The Descartes Systems Group Inc. (DSGX) Q1 2020 Earnings Report, Transcript and Summary

Welcome to the Quarterly Results Call. My name is Adrienne, and I'll 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, Chief Operating Officer. Mr. 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 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 if it's required by law. And with that, let me turn the call over to Ed.

Hey, great. Thanks, Scott. Good afternoon everyone, and welcome to the call. Thanks for joining us today. As you'll see from our results, we had a great Q1 to kick off our fiscal year. Our customers continue to benefit from our investments that have expanded the Global Logistics Network with new technologies, content and trading partners. Happy customers are more likely to buy more stuff, and we have lots of happy engaged customers. For those of you that attended User Group, you would have had the chance to see that for yourself. Engaged customers are also more likely to share their ideas about how you can help them solve more problems, and we feel very fortunate to have customers that are passionate about sharing their ideas on acquisitions and enhanced solutions that can benefit the broader Global Logistics Network community. I mentioned the broader GLN community on purpose, because remember we're not just focused on one type of customer, we build solutions and tools for the entire community of participants in the supply chain, shippers, carriers, and logistics intermediaries, and we connect them to government agencies as well. Logistics is a multi-party, multi-process challenge, and if you want all of the participants in the supply chain to join your network you're going to have to be more successful, you're going to be more successful if you can add value with specific tools for each participant. We've had this vision for a while, and we continue to execute against our plans. As things get more complicated in the global trade landscape, customers increasingly see the need to collaborate with the trading partners in real-time with automated tools that leverage reliable data and content to help them make better decisions. So I'd like to start today's call by thanking our customers for doing more stuff with us, and for continuing to share their great ideas about where to invest for the future. I'll speak to some of those investments on the call including an update on Visual Compliance, and I'll provide some comments on our latest acquisition Core. Allan will then provide a detailed overview of our quarterly financial results, and I'll then finish up the call talking about our calibration for Q2 and our operating plans moving forward. But first, let's start by going over some of the key financial highlights for the first quarter of fiscal 2020. We had another great quarter of operating results, and we're very happy with our key metrics fueled by our continued organic growth and our ability to successfully integrate acquisitions. Our adjusted EBITDA continues to grow nicely. For the quarter, we generated $28.7 million of adjusted EBITDA, an increase of 30% over Q1 of last year. A partial quarter of Visual Compliance was a contributor, as many of you will recall, we earlier said that for the fiscal year we expect to grow more than our longer term plan for 10% to 15% growth in adjusted EBITDA. Revenue for the quarter was up 16% from Q1 of last year coming in at $78 million. We continue to convert our EBITDA into cash, generating a record $23.4 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. All in all another great quarter here at Descartes to kick off the new fiscal year. We have a stable cash generating business and we're well-positioned to continue our growth. So with that, let's talk about some of the investments our customers continue to encourage us to make and how we believe these investments will help us build out our network for shippers, carriers, and logistics intermediaries to connect to and collaborate with each other so that they can move goods efficiently and securely. I'd like to start with some of the comments around our organic investments and the role that engaged customer -- that an engaged customer base can have to help set up your strategic direction. In late March, we held our annual User and Partner Conference in Florida, Descartes Evolution. It's an opportunity for our customers and partners to come down and share their ideas with each other and while getting direct access to the team of domain experts from Descartes that build and support the products they use. Those of you that attended will have had a chance to see this person, but for those that weren't there maybe I can provide a bit of color as to what you would have seen. You would have seen leading carrier shippers and logistics intermediaries engaged with each other sharing ideas about how they leverage Descartes tools in their own business. But also sharing ideas more generally about the challenges and opportunities they face in their industries. We consistently hear from our customers that having chance to meet with their peers and trading partners is extremely valuable. You would have seen a number of sessions where we had a great attendance and some with standing room only such as our MacroPoint Visibility and Capacity Matching Sessions, our trade data content sessions including Visual Compliance and our sessions focused on e-commerce and omni-channel retailing. You would have seen engaged partner community as part of these discussions and sessions, our partners remain an important part of our go-to-market strategy. You would have also seen these customers and partners not just listening to our ideas, but engaging in discussions with Descartes personnel sharing their ideas about areas to improve existing products and investment in new products. This feedback is critical for ongoing investment strategy, but it's also important to note that it doesn't start and stop at User Group. We are continually engaging with customers about product development and areas to strengthen our global logistics network. And as I mentioned off the top, these investment areas aren't just for our product development strategy, but also for acquisition targets. Our customers are a great source of acquisition ideas and sometimes even introductions. With their help we've been able to build a robust pipeline of acquisition opportunities and we're pretty excited about the landscape of opportunities in front of us today. So with that, let's talk about our two most recent acquisitions. I'll start with Visual Compliance as I'm sure everyone is keen to hear about how things about how things are going there? Let's start with a reminder as to what Visual Compliance does and how they fit within our global logistics network. Visual Compliance provide software solutions content and services to automate customs, trade, and fiscal compliance processes, with a focus on denied and restricted party screening processes and export licensing. The acquisition followed other recent investments in trade content including Datamyne, CustomsInfo, and MK Data, a business that was also focused on denied party screening. Adding Visual Compliance not only gave us more scale and denied party screening space, but it also complimentary to our MK Data Solution as it adds new functionality for us to bring to market. MK Data is very strong in supporting large batch screening and powering SAP and Oracle, global trade management platforms, whereas Visual Compliance offers a more robust transactional system which can be helpful in markets such as e-commerce. Looking at market dynamics denied party screening is an area where we're excited to invest further in. You don't need to look to our define news about the latest trade agreements and disagreements with the list of sanctioned companies and products changing literally every day. Denied and sanctioned party screening has become a critical must have for companies for every business dealing that they have, whether it be for shipments, products abroad, or relationships with new and existing customers, partners, suppliers, and employees. We anticipate that the future may include regulatory mandates on certain businesses to conduct these types of screen activities. In the meantime, those that don't have some sort of screening solution in place put themselves at risk. We’re seeing demand for more screening services from our direct customer base as well as from our partners such as SAP and Oracle. Now that we are three months into the integration with Visual Compliance we can provide a little color as to how things are going and we're really pleased with where that business is at. From a financial perspective, we're really pleased with the continued growth of the recurring revenues of the business and the financial profile remains very healthy. We've come out of the gate strong and business is performing ahead of our plans, but perhaps more importantly, as we look ahead, we're really pleased with how the integration is going and how that will set us up for further success in the market. From a go to market perspective, we've been working quickly to cross-train the sales teams on either side and we're seeing some early traction in a few areas including solid demand for Visual Compliance in Europe. From an operations perspective, we've also made some good progress on our plans to bring the content teams together, so we can align our processes and streamline content collection and normalization. By doing so, we can become more efficient and we can free up resources to create more content and product offerings to take to market. We're generally we've also -- we're also really pleased with the attitude of the incoming team. They've been a pleasure to work with and we're really happy to have them as part of Descartes. More recently in early May, we announced the acquisition of CORE. So, what does CORE do, and how do they fit it? CORE in an electronic transportation network that provides global air carriers and ground handlers with shipment scanning and tracking solutions. Customers use CORE's network to accurately track, international mail, parcel, and cargo shipments as well as U.S. domestic mail and parcel shipments. As U.S. domestic and international e-commerce continues to grow, more demands are being placed on carriers and their partners to deliver efficiently and report events in real time. The CORE acquisition complements our recent investment in Velocity Mail helping us to better serve the logistics service provider community working with postal authorities around the world. In fact, we learned about CORE's result of last e-mail acquisition and that's something we see quite often when we combine with someone, is that it presents new opportunities for additional expansion. For instance, following our acquisition of BearWare a few years back, we then acquired another leading pool distribution software provider PCS track. We brought the two businesses together and combined the best of both worlds and we've seen tremendous success in that space over the last couple of years as a result. Looking ahead to the combination with CORE, we're not only strengthening our position in the growing domestic and global e-commerce market by bringing two leaders together, core solutions also extend beyond mail and parcel shipment tracking with air cargo tracking solutions. We will be adding these air cargo tracking capabilities to our global logistics network which we believe will present a compelling opportunity for our global air -- cargo community to enhance real time tracking and visibility of air shipments. It's still early days here with CORE, but we're excited about what they bring to the table. And I'd like to take this opportunity to welcome the CORE employees and customers to our global logistics network. Before handing the call over to Allan to talk a little bit more about the financials I'd like to thank some people that continue to contribute to the strength of our business. So thank you 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. For the second time on this call, thank you again to our customers who continue to place confidence the Descartes as their network of choice, whether you're a shipper, logistics intermediary carrier or even a government agency thanks for connecting and helping our community grow and thanks for your continued engagement. I'd like to thank our partners for helping us continue to expand our ecosystem and finally thank you to our shareholders for continuing to have confidence in the Descartes. And with that I'll turn the call over to Allan.

Okay, Thanks, Ed. As indicated, I'm going to walk you through our financial highlights for the first quarter of fiscal 2020. We are pleased to report record quarterly revenues of $78.0 million this quarter up 16% from revenues of $67.0 million in the first quarter of last year. Due to the general strength in the U.S. dollar versus the euro, the pound, and Canadian dollar there was a negative impact to revenue from foreign exchange of approximately $1.7 million when compared to the same quarter last year. So excluding this FX impact revenue would have increased by approximately 19% year-over-year. Our revenue mix continues to be very strong with services revenue representing 86% of total revenue or $67.0 million in the first quarter compared to $57.8 million in the same quarter last year, an increase of 16% and consistent at 86% of sales. License revenues came in at $2.3 million or 3% of sales in the quarter up slightly from license revenue of $1.9 million in Q1 last year and consistent at 3% of revenues while professional service and other revenue came in at $8.7 million up 19% from revenue in this category of $7.3 million in the first quarter of last year, but again consistent at 11% of revenue. Gross margin was solid at 74.5% of revenue for the quarter which is an increase from gross margin of 72.3% of revenue in the first quarter last year. This increase is mainly due to the addition of the Visual Compliance business acquired in mid-February as well as the continued growth in revenue with existing customers. Despite continued planned investments in product element this quarter as well as additional sales and marketing activities including hosting our annual user group during the quarter, we've continued recurring revenue growth and leverage from the acquisition of Visual Compliance. We continue to see strong adjusted EBITDA growth of almost 30% to $28.7 million or 36.8% of revenue compared to $22.1 million or 32.9% of revenue in the first quarter of last year. As a result of the solid offering results, cash flow generated from operations came in at $23.4 million or approximately 82% of adjusted EBITDA in the first quarter and this compares to operating cash flow of $18.9 million or 86% of adjusted EBITDA in Q1 of last year. Going forward, subject to unusual events or in quarterly fluctuations, we expect to continue to see strong operating cash flow conversion of approximately 80% to 90% of our adjusted EBITDA for the balance of fiscal 2020. From a GAAP earnings perspective, net income came in at $7.3 million or $0.09 per diluted common share in the first quarter, an increase from net income of $7.0 million or $0.09 per diluted common share in the same period last year. Net income in the first quarter was impacted by increased interest expense and amortization of intangible assets this quarter both related to the Visual Compliance acquisition. Overall we are very pleased with the solid offering results in the quarter as strong revenue growth allowed us to continue to make increased investments in the business while achieving a 30% growth in adjusted EBITDA core year-over-year and strong cash flow from operations. If we now look at the balance sheet, our cash balances told $29.6 million at the end of the first quarter while borrowings under our revolving credit facility were $242.7 million for a net debt position of approximately $230 million at the end of Q1. Note that we used our cash flow from operations to repay approximately $20 million on the credit facility during the first quarter while subsequent to the end of the first quarter we borrowed approximately $22 million on the credit facility to complete the core acquisition as Ed mentioned. As a result, we currently have approximately $265 million outstanding on our $350 million revolving credit facility. As always, our big shelf prospectus allows us to offer any issue up to $750 million in additional capital. So in short we continue to be very well capitalized to allow us to consider all 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 $1.4 million in capital additions in Q1, we expect to incur approximately $4.5 million to $6.5 million, an additional capital expenditures for the balance of the year, with this balance expected to include further investments in our network security and infrastructure. We expect the amortization expense will be approximately $52 million for the balance of FY 2020 with this figure being subject to adjustment for FX changes and future acquisitions. All right, our income tax rate came in at approximately 26% of pre-tax income in the first quarter, as we trend towards our statutory tax rate in Canada and in the U.S., our two largest markets. Going forward, we would expect that our tax rate will continue to trend in the range of 24% to 27% 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 it may arise as we operate internationally across multiple countries. We expect stock-based compensation will be approximately $4 million for the balance of the year, subject to any forfeitures of stock options or share units. And finally, in the past, we've indicated that we are comfortable that we would operate the business with an adjusted EBITDA range of 32% to 37% of sales. As a result of the strength from recent acquisitions and the continued operating leverage from revenue growth within our business, we now expect that we will achieve adjusted EBITDA ratios in the range of 35% to 40% of revenue in the quarters ahead. With that, I'll turn it back over to Ed who will wrap up with our baseline calibration.

Hey. Great, thanks, Allan. So calibration for Q2 FY 2020, 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. CAD 0.74, €1.12 to $1 and £1.3 GBP to U.S. dollar, our calibration for Q2 is $76 million in visible recurring contracted revenues, our baseline revenues. Our baseline operating expenses are $52.2 million this gives us a baseline calibration of $23.8 million for adjusted EBITDA for Q2. Some other key points related to how we're positioned for fiscal 2020. We had a solid financial footing. We have a healthy business that's well calibrated and we have a healthy balance sheet profitable and cash generating. We have low capital needs within our organic business and as you've seen from our recent historical financial results we have solid growth in our organic business. Our primary uses of capital for continued use in acquisitions. We've completed 43 acquisitions since 2006, and we have access to additional capital quickly should we need it. Allan mentioned that following the acquisition of CORE we have about $265 million drawn on our line of credit of $350 million, leaving $85 million of capacity available immediately. We've also filed a preliminary shelf prospectus for up to $750 million if capital was needed to be raised by other mechanisms. We have a strong acquisition pipeline that continues to be a lot of industry activity right now, the consolidation continuing in our market. With our capital capacity and our execution capabilities there are still a number of acquisition opportunities to expand the geographic reach, functional capabilities, trade data and content or community of participants on our network. We continue to see a lot of interest and 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 the shelf filing in place doesn't change how we're review acquisitions. We intend to continue to be prudent on valuation but we're confident in our ability to deploy capital effectively. Furthermore, we don't see the recent larger acquisitions of Visual Compliance impacting our ability to continue executing on our plan. As I just said we're confident in our ability to deploy capital. As you've just seen with our recent acquisition of CORE and we have a robust integration methodology in place to help us quickly and efficiently integrate incoming businesses. As a reminder, for our plans for the remainder of fiscal 2020 as we said in the past our belief for sustainable growth in the long-term is 10% to 15% growth in adjusted EBITDA. However given the scale of Visual Compliance and that acquisition for fiscal 2020, we're planning for growth rate in adjusted EBITDA in the mid-to-high 20s. As in the past we intend to invest any over performance back in the business. Our growth was 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 de-emphasize onetime license sales. Given the current performance of the business and mindful of the FX environment, as Allan mentioned we are increasing our plant operating margin from 32% to 37% to a range of 35% to 40%. But please keep in mind this could vary if we buy other businesses that need fixing up or if the FX environment changes both of which would impact that metric in the short run. And finally as always, we'll continue to make ourselves available to shareholders to answer any questions we think we've 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'll do the same. So, with that, let's open it up to your questions. Operator?

Thank you. We'll now begin the question-and-answer session. [Operator Instructions] And our first question comes from Paul Steep from Scotia Capital. Your line is open.

Great, thanks. Can you maybe talk just a little bit about how we want to think about your capital allocation strategy right now, you mentioned a strong M&A pipeline. What's the comfort with taking the level up if the right opportunities sort of appear in terms of taking leverage towards maybe three times or looking at other options?

Well, I think you know as always we're going to do exactly what we think we should do in terms of, you know, we find a company that we think would be a good acquisition and make money for our shareholders, and we view it as our job to make sure we have the access to capital to do that. I think you have seen us do that in a number of times in the past and I think that will continue into the future.

Okay. And if we move on to CORE, the contingent consideration there was fairly high, what's going to trigger that consideration should we think that it's more a revenue growth story or is there a bigger opportunity maybe on building up maintenance revenue or curious about that one given the combination with Velocity Mail?

We don't really like earnouts, but when we do have them there, they're typically focused on stuff that we can measure in revenues, the most obvious one, and that is the case here. I think I can say this for every one we've ever done. We would always be happy if they hit the earn-out, we're happy as they are.

Great. Just a final clarification on that one, what's the opportunity with putting it together with Velocity Mail basically looks like it gives you effectively a great global platform there. How should we think about the timing to maybe get towards that consolidated product? Thanks.

Yes. We're working on it -- thanks, Paul, we're working on it right now. They come at the problem from a little different angle with the CORE being focused on some technology that lets you scan shipments in and readers that help you do that. We think with those two acquisitions, we're the global leader in this space and we do business at just about every airline in the world. So it's something we think we can carry around the world and maybe potentially find more opportunities for that. So, you know on the cost side, that wasn't really our intention in buying it. There maybe things or maybe ways for us to operate more efficiently over time with the two businesses. But that certainly wasn't the driving focus behind the acquisitions; it’s more trying to become the dominant player in our space in that part of our business.

Thank you.

Thanks, Paul.

And the next question comes from Paul Treiber from RBC. Your line is open.

Thanks very much. Good afternoon. Just in the MD&A the disclosure in Visual Compliance is at a contributed $5.7 million in revenue in the quarter. Is that the right number if we annualized that, is that the right number to assume for the full-year or is there any unusuals or adjustments that may have impacted Q1 that may not be recurring through the rest of the year?

Yes. Paul, it's Allan. I think you have to keep in mind that the Visual Compliance we had in for a partial quarter. So, we'll have to -- we'll have it for a full quarter in Q2. And there's also an impact from the accounting for deferred revenue that you have to take into the -- with the accounting rules, so those, those will impact us for the first year. But yes, it's other than being a partial quarter and those accounting rules which will affect us for a year, it's a reasonable number for the run rate going forward and we hope to grow off that.

And then on just to clarify the deferred revenue write down, is that the typical or roughly typical 20% of total revenue?

Of deferred revenue, yes, so wouldn't be 20% of the total revenue in this case, but it would be a - it's a significant number in this business because a lot of the business was built in advance; you'll see a big increase in our deferred revenue number, a lot of that coming from Visual Compliance and unfortunately we have to lose part of that in the purchase price accounting which I think you understand then we pick up next year.

Okay, that's helpful. Just another accounting one, I asked this last quarter but just wanted to clarify just on the new lease accounting standard. Was there any impact to disclose on EBITDA?

No, you'll see that the balance sheet about $10.5 million worth of leases go in and lease of obligation offsetting that in the liabilities, very, very insignificant impact to net income or EBITDA.

Okay. Thank you. And then just one more from me just for Ed, just on IBM's blockchain initiative, Tradelens a couple of additional ocean carriers joined that, I think you talked at length about it in the past, the -- does a couple more carriers change your view on that initiative?

No, I mean look we're participating in a number of blockchain initiatives as well and any ones that are successful I'm sure we'll be right in the middle of. It's another way that customers can communicate. I - just my personal opinion, just looking at that form of communication versus some of the other ones that are out there I think it is unlikely to be the -- if you come back 10 years now I think it's unlikely to be the way that the world communicates with each other but to the extent that we have customers that want to communicate that way it's our job to do that with them and we stand ready to participate with them in doing it. I just don't see a lot of blockchain transactions going on right now. So, a lot of talk, not a lot of action. And so if that changes we're going to be right in the middle of it but until it does we're going to treat it as we see it.

Okay. Thank you. I'll pass the line.

Thanks, Paul.

And the next question comes from Matt Pfau from William Blair. Your line is open.

Hey, guys, thanks for taking my questions. I want to ask on the capacity matching solution, obviously a lot of interest there at your User conference. How did that convert into users on the platform and then when could this product become a more material portion of revenue for you?

Yes, we're really pleased with how it went at User Group. We had a bunch of people who were very interested and even existing customers that were talking about expanding the usage of the solution. And so, we're excited about it because it's taken off quickly, but still it's early days yet, right. I think we have a little north of 30 customers working on it with us right now. We continue to go and add more participants carefully to that solution, but I think, it'll be a ways off before it’s a material part of our revenue. It's exciting to us because we're starting from zero and building stuff from the ground up that we think has a lot of legs, but when you starting from zero it also takes a long time to impact the revenue of the company of our size.

Got it. And then I just wanted to ask on the Amber Road acquisition and E2openwith their acquisition of INTTRA and Amber Road, it seems like they're starting to have some overlap with you, how does that impact you at all if any?

Well, the INTTRA one we're expanding our partnership with them, so that's great - that, I don't view them as a competitor, they're working together to get more, more people, communicating electronically in the oceans space. The Amber Road side it maybe less of an issue for us and we don't directly compete with Amber Road. We work alongside SAP, Oracle, NetSuite and a couple of others to go head to head with with Amber Road and 15 or 20 other companies like them in that global trade management space. And we didn't really have a ton of opinion on whether Amber Road's a public company or Amber Road owned by E2open wasn’t material issue for us.

Got it. That's it for me, guys. Thanks a lot.

Yes. Thanks, Matt.

The next question comes from Steven Li from Raymond James. Your line is open.

Hey. Thank you. Quick one for Allan, you gave us the FX impact on the revenue, how about EBITDA, Allan?

Yes, very insignificant, Steven. As you know, we're very much naturally hedged operating in the various currencies. So a little bit of extra exposure to Canadian dollar, which offsets the impact in the pound and the euro. So, around a $100,000 positive impact to EBITDA from the $1.7 million revenue impact.

Okay. Thanks, and Ed, just if you can give us an update -- regulatory update on ACAS or [ICS] [ph] and whether it started to impact your business, you compliance business? Thank you.

Yes. You've heard us talk about in ACAS for the last several years. We're getting into the exciting part for us which is you know when the government starts enforcing it and really every customer has to join I think sometime later this summer you're going to see fines kicking in, which, which drags the last group of participants into it. And you know kind of puts us in a situation where all the people that need to do this are going to be doing this and hopefully most of them with us so. We're excited about it. We're ready for it. Been years coming and getting our customers ready for this and most of them are already you know in the middle of it, but there's a last round of customers coming in I think as the penalty phases kick in believe towards the end of the summer.

Would you say the modularity of your customers so yet to come in or you've done quite a fair bit of that already?

No, I think the majority of our customers are in well over 50% are in they'll be some guys that come in towards the end and they'll also be customers that are in that don't file all of their shipments because they don't have to, so they'll still find paper ways to do it when they have some kind of issue with their system. But by the end of the summer everyone's going to have to be doing it electronically which is great news.

Okay, great. Thanks.

Thanks, Steven.

And your next question comes from Deepak Kaushal from GMP. Your line is open.

Hey, thanks. Hey guys, how are you guys doing?

Hey, great. Thanks, Deepak.

Sorry, that was my first question. I've got a couple more.

We're doing great. Yes, thank you.

I'm not as funny as Scott, but -- Visual Compliance, I just wanted to dig into that a bit more. So you guys in the past indicated [ph] the way I understood it with my simple mind. You supplied the data to SAP and Oracle platforms and they serve the customers whereas Visual Compliance actually had their own platform and that served in customers directly. Will those kind of be competing with each other or the complementary benefits as Oracle and SAP get now that you owned Visual Compliance?

We bought it because we're complementary, right. And it's a little different than you described, you're directionally correct, but I'll give you a little more detail on it. So an SAP or Oracle customer buys their Global Trade Management System and as part of that they then come directly to us to buy data content. They buy two types of data content, tariff and duty information that they can use to feed the day-to-day changes in the rate information. So, the companies that are using those Global Trade Management Solutions are always calculating accurate tariffs and duties and then the second piece is on the denied party screening side where we're supplying them with the list that they can directly into their SAP and Oracle systems Visual Compliance does not have a system that competes against SAP and Oracle, but they sell to customers that either have built their own global trade management system or use the third-party if not SAP and Oracle and they do it in a way that was very interesting to us which is to have a transactional processing engine where they send us names and shipment information and say, "Can I send this shipment to this guy?" And they give us all the information about the person they're shipping it to and what they're shipping et cetera and we come back with an answer, and Visual Compliance answer specifically, and that transactional system I think is opens us up to a much broader swath of the market that is -- the people that are not using SAP or Oracle or NetSuite. And so that was our reason behind doing it, we're a dominant player in that market as a result owning both of them and we're pretty excited then. Now we kind of have all the bases covered in terms of the way -- different ways that customers want to do this and our ability to service them.

Okay, that's actually quite helpful. And then I wanted to ask you on that further on the pricing strategy. I mean I didn't get full details but at your user conference I kind of picked up that the pricing strategies between what you had with MK Data and your existing content business versus Visual Compliance is slightly different is this related to the fact that there's different type of customer base with an application or is there a fundamentally -- how do you reconcile the different pricing strategies, yes, okay?

At the different service, right. One guy is doing it in one way and another guy is doing it an entirely different way and I don't really see any problem with that. I think they're both priced pretty fairly. But one guy in affect is buying in bulk and I'm giving him bulk distribution every day and the other guy is paying transactional prices and as we look at close enough I think if the customers are getting a pretty good deal on both sides of it. So, for the foreseeable future we're leaving that that mechanism in place.

Okay. Okay that's helpful. And then on the capacity matching I think on the previous question you said you were 30 customers but careful to add new ones. Maybe you can talk about the challenges in scaling the customer base too quickly, and if you're at this stage if you're pushing back demand or how we should think about that?

We're doing a couple things. One, we're trying to get our customers to do more with us, right. They don't all give us all the capacity to match. And so as our solution gets more and more capable or robust we're rolling that out within the existing customer base. And we're also listening to them trying to get feedback so that we make when we bring this out to market in a broader sense that we have all the functionality that the driver wants that the broker wants and that the brokers' customers want in managing this process for them. So that's why you see as proceeding cautiously here that's why you see us making a lot of investment to make sure this is a great service for the long run. We don't launch a whole lot of new services at Descartes most of the time we are buying new services and enhancing them in this case we're launching a brand new one out of the gate and we're being real careful about how we do that to make sure our customers like the service and remain happy with us.

Okay. Good. Well, it's good to know and it's good to know that you're starting to launch some new ones on your own. I have a final question for Allan. Again it's a follow up, you talked about the deferred revenue related to Visual Compliance. So if you're increasing your EBITDA growth guidance to 30% I would assume that the cash flow given the deferred revenue issue would lag it or would that cash flow grow in kind of the same pace?

No. Okay, first off, EBIT…

-- my counting stupidity in that question.

No, no. So what we did talk to you about is increasing the range of EBITDA as a percentage of revenue that we feel comfortable operating the business at 35% to 40% of revenue.

Yes.

So that is something we did do. As far as the deferred revenue impact it has the impact of suppressing revenue in the first year post-acquisition. This happens in every acquisition. This one is a little bit bigger with most of the revenue being billed in advance, annually in advance on contracts. So it will have an impact, it has a - it will not have as big of an impact on cash, but overall that won't change our thought process on cash flow conversion, we're still generate -- we still convert about 80% to 90% of our adjusted EBITDA, if that answer your question on…

Okay. Yes. So, I heard you say that, that you expect EBITDA increase this year 30% year-over-year versus typical 10% to 15% range, and some of the questions -- is cash flow.

Ed - yes, Ed did mention that EBITDA would increase in the high 20s I believe. And so and we were at 30% up this quarter, so, good strong performance.

And so cash flow should follow that?

Yes.

Sorry, cash flow should follow that, okay. Okay, excellent. Thank you. I appreciate it. Thanks for taking my questions.

Okay. Thanks, Deepak.

And that concludes our question-and-answer session. I'd turn the call back over to speakers for final remarks.

Okay, great. Thanks, everyone. We appreciate your time this afternoon, and look forward to reporting back to you on our results for Q2 in a couple of months. Have a great day.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.