a number of other events we're attending and hosting here in North America as well as Europe. So if you want to drop by at any of them and meet our team members, please check the Web-site for more details and let us know, we'll make arrangements to meet you there. And finally before I turn it over to questions, and as always, we will make ourselves available to shareholders. We've got a great business, we want to be available to help people learn about that business, we'll continue to spend time and resources to get the word out, we hope you'll do the same, and with that let me turn it over to questions. Operator, if you could take over?

[Operator Instructions] Our first question comes from Brian Essex from Morgan Stanley. Please go ahead.

So I was wondering, and I apologize if I missed it, but if we could, the obvious question, dig into MK and BearWare, what you might expect for economics to your platform, both near-term contribution to revenue margins and then longer term as it becomes part of the platform, maybe if you could highlight kind of how you came around evaluation and what's the gestation period for those acquisitions for in terms of how long you've known them, and was there anything in particular that got the deal over the goal line?

Okay so I'll start with MK. So I probably met them eight or nine years ago now, I think 2006 or so. We had started hearing about them, a small company at the time, we started hearing about them in the industry as an up-and-comer. We went and talked to them. Of course one of the things we asked is, if you wanted to sell. I think he was kind of saying at the time, it wasn't the right time and the amount of money that he wanted at the time was more than we were willing to pay. Obviously a lot less than we paid now, so maybe I should've done it back then. But in the meantime, we became good friends, we became partners, we started reselling their stuff that turned out to be great for us and great for his business as well. In the meantime, he has solidified his relationship with SAP and Oracle and his business has grown substantially since then. We remained close over the years and their system and their content got better and better that by the time we ended up buying them a couple of months ago, they were clearly the global leader in providing data content around denied party screening. It's a very unique business and a lot like Customs Info, in that it was all recurring revenue, growing rapidly and highly profitable. And when I say profitable, these guys are as profitable as we've seen in businesses that we've looked at. And the great thing about that for us is that this content that they provide has a fixed cost to collect it. So they've assumed that cost already, and as the business grows with each incremental dollar in revenue, most of that money goes to the bottom line, which to us makes it a great investment. It's something that we were willing to pay up for. We're probably known as pretty prudent investors when it comes to purchase prices. In the MK Data case, we looked and went, I think it's going to sound expensive to everybody else but if they know what we knew, they'll know that we'll be looking back at it five years from now going, that was a great deal. So that's what we believed, that was the premise for us doing it, and we think it's a great business and a great addition to our network and something our customers will really get a lot of value-add. On the BearWare side, funny, Jeff Berichon, the guy who runs it, his brother Tim used to work here 10 or 15 years ago. We were good friends actually. Tim went on and did something else, so I haven't seen him in a while, but about a year ago we met BearWare, I met Jeff, who it turns out is Tim's brother, so we had a little kick out of that. It's a great business, I mean these guys do – they help coordinate deliveries for retailers that are in malls. I don't know if you guys ever thought about how stuff gets delivered to a mall but it's kind of a pain in the neck. The mall has a lot of rules, each mall has a lot of rules about when you can deliver stuff. It has to go in through a back area. So behind the front area that you walk around in the mall, there is a back area, there's a bunch of empty corridors where stuff gets delivered. And for a lot of retailers over the years, because the store is not that big typically in a mall, they were like UPS and FedEx and stuff, you're couriering stuff practically to their stores which gets expensive, and the margins are pretty thin in this environment, and if you can save cost there, it's very helpful. What BearWare does is brilliant. They pool – they get a bunch of retailers together and pool all their shipments at various trucking companies' warehouses and store the stuff there temporarily for a day or two, and then a truck drives a whole bunch of retailers' stuff to the mall and delivers it one by one, and it significantly reduces the cost for the retailers to supply their stores. And they have a whole process of mobile handheld technology to coordinate all this and make the people in the store aware and the merchandisers back at the retail offices aware of what's going on and giving them visibility in what's in the warehouse, what's on its en-route to the store and what's actually in the store and haven't been sold. And thus it's a brilliant idea, we think there's a lot more applicability across our business for a bunch of other customers that BearWare hasn't yet met but do business with Descartes and we're really excited about it.

Alright. Is there any way on the MK side in particular, if we can get an idea of what kind of revenue that would add to the platform and what they bring to the table from a revenue standpoint as well? I understand they are pretty profitable but…

I don't think we've called that out specifically yet. We'll have more on that in the coming quarters. You will probably get more visibility into that. I'm sorry, we wouldn't really mind sharing with you guys directly, but we have a lot of competitors that would love to know this information and we'd rather not openly share it with them. What I can say is that it is a highly profitable business. With each new dollar of revenue that we get as it grows, a lot of that goes right to the bottom line, and we think that's a good long term model for our business.

Okay, great. Thank you.

Our next question comes from Matt Pfau from William Blair. Please go ahead.

Just on the acquisition front, I want to get an idea of what your guys appetite for doing additional acquisitions is for the rest of the year, how long is it going to take to fully integrate BearWare and MK Data before you'd consider doing another one?

I don't think that MK and BearWare are particularly challenging integration activities. As I said, we've had a long-term relationship with MK Data already, so all the guys know each other already. It's very similar to the Customs Info business. Customs Info and MK Data have been working closely together for years. There's integration work to do but I don't think it's going to delay us from doing any other acquisition, same with BearWare. Without commenting specifically on what we're going to do next, I think you could see us, you'll see us continue to be aggressive about looking at companies, and I don't think the integration of MK or BearWare is going to get in the way of us doing the next one.

Got it. And just on the sales process with MK, are most of your customers typically using some sort of solution for the denied party screening? And then secondly, when you go in and sell MK Data, does it make sense to purchase that in conjunction with Customs Info, or how does that sales process typically work?

Absolutely, that's I said, we're one of their biggest resellers already. That's part of what creates a revenue issue for us because we were booking revenue and they were booking revenue prior to the acquisition. In reality it's only one revenue stream. That was specifically because MK Data and Customs Info sell together. They had a relationship where if MK Data met the customer first they would sell Customs Info stuff, if Customs Info met the customer first they would sell MK Data stuff. So it was as tightly integrated as two separate companies can be. And if you look at the way they run, they are really very similar businesses, and I don't think it's any coincidence that they grew up together and they run their businesses the same way and they ultimately ended up at the same company in Descartes and on the Global Logistics Network together. I think that was a very natural next step in their evolution.

And as far as what your customers are currently using for denied party screening?

That's the nice thing about this. Denied party screening is an emerging market and a lot of big retailers and manufacturers do it. It tend to be guys like chemical companies or people that might have problems shipping stuff to just, and you know what they do for a living, shipping stuff to various jurisdictions around the world. The more sensitive your cargo is, the more likely you are to already be doing it. I think in the long run though, just about every company is going to be doing it. About three years ago Descartes started using MK Data stuff for our own purposes internally. Before we sign a contract with anyone now, and for the last couple of years, we do a denied party screening check to make sure we are allowed to ship our routing product to that customer, we're allowed to do business with that guy. And we believe every company should do it, we believe that only a small fraction of the companies are doing it today, but as they get more and more familiar with the rules out there or they get themselves in trouble one time in a jurisdiction, they're going to eventually all move to doing denied party screening of everything that they sell international.

Got it. Thanks for taking my questions, guys.

Our next question comes from Steven Li from Raymond James. Please go ahead.

On MK and cross-selling into your customer base, I believe your customer base is like 10 times the size of MK's. So does that present the opportunity longer-term?

For sure, I mean as with Customs Info and a lot of the acquisitions we do, we look at a business that tend to be a lot smaller than we are when we are acquiring them and go, this is a great idea, they need to meet everybody that does this, and fortunately we've gotten ourselves into a position where we do business with most of the guys that have significant import or export operations around the world. So as we buy MK Data or Customs Info, we look and say, these guys have X number of customers, we have 10 times that, let's go take this whole thing out to all those customers and that will create more opportunity and help us grow the business, and I think that's true as ever in the MK case.

And then when do you – I mean do you need a more stringent enforcement to see that accelerate or do you just think it's a question of time?

We have some stuff to do. We are in the process of educating our sales force right now. We are having global conference calls quite frequently where they were just like the guest stars of our – we have a weekly sales education call on Monday mornings. I say it's sales education, it started it that way, it's probably opened up to about a third of the Company now. I'm shocked at how many people are on the call anymore. But, yes, we are in the process of educating our people about what MK Data does so that we can sell a lot more of it. This denied party screening stuff is not nearly as exposed to Europe. It started all in the U.S., all the companies that do it are in the U.S., MK Data included. We're expanding that over to Europe rapidly because we think there's big opportunity for it over there. It's even more of an untapped market than the U.S. or North America is.

Okay. And any growth opportunities outside of shippers with this data, Ed?

Yes, and we're exploring those right now, but we basically think that every law firm should have access to this information, we think that every bank should have access to this information. If you guys want to do us a favor, go tell your compliance guys that they should be doing denied party screening checks on everyone they do business with. I think they should. And so we see lots of opportunities for it right now. I don't know, short of asking you guys to go tell your compliance departments. We don't really have relationships with the banks from a selling perspective and nor with law firms, but we are looking at how we might get into that. It's not our market but we think it's an opportunity for this information.

Is it the same data set or do you need to modify it?

No, it's the same data set. Understand, the data set comes from 130 countries around the world, and just to give you an example, I'll just take the U.S. for example. The FDA has a list, the FDC has a list, they all have these – every little agency has some rules around this, oh by the way you're not allowed to ship this stuff here, you're not allowed to ship to that guy, you're not allowed to ship to that country, and those rules don't just get issued in one list from the United States, they get issued in like 30 lists, and our job is to collect them daily and make sure that all of our customers have access to them so that if some guy gets put on the list yesterday, let's say DoD, Department of Defense, which is the most likely guy to put something on the list, puts something on yesterday, that needs to be accessible to our customers tomorrow. It's very likely the bad guy is trying to do something bad right now, if he just got put on the list. And so our customers need that information as quickly as possible, and that's the kind of business we look.

Alright, great, thanks.

Our next question comes from Paul Treiber from RBC Capital Markets. Please go ahead.

It's been just over a year since you acquired Customs Info. What's been the magnitude of revenue synergies that you've seen to date, and then have the synergies or the expanded revenue, has that occurred at a pace that you expected when you made the acquisition?

Customs Info is growing about what we expected, and we told you they were a high-growth business, and on their own and from a revenue perspective, if I just look at their business, they are growing much more rapidly even than our core business. We expect the same out of MK Data. That was the premise behind buying them. And, yes, Customs Info is largely living up to that. It's not higher than we expected, it's about exactly what we expected. I think we were kind of internally planning on 15% to 20% growth and it's in that range.

And you do expect a similar magnitude for MK Data?

Yes, maybe even on the high end of that.

Okay. And then just jumping to your extended relationship with SAP, could you just review how SAP customers will now be able to access MK Data and then how they accessed MK Data in the past prior to the acquisition?

Nothing has changed there. The integration between SAP and MK Data and SAP and Customs Info was already in place before Descartes bought the companies. Same with the integration with Oracle with both of them too by the way. They access it, I think I just mentioned it on the call, that they can look at Web-screens that MK Data gives them, they can get the data content set delivered directly to them in a format that they can load into a database on their site as directly accessible from their SAP system, or they can use a server that we have here and just make calls to it and ask us questions all day long if you will systematically so that their systems don't have to store the data and it can just – we do that for them and we just answer their questions as they have them.

Okay. Just moving on, in regards to the economy, a lot of the macro concerns around China. Have you seen any deterioration or change in global trade shipments on your network, and then if you could just speak from a historical point of view looking back at 2007 and 2008, how has global trade, the typical movements in that, how has that impacted transactions and revenue on your network?

Let me answer your first question first because it's an easier one. It's gone up significantly since then. We benefited from the growth since the 08-09 timeframe. We were benefiting before that and network transactions dropped off 8% to 10% that year and they have been growing since then on a global basis. Now some areas are stronger than others. North America for us is, and specifically United States, has been growing like gangbusters the last couple of years. China has been slow. We've seen that, long before they had a stock market crisis there, we saw that it – not that it's terrible, just that it's not growing as fast as it used to. And by the way, some of the issues that I've seen is that it's just shifting to Southeast Asia. If I look at the Asian shipments, it's similar, similar kind of growth patterns as seen in the past. If I look just to China, yes, it's a little flatter than we might have expected eight or nine years ago. Europe was struggling there for a couple of years coming out of the recession, maybe went into it a little later than the U.S. did and has come out a little slower, but it's getting better now and so we don't see a whole lot of impact from Greece and that kind of stuff. I don't know what's going to happen in the future but so far Europe seems to be recovering a little bit. Specifically to Chinese stock market crash, we haven't seen any effect of that yet. I don't know that we won't someday, but we haven't yet.

Okay, thanks for the color. I'll pass the line.

Our next question comes from David Hynes from Canaccord Genuity. Please go ahead.

So on MK, how fast were they growing? And then the second question, if you look at kind of the incremental margin on your calibration increase, it's like 65%. So would MK standalone that profitable or help us reconcile what's driving that, is that recouping some of the margin that was lost to reselling, just help us think about it as we kind of look to build the models going forward?

So MK is probably, as I said earlier, they are in the 15% to 20% range and we are not really expecting that to change. I hope it gets a little better but we didn't build our metrics based on that. But it's nice healthy grower and it's been consistently growing for some time. Sorry, what was the second part of your question?

Just the incremental margin on the calibration, like 65%?

So they made a nice healthy margin before we ever met them, and the reason for that is they have a one-time cost to collect the data content, and as their business got bigger they eventually grew through that cost and with each incremental dollar from that point forward, most of it was going into their pockets which made it a nice healthy business, and if you consider that that business is growing, you go, alright, this is going to be very profitable for a long time to come. We increased our margins to the 30% to 35% range in part because of MK because if you think about the MK's situation on its own, we buy it, a lot of our revenue that we get through MK was kind of like being double-booked through the two businesses between MK and Customs Info. When it gets to Descartes, we go, okay, we can only book that revenue once, but the profit stays the same. So all of a sudden, the margin goes up, okay. So that helps us. If we moved to the 28% to 33% last quarter because our business was getting healthier and healthier and making more and more money, this allows us to up it again in part. The second thing that contributes to this is, a couple of things we've done in the last year helped our business operate a lot more efficiently. This Airclic acquisition that we did has been a home-run. It was a business that was struggling when we bought it. I think coming together with Descartes was the perfect fit for it and the customers saw it that way as well. We were able to go out and sell more of it and we brought some of our discipline and operations to that business and have now streamlined that business and it operates a lot more efficiently today than it did with increased revenues. So that's all exciting for us and is part of the tailwind that's allowing us to say, we're going to increase the margin range to 30% to 35%.

And then, Ed, you've been pretty consistent talking about the three growth drivers of the business. I guess when you step back, how would you kind of fourth-rank the opportunity in each, which gets you most excited, where is the most upside, maybe in which are you best positioned, kind of high-level commentary across the three would be helpful?

I think the way I have given my presentation, it was already fourth-ranked. To some extent, they all have their – it's like asking which kid do you like best? I like them all. The omni-channel retail stuff is the area, it's hot right now. Every retailer needs to do something about this and we just are in the fortunate position where we have this thing that they need, and that's a great business. Will that be a great business 20 years from now? I don't think so. I think it's going to change over the next long-term period of time. Hopefully we'll be the best of the next thing, but I don't think omni-channel retail is going to be a novel idea 10 years from now. I think people will have all made these decisions and hopefully we'll be onto the next thing that they all want to do. Conversely, the customs and regulatory area, I do think we'll be back here 10, 15, 20 years from now going, that's still a hot area, because I think there's 167 governments around the world that are all saying they are going to do import filings now, and the next thing they are going to say is they're going to do export filings, and the next thing they're going to say is they are going to do freight forwarder filings. We already see the pattern and we see that it's going to – everyone is going to be doing this. It's going to take a long time to get there. And then there's the part of it, if that was the only set of facts, I would say that's clearly our best business because it's a great business and it's going to be that way forever, the only thing I don't like about it is I don't control when they have to do it. The omni-channel retailer or any other part of our business, our sales force can create demand by going and explaining the customers why they should do something. In this case, I can't walk into someone and tell them to do customs filing if they're not being told to do by a government. So they have to be told that they have to do it and then we help them comply, and I don't control that process. So if I had any reservations about that clearly being the best one, that's the thing that holds me back. Our network continues to – on the GLN, that's the third one, our network continues to grow, and when we add stuff like data content to it, I think it just gets all the stronger and the customers get what we are doing more and more as they buy more and more services from us that are all combined together. And the guy that might have said, I don't really understand what Descartes is doing with its network five years ago, I think now he's going, oh I get it, I just didn't understand what they were after and now I do, and I don't need these 10 services from them and I'm looking at a number 11 and 12 right now. That's the kind of relationships we're building with customers.

That makes sense, helpful color. Thanks guys.

Our next question comes from Paul Steep from Scotia Capital. Please go ahead.

Ed, can you maybe just talk a little bit about when you think the SAP product would hit the market and sort of the timelines for sales training and expectations we should have in terms of the rollout and ramp-up around that?

On the customs and regulatory side, they are rolled out. I mean it's just they are selling more and more of it. We continue to educate the sales force on, when you have this kind of sales opportunity, call us, but in terms of product functionality set, it's done and it's been done for a while. The new thing, and what we were just announcing, is that they are also connecting now to our Global Logistics Network, and that is new. The development work just finished and it's going to be rolling out over the next couple of months, and the next big step and the most important step is to start to educate their sales force, when you get a transportation management customer and they need to connect up to 500 different transportation providers, you need to call Descartes, and along with a whole lot of people at SAP and their alliance and partnership teams and our alliance and partnership group and our sales force and our pre-sales guys, we are in the process of educating the SAP sales force how to sell our Global Logistics Network in conjunction with their Transportation Management system. I think you'll see the first sets of customers rolling in here in the next year, and in the long run you're going to see – next year is probably when you'll start to see some results, and hopefully in a couple of years if we come back and look at it, it will be like the customs and regulatory businesses for us today, which is growing rapidly with each new SAP customer that comes on.

Perfect. And then I guess for either you or Allan, what's the team's comfort with leverage at this point in terms of maybe stepping in and using some of the lines that you have existing?

So, you see we have the $77 million acquisition line of credit. We utilized it almost fully last year right before we did the equity offering. I don't think you'll see us reluctant to use it all. We have it there so that we can use it. The only thing I'd say is, right now – when we went to $77 million, it was an attempt to be 2x EBITDA at the time. That's now, our EBITDA has grown significantly since then, so that number is probably a lot less than 2x right now and I don't think you'd see us concerned about utilizing it all.

Thank you.

Our next question comes from Stephanie Price from CIBC. Please go ahead.

Can you talk a bit about the Oracle relationship? With MK Data and Customs Info, obviously they were strong partners. Can you talk about the possibility for formal alliance relationship there, sort of Company-wide, is it like the SAP partnership?

Yes, we are trying. We have a very good relationship with Oracle by the way, and their global trade management system is newer than SAP's. It's up-and-comer. We obviously have a lot of strong relationships with our customers, so they have a good in to get their global trade management systems sold. From that perspective, the partnership is just as tight as it is with SAP. On the newer announcement with SAP where they are using our Global Logistics Network in conjunction with their transportation management system, it's interesting, the shoe is kind of on the other foot there. Oracle has the long-standing, probably the strongest transportation management system in the market. SAP in that market is the up-and-comer. We just got SAP agreeing to connect to our Global Logistics Network to connect their customers to all their transportation providers when they click the 'Book Us' button or their reservation button, that the reservation falls electronically through our network out to the customer, we get paid a transaction fee to do that. That relationship does not exist with Oracle today. If it did, it would be a great opportunity for us because they have the biggest transportation management system in the world. We are spending a lot of time talking with them about that right now.

Okay, great. And then in terms of additional functionality on the platform, can you talk about any areas that you'd like to add to the platform, either through acquisitions or organically?

You see us in the six pillars that we operate today. I mean our first and foremost strategy is to expand our footprint in those pillars. You can see us doing that in content right now. We've been telegraphing that to you guys for probably a year and a half, and you see it happening now. I think you'll see more of it in the future. Obviously any kind of opportunity we see in the global regulatory environment for acquisitions typically in that area, it's focused on geographic expansion for us, and I think you'll see that continue. I don't think I want to get into naming a seventh pillar yet, but as soon as we know that one's going to happen, you'll probably be made aware of it the same way you were made aware of the content. We'll probably foreshadow it with a couple of comments and then it will show up.

Fair enough. And then in terms of the competitive environment in the omni-channel, just given the growth in that area, can you talk a bit about the extent of environment, whether it's changed, if you've seen anything entering the market, or anything new there?

Our competitors are all – listen, if you look at the history of this over the last 15 years, we went through dynamic optimization or what our developers would call incremental optimization, we left the batch planning world and went to incremental optimization. That was a very painful process for us. What it meant was all of our competitors kept making their batch planning tools better and better 10 and 15 years ago and we stopped modifying our batch planning tools and we're getting beaten repeatedly by them in the early days. We did that because we had a fundamental belief that we thought incremental planning was the way to go or dynamic route scheduling was the way to go. It turns out we were right, took a long time for that to unfold, but eventually our system became the premier application out there to do reservations and dynamic planning. Our competitors right now in the last two years I think have been beaten over the head with that enough that they now know they have to do that. When I look at their sales processes, they are doing their best with their old systems to explain how they might be able to solve some of these problems, and at least today they are not very successful in doing that, because it's just not as good a mousetrap. They are onto it though and eventually they'll catch up. I hope that by the time they do it's too late, I think it may already be. In our thoughts on this, I mentioned a minute ago, omni-channel is the thing that's hot right now. I don't believe it will be the thing that's hot in 10 or 15 years. Our job is to continually stay ahead of that. I think that last time this happened, we were well ahead of the curve and we're benefiting from that right now, and all we're talking about with our guys is, let's stay ahead of that curve, what's the next thing these guys are going to want to do, and the way you do that is you stay close to them and you keep talking to them about it and you find out what's next and then you start building it. That's what we did last time. It was as I said painful to get there, but it feels great right now and I want to make sure that next time this happens, that we are on top of it again.

Great, thank you very much.

Our next question comes from Ralph Garcea from Cantor Fitzgerald. Please go ahead.

Congrats on a record quarter. Just on a housekeeping question first, what were the respective headcounts for MK and BearWare and what's the total headcount now?

We haven't disclosed the headcounts on the two acquisitions but our headcount now is just around 1,000 people.

And then on the growth side, I mean for you guys to get to say to $300 million, I mean do you need the three channels to open, Europe to North America or intra-Europe, or do you need sort of growth in Australia, Japan and/or South America, and if so, how would you get to those kind of numbers?

$300 million, you are talking revenue to $300 million?

Yes, I mean over the next three to five years, is it just regulatory rollouts across Europe and export filings in North America, et cetera, or do you need to open those other channels?

Those other channels are opening up slowly but surely already. We probably don't need it to go that way. We can probably sit in Europe and North America and the key countries in Asia to keep getting the $300 million. We'd see a much bigger opportunity in that in the long run, because we do think that those other trade areas are going to continue to open up as those countries get more sophisticated and get concerned about the things that the first world countries are concerned about today, as they get concerned about it too as they become first world countries, they are going to do all the same things that the North Americans and Europeans and first world countries in Asia are doing, and in the long run we think that's a great opportunity for us. I don't think we need it to happen to get to $300 million but maybe to meet some of our longer-term goals we would expect that that will happen.

Okay. And then just with MK, I mean were they at 50% market share, I mean what was their market share before you bought them and where do you see that growing in the DPS side, as you sort of sell them through your network?

It's not so obvious to tell what the market share is. There's no Gartner Group out there analyzing the specific market. We just know from being in the industry that they were not really the biggest because they are not that big anyway. So they were the biggest in a pretty small market, but it's a rapidly growing market. And what we really liked about it was we thought they had the best content, much like Customs Info which I've explained in the past, the way they collect their data. MK Data was by the way partners with Customs Info almost from the moment those two companies started they were partners. They collect data the same way, and I have explained to everyone on this call probably and sometime in the last year, after Customs Info, the brilliance of how they collect the data and the difference between that and the way everyone else collects it, guess what, the MK Data and the Customs Info guys knew each other when they were starting, they were friends right from the get-go and they collect the data in a very similar way. We think that's why they ended up with the best data set and certainly the most cost-effective data set they collect. So we're excited about adding that to our business. We're looking for other opportunities like that in our business. We are taking all the data collection guys and going, what other data could we collect right now that will be valuable to our customers, and we hope that results in some great opportunities for us in the long run.

Again, just a quick one for Allan, I guess I mean the revenue synergies are obvious between the two deals. I mean can you do anything on the cost side integrating the two offices or are they just too small to really get any leverage by integrating them?

I think in every acquisition we do, we will look at revenue synergies, we look at cost synergies and it will be a mix of those and there's different types of acquisitions we have done. As Ed alluded to, MK Data is a rapidly growing market and we do believe we'll see good revenue growth. BearWare, more likely a combination of some revenue and cost control cost efficiencies.

Okay. Thanks a lot, guys.

Our last question comes from Justin Keywood from GMP Securities. Please go ahead.

On the U.S. export filing initiative, Ed, you mentioned that this is dependent on the government implementing regulations. Should we therefore look at this as like a longer-term scenario or are there some upcoming catalysts to accelerate growth here?

The ones I mentioned earlier on are the ones that are on our mind right now and they are being implemented right now. The ACAS which is the forwarder filing in the U.S. is ongoing and we hope that will start to be enforced next year. The export filing was just announced, the pilot program is just about to start, it'll probably take a year or two to get going but it's a great sign for us because every initiative that we've dealt with so far has been an import initiative, all of a sudden the U.S. and Canada and the EU are all saying, we are also going to do an export initiative. Same thing, manifest collection of, what are you shipping out of my country. And we believe eventually every country will do that. So we're really excited about the long-term prospects for that as that concept expands around the world, and the U.S. is going first right now. What we have typically seen is once the U.S. does something from a customs perspective, Canada typically follows suit. Canada has already announced that they are going to and so has the EU. So we suspect this will spread around the world just the way import filing spread around the world.

Okay, thanks, that's helpful. And then on MK Data, and maybe Customs Info too, is there an analytics piece or higher value subscription for these services or are these all sold as a single tiered pricing model?

There are a bunch of different pricing models depending on what you get and what you want. There is definitely an analytics portion to both. I'll give you an example on the MK Data case. Let's say you type in, let's say you're saying, I'm going to ship something to Steve Johnson, you type that in. There's like probably a couple of million Steve Johnsons around the world and you are trying to figure out is this the Steve Johnson that's on this list. And from an analytics perspective, what MK Data does is, it doesn't just say, yes, you can't ship to Steve Johnson, it gives you a likelihood that the Steve Johnson that you're shipping to is the Steve Johnson that the government is talking about, and it will actually give you a percentage chance that that's the case, and then you have to evaluate, well, MK is saying it's 85% chance this is the same guy, do I want to ship to him? Maybe that's high enough that I say, I probably don't want to take that chance. If they say it's a 5% chance, you may say, I don't think that's the guy and they'll show you all the facts that helped them come up with that percentage so you can evaluate it on your own. And so I don't know if you call that analytics or not, I think of that as analytics and it's helping customers get better information so that they can make a difficult decision a little easier to make.

So that sounds like a pretty useful feature. Is that not an easy sell to customers then?

Yes, by the time customers are talking to us about this as – it's getting them to realize it's important. As I said, Descartes started using it a couple of years ago. If you asked us five years ago, do we need to do denied party screening, we would have said, we are a software company, why would we need to do that. All of a sudden we start getting letters from government saying we're not allowed to ship this here and that there, and we said, wait a second, our legal department goes, we need to start checking this, how do we do that, and turns out we were reselling MK Data and our business guys going, oh, there's a system that does that, and we started using the exact system we were reselling. As companies get bigger and they get in trouble and they ship to more countries, eventually they will stumble across this problem and when they do we are one of the best choices out there to solve it.

Okay, good to hear. And is there a way to generally view like ROI for customers using MK Data or is that kind of hard to tell us right now?

The ROI is if you mess up here and you get a $500,000 fine, you could have spent $0.30 with us for us to tell you that you can't ship to that guy, instead you figured out you can't ship to him when you got the $500,000 bill. That's the ROI. And more specifically, because you may still use MK Data stuff and still end up doing something wrong one day, either you didn't check it completely or whatever, you make a mistake, one of the things that can help you turn that $500,000 bill into a $5000 bill is showing the government you attempted to try to figure this out. You made a mistake instead of knowingly ignored something. Governments don't like when you knowingly ignore a rule that they put in place. If you can go back to the government at that point and say, I wasn't ignoring you, I made a mistake. I was trying to do this properly. I used MK Data and here's the facts that I shipped to this guy based on, and you're right, that came up as a 60% hit and I shouldn't have shipped to that guy, but the guy that was working for me that did it just didn't understand that, but I was trying, and here's what I'll do to mitigate that from happening again, that's very likely to turn your $0.5 million fine into a $5,000 or $7,000 fine, which makes it a lot better.

Okay, that's good to hear. And then are there any benefits through reduced insurance premiums using MK Data services, have you heard anything about that?

I haven't and I don't know that that doesn't exist, but I haven't heard that. This point, I'll actually bring that up, now that you mentioned it. I'm not aware of any, no.

Okay, thanks for taking my questions.

Thank you. I will now turn the call over to Mr. Scott Pagan for closing remarks.

Great. Thanks, ma'am. Thanks to everyone for joining the call. We look forward to seeing you in the coming weeks and reporting back to you again on the results next quarter. Thanks.