The Descartes Systems Group Inc. (DSGX) Q2 2020 Earnings Report, Transcript and Summary

Welcome to the quarterly results call. My name is Erin, and I will be your operator for today's call. At this time, all participants are in a listen-only mode, later we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Scott Pagan. Scott, 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.

Great. Thanks Scott. Good afternoon everyone and welcome to the call. Thanks for joining us today. We carried our strong momentum from Q1 through to Q2 as we delivered yet another set of record results. Our focus on delivering value for our customers continues to pay off, as they trust us with more and more of their business. We believe that the market right now is more dynamic than ever. Global trade regulations can change daily, as we're in a heightened climate of trade sanction regimes and trade disputes. Economic and operating conditions can turn on a dime, leaving companies vulnerable if they can't quickly adapt and consumers continue to increase their expectations about the service delivery. Often they want to buy something now and get it within 24 hours and at a time that is convenient to them. This can create serious supply chain and logistics challenges for even the most advanced operators. Dealing with surges in demand, while also remaining efficient outside of peak time is a tricky balancing act. We think this creates opportunities for companies that can remain agile with the appropriate technology systems fed by timely reliable information. But that's not all, companies often needed to be connected to a wide community of supply chain participants to be able to operate efficiently and react quickly. This of course is why we continue to invest in the Global Logistics Network so that all the participants in the supply chain, whether you're a shipper, a carrier or a logistics intermediary have one place to connect collaborate and execute shipments in real time. I'll speak further on today's call about the challenges and opportunities we're seeing in today's market and how customers are leveraging our network to turn challenges into opportunities. As part of that, I'll also provide some updates on our recent acquisitions. After our market update, Allan will then provide a detailed overview of our financial results and then I'll finish up the call talking about our calibration for Q3 and our operating plans moving forward. But first let's start by going over some of the key financial highlights for the second quarter of fiscal 2020. We had another outstanding 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. Revenue for the quarter was up 20% from Q2 last year, coming in at $80.5 million. Our adjusted EBITDA continues to grow nicely for the quarter. We generated $30.2 million of adjusted EBITDA, an increase of 32% over Q2 of last year. Digital compliance continues to contribute nicely to this growth, growth that is ahead of our plan of mid-to-high 20s adjusted EBITDA growth for this fiscal year compared to the previous fiscal year. We can continue -- we continue to convert our EBITDA into cash, converting 89% of EBITDA into cash and generating a record $26.9 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 research and development investments and by combining with complementary businesses. We combined with two businesses in Q2 CORE and STEPcom, and we combined with BestTransport in August. I'll go into those acquisitions in more detail later. We also had a public share offering in the quarter and raised $245 million increasing our capacity to do more investments as the right opportunities come up. All in all, another great quarter here at Descartes to round off the first half of the year. We have a stable cash generating business and we have a solid balance sheet with financial capacity to continue to acquire businesses, and we're well positioned to continue our growth. So with that, let's talk a little bit more about today's market conditions and some of the tools we have available to help customers manage today's complex market dynamics. I'd like to start with some comments around what many of us are hearing about and seeing in the North American freight market. If you think back to the summer of 2018, you would have heard a lot about capacity crunches, meaning that there weren't enough trucks to fill demand and rates were consistently rising. This summer you're hearing about a number of carriers going out of business, emblematic of businesses that weren't agile enough to adjust to rapid shift in demand. Being able to operate efficiently in the peaks and troughs of the market are key to survival. Freight has always been cyclical. So this isn't a new concern. What's new is the pace of change and how quickly market conditions can turn. And what's also new is that there's now technology that can help in the up and down markets by supporting more efficient use of resources. In the uptimes, you need to be able to improve capacity of the resources available. And to do this you need good information on what is moving right now and what is going to be moving in the future, as well as what resources are available to help. In the downtimes, you need to leverage that same information to make the most of what's out there and get an edge to keep yourself operating profitably. Our MacroPoint capacity matching solution is particularly well-suited to help carriers and freight brokers with this challenge. Our solution is designed for freight brokers and carriers to partner on an opt-in basis to share lean history and capacity to support better network alignment and utilization. As I've highlighted before, it isn't about disintermediating logistics service providers from the customers, it's the opposite of that. It's a tool to help logistics service providers and make them more successful. It's about helping logistics service providers respond to dynamic markets and self assembled identify opportunities to collaborate, remove friction and respond to market forces that are threatening their business. As we continue to enhance the capacity matching solutions and add more users to the community, we're seeing more and more opportunities to really make a difference for our customers here and help them thrive in today's market. We're also seeing how the solution can be used for subcommunities, which is one of the drivers behind our most recent acquisition of BestTransport. BestTransport is a cloud-based transportation management system provider, focused on flatbed-intensive manufacturers and distributors. Moving goods in the flatbed market requires domain expertise in special equipment and the associated transportation management processes have some unique characteristics. The flatbed market is therefore served by a specialist community, a micro community of the wider freight market with its own history and cycles capacity and rate swings. BestTransport built a great business serving the specialist flatbed community with the tools for the shippers, carriers and logistics intermediaries. Asset allocation in a dynamic market is never easy, but it can be even harder on a smaller community with the specialty asset. We see this as a great opportunity to introduce Descartes MacroPoint visibility and capacity matching to this market. We've already generated some interest with some of the BestTransport customers and we're excited to see where this takes us. In the meantime, I'd like to welcome the BestTransport employees and wider community to Descartes. It's great to have you here. While I'm at it, let's switch gears and talk a bit about another acquisition that took place, since we last spoke, a company called STEPcom. You might have noticed that I continually make a point of highlighting that we have solutions on our network for all of the participants in the supply chain; shippers, carriers and logistics intermediaries. Logistics is a multiparty multiprocess challenge and if you want all the participants in the supply chain to join your network, you're going to be more successful if you can add value with useful pools for each participant. The more you can help that community of shippers, carriers and logistics intermediaries to execute additional processes in the life cycle of a shipment, the more likely you are to have them do more business with you and bring others into the community with the network effect. Connectivity is critical for this to work and having the ability to onboard trading partners rapidly is key, particularly in an environment where the supplier or customer landscape can change quickly. When you look at what STEPcom has done, they have spent 15 years helping supply chain participants connect and collaborate to exchange business documents and automate supply chain processes. They're very good at it. Every shipment starts with the purchase order and STEPcom helps its customers automate the process for what will ultimately turn into a shipment. By combining with the Global Logistics Network, we can now help that community execute those shipments with tools for booking and tracking in real-time. So, a warm welcome to all the STEPcom employees and customers. By combining with businesses such as STEPcom, we continue to execute on our three-part vision for supply chain information processing. First, you've got source data collection, which used to be manual, but more and more is becoming automated through internet-enabled devices in an IoT world, such as telematics devices, sensors, GPS devices and other mechanisms. Second, you need a trusted network to communicate and store that source data in a way that is useful to the entire supply chain. And third, you need an application that can leverage that data and help you make better decisions for your business. So source data and content-trusted networks and decision support applications. Our Q2 acquisition, of course, is a good example of demonstrating all of those principles. CORE is 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. CORE's experience in air cargo tracking led them to identify Internet of Things or IoT opportunities to better track the containers that are used by air carriers. These containers are called ULDs. A ULD is a unit load device. Essentially it's the box or pallet that cargo was loaded into before it goes onto a plane. ULD management is a tricky thing and by incorporating Bluetooth-enabled IoT technology, CORE is helping the air carriers better manage their pool of assets. However, that's not where the value ends. By comparing CORE's IoT solutions with the Global Logistics Network, we can then link shipment tracking to ULD tracking because we have the shipment data. In effect, this will create more real-time data events for consumption by the wider Descartes community, not just the air carriers, but also the forwarders and their customers the shippers. An even broader, CORE has applications which allow you to visualize what's going on with the ULDs and mail, so that you can have accurate visibility over your air cargo. Source data collection from the ULDs using the GLN to process the information and applications to analyze what was generated. We're pretty excited about the opportunity to enhance what we do for the wider air cargo community, as we continue with the integration of CORE into our business. So also welcome to the CORE employees and customers, welcome to Descartes. Speaking of integration, I'm sure people are keen to hear how things are going with Visual Compliance, so I'll spend a couple of minutes there. At the top of the call, I mentioned the constantly changing regulatory environment our customers are facing every day. Trade is getting more complex and the velocity of changes is increasing. In order to stay on top of changes to duties, tariffs, taxes and sanctioned lists customers need to access to timely reliable information and they need systems that can digest that information. As a result, we've been building our content offerings over the last few years to help our customers get the right data at the right time. 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 our other recent investments in trade content, including Datamyne, Customs Info and MK Data a business that was also focused on denied party screening. Adding Visual Compliance not only gave us more scale on denied party screening space, but it's also complementary to MK Data as it adds new functionality to us -- for us to bring to the market. We're now six months into the integration and things are going very well. We're starting to see the benefits of the wider content teams working together. We're seeing a lot of interaction between our content teams, which are standardized with best practices and the teams have gelled very well. We continue to make good progress on our plans to bring these teams together, so we can further align our processes and streamline the content collection and normalization process. We're also starting to see more product synergies ahead, as we think about how we can leverage the Visual Compliance offerings combined with our Customs Info solution as an example. From a go-to-market perspective, we've already seen synergies over in our European operations. Our team there has landed a number of Visual Compliance deals following our successful cross-training efforts over the first few months. And 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. The business continues to perform ahead of our plans, which has contributed to our aggregate growth being ahead of our planned range. 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. Thank you to our customers who continue to place confidence in Descartes as their network of choice. Whether you're a shipper, logistics, intermediary carrier or even a government agency, thank you for connecting and helping our community grow, and thanks for your continued engagement. I'll also like to thank our partners for helping us continue to expand our ecosystem and thanks to our shareholders both new and long-standing for continuing to have confidence in Descartes and supporting us with your capital. And with that, I'll turn the call over to Allan to go through the financial highlights for Q2.

Okay. Thanks Ed. As indicated, I'm going to walk you through our financial results for our second quarter ended July 31. We are pleased to report record quarterly revenues of $80.5 million this quarter, up 20% from revenues of $67.1 million in the second quarter of last year. This revenue growth was achieved from solid organic growth as well as from our recent acquisitions, and as well was achieved despite a negative impact from foreign exchange of approximately $900,000 over Q2 of last year. Our revenue mix continues to be very strong with services revenue increasing 20% to $71.4 million, or 89% of total revenue in the second quarter, compared to $59.7 million in the same period last year and consistent -- also consistent at 89% of revenue. License revenue came in at $1.1 million, or just over 1% of sales in the quarter, up slightly -- sorry, down slightly from license revenue of $1.3 million, or 2% of revenue in Q2 last year, while professional service and other revenue came in at $8.0 million or 10% of revenue, nicely up from $6.1 million, or 9% of revenue in the second quarter last year. Gross margin was solid at 74% of revenue for the quarter, which is up slightly from gross margin of 73% in the second quarter last year. This increase is mainly due to the addition of the Visual Compliance business acquired in mid-February, as well as with -- from continued growth in revenue from new and existing customers. With solid revenue growth and continued strong cost control, we continue to see strong adjusted EBITDA growth of approximately 32% to $30.2 million, or 37.5% of revenue, compared to $22.8 million, or 34% of revenue in the same period last year. Consistent with past quarters, the FX impact on adjusted EBITDA was insignificant, as we remain fairly naturally hedged to FX movements across our business. As a result of the solid operating results, cash flow generated from operations came in at $26.9 million, or approximately 89% of adjusted EBITDA in the second quarter this year up 48%, compared to operating cash flow of $18.2 million, or 80% of adjusted EBITDA in Q2 last year. Going forward, subject to unusual events and quarterly fluctuations, we continue to expect to see continued strong operating cash flow conversion of between 90 -- 80% to 90% of our adjusted EBITDA for the balance of fiscal 2020. From a GAAP earnings perspective, net income came in at $8.6 million, or $0.10 per diluted common share in the second quarter, up slightly from net income of $8.5 million or $0.11 per diluted common share in the same period last year. Overall, we are pleased with these operating results in the second quarter, as strong revenue growth allowed us to make increased investments in our business, while achieving 32% growth in adjusted EBITDA and generating strong cash flow. If we look at the balance sheet, our cash balances totaled $27.4 million at the end of the second quarter, while borrowings under our credit facility were $22.8 million for a net cash position of just under $5 million at the end of the second quarter. As Ed mentioned earlier, we completed an equity offering during the second quarter issuing $6.9 million common shares at a price of US$35.50, resulting in gross proceeds of $245 million, and after all issuance costs net proceeds of approximately $237 million. We used those proceeds from the equity issue in the second quarter to repay a large portion of the balance that was outstanding under our credit facility. We also used our cash flow of operations to repay approximately $30 million on the credit facility during second quarter, while we also drew approximately $43.8 million on the credit facility to complete the CORE Transport and STEPcom acquisitions during the quarter. Subsequent to the end of the second quarter, we also borrowed approximately $11 million on the credit facility to complete the BestTransport acquisition. And as a result, we currently have approximately $320 million available to us to draw under the credit facility. In addition, we are able to offer just over $500 million of capital under the current base shelf prospectus. So, clearly, 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 ahead to the second half of this year after incurring approximately $2.4 million in capital additions in the first half of the year. We expect to incur approximately $2.5 million to $3.5 million in 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 amortization expense will be approximately $27 million for the balance of FY 2020, with this figure being subject to adjustment for FX changes and future acquisitions. Our income tax rate came in at 26.3% of pretax revenue in the first half of the year, which is very close to our statutory rate in Canada and the U.S. Going forward, we'd expect that our tax rate will continue to trend in the range of 25% to 28% of pretax income over the balance of the year, though as always, we should add that our tax rate may fluctuate from quarter-to-quarter from onetime tax adjustments that may arise as we operate internationally across multiple countries. And finally, we expect stock-based compensation will be approximately $2.6 million to $2.8 million for the balance of fiscal 2020, subject to any forfeitures of stock options or share units. And with that I'll turn it back over to Ed to wrap up.

Okay, great. Thanks, Allan. Before talking about calibration, I just wanted to highlight to everyone that we now set up the conference website and registration site for Evolution 2020, our Annual User and Partner Conference. Evolution 2020 will be held at the Diplomat Beach Resort in Ft. Lauderdale, Florida from Tuesday March 17 to Thursday March 19, 2020. It's a great opportunity to meet the people that build and deploy our solutions, as well as the customers that use them. What you will learn about Descartes is a really good investment of your time and I would encourage you to book early. With that, let's move on to our calibration for Q3 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 Q3 includes the addition of BestTransport of the business for a partial quarter and assumes the following exchange rates: CAD 0.75, €1.11 to U.S. dollar and £1.21 to U.S. dollar. Our calibration for Q2 is $78.2 million in visible recurring contracted revenues, otherwise known as our baseline revenues. Our baseline operating expenses are $53.4 million. This gives us a baseline calibration of $24.8 million for adjusted EBITDA for Q3. Some other key points related to how we're positioned for fiscal 2020. We have a solid financial footing. We have a healthy business that's well calibrated and we have a healthy balance sheet. We're 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 are for continued use in acquisitions. We've completed 45 acquisitions since 2006. And we have access to additional capital quickly, should we need it. Before the acquisition of BestTransport at July 31, we had $23 million drawn on our $350 million line of credit and we have the ability to expand that line of credit to $500 million if needed. We also have a preliminary shelf prospectus for up to $750 million, of which just over $500 million remains unused. To raise capital by other mechanisms and in short, we have good capacity for our planned acquisition activity. We also have a strong acquisition pipeline. There continues to be a lot of industry activity right now with 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 interesting opportunities out there to continue or even accelerate our pace of profitable growth. We're seeing both larger and smaller opportunities. And while we review everything as it comes our way, we're not just buyers for buyer's sake. The fact that we have an acquisition line of credit and a shelf finally in place doesn't change how we view acquisitions. We intended 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've just said, we're confident in our ability to deploy capital as you've just seen with our recent acquisitions of CORE, STEPcom and BestTransport 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've said in the past, our belief for sustainable growth in the long term is a 10% to 15% growth in adjusted EBITDA. However, given the scale of Visual Compliance for fiscal 2020, we indicated we would grow in the mid to high 20s. Given our performance in the first half of the year, we're now confident that we'll be at or just to be on the top end of that range. As in the past, we intend to invest any over-performance back in the business. Our growth is planned to come through a combination of organic and inorganic activities, and as always, 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 our planned operating margin range remains at 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 believe 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, operator, I'd like to open the call up to questions.

[Operator Instructions] And your first question comes from Raimo Lenschow with Barclays. Your line is open.

Hey, this is Mike on for Raimo. Congrats on the quarter guys. Just wanted to touch base on the kind of the strong acquisition pipeline that you talked about, when you think about just the puts and takes behind that right now for your business and kind of expanding those EBITDA margins to more like 35% to 40% for the rest of the year, can you talk a little bit about like kind of the balance you're seeing between maybe reinvestment back into the business, which, obviously, you guys have been doing on the R&D side and acquisitions. Has anything change with Visual Compliance there and kind of that being stepped up at least for the kind of the short term?

No, I think, you're going to see us operate the same way we have for the last number of years. We continue to see a strong market for potential acquisitions. We look at every one of them. Sometimes they are overpriced. I mean there's a lot of stuff in this market is overpriced because everyone thinks it's a great time to sell their business, that's true for some and not for others. We're just trying to manage our business as well as we can and deploy our capital efficiently. And I don't think in our minds, there is any material change in that belief. Sometimes more acquisition come along that look like great fit to us and we're able to get a deal done with someone and sometimes they don't, and we don't push if it is not there.

Great. And then just a little bit more detail hopefully on the cash conversion, which was especially impressive this quarter at 89%. Can you talk about kind of the puts and takes there and what drove that up, because that's pretty -- a lot higher than what we've seen over the last couple of quarters or significantly higher. Is there anything specific that you wanted to call out on that end?

Yes -- not really. We typically see conversions in the 80% to 90% range of adjusted EBITDA. So this one, we're right at the top of that range. Interest expense went down in the quarter compared to last quarter. Typically the second quarter is a -- can be a better collection quarter. So it is just one of those things we do see fluctuations. Last second quarter we were at 80%. It was a weaker quarter, have a couple of receivables didn't come in, just more of the same. You could expect us fluctuate typically in that 80% to 90% range and, yes, nothing terribly unusual.

Okay. And then just kind of going off of that with interest expense kind of coming down in the back half of the year, should we kind of expect maybe some similar trends or it's a little bit more on the higher side of that part?

It's possible. I think we did say in the notes that we still expect 80% to 90%. There is a number of moving parts there. We are a victim of our success in some ways where cash taxes are slightly higher than they've been in other years for us. But, overall, we'll update you as we go through the quarters. But I would, at this point, if I had to best guess it would be right at 85% going forward, and we'll see how that plays out for the second half of the year.

Great. That’s all I had. Thanks guys. Congrats on the quarter.

Okay, thanks, Mike. Appreciate it.

And your next question is from Matt Pfau with William Blair. Matt, your line is open.

Hey guys. Thanks for taking my questions. I wanted to ask a few on MacroPoint. So first of all, are you gaining anymore traction with shippers? My understanding is that your primary exposure with MacroPoint was traditionally with brokers, but have you seen anything on the shipper side? And then also at your user event earlier this year I think it was discussed about entering the European market with MacroPoint sometime during 2019. So just was wondering what the update on that is?

Sure. Thanks, Matt. Yes, we do business with a lot of shippers on the MacroPoint side you're right. Our primary customer base is freight brokers and 3PLs. And typically as they're big customers of ours we're trying to -- when we're dealing with shippers trying supplement the informations they're getting from their broker that's our primary driver in that market. We also have had a number of large shippers come to us over the last several years to sign up for the service and happy to do that in their place they're usually supplementing something they're already doing with the freight broker and looking for one place where they can go and get all the tracking information. As far as European markets are concerned, we're making a very cautious move in there. You have a lot of personal privacy issues in Europe to get over and certainly some language barriers as well. So we're starting in some of the English-speaking countries and being very careful about how we're collecting information from drivers to not run afoul of any rules over there.

Got it. And then also wanted to ask on the capacity matching solution and related to some of the dynamics that you mentioned going on in the trucking industry currently, how are those impacting the demand for capacity matching from the broker side? And then from the supply side with the actual carriers, how does the current environment impact that for capacity matching?

It's tough for me to tell really. We're just in the early innings of this, so we're just getting started. Not enough for us to see massive trends in it other than the customers that have gone through this pilot process and now we're kind of opening that up to other mid-sized brokers and 3PLs continue to expand their usage of the service as they get into it. It's not clear to me that what the impact of the market is yet on that, how it's affecting it, it's not big enough representative sample. But I can tell you that the customers are using and getting a lot of benefit out of it. And everyone that started in this pilot is rolling the solution out and using it more and more effectively every day, so we're really excited about that.

Great. That's all I had. Thanks guys.

Thanks. Thanks, Matt.

And your next question comes from Paul Steep with Scotia Capital. Paul, your line is open.

Great. Thanks. Hey, Ed, can you talk a little bit about the e-commerce side of the business in terms of the uptake of a number of the solutions that you've pulled together over the last few years there in terms of where you're at in terms of feeding that into the base and growing that part of the business?

Yes, sure thing. That has been a big -- you've probably noticed our organic revenue trending up over the last couple of years and that e-commerce drive has been a big part of the reason behind some of that organic growth that you've seen in the business. ShipRush us a couple other ones that we did have really been put together I think quite effectively by our team and the revenue in those businesses has gone up substantially, maybe even more than we thought when we bought the companies. I don't see it slowing down anytime soon. It seems to be -- right now it seems to be something that the customers are really after and that I think we're in a great position to take advantage of it. So we've been real pleased with it.

Great. And then the other area that we haven't talked or discussed a whole lot in the last few calls has been the customs area. What's your take Ed on with the U.S. doing ACE trial for low value goods, I know it's a small trial and just going into test, is that -- does that hold the potential for us to finally get the step function that we talk about over series of years in that customs business?

It will help. I mean the big one that's been going on in the last six months that's been helping us is ACAS going into penalty phase, meaning if you don't comply, you get penalized and we helped a lot of customers get ready for that and that was a driver over the last six months. There are still a number of other over 100 countries that have said they're going to launch programs in this that have not done so yet. So we're optimistic that they'll continue to do that. And the little test that you see going on right now for low value goods, I don't know where that's going to go yet that could be a big opportunity for us, but it's still a very small pilot right now. And I don't think something you're going to see in the next two quarters or three quarters or so. It's probably more like years before that takes hold. I think our long-term opportunity there is focused on export filings from a lot of the big countries that have already gone live with import filings and new countries are rolling out import filings around the world. The smaller countries you saw Argentina go live last year you see countries like that. It's not a massive business for us, but it's -- every one of them is helpful and our customers I think really appreciate us doing all those countries as they don't have to do themselves.

Perfect. Thanks guys.

Thank you, Paul.

Okay. And your next question comes from David Hynes with Canaccord. David, your line is open.

Hey, thanks guys. Nice set of numbers. Ed, I wanted to ask you just generically around trade volumes on the GLN, it's hard to parse out given the diversity of the business. So are you seeing any slowdown at all given the ongoing trade disputes? And I guess as part of that maybe you can remind us kind of exposure to China that you have there?

We haven't really. We read the same newspapers as you do. So we're kind of watching to see what will happen. We haven't seen much impact on our network, but some of that may make sense, right. I mean one of the big reactions you see from companies who are dealing with trade restrictions in certain countries is to start moving manufacturing to other locations. From the perspective of our network, we don't really care where the shipment comes from. We care that it gets made. And so whether that shipment comes out of China or Vietnam, it's still shipment that's going on over our network. Now if you live in China or Vietnam, it might be an issue. But from the perspective we take on which is we're just trying to process the world shipments that's still ends it up being a shipment on our network and which country it came from is not particularly material to us. The part that it has helped quite a bit and I think it may continue we're in -- our trade in data content business is a big part of it's focused on database and tariffs and duties. And over the last couple of years with all the rhetoric that's going on around the world, not just in U.S. but in other countries around the world too has put a real high focus on that trade data information and it's one of the fastest-growing parts of our business as a result. So we're pretty excited about that.

Yeah. That make sense. One housekeeping for Allan and then I'm going to come back to you Ed for one. Just share count expected, the diluted shares for Q3 like just over 85, 85.2 is that kind of the right spot we should be?

For Q2, that might be a little high. We did the share issuance right at the middle of the quarter. So a dilution of 3 million, let's say 3.5 million shares essentially for Q2. It will be the full effect in Q3. I think it's 84 and change. You're testing my memory, but 84 million and change of the shares outstanding. So in around that. That's part of -- just look at the balance sheet, the bottom of balance sheet, you'll have the actual numbers, but both have the dilution effect for this quarter so Q2 they just passed and the second part of it comes through Q3.

Okay. Got it. And then Ed, so Matt was asking earlier about capacity matching and the opportunity there. And it seems like there is kind of two strategies in the market, right. There's the folks who are -- your competitors who are kind of trying to disintermediate the 3PLs and the freight brokers and you guys have obviously taken a different tack which is deliver tech to enable those folks. Can you just talk about kind of your view of the challenges that the competitors were trying to disintermediate will face and kind of what gives you confidence that you're pursuing the right strategy, if that make sense?

Well sure. Yes, thanks for asking actually. I feel like I've seen this moving before, right. The same thing happened in the late 1990s early 2000 time frame where a bunch of dot-coms came in and said "We're going to disintermediate this entire market." If you look back on that time, every one of those companies did not succeed, right in our market in particular, right that's just not how they did it, they did not cut the freight forwarders and the 3PLs out. In fact, those markets grew substantially since then. We don't think it's that easy to manage people's freight and I don't think you're going just quickly do it on a website and problem solved. We -- because of what we have in MacroPoint where we have visibility into hundreds of thousands of trucks everyday and where they're going to be a few days from now, we think that's very valuable information to help companies decide who the next carriers should be or who the next driver should be to take that next load. And to the extent that we can identify three or four trucks or 10 trucks within a couple of miles of that location who are available for pickup three days from now that information could save a freight worker $150 to $250 on a move because they don't have to pay for backhaul or deadheading to drive empty to pick up location. There's two things you can do with that and you've said it rather eloquently right. The first is you can say, well I'm going to be a freight broker and I'll save that $200. And the second is the approach that we're taking, which is, hey I do business with 5,000 or 6,000 freight brokers around North America, why don't I just provide that information to them, my customer and have them make the money and hope they'll give me a cut of it for providing that information? We have no intention to being a freight broker. I look at the guys that are doing it and I say, hey the last time someone tried to do this, they didn't do that well. And -- but I have seen a lot of the market go that way right. They come out and they get investors and they get valuations in the hundreds of millions of dollars for a company that's doing $2 million or $3 million in revenue. And then you have a lot of expectations to meet and I don't think they're going to. And I look at our approach to it and I say I think it's a much more reasonable approach. I think it's up and it's helping our customers and helping the market be more efficient. And I think the guys that are trying to say, hey I'll help the market be more efficient too and I'm going to put all the money in my pocket, I think those guys are being greedy and I think they eventually are going to get burned.

Yeah, okay. That’s helpful. Thanks guys.

Okay. Thanks, David. Appreciate it.

And your next question comes from Justin Long with Stephens. Justin your line is open.

Thanks and congrats on the quarter. So, maybe to start with the adjusted EBITDA growth guidance for this year. I just wanted to be clear on what drove that upward revision. Was that just a function of Visual Compliance outpacing expectations? Or has your assumption on organic growth improved as well? And maybe if we think about that EBITDA growth in the high 20s or something around that this year, could you speak to the rough split of that between organic and acquisition driven growth?

Sure. So I'll make a couple of comments about it and pass it over to Allan to see if he has anything else to add. But at a high level, we were bumping up -- before we bought Visual Compliance, we're bumping up against the top of the range that we had given previous, which I think was 32% to 37%. We're getting closer and closer to that. And you're absolutely right, Visual Compliance is a very profitable company and was behind us improving to -- and then moving the range up to 35% to 40%. But I think prior to that, our business was performing very well and continue to move up and up each quarter and then we bought Visual Compliance. And we said, well we're definitely going to be in that range now for the foreseeable future. So with that I'll pass it to Allan?

Sure, sure. Ed was referring to the EBITDA as a percentage of revenue if you're -- and that's exactly true on that front. If you're looking at it from an EBITDA growth perspective where we came in at 32% for the quarter and as Ed mentioned in the remarks where we had said in the previous quarter that we would be in the mid to high 20s as a growth rate for this year, we're feeling more comfortable with the business overall. We've run Visual Compliance now for 5.5 months. We've added some small additional items to our companies to our mix here. The business is performing well organically. So that led us to a bit more comfort to say we'll be at the higher end of that range into the 30-ish range percentage as far as growth in EBITDA. So you've kind of got now answers on both the EBITDA growth and the EBITDA as a percentage of revenue. And both have impacts of our core business improving and Visual Compliance improving. And then separately your last piece of the question was split between organic and acquisitions. Well our typical model growing 10% to 15% a year I think our 10-year average is 17%. You should roughly think of that as being roughly split half and half, half organic growth and EBITDA half acquisitions. In a year like this where we're going to be upwards around 30% or so much more of that is coming from acquisitions. Our core business is performing as we would expect and that's great, that's giving us a good solid EBITDA growth the rest is coming up from acquisitions.

Great. That's really helpful. And maybe following up just organic growth, I think if you adjust for FX in the quarter, I get to organic revenue growth of around 6%. Any reason to expect that growth rate to accelerate or decelerate in the next couple of quarters?

It's been in that range for the last few quarters, second half of last year on through this year. I don't know -- for us remember we're trying to grow a business here in a combined fashion. We're continuing to add pieces and solutions too that will be valuable to our customer base and so it's an organic growth story with acquisitions. I guess, I personally believe you'll see fluctuations in organic growth from time-to-time. Its good economic times right now and we're seeing really strong good growth. And let's just see where the second half takes us we'll see how it plays out.

Okay, fair enough. I appreciate the time.

Thanks, Justin.

And your next question comes from Paul Treiber with RBC Capital Markets. Paul, your line is open.

Thanks very much and good afternoon. Just hoping that you could elaborate more on BestTransport and the TMS strategy in general. You have a number of partnerships with TMS companies. How do you look at/or how do you decide between partnering with these companies and then owning a TMS vendor themselves? And then at what point would you consider moving into the broader TMS market?

Yes. Well, BestTransport is a niche player in that business and that they have -- and a fairly unique player in that business and they handle something that's a little more complicated than your normal truck movement that it's flatbed and people get a flatbed because the cargo is odd-shaped and maybe even more difficult to move and you can't put it inside the trailer. We wanted to have that functionality in our TMS. We thought our customers would benefit from getting access to that functionality. We certainly didn't buy it to go after any of our partners that are in the broader TMS market. I think if you ask them, they would say that flatbeds are relatively small part of most of their customer's moves. Our partnerships in that space are largely based around connectivity and that's why we're working with SAP and Oracle and a bunch of other TMS providers to be the network of choice for their customers so that they can get connected to those carriers. If you think about it what BestTransport brings us there maybe one of the more valuable things is connection to those flatbed carriers that may otherwise have been somewhat elusive because they're relatively small players in the market. Now they're on our network and if you look at the BestTransport acquisition from that perspective you probably have a pretty good sense of where we're coming from and buying it. We didn't think of it as a predatory move to our partners, we actually thought it's something that would help them and they want to provide connectivity to flatbed providers and their TMS, now I'm available to do that and I can do it all electronically. So that's the driving force behind it.

And do you see, is there an opportunity for synergies between BestTransport and MacroPoint in capacity matching?

For sure. I mean they bring a whole new set of carriers to the table, whole new set of shipper customers to the table as well. And to the extent there's people using those solutions that also want to use capacity matching. We have brokers on our network that want to use capacity matching and now do it -- match up for flatbed moves. I have a much better ability to do that for them today than I did before the BestTransport acquisition.

Okay. And then hoping to clarify something in the notes or just provide more details on it, in regards to performance obligations up quite strongly 60% year-over-year and 10% quarter-over-quarter. What are the drivers of that? And how much is impacted by organic growth versus acquisitions?

Sorry Paul, can you repeat that one for me please?

Performance obligations is up $220 million this quarter.

Okay. Throwing a bit of a blank. Performance?

Sorry, well it's in the notes. I'll -- I can take it offline with you.

Okay. Yeah please do, sorry. You're catching me. I apologize.

No problem. I’ll pass the line. Thanks a lot guys.

Hey, thanks Paul. Appreciate it.

And your next question comes from Scott Group with Wolfe Research. Scott, your line is open.

Hey, good evening guys. It's Rob on for Scott. With -- I guess -- just following up in terms of the organic growth. Clearly, in North America we've seen some very light railcar load volumes as well as soft truck demand more broadly. I was hoping if you could speak to kind of your view of the sustainability of the organic growth as we look forward in what could be a softer freight market?

Well, the short answer is I don't know. But I also don't know what's going to happen to the freight market any better than anyone else in our industry. Other than to say that, if transportation volumes go down, we could pay by the shipments to process transactions and if there is less transactions, there is less revenue for us. And therefore either our organic revenue is going to slow or we're going to have to sell more to keep it growing at the rate that it is. I don't have crystal ball, so we don't put the stats out there about what's going to happen it in the future. But we know, over the past couple of years, it has gotten a lot better. You can see that in the results and I think it's due to us having a better and better network every day with more and more participants on it, I think that's partially due to the quality of some of the acquisitions that we bought in the past few years where they're growing at a faster clip than some of the things that we bought in the past. And then our company is doing a good job of integrating those acquisitions in and getting them to perform even better than they were before we bought them. I hope that continues. If we have to do that with some headwinds in the transportation market, pushing against us, it will make it a little harder. If the transportation market continues to boom as it has over the last couple of years, that's going to make it easier for us and give us the potential to do even better. So, I don't know that I'm prepared to predict what's going to happen for you, but I'm happy it's growing right now and it's been growing nicely over the last couple of years. And we hope it continues and if not, we're going to do our best to manage through it.

Yes, understand and appreciate that color. You guys really clarified up in terms of some of the concerns that we've been hearing out there in the market about trade and shifting -- potentially some shifting of volume from China to other Asian countries and the impact for Descartes. I was hoping you kind of speak a little bit about, in the news, we've seen some forwarder consolidation with the recent closure, but by DSV. How does that impact, if we're seeing kind of growth of some of the bigger participants, how does that impact the Descartes as we look forward?

Well that one in particular has been pretty good for us, right. DSV is one of our best customers and they bought Panalpina that was also a very good customer of ours and we're looking for them to do even -- if we can get DSV to do all the stuff with Panalpina that DSV is doing with their own business, which I think is their plan I look for that to be pretty good news for us. It's certainly the way they're talking at the moment. So, we're excited about it. We like the DSV guys. They've been great customers of ours. They've grown from a midsize player to one of the largest forwarders in the world and we're excited for them and excited to help them.

That's helpful. So, we should more be thinking about the potential as if you've got a relationship with the acquirer as being accretive or not per se relative to the target?

Well, I think you're going to find, we're going to have -- in the freight forwarding space we're going to have relationships with most of the acquirers. It's how strong that relationship is. In the case of DSV, it's very strong. And fortunate for us over the last 10 years or so as there's been a lot of consolidation in this market, the bigger guys in that market tend to be our best customers. They're the ones that have taken advantage of what we have more effectively than the smaller and midsized guys. So, in most cases, it's worked out pretty well for us, right. They buy a smaller freight forwarder who uses some of our stuff but not all of our stuff. And now all of a sudden they're bought by a bigger player who uses a lot of our stuff and as that small freight forwarder gets rolled into the bigger operation, we tend to benefit.

Really appreciate the color guys.

Great. Thanks.

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

Hey guys, good evening. A couple of follow-up questions for me on the recent acquisitions. Ed, just on BestTransport. Was kind of the opportunity to sell capacity matching into a niche network, the motivation behind acquiring BestTransport?

It's certainly one of them. We saw that opportunity as a pretty good one and to add something that's not otherwise there in the capacity matching space at the moment, right, because it's kind of a unique space, flatbed is. So that was certainly a big help. I think more broadly, we wanted to add these flatbed carriers to our network and add the ability to manage a flatbed move to our network. And there's not a lot of networks out there that can do that. Most of that stuff is done manually today. And now we have a chance to automate it not only for ourselves, but as someone mentioned earlier on the call for our partners as well.

Okay. And do you see like similar or parallel niche networks that could be well suited for capacity matching? And is that a reasonable strategy to go forward on some M&A? Or is that I'm stretching too farther?

Well, I think there are a couple of opportunities to do that, but I wouldn't say that's going to be a core driver to our M&A strategy. BestTransport came along as bit of an opportunistic thing for us. We saw it for sale and went oh that actually might be a good idea. And then we went and talked to them and started to like what we hear and thought we could prove that thesis out and did so. I don't know that you're going to see us continue to look for those opportunities. If they're around, we'll take a look at it and see if we think it's a good fit. In BestTransport's case, we thought it was, so we did it. I think you're more likely to see us go after stuff in the trading space and some of the areas that we've been investing in over the last couple of years. Sorry Deep.

Got it. But in terms of driving capacity matching adoption, not necessary to find these close networks you can do it?

No. I think the biggest thing that's going to drive capacity matching is going to be us going out and getting more and more of our brokers heads around using a third party to provide them with this information and using that as a competitive advantage for their competitors and maybe for some of these dot-coms or things that they're going to do it without a broker.

Got it. And then just on STEPcom, you gave some good color on the supply chain integration networks that they have. And I wanted to know, if you can go a bit further in terms of how different it is from integrating a transportation network, supply chain versus transportation? And in terms of supply chain, how penetrated are you? How much of your GLN is related to supply chain specifically? And what could the opportunity become? Like could it be a 10% type of business?

Yes. So, obviously, we're much more focused on the logistics side of it and that we have just about every transportation provider of size in the world on our network. And so, we're very large player in the logistics network space. We're relatively small player in the supply chain network space. We eventually believe these things need to come together. They are different. It's different processing of purchase order and an ASN versus a bill of lading and a booking and transportation status messages, but they all need to be done. And really in our mind, they should be done by someone who can put them all together, so that the end customer, the retailer and manufacturer can get complete visibility into. I ordered this thing with my purchase order. I created an ASN that said what I'm going to be shipping, I then created a bill of lading, a booking bill of lading and then started getting status messages back so that I can see where my stuff is on a line item basis versus getting information back from a carriers like, hey your container is here. Well that's not -- that helpful unless you know what's in that container. If someone can do all of that for you, they can put all of that information together, they can start to give you SKU-level information as to where your inventory is around the world and when you think it's going to get to the places it needs to get to so that you can better manage your supply chain. That's -- at a very high level that's what's behind us buying STEPcom and I think you'll see us do more of that moving forward.

Got it. And are there certain industries that are more receptive to bringing both of these things under one network and one house?

I don't know. I don't know if industries are more or less. Certainly, the bigger industries out there, retail just take for example, is one of the groups of people that seem to have the most of gain by doing this. So, I think you'll see us go after that group more than most in that they have an awful lot of inventory. Their buyings are extremely high. And if they can start to think of some of these things, they can really save a lot of money. So that's certainly I think been something that's driven a lot not only of our acquisitions, but visibility and things like that into the supply chain space.

Okay. Got it. Thank you. That’s it for me. Very helpful, thanks.

Hey great. Thanks Deep

Okay. And there are no more questions at this time.

Okay. Great. Thank you, guys. Appreciate your time and we look forward to reporting back to you next quarter on our Q3 results.

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