The Descartes Systems Group Inc. (DSGX) Q2 2018 Earnings Report, Transcript and Summary

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

Thanks and good afternoon, everyone. Joining me on the call today are 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, Descartes’ gross margins and any growth in those gross margins, 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 SEC, the OSC and other securities commissions across Canada, including our MD&A filed earlier 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 don’t undertake or accept any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements to reflect any change in our expectations or any change in events, conditions, assumptions or circumstances on which any such statement is based, except as is required by law. And with that, let me turn the call over to Ed.

Hey. Thanks, Scott. Good afternoon everyone and welcome to the call. Thanks for joining. Q2 was another great quarter here at Descartes. Our Global Logistics Network continues to grow and gain traction in the marketplace as a leading platform to research, plan, execute and monitor multi-modal shipments around the world. As a result, we are adding more customers to our network and we are seeing our existing customers do more and more with us. I think there is a lot of runway for our customers to do even more with us as well, both within our existing GLN framework with new solutions we’ve recently added and with potential new solutions that we can build or require. All-in-all, things are going really well as we execute to our long-term operating strategy. We believe we’re well-positioned to continue to help isolate our customers from the complexity of the ever-changing global trade landscape while also helping them thrive in the face of increasingly demanding consumer and business buying patterns. I’ll talk a little bit more about that later on today’s call but first I’ll go through some brief highlights of our outstanding financial results followed by some comments on the overall business and our recent acquisitions. Allan will then take us through the financial results in a little more detail and then I’ll finish up with some more comments about our calibration for Q3 and our operating plans moving forward. So, let’s start by going over some of the key financial highlights for the second quarter of fiscal 2018. We had another record quarter of revenue and operating income, and we’re very happy with our key metrics. Our adjusted EBITDA continues to grow in line with our plans of 10% to 15% per year. For the last quarter, we generated $19.8 million of adjusted EBITDA, an increase of 15% over Q2 last year. Revenue for the quarter was up 13% from Q2 of last year coming in at $57.3 million. Our revenue mix is again very healthy. For years, we’ve talked about our continued focus on recurring revenue and deemphasizing license revenues, and this is evident in our results with service revenues accounting for 96% of our total revenues. You may see that shift around from time-to-time if we buy businesses that have higher license components but we generally continue to plan and calibrate our business for less license revenues. We’re also very happy with our margins. Adjusted EBITDA as a percentage of revenue was 35% this quarter, up from 34% in the same period last year. We generated $17.1 million of cash and consistent with our long-term operating plans we’ve been investing cash back into our business by combining with complementary businesses, which I’ll talk about more in a minute. So, as I said before, all-in-all, a great quarter, really happy with how we’re performing. With that, I’d like to turn our attention to the trends we’re seeing in the market and how we’re helping our customers stay ahead of the curve with those trends, including how our acquisition strategy fits in. First trend I’d like to talk about is the continuous change in consumer and increasingly business buying patterns or what some people often call, the Amazon effect. E-commerce and omni-channel retailing continue to influence customer expectations about how goods can and should be bought and delivered. We’ve talked about this at length over the last few years. While at the beginning it was primarily end consumer level, businesses are increasingly demanding the same thing from their transpiration providers. Businesses and consumers want to be able to source goods across a number of channels, have a choice around delivery, and they want to be updated in real time about the progress and shipments. With leading e-commerce retail and other shippers demanding that the transpiration providers provide real time location-based information, the business-to-business market now has the same expectation of full visibility in the transportation routes. Visibility in the real time shipping information has always been at the heart of our Global Logistics Network and we’ve continued to invest to add more capabilities in this area. Historically, we’ve had great coverage globally for air and ocean shipments as well as parcel shipping and pockets of truck related shipments, particularly in the LTL space or for deliveries on trucks where customer uses their own fleet. However, one area we didn’t have the density our customers needed was in full truck load tracking here in North America. So, in August we combined with MacroPoint, the preeminent network of connected vehicles and location-based content in North America. MacroPoint runs a connected network of over 2 million trucking assets and drivers. MacroPoint connects to trucks through integrations to onboard electronic logging devices or ELDs, transportation management systems and/or any cell phone whether that be through GPS-enabled smartphone applications or location-based mobile phone triangulation. MacroPoint uses its data to help transportation brokers, logistics service providers and shippers track the location of deliveries made in trucks. MacroPoint can also use this content to provide transportation brokers and shippers with predictive freight capacity to help them identify early opportunities for additional freight moves. We’ve had great feedback so far from both MacroPoint and Descartes customers as well as from our partner ecosystem that is excited to see the Global Logistics Network adding scale and scope. And equally, everyone here, Descartes is really excited about this addition to the Global Logistics Network. MacroPoint has a history of extremely high revenue growth, high recurring revenues and profitable growth. Ultimately, we view these as hallmarks of a very good business with a bright future, and we value these metrics very highly. However, with MacroPoint, there is one additional factor that made this a perfect and logical fit for Descartes. MacroPoint runs a network of connected transportation carriers, just what Descartes does with our Global Logistics Network. MacroPoint also generates data content, in their location vehicles that is very valuable to parties like brokers or looking for information on where they may be for future freight capacity. Essentially, MacroPoint is a transportation network business with a data content business much like Descartes. It’s rare that we see such a natural financial, practical and strategic fit between businesses. So, we’re thrilled to see the combination take place. I know some of you are keen to learn about more about the deal and how this business will contribute to Descartes results over time, so I’ll start with some history. As mentioned, MacroPoint has a history of high recurring revenue growth, recurring revenues and profitable growth. More recently, while it continued its a high revenue growth trajectory, its lead investor increased the cost base considerably to deal with the expected future growth as a standalone entity. So, immediately before acquisition, it was still at a very high growth rate that was then $12.5 million annual revenue rate, but practically all recurring revenues, but it wasn’t at a profitable run rate. Immediately upon closing, we restructured the business to fit within our larger infrastructure and we’re targeting getting it to our margin levels over time. But we will be balancing that margin focus with the large potential for revenue growth in the short to medium term. From an integration perspective, we’ve already hit the ground running. And as I mentioned a minute ago, we’ve had good feedback from customers and partners, and our respective sales teams are already collaborating on joint opportunities. With that, I’d like to welcome the MacroPoint team and customers to the Global Logistics Network. We’re really excited to have you with us. Continuing the thread on the Amazon effect and changing buying patterns, I’d like to talk a little about our recent incremental investment in pool distribution capabilities with the acquisition of PCSTrac in June and how it helps retailers deal with omni-channel challenges. Although store sales still represent the majority of revenues for specialty retailers, the continued rise in ecommerce and omni-channel retailing puts more pressure on retailers to find new ways to compete and meet the ever-increasing expectations of the consumer. Part of that challenge is to make sure you have the right goods in the right location at the right time and for the lowest cost. Having forward deployed inventory and affordable last mile store fulfillment infrastructure is an effective way to meet these expectations. And it also sets the stage for last mile customer fulfillment for home delivery. This is where PCSTrac, like Descartes BearWare platform comes into play with pool distribution. For those of you that don’t know how pool distribution works. It leverages the community of retailers and pool carriers to substantially lower distribution costs, increase delivery frequency, and improve overall replenishment performance. And to do it effectively, pool distribution requires a common technology system for participants that helps standardize the process and provides carton-level visibility across the entire store replenishment life cycle. By combining two market leaders in carton-level tracking and pool distribution with our Global Logistics Network, we plan on bringing increased efficiencies to both retailers and their logistic service providers. Our pool distribution domain experts at BearWare and PCSTrac have hit the ground running and are already working together to plan the integration. So, welcome to the PCSTrac team and their customers, it’s great to have you with us. These investments are reflecting e-commerce trends. Coming back on our main investment in ShipRush. As you’ll recall, ShipRush specializes in helping small and medium businesses who are shipping parcels. We continue to see individualized and parcel shipments becoming a larger and larger part of logistic landscape, in large part driven by e-commerce trends. You can see with these and many other previous investments, our readiness for helping with e-commerce and related last mile delivery challenges. Final trend I’d like to talk a bit about today is the change in regulatory environment. It’s been a few calls since we provided an update on the regulatory environment. So, it’s an area of our business that sees substantial organic investment as it’s constantly evolving. As we’ve discussed on past calls, moving goods from point A to point B can be very complex process, one that often involves multiple modes of transportation and parts. This process gets even more complex when you are crossing borders, and in many multiple borders. There are rules in each country relating to statistical data collection, customs declaration, so the countries can collect tariffs and duties and security filings, so that people can protect their borders. There are different rules for imports and exports for each party involved in the movement of goods, carriers, intermediaries and shippers and by the mode of transportation. Moving goods internationally is complex. Our Global Logistics Network helps isolate our customers from this complexity. We gather information from multiple parties to system generate the applicable filings and workflow. We help our customers do this every day and our customers rely on us every day. And that’s not just because our system works, it’s because rules and regulations are always changing and it’s impossible for our customers to stay on top of everything. A year ago or so, we talked on this call about Brexit and we said while we don’t know exactly what would change, one thing we knew is that things would happen or the change would happen. Interestingly, we find ourselves a year on and while we still not know what Britain’s relationship with EU will look like and no one does really, changes are already happening. Companies are already rethinking their supply chains and we’re helping them plan, set up systems for the future. By way of example, we are working with some pan-European 3PLs that are rethinking what the first protocol should be for their shipments. If they won’t be able to clear European customs in the UK, then they will have to rethink how a number of other things work. This can get very complex, very quickly. What our customers need to solve this are tools that can help them. One tool that help them research and make informed decisions about who to do business with. We need to help them classify goods appropriately and submit compliant documentation across multiple geographies. We need to help them move goods efficiently and work with a broader ecosystem of parties and finally do it all cost effectively and in a secure manner. And that’s exactly what we do on the Global Logistics Network. Having one platform to make decisions and execute shipments is critical and will become increasingly important as companies continue to adapt to new regulatory customer buying environments in the future. Before handing the call over to Allan to talk a little bit more about the financials, I would like to thank some of the people that made this another great quarter at Descartes. So, thanks to our employees for all their hard work they have put in to make sure our customers get results. Our customers continue to get great results, and that’s why we have a successful business. Thanks to our customers to continue to place confidence in Descartes as their network of choice. Thanks to our partners for helping us to continue to expand our ecosystem. And finally, thanks to our shareholders for continuing to have confidence in Descartes. With that, I will turn the call over to Al.

Okay. Thanks, Ed. As indicated, I am going to walk you through our financial highlights for the second quarter for the three months ended July 31st and our year-to-date results for the six months of our fiscal 2018. As mentioned earlier, we are pleased to report record quarterly revenues of $57.3 million this quarter, up 13% from revenues of $50.5 million in the second quarter of last year. Revenue for the six months year-to-date was $111.8 million, which is up 12% from revenue of $99.4 million in the first six months of last year. As Ed mentioned earlier, in keeping with our recent trends, our revenue mix continues to be strong with services revenue again representing 96% of our total revenue in the quarter and 97% for the year-to-date results, which is consistent with our first half of last year. Although, license revenue will fluctuate from quarter-to-quarter in part depending on the revenue profile of acquisitions, we continue to expect that license revenue will remain a small portion of our revenue going forward. Gross margin continued to be very strong at 73% of revenue for the quarter and for the year-to-date six months’ period. This is consistent with the second quarter last year and a slight increase from gross margins of 72% for the six months year-to-date last year. Our gross margin continues to benefit from strong operating leverage from our service revenue growth. While we continue to invest in more resources and product development as well as additional sales and marketing activities, as a result of continued recurring revenue growth and leverage from our acquisition strategy, we continue to see strong adjusted EBITDA growth of 15% to $19.8 million or 35% of revenue compared to $17.2 million or 34% of revenue in the Same period last year. For the year-to-date six months’ period, adjusted EBITDA was $38.8 million, up 15% from $33.8 million in the same period last year. While there is a slight negative impact from foreign exchange on our adjusted EBITDA this year, we continue to be fairly naturally hedged to currency movements against the U.S. dollar. As a result of these strong operating results, cash flow generated from operations came in at $17.1 million or approximately 86% of adjusted EBITDA in the second quarter of this year and this compares to operating cash flow of $16.6 million or 97% of adjusted EBITDA in the second quarter of last year. Year-to-date cash flow from operations was also steady at $33.6 million compared to $32.5 million in the same six-month period last year. Going forward, subject to unusual events and quarterly fluctuations, we expect to continue to see strong operating cash flow conversion of approximately 85% to 90% of our annual adjusted EBITDA balance. From a GAAP earnings perspective, net income came in at $7.2 million or $0.09 per diluted common share in the second quarter, an increase of 24% from net income of $5.8 million or $0.08 per diluted common share in the second quarter last year. Year-to-date, in the first half of this year, we produced net income of $14.0 million or $0.18 per diluted common share, up from $11.8 million or $0.15 per diluted common share in the first six months of last year. Overall, we are very pleased with these operating results in the second quarter. If we look at the balance sheet, our cash balances totaled of $87.5 million at the end of the second quarter. At the end of July, we drew $40 million on our revolving credit facility in anticipation of the MacroPoint acquisition. Subsequent to the MacroPoint acquisition that we completed in mid-August, we had approximately $40 million of cash available as well as an additional $70 million available to us under our revolving credit facility. We should note that we have the ability to increase the revolving credit facility beyond the current $150 million limit by an additional $75 million with the agreement of the lending syndicate. Also, as a reminder, we have a base shelf prospectus, which would allows us to offer and issue up to $500 million of additional capital. With the capital we have available, we continue to be very well-positioned to execute on our current business plan. So, as we look forward to the second half of this year, we should note the following. We expect to incur approximately $3 million to $4 million in additional capital expenditures for the balance of the year. We expect that amortization expense will be approximately $15 million for the balance of fiscal 2018 with the figure being subject to adjustment for foreign exchange rates and future acquisitions. Our income tax rate came in at 22% of pre-tax income in the second quarter and we should expect that -- our tax rate will continue to be in the range of 22% to 25% of pre-tax income over the balance of the year. Finally, we expect stock-based compensation will come in at approximately $1.6 million for the balance of this year, subject to any forfeitures of stock options or share units. So, I’ll now turn it back over to Ed, who will wrap up with our calibration.

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 to the ongoing health and strength of our business. Our calibration for Q3 assumes the following exchange rates. C$0.79, €1.18 to US$1 and GBP1.3 to US$1. And with the addition of MacroPoint, we’ve taken calibration as of August 15th to reflect some of our initial expectations from that business. With MacroPoint’s contribution to calibration, we have to be careful and have taken a very conservative approach. MacroPoint has been part of our business for only a very short time, has very high growth rates, but also has recently been restructure to be under a new operating model. Given all of that, as I’ve said, we’ve been very conservative about initial contribution of MacroPoint, when we actually calibrate how our business will run. We’re hopeful that with more operating experience with MacroPoint in future quarters, we’ll have a greater degree of confidence to how the MacroPoint business is calibrated as part of the greater Descartes hold. Our calibration for Q3 is $56.8 million in visible recurring contracted revenues or baseline revenues. We have $40.6 million in baseline operating expenses; this gives us a baseline calibration of $16.2 million for adjusted EBITDA for Q3. Some other key points related to how we’re positioned for the remainder of fiscal 2018. One, we’re very well-capitalized. We have a healthy business that’s well calibrated. And as Allan mentioned, we also have a very healthy balance sheet. We are profitable and generating cash. We have low capital needs within our organic business. Our primary uses of capital are for continued use in acquisitions. We’ve completed 38 acquisitions since 2006 and 3 already this fiscal year. And we have excess to additional capital, should we needed it. Allan mentioned that we have $80 million drawn on our line of credit of $150 million and previously filled shelf prospectus for up to $500 million if capital is needed to be raised by other mechanisms. Two, we have a strong acquisition pipeline. You’ll have seen there continues to be a lot of industry activity right now with the consolidations continuing in our market. This capital capacity and our execution capabilities, there are still a number of acquisition opportunities to expand the geographic reach, functional capabilities, trade date and content or community of participants on our network. We continue to see a lot of interesting opportunities out there to continue or even accelerate our pace of profitable growth. We’re seeing both larger and smaller opportunities. And while we review everything as it comes our way, we’re not buyers for buyers sake. In fact, we have an acquisition line of credit and shelf filing in place doesn’t change how we acquisitions. We intend to continue to be prudent on valuation, but we’re confident in our ability to deploy capital effectively. As a reminder of our plans for the remainder of FY18, we continue to target 10% to 15% annual adjusted EBITDA and adjusted EBITDA per share growth. As in the past, we intend to invest any over-performance back in the business. Our growth is planned to come through a combination of organic and inorganic activities, and acquisitions are not incremental to this plan. We intend to continue to focus on recurring revenue and deemphasize one-time license sales. If you recall, on the last call, we increased our planned operating margin range to 32% to 37%. Given the current performance of the business and mindful of the FX environment, that remains our target range, even as we integrate MacroPoint into our business. But please keep in mind, this could vary if we buy other businesses that need to be fixed up which would impact that metric in the short run. As a quick update on our Annual User Conference, we’ve set the date for our 2018 Evolution User Conference in West Palm Beach, Florida. It’s a bit earlier than last year. So, take note on your calendar. The event is three days from March 6 through the 8, 2018. This event provides a great opportunity to see our businesses at work from products to customers to partners to Descartes team members. And there are several on this call have been to the event in the past and I hope it’s worthwhile. Registration information is being sent out this week, so keep an eye out for that. And you can always find registration details on our website. And finally, as always, we’ll continue to make ourselves available to shareholders to answer any questions. We believe we have got a great business. We want to be available to help people learn about our business. We’ll 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. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Phillip Huang from Barclays.

Thanks, guys. I think I had to try a few times to queue. So, I think others might also see problem as well. But, I wanted touch on MacroPoint. Just given the size of the acquisition, just wanted to better understand the integration process. You did sort of say that targeting getting the margin profile over time. I know it’s a very high growth business. So, you guys are still trying to feel it out. But, I just wanted to know a few things. First, given the size of the acquisition, does it also mean that you guys might need to press pause a little bit on M&A for short period until the integration is done or is integration relatively straight forward, based on your current visibility such that it should follow a pretty similar integration timeline versus historical deals that you guys have done?

Well, look, we think MacroPoint is a great company, there is a lot of demand in our customer base for it. And we’re definitely taking a lot of time to integrate it in with our sales force and get both sales forces acclimated to selling, and talking to customers about the solution fit together. That having been said, it’s a very straightforward business, right. These guys are tracking trucks on cell phones. And to explain the customers, there is a great value proposition for the customers. And with all that, I think we can continue the growth rates this business has seen and maybe even expand them over time. But, I don’t anticipate that it’s going to slow down our needs or desires to acquire new businesses and integrate them effectively in our Company. So, no, I guess the answer to your question is, I don’t see it slowing us down; in fact if anything, I think it helps us get more traction at bigger and bigger customers over time, because frankly we have something with MacroPoint that everyone is really interested in.

Right, that’s very helpful. And on the synergy side, maybe I’ll start with the cost side first. Obviously, from a outsider’s standpoint, it’s relatively straightforward. You’ve got a lot of users on a network and you certainly already have the global -- the GLNs. Is it too simplistic to think that you’re just basically adding revenue on top of an existing network and the to cost to run this business over time is relatively small, and how quickly can we kind of get to that stage for you guys.

Well, as I mentioned at the outset, when we bought that and invested an awful lot of money, primarily in sales and marketing trying to get the growth to come as fast as possible and we kind of look at that, we also want to make money doing that. That said, a lot of the people that they were trying to get to is the standalone business, we already do business with. So that’s a great opportunity for us to be able to do that a lot more cost effectively than they were able to do that as a standalone business. And what you’re seeing now over the next 12 months or so is us going and putting those plans in the motion. And we’re pretty confident in our ability to do that effectively.

So, basically, it’s a sales force training sort of process type thing?

Yes. I mean, look, you also have to go out and educate the customers, right. You have to tell them, hey this service exists and let me tell you some of the advantages of doing that now with Descartes since you’re already a member of the Global Logistics Network. So, there is some work to be done. You don’t just flip a switch and do it, but you certainly -- we have to get out in front of our customers and tell them what they can do now that they Descartes and MacroPoint together. And I think that’s something they’re going to be real excited about as they learn more about it. I also think it helps us to beat up what MacroPoint was doing because they have a lot of customers they wanted to get to that we already do business with.

And our next question comes from Brian Essex from Morgan Stanley. Please go ahead.

Thanks for taking the question. I guess, kind of follow-up on the previous set of questions. Baseline EBITDA coming down a little bit in quarter. I’m assuming that’s due to profitability of MacroPoint. Do you have a timeline established for, I guess payback to how you thought about acquiring the business and how long it might take you to get business up to corporate average margins?

We’re kind of targeting next 12 months to get it in line with our margin profile. We’re starting roughly from zero, so we have a little bit of work to do, but we’re confident, given its growth rates and our ability to run business costs-effectively that we’ll be able to do that over that period of time. We’re probably more focused on getting out in front of our customers with this new solution and telling them all the great things that they can do with it. And maybe some of the products that we already have like dock door rescheduling that it might integrate into very effectively, we have a big benefit to our customers. So, that’s got the majority of our attention. We’re trying to balance -- it’s profitability of the standalone business with our desire to continue to grow at the pace with which we think it can grow. And we’re trying to be smart about that. I had some cautious statements at the beginning, because we just got this business to hours right now and now, we’ve got to integrate them together. And we want to make sure that we make the money that the businesses should make but also don’t stifle any of the growth that it deserves to have. So, we’re cautiously trading through those waters right now to make sure that we do the right thing.

Got it. And what’s the trajectory of those cost savings over the next year or so? I mean, is it, do they have their own separate headquarters, or you run into standalone business, are there easy synergies upfront or maybe have quarter of low-hanging fruit and the rest kind of it takes longer to materialize? How should we think about that process…

The restructuring that we’ve done as we just did, we did almost immediately when we acquired the business. Now, it’s getting -- the two businesses together, just like we’ve put every business that we bought together, right? It’s going to be part of Descartes, going to be part of the Global Logistics Network, all of our sales people are going to be selling this. And take some time for us to make that happen. But once it does, I think it will be a better company for it. It’s not going to be any different than any other acquisitions we have. It’s not running as a standalone business, it will be part of Descartes. And we think that’s what our customers want. We think our customers look and say, hey, I want to be able to go to one place, the Global Logistics Network and get all this information. And our job over the next say 12 months is to make that a reality, make sure that that opportunity is put in front of the customers and they can take advantage of it, just like anything else that we buy and integrate into the Global Logistics Network. The big difference here is, it’s a really fast growing company. And we want to make sure, we don’t cycle that growth in the process of integrating.

And if I could sneak one last one. Customer overlap, how meaningful was it or is this like previous question, this is pure incremental addition to revenue going forward?

They do business with a bunch of logistic service providers and a bunch of big retailers and manufactures. We do business with a lot of those -- with those guys already. There is a lot of overlap, there is some new customers that we brought on. But, maybe the bigger issue is, we have 17,000 or so customers on our Global Logistics Network. We want to bring this solution to all of those customers. And we think, almost all of them have a potential need for the service. And now, it’s a matter of how fast can we go out and eloquently deliver that message and get them signed up and activated on MacroPoint and make this all part of the Global Logistics Network.

And our next question comes from Paul Steep from Scotia Capital.

Can you maybe just talk, I guess, almost nine months in on Datamyne. How you think that business is performing against your expectations whether it’s on the operating model? And then more importantly, how it’s playing out in terms of cross-selling the compliance and the content management product across the base?

Yes. So, we are very happy with the Datamyne acquisition here nine months in. It is performing to the plan we had, which was a pretty aggressive plan. So we are happy about that. Moreover or maybe more importantly, I think our customers see a lot of value in having data content available to them while they’re making shipping decisions. And Datamyne is one of the great sources of data content that we have on the network that helps our customers do that. So, I think that’s what’s got us most excited. Yes, it continues to hit the financial metrics that wanted from that perspective. It’s been a great acquisition and I suspect that will continue. But, probably even more focused on the value that it brings to customers and finding more customers that we can kind of highlight, hey, if you do these two things together, you get a bigger benefit, you should do these. And we are spending a lot of our time focused on that at the moment.

Great. And then, I guess my quick follow-up would be, on the M&A side, we’ve always talked about the three areas of the business. Can you just refresh? I am assuming there’s no change in the priorities in terms of the target areas, but may be what your thoughts are on the current market and the environment? Thanks guys.

Sure. So, I think the three areas you are talking about are customs and regulatory business and data content business in the routing, mobile and telematics businesses. No significant change on all three of those. There continues to be a great opportunity in our routing, mobile and telematics business. We’ve got a bunch of big wins in the past year. And I don’t see anything slowing us down there. The data content business, we’ve been spending a lot of time talking about here on the call and with Datamyne and Customs Info and MK Data and things like that, I think our customers are seeing -- increasingly seeing what we saw when we started to integrate those things into our network and that’s got us pretty excited. The customs and regulatory business has always been a step function. So, we keep watching governments -- waiting for governments to roll out some of the standards, as they said they would roll out. And that’s largely on track. We are always kind of planning for governments to say they are going to do one thing and they do it but do it a little slower than they said. So, that’s just the nature of that business. But, I do think it’s going to be a good business and not just in the coming year or two but for the next 15 to 20 years we think we are going to continue to see growth as governments around the world say hey, to prevent terrorist attacks, we need to figure out what’s coming in and out of our country. And we need to ask the trade participants, the big transportation providers, the big logistic service providers, and the big retailers and manufacturers to tell us what’s going on in their supply chains so that we could better target the bad guys. And I don’t think that’s slowing down, I think it’s speeding up. And I think with that you’re going to see more and more governments over the years adopt standards like the EU and the U.S. and Canada have been adopting over the last 10 years.

And the next question comes from Anshu Deora [ph] from Raymond James. Please go ahead.

Could you update us on what you are seeing with your larger retail clients, given the industry pressure they are facing?

Sure. As we’ve talked about this for the last couple of years, as the Amazon effect that I mentioned earlier on the call, takes hold, right, where people expect to have time-definite delivery, fast delivery and they expect to have a lot of information about what’s being delivered and when it’s going to get there. That has moved from a consumer world to business-to-business. And it’s been a big opportunity for us as big retailers once faced with those pressures often turned to Descartes to solve those problems. And you can see it with a bunch of the household names that we’ve gotten in the last several years on our Global Logistics Network. They did that because they said, hey, I want to be able to compete with that and with that let’s say that Amazon effect and be able to deliver that type of service to my customers. And most of the time, when they decide that, they turn to Descartes to help them solve the problem. So, we haven’t seen it slowing down, we’ve actually seen it picking over the last couple of years. And I expect it’s going to be a good business for us for some time to come.

And our next question comes from David Hynes from Canaccord.

Hey, thanks guys. So, as maybe just a high level one on the acquisition strategy. I mean, MacroPoint was obviously larger, a bit more expensive than normal, which makes sense given the growth. I mean, if you look at the landscape and what you’re seeing now, does this feel like you’re considering more larger deals, how would you qualify kind of the appetite on that front? I imagine, the deals have to get bigger just to move the needle, the firm scales but just curious what you’re seeing out there today?

We see a lot of stuff for sale for sure. Our bread and better has always been tuck-in acquisitions that historically were $10 million, $15 million, $20 million $30 million. And I hope to continue those forever because I think there is great opportunities for us to buy businesses like that and integrate them into our business and increase the scale of customers they can get to rapidly because of the size of our network. In the last three or four years, you’ve seen us start to look and buy and integrate companies that are maybe more $60 million $70 million $80 million acquisitions as MacroPoint was $107 million acquisition. As we’ve grown, we’ve gotten the ability to get our hands on the money to do those acquisitions. We have a group of people around here that are comfortable doing acquisitions. If you look at it, a large portion of our management team came from acquisition myself included. And the more people you get around that have experience doing that, the better you can find, negotiate, close those types of deals and even more importantly integrate them into your business effectively. And as we’ve grown our wherewithal to do that kind of work, has expanded over time. We’ve looked at bigger deals in that, we haven’t pulled the trigger on any of them, some of the ones that were larger, we kind of thought were too expensive. But there has been a lot out there in the last couple of years. And I don’t see it slowing down at the moment. So, we’re trying to just looking what’s in front of us and keep doing what we’re always doing. And if we see an opportunity for something bigger, that’s a good price and something we think is a good deal for our shareholders, we’ll jump on it. And if we don’t, we’ll watch them go to someone else. The way we build our business, there is never an acquisition where we go, we have to have that. We’re going to be in trouble if we don’t have it. We don’t have those kinds of decisions that go on in our acquisitions processes because of the cautious nature that we run our business with and I’d like to see us keep doing that.

That makes sense. And then, as you think about the calibration for Q3, I think you said it was of August 15th. Just curious, I mean does the weather have any meaningful impact on your business, you need to worry about that? I don’t know what kind of exposure you guys have to Gulf Coast ports or the southeast with all the hurricanes going on. Anything there that we should be thinking about?

It could have a minor impact. But bear in mind, the shipping companies that are shipping stuff via ocean have been watching the storm for two weeks before you and I thought about it, I think how they’re going to get product to market in a different way than they might have before. So, it’s usually not a gigantic impact, stuff like this. You’ll remember, the volcanoes that went off a bunch years ago, that shut down flights to Europe for seven days. That has a minor impact, but if you look it over a little broader period of time, all those shipments get made again. It doesn’t -- it’s not like it’s just the economy is down in the world for a very long. The shipments might have to go a different direction to get to its ultimate destination. But at the end of the day, most of the stuff that was supposed to get there eventually gets there and gets sold. Opposite of this is, it’s been a couple of weeks, people are going to be selling a lot more plywood, drywall and installation and everything else to fix up for it. So that kind of -- while there is a little bit of harm that gets done when storms blow through Harvey and now Irma that we down on us in the U.S. It also creates an opposite effect on the other side of this where people need a lot of stuff quickly. And our network is an integral player and helping those products get to market fast. So, potentially a minor downside, potentially a minor upside; all-in-all, it’s not something we spend a lot of time thinking about its impact on our network, I think over a longer period of time, it’s somewhat insignificant.

Yes. I think that was the case just given how diversified you are, but I figured I’d ask.

And your next question comes from Paul Treiber from RBC Capital. Please go ahead.

Just in regard to MacroPoint, I mean, as mentioned, I mean valuation is little more expensive. Just, I’m sure, you did a lot of due-diligence to get comfortable with that in the company’s growth rate. Can you share perhaps what gives you the confidence in sustainability of the growth rate going forward? And then, perhaps a little bit more is, can you help us better understand the competitive environment and MacroPoint’s competitive advantages?

Sure. So, we really got for little over two years, we met them and they were probably $4 million in revenue. And we got to watch them, do what they said they were going to do repeatedly for 24 months. I could think of a few other acquisitions where we had value [ph] that’s come to mind where we got to watch company for a long period of time MK Data was the same way. And we meet a lot of companies. We’re very acquisitive, we meet a lot of companies that are for sale. And most of them come in and tell us they’re going to the moon and they’re going there quickly. And then, we start watch them for a little while and it turns out that’s not true, things slow down, they don’t do what they said they were going to do for whatever reason. In the case of MacroPoint and in the case of MK Data, in the case IES and a handful of others that we bought, we watched them for a long period of time. And while the purchase price seems high, we look and go, if they do what they say they’re going to do, we think that purchase price ultimately will be a great deal for our shareholders. And the longer we have to watch them over a period of time, the more we gain confidence that what those guys say is going to happen actually happen. And those are the deals we jump up. Right, where we go, this is -- these guys are saying they’re doing very well and come back six months later or a year later and they did exactly what they said they were going to do. Most companies that we look at fail that test and MacroPoint was one of the once that past those flying colors and was one of the reasons that we were willing to pay what I think, today seems like -- might seem to have an outside observer like an expensive price, but I think couple of years from now might look like a bargain. I guess your other question was just about how it works?

From a competitive point of view.

Yes. Listen, these guys are the dominant player in this market, right? They invented the market, they have patents on it. They were the first mover by several years and they came to a dominant position. Their competitors are way smaller than them, and not nearly as successful and certainly not with the ability to grow at the rates that they are growing. These guys came in and captured the 3PL market, which is the core of that truckload business, 3PLs and domestic truck brokers. And they did that because they were the best at it. And they were the best at it because they were the guys that’s thought of it, they built the business long before anybody else did and that’s why it was a very attractive business to us.

And then, if you think about the Blue Sky revenue synergies, what do you think would be the -- if everything went well and you could unlock it, what do you think that would be, not from a revenue number but from a -- just from a common point of view?

We think the truckload market is very big market. We think there’s opportunity also in LTL and some of the other modes of transportation like dray haul with ocean carriers or things like what MacroPoint does. I alluded to this in early days of this, we are just kind of figuring out how we want to take advantage of this over time, but I alluded to it in the beginning of the call. Right now, they’re just telling you where trucks, right. They’re saying, hey made a move, let me tell you from the moment that move gets picked up, I’ll show you on a map exactly where it is and I will make a prediction about when it’s going to get there. That’s a great business and that’s the business that we bought. But if you think about the downstream ramification of that, if I know that a driver is driving from Pittsburg to Cincinnati and he is going to get to Cincinnati on Thursday, I have some very valuable information for a guy that wants to make a move from Cincinnati to let’s say to Chicago on Thursday afternoon. I know a list of drivers that are going to drop a load off in Cincinnati on Thursday morning and would be available to go somewhere and see that as an untapped and potentially gigantic opportunity for us to help our customers know that information, so they can make better and more cost effective decisions about who to ship with. If I can tell you that driver is available on Thursday and he wants to go to Chicago, that will be very valuable information to you, if you had a customer on your side, if you are a freight broker that wants to make a Cincinnati Chicago move on Thursday. And we’re talking a lot internally and MacroPoint was even before we acquired them thinking about how we are going to take advantage of that and do it in a way where we are not competitive with our customers, where we are helping our customers to figure this out. We are not trying to become a freight broker at the end of this. But we do think we might have very valuable information for them that would help them run their businesses more effectively and we’re looking for opportunities to do that for them. I don’t know what the market size is for that but it’s gigantic.

And the next question comes from Stephanie Price with CIBC. Please go ahead.

Good afternoon. Ed, you talked a bit about cross selling in your prepared remarks. Can you give us an update on the average number of products that current customer use, and how that’s evolving over time?

Well, we have like 200 different products depending on how you look at it because they are probably less than that if you look at it as solution set. Our biggest customers in the 3PL markets, we’re well into the 30s now in terms of number of solutions that use from us. Average 3PL might be in 10 to 15 different product solution sets that they use from us. And the job of our sales force is to go in and tell them how they could use products 16, 17 and 18 and that’s the cross selling that we are doing there. When you get to manufacturers and retailers, it’s probably more like 3 to 5 and we are trying to get that to 5 to 10 in the coming years. As we keep buying more stuff that we think will be attractive to them, we’re trying to interact willy-nilly buying companies that are in the supply chain and logistics technology space. We’re buying stuff that is right next door to what we do typically or take like MacroPoint. We do dock door scheduling. And we look at MacroPoint and go hey, they run a network of transportation providers and they show you where trucks are all day long. That’s sounds an awful lot of great fit for our global logistics network. But it’s also a great fit with our transportation management solution and our dock door scheduling solution. Imagine if you’re a big retailer and you have 40 dock doors at one of your distribution centers and everyone’s scheduling times at our dock door scheduling system all day long. You have an appointment booked with a particular trucking carrier to deliver at 5 o’clock, wouldn’t you like to know at 3 o’clock that he’s not going to make that 5 o’clock time, because today you do not know. He books the 5 o’clock time and you’ll sit there at 5.15 and go, you might tell a trucker, I can’t give you that door because waiting for this truck is showing up. Wouldn’t you like to know a 3 o’clock that that guys is not going to make the 5 o’clock slot. That drives efficiency into our customer base. And our job is to go out and tell them about those opportunities and try to as you said cross sell them on the fit of the solution, instead of having all of these things together. The bigger we get and the more customers we get and the more product solutions set that we get, the better and more effective we are for our customers in doing that.

Great, thanks. And then in terms of the current sales force. Can you give us a reminder of the number of people you have and also the partner networks?

We’re up over -- I don’t know if you know the exact numbers.

Yes. Sales force is 8,200 people and not all of those are commission carrying people but that’s our sales force today. And then the second part of your question was partner network?

Yes, around OEMs and partners.

Yes. Active partner network, some of the big players that we talk about on a repeated basis, the SAPs the Oracles of the world and a number of other smaller partners. For those who attend our user group, you’ll see 25 partners there; it’s much broader than that; it’s deeper but a very active partner network, starting with those big guys on through multiple players.

Yes. And bear in mind, top 20 partners drive a massive amount of a partner revenue that we get.

Great, okay. Thanks. And then just finally in terms of evaluations. It’s been touched on the MacroPoint, was a little more expensive than your typical deal. Can you talk a bit about the average valuation that you’re seeing in the space?

Well, it depends on the large size deal we’re seeing, stuff that we think is too expensive. We’ve demonstrated that we’re willing to pay handsome prices for companies. What we think are fair prices but handsome by our normal standards, when we see a company that has all recurring revenue and is growing quickly and making money. And we look at that and say hey, we think we can make it even more money over time and that makes us willing to spend more money to buy the company. What I don’t like is when I’m asked to spend a very high multiple for something that I go; that’s just a good company or maybe just an average company. And someone will say that’s well because of its scale, you should pay up for that and we just look at that and go, we don’t agree. And we tell our shareholders we’re going to be prudent investors for them. And we really go out of our way to remain disciplined when we’re looking to buy stuff, so that we can keep those promises.

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

So, I just wanted to start out with the MacroPoint acquisition and I guess try to better understand how this product fits in or interacts with telematic offering that some of these full truckload providers could have already implemented. Because I’m guessing that a good portion of those guys are going to be regulated by the new ELP standard, so they probably up something in place. So, just trying to figure out how MacroPoint interacts with that?

That’s one of the main data sources for MacroPoint. I mean, the biggest data source is mid-size and smaller trucking companies, all the way down to individual owner operators that are using either a MacroPoint application or just a flip phone. And we’re getting either cell phone triangulation data from phone companies or we’re getting geo-locations directly from the MacroPoint app that those drivers have on their cell phones. When you get the larger trucking company and especially as you get into LTL and things like that, they have ELD solutions. And when you go to some of those bigger companies and say hey, I want to know where your trucks are, they say, I already know where all my trucks are. And we say great, give us the ELD information and that’s one of the main data sources that MacroPoint gets. And I suspect, as those rules become more and more prominent that we’ll get more and more data from those data sources. If you think about it from the customers’ perspective, they don’t really care where we got it from. They want to know where the trucks are the whole time. And then want to get that from one data source, so that they can connect to one company and collect all that information and know where every one of their shipments are. And that’s been MacroPoint’s goal from day one. They’ve done a tremendous job, not only of getting to the owner operators in the mid-size and smaller trucking companies, but going to the big guys as they got big retailers and manufactures and big third-party logistics providers on their network going to the larger trucking companies with their customers and saying hey, I need that ELD information. And I think it’s one of the main reasons that MacroPoint got to the size and scale that they did so quickly is because they were aggressive about going and doing it.

And then on MacroPoint, I think if I’m correct, it’s your largest acquisition that you’ve done to-date. And I think one thing that has sort of made Descartes successful over the years has been able to stay out of sort of bidding wars potential acquisition in Canada. So, I guess, as you look at MacroPoint and other potential acquisitions around the same size in the pipeline, is it getting more competitive for these types of businesses? And if so, how is that sort of impacting the valuation or return requirements that you have?

We spend a lot of time with MacroPoint convincing them that we were the right guy to do this with. They sold to -- as I mentioned, they sold to a private equity firm roughly a year before we bought them. And the process that we were in, but they didn’t want to sell the whole company and so they ended up selling to this private equity firm. And I think over time they realized that we might be the better home for their baby and went to their private equity firm and said, hey, I think, I’d like to do this. And then, the three of us sat down and found out -- figured out a way to do it. When we bought the company, it was sole source deal between us and the MacroPoint guys and the private equity firm that ended up selling the company. And we tend to do very well in those processes. We spend a lot of time working with small and mid-size companies, showing them the fit between what we do for a living and what they do for a living and convincing them that you if you’re going to sell your company, you should sell it to us. And we pay fair prices for stuff. We’re not looking to overpay for someone, but I don’t think anyone is, they shouldn’t be at least. And at the end of the day, we were able to convince them on that we’re the right place, we’re the right home to end up at. We like our chances in getting a deal done like that. And we will continue to go out in the market and do that, finding small and medium size businesses that we think will be a great fit on our network and convincing the owners of those businesses that this is the right home for their baby. And when it’s not, we don’t spend a lot of time trying to convince them to do it, because it’s not -- we think well, maybe that business should be somewhere else. And I am not going to want to pay the most money for this. And so, it’s a double-edged sword. But when we see something that we think is a great fit for our business like a MacroPoint, we thought we were the best buyer for MacroPoint hands down, we spend an awful lot of time making sure that they come to believe the same thing.

Got it. And then just one last one for me. You previously mentioned that you have been working internally on a new trade content solution based off data from the GLN. Maybe just any update on the progress there on that product?

We haven’t released it yet, but yes, we have a product coming out there, the air mode that we will announce fairly soon when it’s ready for market but we certainly started looking after we bought Datamyne, we started looking a couple of times work on their staff and started looking at the data that we have on our network that we could homogenize and take any -- strip any customer specific detail out of. But that when combined with the Datamyne content data base, we thought we’ll provide additional extra value to our customers. So, I don’t want to say too much about it because the product is not out yet but we certainly are excited about some of the prospects for that in the future.

Next question comes from Deepak Kaushal from GMP Securities. Please go ahead.

Hi, guys. Thanks for taking my question, I know it’s late into the evening. So I will just ask two, one is a follow-up on Datamyne. Just wanted to understand how -- sorry, one is a follow-up on MacroPoint, wanted to understand how that fits into the Oracle SAP partnership strategy. If you can give us an update on that…

Yes, sure, we’re happy to. Yes. So, when we bought MacroPoint, both SAP and Oracle were calling us that day and very excited about it. I think it was obvious to them exactly how it might help. Remember, they both run two of the preeminent transportation management systems in the world and figure out what those transportation management systems are doing, they’re executing largely domestic truck modes. And that’s deciding which carrier you are going to use, executing the move with that carrier, which we hope in most if not all cases, they are going to use the Global Logistics Network to execute that move. But then, they would like to track it, and their customers would like to track it, know where that truck is to make sure that that shipment that I ordered from point A to point B is actually going to get there when I think it’s going to get there. And us buying MacroPoint brings a lot more data content to the Global Logistics Network that will be valuable to the Oracle and SAP customers and we are really excited about it, and so are they.

Okay, great. And then, just in general, you have been doing a lot of good acquisitions that bring a lot of cross selling opportunities. I mean, is there a point where the customers kind of get fatigued here in terms of cross selling -- or how do you guys prioritize your sales force in terms of managing what your cross selling when and not overstocking your customers?

I don’t think so. I don’t believe that’s going to happen. I think if you’re the customer, it’s just the opposite. You want one company to come to you and say hey, I can do all the stuff. And if you are coming with new stuff that it can do, and say hey, now I can also do this and that and the other thing. I think about when supplier does this, [ph] we are always excited about it. It’s one company that we can focus. As we get bigger, we have the ability to go with one supplier to do something bigger for us that’s exciting to us. And I think our customers feel the same way, as we come with more solutions. It’s not just, hey, buying other solution from me; it’s hey, look at the advantage to you and using these two things together. And that’s our best cross-sell, is to walk into them, like the example I gave with dock door scheduling and transportation management earlier. For them that’s great news. And they go geez, I used to have to either not get this information or get it from multiple parties. Now, I can get it from one source. And by the way, that one source is coming out with multiple products that work together and make me more efficient as a company. What I see is when I’m talking our customers is they’re excited about that. And I expect that will continue.

Got it, okay. Great. Well, congrats on the acquisitions and thanks for taking my questions.

Hey, great. Thank you, Deepak.

We have no further questions at this time. I’ll turn the call back over for final remarks.

Great. Thanks everyone. We appreciate your support and we look forward to reporting back to you next quarter. Have a great night.