The Descartes Systems Group Inc. (DSGX) Q1 2017 Earnings Report, Transcript and Summary

Welcome to the Descartes Quarterly Results Call. My name is John and I'll 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. Now, I'll turn the call over to Scott Pagan. Scott, 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 calibrations, 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 statement is based except as required by law. And with that, let me turn the call over to Ed.

Great, thanks, Scott. Good morning everyone and welcome to the call. Thank you for joining. We had another great start to the year and delivered another record quarter. Financial results are where we like them to be with strong adjusted EBITDA and cash flow growth and we continue to focus on recurring revenue. We also continue to invest in our Global Logistics Network including our most recent acquisition in a new geography in Germany and we believe that there are more opportunities out there for investment to capitalize and some of the trends that we’re seeing in the market. We’re executing in line with our long-term plans and we’re excited about what’s in front of us. On today’s call, I will revisit some of those long-term plans, and in particular, I’ll talk about our long-term strategic planning framework and some of the key things, we believe, we need to do to be the winner in our space. But before I speak to that, I will start by going through some of the financial highlights in the quarter. Allan will then take over and talk through our financial results in more detail and I’ll finish up the call by talking about our business calibration for the second quarter of fiscal 2017 and the landscape we see in front of us. So with that, let’s start by going over some of the key financial highlights for the past quarter. Consistent with our plans we generated $16.6 million of adjusted EBITDA, an increase of 17% over last year, and on a per share basis, we grew adjusted EBITDA 16% year-over-year. Revenue for the quarter was $48.9 million which was up 10% from last year. Unlike the last few quarters, the FX impact on revenue was negligible only about 400K as compared to a year ago. We continue to focus on recurring revenues and deemphasize license sales. Our service revenues were very high at 97% of our overall revenue, up from 94% at this time last year. And as I said before, we don’t expect that license line to go to zero as some customers prefer to buy that way and it could fluctuate from quarter to quarter. But in general, if you look at the trends over the last few years, we’ve done a very good job focusing our team on growing recurring revenues as part of our profitable growth strategy. As we continue to focus on this profitable growth, we’re really seeing the leverage in our business. We’re not just growing at any cost, we’re growing profitably and with a disciplined operation and our adjusted EBITDA margins are growing too. Our adjusted EBITDA margin for the quarter was 34%, up from 32% a year ago. I think it’s also important to note that we’re not just generating great growth in revenues and adjusted EBITDA, but while doing this, we’re generating lots of cash. Lots of ways that different companies define EBITDA or adjusted EBITDA but what we believe is important is the ability to turn that EBITDA into cash. On that front, our cash conversion metrics remain very healthy. We had a strong quarter converting 97% of adjusted EBITDA into cash and over the last 10 years, our conversion ratio has been north of 85%. Not only do we see this as a sign for a very healthy business but it also gives us the opportunity to reinvest that cash back in our business. And how we reinvest that cash and how we deploy that cash and invest in our business in general is really governed by our long-term strategic planning framework. So let’s shift gears with that from our financial results and talk about our strategic planning framework here at Descartes. Some of you may be familiar with this but I think it’s worth revisiting as it will help put things into context as we talk about investments in our business and trends in the market. The first thing I would like to do is walk through the key tenants of the strategic planning framework and then I will go through a few of them in more detail and talk about how it influences our decision making process. We believe to be successful in the long run and to be the winner in our space; we need to do the following things. One, create a network of authenticated connected parties that are essential to do a business process and it serves as both an attraction to our customers and a barrier to entry for our competitors. We do this with our Global Logistics Network. We want to be viewed as neutral, non-competitive to our customers, and trusted in respect of the business processes that we’re managing for our customers. We want to operate a stable economic and technology platform that can be relied on for the long-term. We want to be viewed as the main experts in the business processes that we’re managing for our customers and we want to be attuned to emerging trends such as mobile technologies, omnichannel, eCommerce, and regulatory compliance. We want to have access to capital to facilitate acquisitions that we see as good opportunities for our business and we want to be viewed as the ideal steward for businesses and customers that join us via acquisitions. So with that, I would like to speak to a few of these tenants and let’s start with the network. I said many times that we believe that what we have with our Global Logistics Network as unique and a major differentiator for our customers. Lots of people -- lots of companies talk about the network effect and for good reason it takes a long time to build a community of participants and the more people and services you have on the network, the greater value it is to the existing community and to potential participants thus driving expansion and adoption. For us, we spent decades connecting parties on our network. This has been and will continue to be a large area of investment for us. These connected parties are key for us, it means that when we a new customer joins our network, it’s likely that a lot of their transportation partners are already on the network, so we can get them up quickly and get them running efficiently and saving money. A lot of our people that cover us refer to this as a note and we think of as a network effect but same difference. We talked about the life cycle of shipments before, we want our customers know that they can come to one place to research and make informed decisions about who to do business with, classify goods appropriately, and submit compliance documentation, move goods efficiently, and work with the broad ecosystem of parties, and do all that in a cost effective and secure manner. We’ve created this one place, the Global Logistics Network by investing organically and inorganically in our business and we will continue to do so. But those investment decisions are also influenced by our overall strategic planning framework. So with that, let’s move to another key tenant that we also believe that to be successful in the long run, we need our network to be neutral, non-competitive with our customers, and trusted by our partners. And we absolutely need to be experts in logistics and supply chain processes. This applies in all parts of our business whether we talk about routing, customs, content, or any of the pillars really. If you’re not a domain expert in our business, you’re not going to get a second meeting with the customer let alone a relationship or a long-term relationship and you shouldn’t. We will continue to invest and keeping domain experts that we have and we will continue to invest in making this company a place where more of those domain experts want to come whether that would be through acquisition or general recruiting. We believe that we have assembled a large world class team with domain experts in the supply chain and logistics space and we have put up our team against anyone out there in the market. This in the long-term is a long-term gain and will be around for the long run and I think people want to join and be on the winning team, a place where the best domain experts out there reside and I can tell you we want to be the winner in this place and we plan to do that. The next area of our strategic planning framework I’d like to talk about is one you’re familiar with from recent calls. We know that to be successful in the long run, we need to stand on top of emerging trends in the industry. We talk about these trends quite frequently on our calls as they are clearly impacted our investment decisions overtime. I won’t go through them in as much detail today, but as a quick reminder, two of the key tenants impacting how we run our business and make the investment decisions include eCommerce and omnichannel retailing, customer expectations about how goods are bought and delivered continue to evolve, and we continue to invest to be at the forefront of this changing landscape. In fact our past two acquisitions really bolstered our capabilities in this area. If you recall we combined with Oz in November, their solution address a number of pinpoints for the eCommerce shippers by automating logistics and supply chain processes, including order fulfillment, inventory management, scanning, and shipping. See a lot of interesting tractions since the combination with Oz with lots of cross-selling opportunities emerging and we’re starting to land some of these opportunities already it’s great. More recently, in April, we combined with pixi over in Germany I’ll come back to them in a minute, but they are the German-based Company that provides solutions for eCommerce, order fulfillment, and warehouse management. Another trend we’ve talked about often is the current security environment for international shipments. This has evolved significantly over the past decade and will continue to evolve for the foreseeable future. We expect investments in this area to continue for some time as there are lot more security initiatives to come over the long period of time and we plan to be there to help our customers remain not only compliant and secure but to do it in a way that they could still run efficient logistics and supply chain operations. Finally, as it relates to the strategic planning framework, we believe it to be successful, we need not only to have access to capital for acquisitions but also be seen as an ideal steward for businesses and customers that join us through acquisitions. Put simply access to capital is important for us because we continue to see an increasing number of opportunities to combine with businesses that could help us deliver more comprehensive solutions to our customers. People often ask us that we would consider doing larger transactions and the answer is yes, we’re interested in potential transactions of both larger and smaller size that can help us advance our long-term goals. In order to remain nimble and able to move quickly should such an opportunity or collection of opportunities in a particular time present itself, we recently done a couple of things to enable us to access capital quickly if needed. We increased our acquisition line of credit back in March, now $150 million, $10 million of which we used for the pixi acquisition. And then in April, we filed a short form based shelf prospectus, enabling us to raise up to $500 million by way of issuing shares or other forms of securities. None of these changes how we view acquisition, we plan to continue to be prudent and focus on our business fit for the long-term strategic plans of our business, at the same time having access to capital is only part of the equation we think it’s even more important to be seen as the best home for these businesses and customers. Can’t emphasize this enough. For any company that joins Descartes they have options for who to sell to and part of our job is to make sure they feel that Descartes is the best home for their employees and their customers and we are out there doing that every day. In order to do this we only focus on company where we feel there is a good strategic and cultural fit, a lot of us at Descarte and myself included, joined through acquisition. We believe that we have a good reputation out there as a home for the right businesses and we plan to keep that reputation in the market. So let’s take pixi for example. As I mentioned earlier, this is a German-based business focused on eCommerce automation and warehouse management. These guys are solving problems that are becoming increasingly important as eCommerce grows in the general business community. We want to make those stuff available to more customers on our network. They joined Descartes because they thought it was the best opportunity for them to take their business to the next level both in Europe and North America and they wanted their company and employees to be part of a business that takes pride in being logistics experts and solving customers problems and a business that will be around for the long run. So I would like to take a quick minute just to welcome the pixi employees to the team. I had chance to meet them during the acquisitions process. They are a great group of people operating in excellent business and they are operating in a key global geography where we’ve had Descartes had not much global presence yet in Germany and we’re really happy to have them as part of the team, so welcome. Hopefully that summary of our strategic planning framework helps you to better understand how we think about the business and our investment strategy and with that strategic framework in place we’re feeling good about the future and we’re looking forward to continue delivering outstanding results for our customers and our shareholders for a long time to come. Before I hand it back to Allan, I’ll talk a bit more about the financials or Allan will talk a little bit more about the financials. I would like to talk a bit about our recent user group and I’d like to thank the people that made another great quarter possible for Descartes, so starting with user group. For those on the call that attended thanks very much for coming. I hope you enjoyed it as much as we did. And I trusted from attending you got a feeling for what Descartes is all about. And you could sense how our customers feel about what they're doing and our strategic plans for the future. I’d also like to thank our customers and partners that attended and in particular those that were part of the Steering Group Committee. This is an event for our customers agenda is set by them. We couldn’t make it happen without the Steering Committee, so thanks again for all their work in preparation to make it another great event. And finally, as it relates to user group, I want to thank our employees for putting on a great event and special thanks to the user group team that worked literally thousands of hours setting up and running that event. You guys are awesome. We really appreciate all the hard work you put into doing it and making it a great event. More generally I want to thank everyone who helped kick this year off positively with another great quarter. Thanks to our employees for all the hard work they put in to make sure our customers get results. Thanks to our customers who continue to place confidence in Descartes, their network of choice. Thanks to our partners for helping us continue to expand our ecosystem. And finally, thanks to our shareholders to continue and have confidence in Descartes. With that, I'll turn it over to Allan.

Okay. Thanks Ed, appreciate it. As indicated, I'm going to walk through the financial highlights for the first quarter ended April 30. We are pleased to report record quarterly revenues of $48.9 million this quarter, up 10% from $44.4 million in the first quarter of last year, and up 2% sequentially from the fourth quarter of last year. Consistent with our plans, license revenues continued to decline as a percentage of our overall revenue with license revenues coming in at $1.4 million in Q1, down almost 50% from license revenues of $2.7 million in the first quarter last year. As service revenues, as a result service revenues represented 97% of our total revenue this quarter, up from 94% of revenue in Q1of last year and 96% of revenue in Q4 of last year. Gross margin continue to be very strong at 72% of revenue for the quarter, which is a solid increase from gross margin of around 70% in the first quarter of last year, as we continue to experience operating leverage from our network revenue growth. With continued recurring revenue growth, and leverage from our recent acquisitions, we also continue to see solid EBITDA growth of 17% to a total of $16.6 million or 34% of revenue in the quarter compared to $14.2 million or 32% of revenue in the same period last year. As a result of these strong operating results, cash flow generated from operations came in at $15.9 million or approximately 96% of adjusted EBITDA in the first quarter of this year, an increase of 34% from operating cash flows of $11.9 million or 84% of adjusted EBITDA in the first quarter of last year. Resulting net income came in at $6.0 million or $0.08 per diluted common share in the first quarter, an increase of 22% of net income of $4.9 million or $0.06 per diluted common share in the first quarter last year. Overall we are pleased with these solid operating results in the first quarter. If we turn our attention to the balance sheet, we look at our cash and short-term marketable securities balance totaled $58.5 million at the end of the first quarter, which when you combine it with our recently expanded $115 million revolving credit facility, we have plenty of room for acquisitions opportunities. In addition, as discussed earlier, in March of this year we filed a new short form based prospectus, short prospectus allowing us to offer up to $500 million of additional securities over the next two years. In short, we continue to be very well capitalized to execute on our business plan. As we look forward to the second quarter and to the balance of this year, we should note a few things for you. We expect to incur approximately $4.0 million to $5.5 million of additional capital expenditures for the balance of this year. And this is expected to include primarily focused on network security and infrastructure expenditures. We expect amortization expense will come in approximately $21 million to $22 million for the balance of this year, with this figure being subject to FX changes. Our income tax rate came in at approximately 24% of pretax income in the first quarter and then we would expect it going forward to the balance of the year, it will stay in the range of 21% to 25% of pretax income. And finally, we expect stock-based compensation will be approximately $1.5 million to $1.9 million for the balance of fiscal 2017 subject to any forfeiture of options. So with that, I'll now turn it back over to Ed to wrap up.

Great, thanks Allan. All right. So let’s start with -- I will start with calibration for Q2. Similar to previous quarter, we don't provide guidance, but we use our baseline calibration as a key metric relating to the ongoing health and strength of our business. With movements in FX rates, we used the most recent FX rates as of yesterday, so our calibration for Q2 assumes the following exchange rates: CAD0.77, a EUR1.12 to U.S. dollar and GBP1.47 to U.S. dollar. So to turn to Q2, as of May 1, 2016, for Q2 we had $48.3 million in visible recurring contracted revenues or baseline revenues. We had 37 -- or excuse me $34.7 million in baseline operating expenses. This gave us baseline calibration of $13.6 million for adjusted EBITDA for Q2. Some other key points related to how we’re positioned for Q2 and beyond. We’re well capitalized. We have a healthy business, it’s well calibrated, and as Allan mentioned, we also have a healthy balance sheet and access to capital. 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. We continue to see a lot of interesting opportunities out there. We are seeing both larger and smaller opportunities and while we review everything as it comes our way, we’re not buyers for buying sake. The fact that we have increased our line of credit recently and filed for the new shelf doesn’t change how we view acquisitions. We intend to continue to be prudent but we’re confident in our ability to deploy the capital efficiently and effectively. As a reminder, our plans for the remainder of FY 2017, we continue to target 10% to 15% adjusted EBITDA and adjusted EBITDA per share growth. We will invest over-performance back in the business. This growth will come through a combination of organic and inorganic activities and acquisitions are not incremental to this plan. We will focus on recurring revenue and deemphasize one-time license sales. If you recall in FY 2016, we increased our planned operating margin range to 30% to 35% given the current performance of the business and mindful of the FX environment, we expect to continue to operate in that range in FY 2017. But please keep in mind this could vary as we buy businesses that need fixing up which would impact that metric in the short run. Finally and as always we will make ourselves available to shareholders. We think we got a great business. We want to be available to help people learn about that business. We will continue to spend time and resources to get the word out and we hope you will do the same. So with that let’s open it up to your questions. Operator?

Thank you. And we will now begin the question-and-answer session. [Operator Instructions]. And our first question is from Matt Pfau from William Blair.

Hey guys, thanks for taking my questions.

Hi Matt, how are you doing?

Good. First thing I wanted to ask was on the ramp up in capital and so the increase in the line of credit and also the shelf filing that you guys put out. Just wondering is this related to anything specifically you’re seeing in the pipeline of deals. So is there may be an abundance of attractive deals out there that you want to be prepared to execute on or is it more in terms of the size of deals that are potentially in your pipeline?

May be a little of both. We -- I guess the last couple of quarters we’ve come out saying hey we’re seeing more deals than we’ve ever seen before and that continues, it may actually be even getting may even be increasing. We see as always I was just saying a minute ago, we see a lot of opportunities to expand our network reach and we look at all of them and we want to be prepared in case that becomes a possibility. So yes it’s somewhat related to what we’re seeing in the market nothing, we didn’t really bring specific deal but we do see a lot of opportunity, a lot of stuff for sale out there, and we want to be prepared to take advantage of it, we can get a deal that we want at the price that we want.

Yes, Matt this is Allan here just to add on the credit line, we had a smaller line in place before and as the business grew it just made sense to increase that line and have access to that capital. And on the base the shelf prospectus, if our existing shelf was expiring, so as a matter of course we put this one in as a replacement. So consistent with what Ed was saying but these are replacements of existing capital sources we had.

Got it. And then may be Allan how do you think about financing potential deals in terms of the mix of debt and equity and what’s your preference between the two?

I think our preferences to use our existing cash flow first, second, and third. I think following that the operating line is I think a reasonable source of capital in a predictable business we have to continue to do this smaller acquisitions that we would -- that we’ve done and have targeted. On the shelf prospectus, I mean it’s good to have that out there as a form of capital. I think we would be as larger acquisition or set of circumstances that would allow us to go to that. But right now our current business plan, existing cash flow, the operating line would -- should suffice for now to continue that current business plan.

Got it. And last one from me Ed just wondering if you could provide an update with how the SAP partnership is progressing if anything’s new there and what you are seeing from that partnership?

Yes, I mean, if you -- any of those people that were user conference could probably tell they were a big sponsor at user conference. They, as I mentioned on the last call a quarter ago, they have recently kind of expanded the relationship they have with us to also start selling or promoting our network with regard to their transportation management initiatives. So as they go out and sell the transportation management tools, they are using the Global Logistics Network to power that solution and get their customers connected to all of the various transportation providers in the world. That’s starting to bear fruit. We are starting to get the first couple of deals with them and we have a whole lot in our pipeline. So we’re pretty excited about it.

Our next question is from Paul Steep from Scotia Capital.

Great, thanks. Ed, may be we’re almost the year for MK data could you talk a little bit about the attach rate do you’ve seen with clients. We saw lots of interested evolution that what you’ve seen in the field.

We’re really pleased with how the MK acquisition is going, may be even better than when we thought when we bought it. We are getting a lot of traction with our customers, started to be interested in buying their solution, as our sales reps get knowledgeable on how that solution works and are able to go out and explain that to our existing base of 13,000 customers. We’re getting a lot more deals. We just signed one of their biggest customers, the biggest customer they’ve ever got in the past couple of months here and that was, a customer of Descartes that was talking at Descartes, and then got interested in the MK Data Solution and ended up becoming a very large customer. So we’re really excited about it. I think it’s going to be a great acquisition for us in the long run. And I think it helps us bring a lot of value to our customers who otherwise might not had that chance that we didn’t bring that solution to the Global Logistics Network.

Great. And then just one follow-up, what’s been your past experience look it sounds like there is a number of mergers out there that are percolating around the ocean market and then you obviously saw FedEx close TNT yesterday. What’s been the impact on the GLN historically when these larger mergers have occurred? Has there been any impact on pricing or volume across the network? Thanks guys.

It’s usually being good for us. Remember the guys that are the -- that really drive the Global Logistics Network tend to be the bigger guys, the DHLs, FedEx, UPS, the big airlines, the big ocean carriers, the big third-party logistics providers, and the big trucking companies. They tend to be the acquirers and when that happens they tend to buy a smaller company who may use the Global Logistics Network but not as fully as the larger guys have come to use it. And that usually ends up empty over time, right, they buy the company and they turn on more services and get more transactions going through the network as a result. It can go the other way. We have two guys that merge and we don’t really get much more but a price negotiation. I’m not saying that can’t happen but it’s not the norm. What the norm is they are buying someone smaller who may use the network but not to the fullest extent and they’re bought by a bigger guy who uses it globally and more transaction or business processes on the network and that ends up being a good thing for us.

Next question is from Brian Essex from Morgan Stanley.

Hey Brian, how are you doing?

Hey good, good morning. How are you guys?

Yes, we’re doing great. How are you?

Great, great. Yes so couple of questions. I mean one I guess the first one is on the baseline metrics that you provide, it looks like baseline adjusted EBITDA as a percentage of revenue little bit lower than it had been in the recent past or at least sequentially. And I guess I’m wondering how do we think about some of the puts and takes of how that number is calculated versus reported metrics and how does it help us kind of forecast or fine tune our models going forward?

Yes, there is few things that impact that ratio. One is going to be foreign exchange; we have certainly seen foreign exchange help that ratio as foreign exchange of the U.S. dollar was strong to a number of other currencies. As that came back a little bit to us, it has an impact. In addition acquisitions not every company we buy is going to have the same operating margin that we have, we will strive to get them there, so that will have an impact. So there’s a small difference that you picked up on as far as the ratio into the low 28. But those are two driving forces behind it and overall positive, it’s a longer-term positive will be the fact that as our network gets stronger as we do more transactions that helps the ratio longer-term. But we can’t control those short-term issues of acquisitions or FX rates.

Got it. Very helpful. Thank you. And I guess if I could point back to the pipeline and may be as it relates to the opportunities that you’re seeing in the competitive environment you notice that WiseTech recently went public, and I think that got a little bit of press in other markets. But wondering how you compete with them, do events like that help you, hurt you, is it raise the profile of your industry and then accelerate some of your deals either on the sales side or on the acquisition side.

Well WiseTech is a competitor of ours in the broker forwarder market which is about 10% of our business. So I think some of them are familiar with not what we call it as a gigantic competitor but certainly some we are aware of. I don’t know their valuation seem to be helpful to us. We think, we got a pretty good company, so I look at their valuations, they just went public and I go, that might be helpful to us if other investors look at that and compared their company to us, we would relish that comparison. But more broadly, yes it’s good for us, logistics and supply chain technology markets comes into its own and these things are a sign of that, we agree. We agree here it’s a good place to be and there is lots of opportunities out there and I’m sure there is lots of opportunity for other companies to come in and be successful in this space without really harming us and may be in a certain sense it helps us and that people pay attention to it more that creates longer-term opportunities for us and may be even for our competitors.

Got it. May be last one I want to sneak in is omnichannel, any acceleration there you know you had Big Box retailer that you ink to deal with and I’m wondering if you are getting any traction from that and kind of what you seeing in the market as we’re starting to see other forms of distribution even things like Uber rush getting traction in the market. Just a sense of how much of the business is -- how much of that’s contributing to your overall growth and what the pipeline looks like there?

Yes, I mean omnichannel has been a big driver in our growth for the past several years. I expect that that will continue to go on for the foreseeable future. With each new big retailer that we get, we're kind of cementing our position as the leader in that space. At least when you want to deliver goods to the home increasingly is becoming Descartes is the best guy to call. The consulting firms now know that, they tell the customers the other customer see that their competitors are on our network and using our routing mobile and Telematics Solutions to manage that process, and with each win it’s helpful to us. It cements our position as the market leader and makes it easier for the next guy to make that decision. And so we’re pleased of what’s going on, I -- it looks like it’s going to go on for a long time to come and we've got a long list of good household names on our network doing those types of things with us, and I suspect there's a lot more out there to be had as each business kind of realize, I've got to do something about this.

Our next question is from Paul Treiber from RBC Capital Markets.

Hi good morning guys.

Hey Paul, how are you doing?

Good. I just want to focus on pixi for a moment; you mentioned that it's your first time getting to scale in Germany. What’s the opportunity for the existing services like the GLN or mobile routing in Germany?

Well we -- there's a lot of Global Logistics Network business in Germany already. In fact three of the largest third-party logistics providers in the world are in that general region and there are some of our biggest customers on a network. So what I’m referring to when I say this first entry into the German market, it's not like we don't process a lot of German transactions, it's just the first time we've established an office there and have our feet on the ground there every day in the building. If you look at our network already, I mean Germany is one of the main places the transactions get processed through most of the -- lot of the manufacturers in the world come out of Germany and there's the guys that produce the transactions on our network a lot of the big three PLs are based in Germany or close by, and that also produces a lot of transactions on our network. So it's not that we’re new to the German market this is the first time we have a big office there. With pixi, we look and say, hey these guys are focused on that that region, but we think what they do is applicable in other parts of the world might take us a little while, but we plan on bringing that over to North America and hopefully expanding the footprint what pixi was able to do around the world.

When on that point on North America, can you speak to integration plans for pixi and Oz and the potential cross-selling revenue synergies that you could see out of it?

Yes, so the Oz guys are directly involved in the acquisition of pixi with us. We think it's a great fit between those two solutions. We also think there's applicability for Customs Info and MK Data in our order express set of solutions, which is the pick pack and ship solutions that we think those things all need to be put together itself logistics and supply chain problems for all these new ecommerce providers that are popping up. You know the guy that used to own a stereo speaker store that was a storefront is now selling thousands of speakers a day over the Internet and he needs a solution to manage that process right. He used to just have a bunch of speakers in a store and someone comes in the store and you go in the back and pull it out, sell it to them. Now he's doing a lot more traffic, and needs to come up with a simple way to as a customer comes in an orders off a website whether that Amazon or eBay or his own website he needs to be able to pick pack and ship that stuff and make sure that all the tariffs and duties are accounted for and make sure he’s allowed to ship it to that guy. And we are increasingly provided solutions that make that guy more efficient so that he compete with the big retailers in the world, and pixi is a big part of that process, Oz is a big part of that process and it wasn’t by coincidence that we did all these deals in the recent year here.

Okay. And then just want to shift gears and just look at the shipping volumes; I’ll say that shipping volumes I mean typically seasonality is pick up in Q1/Q2. What are you seeing on the network so far in May?

We don't comment on the quarter that we’re in. So I won't comment specifically on May, but last quarter was not long ago that ended in April and we saw strong network performance in March and April as we would expect, probably beat our own internal projections by a little bit in those two months. So it looked pretty good, it looked like if I was using our network as a judge of how’s the world economy is doing, I’d say hey it was looking like things were moving up a little bit.

Next question is from Steven Li from Raymond James.

Thank you. Ed, the ELD mandate that’s coming, can you speak to the opportunity for Descartes? Is it substantial enough to accelerate growth for your Telematics growth? Thanks.

Sorry, Steven could you repeat the question. I had a trouble understanding the beginning there.

The ELD mandate for trucking?

Okay. That’s -- there‘s lot of Telematics providers out there that would see that as a big driver and it is a driver on our network. But I think the main thing is people -- for people buying our Telematics Solutions is growth in our routing and mobile solutions right. So customers which is by the way we’re the big savings as for our customers. As customers decide hey I need to do this more efficiently the big money savings is routing and that’s usually what we brought to the table. When we get to the table we say hey you can do this more efficiently if your drivers are driving around with this mobile handheld tool in place or in their hands. And if I’m tracking what your trucks is doing all day long. Those are kind of the main drivers for us. I think some other Telematics providers might see ELD use a as a bigger part of the driver for them but usually not the reason people call us.

Next question is from Michael Urlocker from GMP Securities.

Good morning. Thanks for taking my question. Ed, I just wanted to touch on something that was examined briefly but may be in a fuller context. There was a question about MK data and if we as ambassadors if we look at MK and Customs Info’s in the prior year those were strong businesses with high profitability but relatively small customer base if I generalize. And so probably they are little bit more expensive in terms of the financial ratios. Would you say that, they are both delivering the strong returns required to get the payback you need and are there any kind of generalized observations about acquiring these businesses that weren’t fixer uppers so to speak.

We are very pleased with the performance of both businesses. I’d say if I could just say generically Customs Info was as expected, MK data is even better than expected, and we don’t know that long. But we’re seeing some very healthy growth in that business and some real excitement in our sales force about selling the MK data products because it’s just more and more people that need them. And we know a lot of those people and MK data was a fairly small company that was doing a great job of getting to the customers that they got to. We would mostly was inbound stuff and all of a sudden now we have, 60, 70 some sale reps out promoting it and we’re starting to see the fruit of those efforts.

Okay, excellent. And to be the business as you’re executing as you’re describing and it’s all pretty straightforward. So I just thought I’ll check in on a generalized sense omnichannel has been a pretty good driver of parts of your business, it sounds like that’s still very strong and it’s still early days of the growth opportunity; is that fair?

Yes, we think it’s going to be a strong growth driver for us for a long time to come here. More and more companies are realizing this as important and that they need to do something about before some eCommerce site takes all their customers from them and when they go out to put a solution in place and we’re just a part of that solution by the way. But when they -- one of the things they do is that they’re they need to be able to be good delivering to the home, washer machines, furniture, whatever they are selling electronically and when they do that we’re the leading choice to solve that problem. And it’s like you could do with that us but let’s say your customers that has 2,000 trucks if you start letting customers pick whatever time they want for deliveries, you might end up need 25,000 trucks whereas if you’re pointing our solution we might be able to come in and say hey I can show you had to do the same thing with 2,100 trucks. That 400 truck difference is a big, big difference. I mean it’s $250,000 per truck per year to own and operate. And so if I could take a couple hundred trucks off the road will prevent you from having to buy them, it’s a big difference for our customers and certainly while we get a lot of attention and we got a lot of traction in the space as we become a market leader here.

Excellent, thank you. And if I can ask a last question, your introductory remarks you emphasized the network effect is that just interesting topic of the day or are there changes in what your customers are doing or interacting with you on where you think where it's kind of highlighted in their minds as well as in your mind?

Well every day as our network gets bigger, I think it becomes more important for us, right, that the moat gets wider. And as we add more solutions to that network that's our way of staying on top. Adding pixi, adding MK Data, adding Customs Info, these things are things that make the move wider and we think that’s important and thought I should mention.

Our next question is from David Hynes from Canaccord.

Hey guys, good morning. Just one from me. So may be a more detailed question on the omnichannel. So on the on the home delivery opportunity, one of the things that came up in our conversations with customers was that nobody is really figured out or perfected kind of how to do dynamic pricing, a pricing based on the actual cost of the delivery. So do you have any thoughts here, I mean how hard is this to do? Do you see the market moving in this direction? Is that an opportunity for Descartes? That would be helpful.

Some of our customers do dynamic pricing. I don't know if it's terribly sophisticated the way they do it, but they certainly say well these delivery times are free, these delivery times are $5, these delivery times are $10. We tell them -- we give them enough information to start to figure that out, right, just to say which are the cheaper times. We continue to drive in that direction. I don't know if it’s the most important thing that we're doing, figuring out whether or not the customer should pay $0 or $5 or $10 for the delivery. I don't think is important as figuring out how to optimize the route the trucks are taking so that you can take trucks off the road. The difference in savings is dramatic between the two. I think customers probably outside of what Descartes does are probably trying to figure out what their customers are willing to do. Do their customers want to pay for this? Is it fair to charge them for this? Do I make more money if I do it for free? Or do I make more money or if I charge them a fee for some of the times that I offer. I don't know if it's the biggest decision they have to make, and I don't know if Descartes really helps them solve that decision. But you are certainly the more sophisticated ones the guys that have been doing with us for several years now are thinking about things like this.

Yes that makes sense. And then I guess may be just a high level one on evolution, I mean how did you feel this year’s event kind of shift out as a lead gen tool versus previous years. I mean obviously there was a lot of people in attendance, but how did those behind the scene conversations goes and how are things gone matriculated since?

Yes I was just talk in general, but the biggest event we've ever had and for those of you who are there you could probably tell or if you've been there a couple years in a row it just keeps getting bigger. And you're right it is a great source of opportunities for us. I don’t think it misleads so much because there are already all customers just talking about doing more stuff with us, but I definitely find that customers talking to each other about how they deployed our solutions and took advantage of them, usually ends up helping us, because they another customer that want to buy more stuff from us, and I don't think this last event was any different, the more people that show up the more leads we end up getting out of it. So that gives you some sense.

Our next question is from Ralph Garcea from Cantor Fitzgerald.

Good morning gentlemen. Thanks for taking my questions.

Hey Ralph, how are you doing?

Just a couple here. On the pixi deal, I mean how long did it take from initial discussion to closing that deal and are those times shortening I guess as you have a bigger funnel and you're looking at more opportunities?

It’s different for every deal I wouldn’t say they're shortening or lengthening it just depends on the circumstances that one probably about five months, so I’m guessing give or take, but that's kind of normal for us, but it sometimes we’ve known the guys 10 years. Sometimes we meet them through a banking process, sometimes we meet them a year make an offer and that doesn’t work and then a year or two later we come to some agreement. But pixi in this case was someone we met fairly recently had a little bit to do with the Oz guys. The Oz guys knew who they were and that kind of helped a little bit. But it was a normal process. And they're really all over the place. You asked if it’s getting any faster as we get more experience doing deals, may be a little bit. We have the ability to go faster that doesn’t mean that deals goes faster sometimes as price negotiations it can’t be solved quickly and there is obviously a lot of due diligence that have to get done and we will skip steps in the process in an effort to go fast. So sometimes that the seller is in a position to move fast and that works out and sometimes they are not and that’s the case we don’t rush them.

And have you increased that staff on the M&A side or you relying now on Oz and MK and then your recent acquisitions, I guess to work these deals in their respective verticals or --?

I know both our corporate development group continues to grow modestly. But we just give you sense how we think about it and we’re acquisitive company right, most of us came from acquisitions. And that team keeps getting bigger. I mentioned Oz involvement in this pixi deal, which is just really an example. But as newer guys come here we buy another company and this is just going to happen with pixi again, we’re going to spend some time with them and they are going to say, well we always thought we should combine with this company or really we should have talked to that company. We get new good ideas from the guys that we buy and end up become a part of the Descartes team and they usually have some ideas and we usually go and explore those ideas. Sometimes it amounts to nothing but often times it amounts to something. And I like that culture. I think it’s one that helps us to do smart acquisitions and I think you’re going to see us continue to do that.

Okay and just on SAP versus NetSuite, I mean you announced Redcat raising on the NetSuite side. SAP last week at SAPPHIRE, I mean lot of emphasis on their new logistics module on HANA. How are the two sales forces on each side and sent incented to sort of push your solution after they either sell SAP logistics or for the NetSuite module?

There is no special incentive; our sales guys get the same commission plan, so however the deal comes in. What I do know is that as the two sales forces work together SAP and Descartes or NetSuite and Descartes or Oracle and Descartes as those sales forces get more familiar with each other and they start to get deals done it is oftentimes if you’ve been in sales your whole life like I had you know that the most successful sales guys that they close a deal, they look around as soon as they close it and they say who else is like this, how do I find another one of these guys and that’s what I see going on right now. We don’t have any special incentives to close SAP or NetSuite or Oracle over any other opportunity. But the sales guys see that as a great way to get traction and it’s very helpful if you walk into a customer and SAP is already telling that customer Descartes is the network of choice and that makes our sales process easier and makes our sales guys gravitate to those types of deals. So I definitely see that type of traction going on.

Our next question is from Blair Abernethy from Industrial Alliance.

Thanks. Ed just one more quick one on the retail side from a very high level. Can you just give a sense of the go to market strategy for you of going after the large retailers, large chains versus going after the SMB market, where do you think is the better opportunity for you and where are you putting more dollars to work?

Well we’ve been historically been very good getting at getting the big guys that’s been our bread and butter over the years and that continues, we continue to trying get better and better at that every day but that’s a big part of our success. In the last couple of years we’ve gotten into this SMB market and we are trying to do better at that every day. And it’s the tough transition; it’s tough to be good at both. Right there is a way you go and get the Best Buys of the Home Depot’s of the world and it’s a whole different way that you go and get the small retailer that’s an eCommerce site that might be five or six years old or may be as I -- in the example I gave started out of a speaker store and becomes a bigger city and it’s now a site on eBay or Amazon just to pick an example. We’re getting better at that every day, it’s becoming a bigger part of our business MK data, Customs Info, Oz, pixi, and a bunch other acquisitions we’ve done more recently are focused on that SMB market and its made a better at it and I think there’s still room for us to improve. I hope to answer this question in a year or two with -- we’re great at both right now. I think we’re great at the larger accounts and we’re getting better at the SMBs.

Okay, great. And just shifting to the government protocol, I’m just wondering with the regulatory changes going on all around the globe obviously and you’ve gone through those in the past many times, I’m just wondering though is there more of an opportunity for you or any opportunities for you in actually providing security initiatives or data or analytics to government import, export offices?

Well we do, if you think about what we’re doing on behalf of our customers, we are providing that data to the government, and that’s how they get, they get it from, they put a requirement in place and say for all imports or exports you have to make this finally and they put that burden on our customers and then our customers call us and say hey, can you handle that for us and that’s how they get that data. We do not sell any of that data in an aggregate fashion to anyone government is included because we look at that as our customers data. And as I was saying early, we want to be a trusted party by those guys and the last thing they want to hear is that I’m selling their data to somebody else for a purpose that they might not have intended in the first place. So we’ve avoided that and by the way we don’t really have government asking us to do that either. But I think if they did we would be telling them no, you can go after the customer if that’s okay, they won’t be giving the data, I’d be happy to but without their approval we will not be doing it.

Okay, great. And Allan just one quick one for you, tax rate outlook this year I think you said 21% to 25%, what how do you expect that to trend over the medium-term?

Well you know I mentioned we’re 24% this quarter. On balance that is a reasonable rate we’re looking at few points either side of that and that’s where we give you a range. We’re running an international business; I think our business is fairly stable, predictable. So we think that would be our near-term range. So it will fluctuate but we just gave you that 21% to 25% range but no major changes to our business. Acquisitions could change that something that takes us out of our current state could change but for now we see that as a good niche to longer-term rate.

And I’ll turn it back over to Scott for closing remarks.

All right. Thanks everyone. I appreciate your time today and look forward to reporting to you next quarter. Have a great day.