The Descartes Systems Group Inc. (DSGX) Q1 2019 Earnings Report, Transcript and Summary

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

Thanks very much 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 conditions, 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 management’s discussion and analysis filed today. We provide forward-looking statements solely for the purpose of providing information about management’s current expectations and plans relating to the future. You’re cautioned that such information may not be appropriate for other purposes. We don’t undertake or accept any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements to reflect any change in our expectations or any change in events, conditions, assumptions or circumstances on which any such statement is based, except as is required by law. And with that, let me turn the call over to Ed.

Thanks, Scott. Good afternoon, everyone, and welcome to the call. Thank you for joining us today. We had another great quarter to kick off our new fiscal year, and I’m looking forward to taking you through some of the highlights of the quarter. The demand for our Global Logistics Network continues to grow as the global business environment gets more and more demanding. Combination of increasingly dynamic regulatory environment and a consumer-driven change in the way companies need to set up their supply chains and augment their delivery capabilities means that things are more and more complicated than ever. However, this also means that there are more and more opportunities for companies to differentiate themselves, if they invest in their supply chains and logistics operations. It wasn’t too long ago that we had to convince many of our customers that having access to real time information across their business was a worthwhile investment. The market has changed. The Amazon effect on the consumer market has made its way to the business-to-business commerce. And with the consumer expectation of being able to track packages to your door, the business-to-business mark is increasingly looking for the same visibility and deliver certainty as consumers are. As a result, the market for our solutions is picking up steam, and that’s reflect in our financial results as we deliver another record quarter to you today. We continue to add more solutions and connect to partners with the Global Logistics Network, our customers trust us with more of their business as a result. On today’s call, I’ll walk you through some of the highlights of what we’re seeing in the market and the investments we’re making to help our customers today ahead of that curve. After that, Allan will go through our financial results in detail, and I’ll finish up with some comments about our calibration for Q2 and our operating plans moving forward. First, let’s start by going over some of the key financial highlights for the first quarter of fiscal 2019. We had another record quarter of revenue and we’re 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 $22.1 million of adjusted EBITDA, an increase of 16% over Q1 of last year. Revenue for the quarter was up 23% from Q1 of last year, coming in at $67 million. We converted 85% of our adjusted EBITDA into cash, generating $18.9 million of cash in the quarter. And consistent with our long-term operating plans, we’ve been investing cash back into our business through focused R&D investments and by combining with complementary businesses. So to summarize, it’s a great quarter to start the year. We’re really happy about where the business is at the moment. With that, I’d like to take you through some of the trends and opportunities we’re seeing in the market. As I mentioned off the top, increasingly demand and consumer buying expectations continue to impact the business-to-business market. Companies need to adapt this increased complexity -- adapt to this increased complexity to remain competitive. Our Global Logistics Network helps isolate customers from this complexity by giving them one place to access the trading partner community, research and planned shipments and then execute and monitor to those shipments in real time. We’ve been building out our platform for a number of years and we’ve been helping our customers navigate this changing environment by giving them more and more integrated tools they can access in one place and increasingly growing the community of shippers, transportation carriers, logistics intermediaries and government agencies that they can interact with in real time. This is driving increased adoption in both the number of solutions our customers meeting with us and the number of customers and connected parties on the network. So, let’s take a look at a few of the areas we’re investing in to meet the strong demand for our solutions going forward. Let’s start with what some people call the backhaul opportunity and how to leverage predictive capacity to improve the efficiency of fleet operations. So, what do we mean by the backhaul opportunity? It’s estimated that more than 15% of miles driven in the U.S. are empty miles. This is in part -- in larger part due to trucks returning from an outbound delivery back to base being in part or entirely empty. That’s a massively inefficient process. It impacts our environment and it impacts the bottom-line. Billions and billions of dollars are wasted every year in our economy as a result. But, it’s not really an easy problem to solve. To do so, you need to have visibility into where the assets are and that visibility needs to be aligned or matched up with upcoming freight moves. The critical massive assets that can be aligned with upcoming moves are most likely not available for you unless you’re prepared to share information with other parties. It’s a classic network scenario. With more information now available about the location of assets and the upcoming freight demand allowing you to provide better results for customers. This is an area we have been investing heavily in with our MacroPoint team, and we recently launched our solution at the TIA event in April which generated a ton of interest. Our initial focus is to help freight brokers and logistic service providers leverage real time capacity matching to better identify carrier capacity inside their own network and based on opt-in model, the capacity co-op we call it with other consenting freight workers. Customers will be able to opt in to make their capacity available to key partners of their choice. It’s up to each customer to determine who they want to share information with and how. It’s not an open load board or capacity portal or marketplace. Like many other solutions, Descartes provides our MacroPoint capacity matching solutions designed to support broker and logistic service provider business models not compete with them. We already have customers piloting the solution right now. We think this is an area with a lot of potential as we look to the future. Speaking of MacroPoint more generally, it’s always a hot topic for questions. So, I will provide a quick update on that as well. The business continues to grow in line with our plans and we are really happy with the performance of the business and the team that we have here at Descartes. One area that looks set to pick up the pace further is with our partner community. Partner interest for MacroPoint has been very strong. For instance, SAP has been investing time and resources to accelerate their integration with MacroPoint, so it can really be a showcase at the SAP Sapphire Conference next week in Orlando. We are pretty excited to see how this develops over time and we will keep you posted on future calls. The next area of our business that I would like to speak to is e-commerce. As we talked about on previous calls, we made a number of investments over the past few years to broaden our e-commerce solution footprint. This area of our business is really humming, fits pretty well with our partner strategy, and we are seeing increased demand across partner and direct channels as we continue to improve our various products work together. We now have a comprehensive omni-channel solution that helps small and medium sized businesses deal with the life cycle of e-commerce shipments from capturing initial order through the managing the fulfillment process and then executing and attracting the parcel shipments. To give you an example, our customers can integrate with front-end e-commerce systems, collect order information, translate that into a mobile-driven pick and pack process within the warehouse and initiate the shipment to the customer with seamless package labeling, rating, tracking and postage processing. This is a highly differentiated offering. Our competitors provide pieces of the solution but we can offer customers more and more holistic approach and that holistic approach also includes the ability to plan, execute and monitor shipments that don’t fit in a parcel or maybe that shouldn’t be sent as a single parcel in the first instance. For example, by integrating with our broader transportation management portfolio, customers can take a wider view and look at their delivery capabilities differently. Sometimes, it makes sense to pull shipments together for a portion of the trip and then break them down to a later point for individual deliveries. We think we can help our omni-channel e-commerce customers save a lot of money while improving their customer satisfaction levels. And with the current trajectory of e-commerce, we see a lot of runway to sell more solutions to our existing customers as well as add new customers to our network. Another area of our businesses that’s been greatly impacted by the explosion of ecommerce is our Routing, Mobile and Telematics offering. Because at the end of the day, someone needs to actually make deliveries. Our solutions help private and dedicated fleet owners do just that. Our Routing, Mobile and Telematics offering supports both omni-channel retailers that own their own fleet as well as transportation carriers for home delivery of their product. The biggest opportunity we see here remains for larger retailers helping them create an efficient omni-channel program based on our the state of the art home delivery solutions. In many cases, these retailers may be competing with the same small and medium sized businesses that we just talk about who are using our ecommerce solutions, depending on the size of the goods. But either way, they’re almost certainly competing with the likes of Amazon and they need to meet the bar that has been set for delivery and service. What that means is they need to have the same capability to provide great customer experience. Customers may be going into the shops to look at some goods, but if they buy it on the web, they want it delivered quickly in a time that’s convenient for them with mobile monitoring and tracking and all at a good price. This is exactly what we can help them do. And the customers we’re helping aren’t just the retailers who run their own fleet. Many people outsource their deliveries to transportation carriers and we can also help those carriers offer their customers premium service levels that can include delivery slots and real time tracking. We strongly believe that we have the premier routing and delivery scheduling solution on the market to help customers with these more complex delivery problems and we will continue to invest in this part of our business for continued growth. Before wrapping up this section of the call, the final piece I’d like to talk about is the current regulatory environment. The impact it has on our customers every day and what we’re doing about it. So, it’s been a few calls since we’ve talked about this. But just to be clear, it’s not because we’re idle on this topic, this is a consistent area of investment for us and will always be do due to the dynamic nature of global trade. Every day, we hear about potential major changes in the news that could stem from NAFTA negotiation, Brexit, trade wars and new sanctions on Iran. Things are changing for our customers literally every day. We have a team of people at Descartes dedicated stay on top of the rules and regulations on a daily basis. For instance, as things change, customers who use our content solutions can be sure that they have up-to-date information about duties, taxes and restricted parties around the world. This timely data is critical for companies managing large international supply chains. Equally, customers that are using our customs filing solutions to send their information to governments every day can take comfort in the knowledge that our team of domain experts is continuously liaisoning with government agencies to make sure our solutions are maintained in accordance with the latest requirements from local authorities and being powered with up-to-date duties and tax content. The stuff is pretty complicated. It’s our job to isolate our customers from that complexity. It’s what we do, what we’ll continue to do to make sure our customers can operate efficiently, secure and compliant supply chains. Before handing the call over to Allan to talk a little bit more about the financials, I’d like to thank some of the people that continue to contribute to the strength of our business. So, thanks to our employees for all the hard work they put in to make sure our customers get results. Our customers continue to get results and that’s why we have a successful business. Thank you to our customers who continue to play the confidence in Descartes as their network of choice. And thanks to those who made the trip to our global user conference in March. Thank you to our partners for helping us continue to expand our ecosystem. And thank you to our shareholders for continuing to have confidence in Descartes. And with that, I’ll turn the call over to Allan.

Okay. Thanks, Ed. So, as indicated, I’m going to walk you through our financial highlights for the first quarter ended April 30th. We are pleased to report record quarterly revenues of $67.0 million this quarter, up 23% from revenues of $54.5 million in Q1 of last year. Looking at our revenue segments. Starting this quarter we have decided to further break out professional service and other revenues from the other revenue streams of our business. Our revenue mix continues to be strong with services revenue representing $57.8 million this quarter, up 24% from $46.7 million in the same quarter last year. As a percentage of total revenue, services revenue in both Q1 of this year and last year accounted for 86% of total revenues. License revenues came in at $1.9 million or 3% of total sales in the quarter, up slightly from license revenue of $1.7 million in Q1 of last year and is well consistent at 3% of total revenues. While professional service and other revenue came in at $7.3 million this quarter, up 20% from revenue of $6.1 million in the first quarter of last year, in both quarters consistent at 11% of total revenues. Although, revenue in the professional service and other segment will fluctuate from quarter-to-quarter, in part from some minor seasonality trends related to vacation periods that impact our professional services revenue as well as the potential for lumpiness from hardware revenue that is included in this segment, we continue to expect that our revenue mix will remain reasonably consistent from quarter-to-quarter as we move forward. Gross margin was solid was at 72.3% of revenue for the quarter compared to 73.6% of revenue in the first quarter of last year. This decrease was mainly due to an increased proportion of hardware revenues in the first quarter, which generally have a lower margin. Gross margin in the large service revenue segment remained constant at 76% of revenue for the quarter, when compared to -- and consistent with the same quarter last year. Despite continued planned investments in product development this quarter as well as additional sales and marketing activities, including hosting our annual user group this quarter, with continued recurring revenue growth and leverage from our acquisition strategy, we continue to see strong adjusted EBITDA growth of 16% to $22.1 million or 33% of revenue compared to $19 million or 35% of revenue in the same period last year. As a result of these solid operating results, cash flow generated from operations came in at $18.9 million or approximately 85% of adjusted EBITDA in the first quarter of this year, compared to operating cash flow of $16.5 million or 87% of adjusted EBITDA in Q1 last year. Going forward, subject to unusual events and quarterly fluctuations, we continue to see solid operating cash flow conversion of approximately 80% to 90% of our annual adjusted EBITDA for the balance of fiscal 2019. From a GAAP earnings perspective, net income came in at $7.0 million or $0.09 per diluted common share in the first quarter, an increase from net income of $6.9 million or $0.09 per diluted common share in the first quarter of last year. Overall, we are pleased with these solid operating results in the first quarter as revenue growth allowed us to make increased investments in our business while maintaining our overall growth target of adjusted EBITDA and in cash flow from operations. If we look at the balance sheet. Our cash balances totaled $36.2 million at the end of the first quarter, while borrowings under our credit facility were $51.2 million for a net debt position of approximately $15 million at the end of Q1. We borrowed approximately $33 million on our credit facility to complete the Aljex acquisition at the beginning of the first quarter, while our cash flow from operations allowed us to repay $17.6 million on the credit facility during the balance of the quarter. As a result, we continue to have approximately $99 million that we can borrow under our credit facility. And while our base shelf prospectus from 2016 recently expired, we just recently filed a new base shelf prospectus which when approved will allow us to offer and issue up to $750 million in additional capital as required. In short, we continue to be very well capitalized to allow us to consider a wide variety of acquisition opportunities in our market, consistent with our business plan. As we look to the second quarter of this year, we should note the following. After incurring approximately $1 million in capitalizations in Q1, we expect to incur approximately $4 million to $6 million in additional capital expenditures for the balance of this year, with this balance expected to include further investments in our network security and infrastructure. We expect amortization expense will be approximately $28 million for the balance of FY19, with this figure being subject to adjustment for FX changes and future acquisitions. Our tax rate came in at approximately 24.5% in the first quarter, which was just a little higher than expected as the benefits of a new tax reform in United States were more than offset by the impact of changes in accounting policies related to income taxes. Going forward, we would expect our tax rate will continue to trend in the range of 23% to 26% of pre-tax income over the balance of the year. Although, as always, we should add that our tax rate may fluctuate from quarter to quarter from one-time tax items that may arise as we operate internationally across multiple jurisdictions. Finally, we expect stock-based compensation will be approximately $3 million for the balance of fiscal 2018 subject to any forfeiture stock options or share units. I will now turn it back over to Ed to wrap up with our baseline calibration.

Hey, great. Thanks, Allan. Before talking about calibration, I would like to take a moment and talk about our global user group event in Q1. If you recall we hosted our last conference call from our Descartes Evolution user group event in Florida. For those of you that were there, hopefully you’ll agree with me that it was a truly incredible event. It was our biggest event by far and we are proud of how the team planned and executed it. It’s very rewarding to see so many customers engaged in discussions sometimes with their competitors about how they are using Descartes solutions to improve their business. The event was such a success that we need to move it to a larger location next year. And you can save the date on your calendars already. So, Descartes Evolution 2019 will be held at the Naples Grande Beach Resort in Naples, Florida from Tuesday March 26th to Thursday March 28, 2019. More information will be coming to our website and in the upcoming calls and we hope to see you all there. Please book early, I think there are discounts if you do so. So, please go on it. So, with that, let’s move to our calibration for Q2. 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 Q2 assumes the following exchange rates, C$0.78, €1.20 to U.S. dollar and a £1.36 to U.S. dollar. With that, our calibration for Q2 is $36.0 million in visible recurring contracted revenues, otherwise our baseline revenues. We have $44.9 million in baseline operating expenses. This gives us a baseline calibration of $18.1 million for adjusted EBITDA for Q2. Some other key points related to how we’re positioned for the remainder of fiscal 2019. One, we’re very well-capitalized. We have a healthy business; it’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 39 acquisitions since 2006. And we have access to additional capital should we need it. Allan mentioned that we have about $51 million drawn on our line of credit of $150 million. We have the ability to expand that line of credit to around $225 million and we just filed a new preliminary shelf prospectus for up to $750 million of capital was needed to be raised by other mechanisms. We have a strong acquisition pipeline. You’ll have seen, there continues to be a lot of industry activity right now with the consolidation continuing in our market. With this capital capacity and our execution capabilities, there are still a number of acquisition opportunities to expand the global 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 to continue or even accelerate our pace of profitable growth. We’re seeing both larger and smaller opportunities. And while we’re review everything as it comes our way, we’re not buyers for buyers’ sake. The fact that we have an acquisition line of credit and a shelf line in place doesn’t change how we view acquisitions. We intend to continue to be prudent on valuation, but we are confident in our ability to deploy capital effectively. As a reminder for 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 overperformance back in the business. Our growth is planned to come through a combination of organic and inorganic activities. And as always, acquisitions are not incremental to this plan. We intend to continue to focus on recurring revenue and deemphasize one-time license sales. Our planned operating margin range remains 32% to 37%, given the current performance of the business and being mindful of the FX environment that remains our target range. But please keep in mind this could vary if we buy other businesses that need fixing up, which would impact that metric in the short run. And finally and as always, we continue to make ourselves available to shareholders to answer any questions they may have. I think, we’ve got a great business. We want to be available to help people learn about our business. We 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 the call up for questions. Operator, if you could, go head.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first questioner is Steven Li with Raymond James. Please go ahead. Your line is now open.

Thank you. Hey, guys. The margin was a little off year-over-year. Is that all hardware related? I think Allan mentioned hardware. So, is the mix -- was the mix a little bit different or is that something else?

Yes. Steven, as you know, we don’t have a lot of -- typically have a lot of hardware revenue in our business, that’s something we have planned not to have. From time-to-time, we will have hardware; this quarter, there was a little bit more related to certain yields we had and the margin on that is lower. So there is a cost increase. The impact of extra hardware cost was within the numbers and that did affect the gross margin. And that was the predominant reason for the margin -- gross margin being off a little bit.

Can you say how much hardware revenues was there Allan?

Yes. Typically, it would be less than $200,000. We were probably 800ish in the quarter, so. And typically hardware -- again, not in the hardware business typically, but we experienced very low, low margins on our hardware piece.

Okay, perfect. That helps. And also, if you can, the FX benefit on your top-line this quarter?

Yes. Compared to the fourth quarter sequentially, very, very minor. FX rates were fairly stable; compared to the first quarter last year, it was somewhere under $2 million of a positive impact. So, excluding FX, excluding acquisitions, our business grew nicely.

And so, I was going to ask you, so excluding -- so, that organic growth, what was it in the quarter excluding FX?

Yes. And as we’ve always mentioned, it’s very, very difficult. We run an integrated consolidated business. We integrate the acquisitions pretty much from day one. But, if we were to guess at that, we always talk about a range in that 4% to 6% range, probably a little bit in the higher end of that, definitely in the higher end of that range this quarter.

Okay, perfect. And I guess, maybe for Ed. Are you seeing anything in the macro that would prevent you to stay at that level of organic growth for the rest of the year?

I think our business is performing well. We’re seeing our network is performing well; you can see that in the results that we just released. We don’t know what the future will bring, but it’s certainly looking good right now.

Okay. And Ed, can you repeat calibration for revenue for Q2, is it 63?

It was $63.0 million. Yes.

63.0 and 18.1 for calibrated adjusted EBITDA.

For EBITDA. Thank you. Thanks, guys.

Our next questioner is Brian Essex with Morgan Stanley. Please go ahead. Your line is now open.

Hi. Good afternoon. Thank you for taking the question. Yes. I guess, Ed, I just want to ask about the volume related business or volume related revenue across your network. And relative to subscription, how that’s trending? And if you’re starting to see more pull before because of the network or some of the other factors like omni-channel and broader industry factors are driving growth outside of that?

Well, our network is performing as well, we had a couple of record months in the quarter that we just released. So that’s great. Comparing transaction revenue to subscription revenue changes the dynamic a bit. But, I think they’re both doing pretty well though, frankly. But, our network if you look at the last couple of months has been highest ever. I think and that’s largely attributable to our customers doing well and our network being in a good place for them to transact business, and those two things come together that have put some pretty good numbers.

Okay. And in terms of revenue growth. I mean, how much come from pull from your supply chain partners like SAP and how much from your own sales efforts? And is that dynamic changing as you see some of the market dynamics changing?

Yes. I mean, the vast majority is still coming from our own direct efforts. But increasingly, the SAPs and Oracles and handful of others are contributing at the higher levels than they used to in the past. You heard me mention some stuff with MacroPoint in the beginning, about how MacroPoint is doing pretty well. SAP and really Oracle, since we bought MacroPoint were both calling us that same day, how I get a partnership in place with these guys. We have been talking about this for a while. They were a small company. We couldn’t get our arms around it but our customers want this and all of a sudden Descartes buys it and they go oh! This makes it easy for me. Now, I already have a partnership with Descartes, now, how do I get this in the hands of my sales reps as quickly as possible? So, I don’t overstate it. That’s still a relatively small part of our overall revenue, but it’s growing and it’s increasingly more important to us.

Got it. And then, maybe Allan. In terms of OpEx, I mean certainly R&D and sales and marketing grew a little bit faster than I’d expected this quarter, particularly relative to revenue growth, so more M&A driven. And can we expect scale for the rest of the year or maybe are there certain dynamics in the quarter that may have caused those to get a little bit elevated?

Yes. It’s actually a mixed bag. Certainly from the acquisition perspective, there is some aspect of that in the let’s say most recent acquisition, Aljex, certain cost structure there that impacted as well as MacroPoint. There are conscious investments we are making in our business. We are making investments for the long-term. We are running a business for the long-term. And certainly, better the business performs, the more we can look at certain levels of investment on that business. But yes, it’s a combination of those that’s impacting. That’s driven up the ratios, ever so slightly in sales and marketing and R&D as you mentioned.

Got it. May be I can sneak one quick one in. Someone asked a question on FX for revenue. What about on the cost side?

Yes. For the most part, both sequentially from Q4 and quarter-over-quarter in Q1, the FX impact on adjusted EBITDA is very, very minor. In fact, one was slightly positive, one was slightly negative, but I can’t remember, it’s that small.

Our next question is from Matt Pfau with William Blair. Please go ahead. Your line is now open.

First one to start off on the backhaul opportunity. And Ed, maybe you can just give some more details on that in terms of how does it work? Are you going out and selling to the carriers or is it the brokers that you are selling to and then how does the monetization of that model work? And then, I guess, from the carriers’ perspective, what do they have to do to you get connected into this backhaul system that you’ve created?

Yes. So, we just finished our first pilot, we are now in a second phase of piloting this with a bigger audience. And it’s the brokers we are focused on, right. The brokers are the ones that are sharing their capacity and sharing the location of their drivers with other brokers, so that they can match that capacity up and find the trucking company or the truck driver that’s best positioned to take those loads. From the broker’s perspective, that works out great because you are able find an efficiency by finding a driver that is already going to be in that location on Thursday when you need that order picked up or that shipment picked up. From a carrier’s perspective, it’s really because they don’t have to drive 300, 400-mile backhauls or repositioning to -- to reposition themselves to pick up a load. So, to me it’s a situation where everyone kind of win. The broker wins because they create an efficiency by using the MacroPoint network to figure out the location of all the trucks on the network and determine who is best positioned to make that next move. From the carriers’ perspective, they eliminate a lot of unwanted or wasted miles. So, from a customer’s perspective, it’s probably good, because this probably ultimately results in a lower cost of service.

And then, maybe on the acquisition pipeline. Can you just talk a little bit about what the pipeline and looks like? And then, as the increase in shelf, any indication that maybe you’re seeing larger interesting deals in the pipeline?

I don’t know as the pipelines change; it’s been pretty good for the last several years. There is a lot of stuff for sale. There is a lot of people in the market willing to spend more money sometimes than we think things are worth. So, we have to be kind of be prudent investors, especially in the bigger deals where a lot of people show up and be smarter than our competitors in terms of going out and finding the small or medium sized deals that are good bids for our network and trying to get those businesses to become part of the Global Logistics Network. The shelf is not directly related to that. I mean, we have a shelf, because we want to be in a position to add quickly if need be. Those shelves for last 25 months and they expire and ours is about expire. So, we had to re-up. Our last shelf was for 400 million. And our business is grown considerably since 25 months ago. So, when we went to re-file the shelf, we filed for slightly higher amount of $750 million. That’s because the government, the regulatory authorities make us identify an amount, at least in Canada they do; in U.S., they don’t. So, we did. And I don’t think it’s something directly behind it as always, I would expect, we’ll always have a shelf in place as long as we’re as acquisitive as we are.

And then, last one for me. Allan, just wanted to touch on the hardware revenue that you saw in the quarter. Is that all related to the routing and telematics business or is there any hardware associated with MacroPoint? And I guess, what I’m trying to get at is, as we think about the gross margin impact going forward, was this more of a one-time situation or is that a situation where we might see an elevated level of hardware revenue going forward? Thanks.

Yes. It predominately relates to the routing space. Most of our hardware revenue, as small as it is will relate to that space and very little, if nothing and most of the other product lines or core product areas, pillars of our business. Was it typical? No, I would say this is atypical quarter. From time-to-time we get larger deals. They require some level of hardware and sometimes some installation related revenue. Those are things we have to do to get the subscription revenue and license revenue that we get from those larger deals. So, I would say this is not typical; it’s -- it would certainly be an atypical and usual quarter in that regard.

And really, nothing to do with MacroPoint, to answer your second question.

Our next question is from Paul Treiber with RBC. Please go ahead. Your line is now open.

I just wondered, going back to prepared remarks on the opportunity outlined, so one that you didn’t speak about is blockchain. And I was hoping, if you could just provide some comments in terms of if you’re doing any internal work there, development there. And also on the M&A side, are there any blockchain companies that you have looked at or consider looking at?

Yes. I didn’t mention it because I don’t think it’s the same sized opportunity or even close as the other ones that I mentioned. We are involved with a number of blockchain pilots with a bunch of customers. The hype around blockchain I think far outweighs the actual, real volume of transactions going through it, certainly in the supply chain space, there are almost none. There is a few pilots going on that may amount to up something but I don’t think you’re going to see it take over the world. If you remember, I made some comments on this at Descartes Evolution a month or two ago. About every 5 to 10 years, there is another standard that comes out where everyone says something like the following. If everyone just did this, we could all communicate seamlessly with each other. And the only problem is you’ll never find a standard that everyone just does. There are people on every version of every standard back 40 years or different ways to communicate, and blockchain is the newest one. And there will be a blockchain two and the blockchain three or something else that you and I don’t even understand yet will come out some day and someone is going to go, if everyone just did this, we would all be able to communicating with each other and seamlessly with each other. And I know from past experience, the world will never work that way. There will always be a guy that goes, well, I use this flavor of XML, or I’m still on traditional EDI, or use these flat file structures that we invented back in the late 80s. And that’s the way I want to communicate. And the problem is that guy will have to communicate with everyone else regardless of what standards they want to use. And that’s where we come in. We run this network that says, hey, you can talk to me and whatever language you want and you can talk to; you can call a 40-foot container. Anything you’d like to call it, just call it the same thing every time. And I will make sure that when I communicating that with some other customer that I will use his word for 40-foot container when I’m sending the message to him and your work for 40-foot container when I’m sending it back to you. And that is the beauty of our network, it’s why it exists; it’s why it’s makes it easy for our customers. And we do our job as insulate them from all of these various standards that exist. And everyone’s desire to work on one standard or the other, we want to just help them communicate with each other. And that’s the strength of our network. That’s what we’ve focused on. And I don’t see blockchain providing an enormous opportunity I see it providing new way for some people communicate. And our job is to help those people communicate with their trading partners whatever standard they use. And if you can see, our network continues to do that for some time to come.

Thanks a lot. The other comments you made on the backhaul capacity sharing solution and also in regards to your parcel business, e-commerce business. What’s the timeline for those newer products coming out into the market?

Yes. They continue to -- backhaul one, as I’ve said in the Phase 2 of a pilot right now. We’re just now having customers share capacity amongst each other which, was a big step for us. We first started doing this and we started looking at the customers, are they going to be willing to share that capacity? Because there is a big opportunity before them, if they do. If you refuse to share your capacity with everyone else, you’re only going to be as good as your own network. If you participate in a network that shares capacity across participants on the network, you’re in a potentially a much, much better situation. And over the course of the first phase of the pilot, we talked to our customers about that. We spent some time talking about the efficiencies that could be gained if we all decided to work together. And got the initial group and now the second group or let’s say larger group to agree to do it at that way. I don’t know exactly when we are going to be rolling it out for general availability but this next phase, the pilot run several months and we are looking to prove it out with a much bigger audience and then take a much bigger step after that, and more to come when we do that. This is really a standard -- this is the same problem your family has with babysitter, right? Do I want to share the name of my babysitter with all my friends because I may want that babysitter to work for me on Saturday night. And if I told all my friends about it, they won’t be available for me. And so, we had a little hurdle there with our customers to get them over that but told them hey, if you all share the location of your truck drivers, you will actually all be a lot of better off. And eventually, we got all the participants and the pilot to agree to that and I think it’s going to be a much more successful solution as a result.

Just one last one from me. Allan, I think in the MD&A you mentioned that there’s a $400,000 benefit from ASC 606 on EBITDA. Is that all the way through the sales commission or was there any tailwinds or headwind to revenue this quarter?

Yes. I think we’ve put on the MD&A, I think in the press release we indicated there’s barely any impact, a very, very small impact to revenue, approximately $400,000 impact to our sales and marketing expenses, and $400,000 impact to net income is I believe what the numbers look like coming out of 606, and the resulting change in segment disclosure which really caused us to break out the professional service and other segment line in revenue.

Our next questioner is Stephanie Price with CIBC. Please go ahead. Your line is now open.

So, you mention that customers are trusting Descartes with more of the business? I was wondering if you could talk about the areas you are seeing the most cross-sell and whether you have any metrics around the average number of products per customer?

Well, I don’t know if we have really specific metrics about it. We have customers with up to 30, I think one of the biggest out, 32 different solutions that they use of ours. It depends on the area. We are talking with the freight boarding space, guys sit in the middle, intermediaries, freight brokers. They tend to have more of our products, because they have a lot of products that work for them. We are talking about the carriers and the outside of those transactions, they tend to have five, six, seven products versus 10, 15 products because there’s only so many things they can do on our network. They’re mostly there to communicate with the trading partners. So, we have some value added services for them but maybe not as much as we have for those transportation intermediaries. And then, big retailers and manufacturers similarly, good one has five to 10, I think we have a couple with something like 12 or 13 different solution sets because again they don’t do everything in logistic. So, unlike an intermediary, they might not quite have as many as a DHL or a Panalpina or a Kuehne & Nagel who can use a lot of the services that we offer. Some are the ones that often cross-sell, most of them are participants on our network. They’ll be buying on top of that our transportation management solutions, our freight forwarding packages. A lot of people also buy then our customs and tariff duty databases, access to our denied party screen databases, access to our Datamyne solution that has built up [ph] from around the world that you can access and do competitive searches on. Pretty recent one now was MacroPoint where we do business with a lot of retailers and manufacturers that are relatively new customer base for MacroPoint and as Descartes does business with a lot of those guys already. We’re running around it and now saying, hey, here is this MacroPoint solution, not only can you get that business back on this truck, but you can actually track them mile-by-mile to the final destination and get the dynamic ETA, while you’re doing that, that’s often very attractive to those customers. And it’s early days for that. We’ve only owned MacroPoint 6 or 7 months now. But we’re getting a lot of traction within our existing customer base on it.

You mentioned Datamyne and you have that for about a little over a year now. I was wondering if you could talk about how you envision that solution. And whether you’ve been find ways to use the solution, particularly information from the GLN?

We have, we just released in our product couple of months ago that takes aggregated area information off of the Global Logistics Network with our customers’ permission and supplement data that exists on the data mine, Datamyne data content service and hope the participants on the forwarding side and the airline side in our aerospace would fund value in that and knowing their position in the market and things like this. So, we’re just rolling that out right now. But we’re pretty excited about it, if it could provide the big advantage to our customers and a unique service that really no one else in the industry offers at the moment. And we’re able to do that, because of the fact that we own Datamyne and the Global Logistics Network in bring all the things, the two of those solutions together. We would tell you about the data that’s moving in the world’s air supply chain.

Our next question is Paul Steep with Scotia. Please go ahead. Your line is now open.

Ed, can you maybe talk, just a little bit MacroPoint? Obviously, lots of excitement at the conference about it. How should we think about the sales conversion cycle on that product and the upsell there in terms of the lag from sale to actually implementation and the conversion there?

It’s a fairly quick sales process relative to some of the other more sophisticated solutions we offer. People can usually sign up in a month or 2, and for a small customer, they might take less time than that. There is obviously very large brokers, C.H. Robinson of the world types that might take a while to roll out to make sure we get all of the truckers on the networks, they might take some time to rollout across all their available capacity, as they might buy space from. We continue investing that activation role. I don’t think that investment will continue at the rapid pace that it is at right now, forever. Because eventually, we’re going to get all the truckers in North America on this. But at the moment, we continue to get customers at such a pace that they basically demand, hey, you need to get every truck driver that I have. And it’s great that I started with you guys and you have 60% right out of the gate that makes up a lot better than our competitors. But if we’re really go to do the job for them, we need to get the other 40%. So that every loans that they have under management is actually able to be contract on behalf of their customers.

Just on regulatory for a second. ACAS actually threatens to finally come to an end, I guess at the end of July. What type of uplift? We haven’t really talked about the split between ocean and air, and I’m assuming ocean at this point still a heavier weight in the network. But, is there a little bit of an uptick there they may actually come once we finally get through the end of the pilot process in the U.S.?

Yes. I think as with every standard that comes out, new government comes and says you got to do something, they put that burden on our customers. And then we go and build software that helps them deal with that standard and then we go around and sell it to them and oftentimes, there is a pilot process as you can see here, no different. And yes, usually when they go live, there is an uptick -- cases a lot of people that we’re -- it’s because the way they did or a lot of people that are able to participate the pilot. So you already seeing some of that going through our network. I think when they finally go live and they going live really means when you’re going to go into the penalty enforcement phase. But that’s one everyone has to do it. You’ll see an uptick on that. I don’t know that it will be that it will be -- as with any understand, we did so many of them. I don’t know that it will be material enough that you’ll go, the Descartes numbers changed materially because of this. But it’s always good news for us. I’ve never really seen a government say that we’re going to do one of these initiatives and not go through with it. I’ve seen plenty of them delay. Various governments have different ways of slowing things down when the industry complaints that hey we’re not going to be ready on time. Some governments say great, we’ll give you all the time you need, some governments like the U.S. might say hey, great, I’ll give you 60 days or 90 days to comply. Governments like Japan in the past have just said what they do not understand about the date that I gave you, that’s the date, it’s rolling out. And if you’re not ready you’ll be paying penalties for. But on those days it usually ends up in a good thing for our business, more volume and more revenue. But each one -- there is no one initiative that’s of a size that’s going to materially impact our revenue. It’s just generally good news for us.

Okay. I guess just the last quick one here to clarify. Allan, you’ve called out the quarter-to-quarter fluctuation both in the MDA and the script. How should we think about the magnitude of that step down Q1 to Q2 on PS with recognizing there is vacations in the summer in northern hemispheres?

Yes. It’s not big. It’s just that it is one of area. Our business, as you know, we’ve put a lot of energy and effort to making our business as predictable and consistent as possible. That’s the one area we have some level of fluctuation. I would be surprised to see fluctuations of more than 10% or $700,000 quarter-to-quarter when it comes to professional service and other revenue. But it can have it

Our next question is from [indiscernible]. Please go ahead. Your line is now open.

So, you talked about the Oracle and SAP partnerships. I wonder if you can add some comments whether there are opportunities for others.

Well, we have a lot more partners, 100 and some other partners. I often talk about SAP and Oracle because they tend to generate the most traffic, they also tend to drive the most revenue on our network because of their size. There is lots of other important ones that we deal with. The handset providers, a lot of times we’re selling mobile handheld pools. And those handset providers and their authorized resellers are often times big partners of ours and important. And they’re not household names like SAP and Oracles. So maybe talking about on this call not as meaningful. But they’re also a great partners. We also have a number of resellers around the world that do a great job reselling our services in various jurisdictions where we don’t have our own people on the street, and they are all important to us. Probably talk about SAP and Oracle more on this call because of their size and their potential to impact our revenue.

And then, just a follow-up question on MacroPoint. I was wondering if you can add some color, whether there’s international opportunities for that going forward.

There are. We don’t spend a lot of time talking about publicly right now because there’s a lot of work to be done to get this to work in other locations. Someone asked earlier on the call about hardware in MacroPoint, there is no hardware that we sell in MacroPoint. Everyone is using their cellphone or a telematics solution that they procure on their own, they just send us the information. In other jurisdictions to get those cellphones to work to get partnerships in place with the various cellphone plans because of the GDPR stuff and the data privacy rules around the world, we have some issues we got to contend with there in various jurisdictions. So, as a network, we kind of know when you’re rolling out service, you can’t just go willy-nilly and just roll it out and pray that everything is going work right. We are not up for offering a service that’s not of a very high quality our customers come to expect from us. And I’d say you’ve seen us take the same conscious approach with MacroPoint. There are some language barriers, the software is in English and how do I get it to work, which country should I go to first. But we are certainly taking a look at Europe right now because of our presence in Europe. When we bought MacroPoint, the service didn’t exist over there. And I do believe that some points in the near future it will start to exist over there. So we are looking forward to that day but we got a lot of work to do to get there.

Our next question is from Thanos Moschopoulos with BMO Capital Markets. Please go ahead. Your line is open.

Ed, can you provide a bit more color on what you’re seeing from a regional perspective? If I look at your segmented revenues, it seems like you’re seeing healthy organic growth in North America, although looking at EMEA it seems like that was significantly slower, if I just had the constant currency. Is that just maybe quarterly noise or there are discernible differences as far as what you’re seeing in terms of solution adoption across the regions?

A couple of years ago Europe was in a real recession as the U.S. was coming -- U.S. and North America were coming out of one. Actually, I know we segment report the revenues based on the countries that customers are located in and that provides you with some relevant information. But it has also made -- created a bit of a misnomer. If you look at the transactions on our network, it’s more closely split a third, a third, a third across North America, EMEA and Asia Pac. We certainly see a couple of things. One, North America continues to perform very well. We have seen some modest improvements in European theater over the last couple of years as they come out of recession, more deals getting done, more transactions getting processed. As our customers do better over there, we tend to drag the one with them. Asia is an interesting one because people know over these last couple of years talked about recessions in various areas in Asia. Overall, we have seen it perform fairly well, not the high growth we’ve seen in North America but we have seen trend where a lot of the manufacturing processors are moving from one country to another. So, a lot of the low end manufacturing process that may be 20 years ago get started off in Asia -- sorry in China specifically, are now moving to Southeast Asia. And as China has gotten better in some of the higher end stuff making cellphones and things of that nature, they’re losing the low-end stuff to a pick on like yoyos and toy lights and things like that didn’t require nearly as much skill and were the first things that China took on. Now, they moved to cheaper jurisdictions as China’s economy becomes stronger and stronger and the employees demand more and more money. For us that doesn’t matter so much. I don’t really care with the shipments comes from. If you’re in any one of those countries, it might matter to you, but in terms of our broader network, it doesn’t make much difference, right, as long as the shipments move overseas and getting moved by air or by ocean or by truck. So, it’s a good thing for our Global Logistics Network.

Thanos, just to add, there can be some quarterly fluctuations, you got to be careful not to get cut up on a year-over-year. Although, we have very little license revenue, it can happen where the license revenue was in Europe one quarter and this first quarter in North America. So, we don’t -- just support that there is some quarterly lumpiness that happens there?

And talking about macro comments, would it be fair to say that, if you look at some of your highest growth solutions that maybe, they’re more weighted towards North America where maybe the adoption of the parcel solutions and certainly things like MacroPoint, which you just acquired recently don’t have that same level of European exposure?

For sure some of the stuff you see growing quickly to ShipRushs, the MacroPoints, the Customs Info, MK Data, Datamyne, some of the stuff that’s growing faster on our container network spaces is more focused on North America, has a stronger foothold here, and so that could be contributing to what you’re seeing.

We have no further questions at this time. I’d like to hand it to Ed Ryan and Scott Pagan for closing remarks.

Hey, great, guys. Thanks for your time this afternoon. We appreciate you joining us on today’s call. And we look forward to reporting back to you next quarter. Have a great evening.

Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you all for your participation. You may now disconnect.