The Descartes Systems Group Inc.
Q4 2018 Earnings Call Transcript

Published: 6 Mar 2018

[Operator:]

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

[Scott Pagan:]

Thanks and good afternoon everyone. Joining me in the call today are Ed Ryan, CEO; and Allan Brett, CFO. I trust that everyone has received a copy of our financial results press release that was issued earlier today. Portions of today’s call, other than historical performance, include statements of forward-looking information within the meaning of applicable securities laws. These statements are made under the safe harbor provisions of those laws. These forward-looking statements include statements related to Descartes’ operating performance, financial results and conditions, Descartes’ gross margins and any growth in those gross margins; cash flow and use of cash; business outlook; baseline revenues; baseline operating expenses; and baseline calibration; anticipated and potential revenue losses and gains; anticipated recognition and expensing of specific revenues and expenses; potential acquisitions and acquisition strategy; cost reduction and integration initiatives; and other matters that may constitute forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties, assumptions and other factors that may cause the actual results, performance or achievements of Descartes to differ materially from the anticipated results, performance or achievements implied by such forward-looking statements. These factors are outlined in the Press Release and in the section entitled Certain Factors That May Affect Future Results in documents filed and furnished with the SEC, the OSC and other Securities Commissions across Canada, including our management’s discussion and analysis filed today. We provide forward-looking statements solely for the purpose of providing information about management’s current expectations and plans relating to the future. You’re cautioned that such information may not be appropriate for other purposes. We don’t undertake or accept any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements to reflect any change in our expectations or any change in events, conditions, assumptions or circumstances on which any such statement is based, except as is required by law. And with that, let me turn the call over to Ed.

[Ed Ryan:]

Hey great. Thanks Scott. Good afternoon everyone and welcome to the call. Thanks for joining us today. As some of you may know we are hosting our call this quarter from beautiful West Palm Beach, Florida. We are about to kick off our Evolution 2018 Descartes' Global User & Partner Conference. Seems fitting that we are about to kick off our biggest conference ever with record attendance from customers and partners at the same time as we announce another record quarter and fiscal year. The theme of this year’s conference is consistent with one of the larger factors impacting our business. The conference theme is titled ‘Logistics

[Allan Brett:]

Okay, thanks Ed. As indicated, I’m going to take you through our financial highlights for the fourth quarter and our year ended January 31, 2018. As Ed mentioned, we are pleased to report record quarterly revenue of $63.6 million this quarter, up 20% from revenue of $52.8 million in the fourth quarter last year and up 3% sequentially from the third quarter of this year. Service revenue remains strong, coming in at $61.1 million, also up 20% from the same period last year and consistent at 97% of total revenue. Gross margin was also strong, coming in at 73% of revenue for the fourth quarter, and this is consistent with the third quarter of this year and up slightly from 72% in the fourth quarter of last year. As a result of the continued revenue growth and strong cost control, we experienced adjusted EBITDA growth of 16% to $21.4 million or 34% of revenue in the fourth quarter compared to $18.5 million or 35% of revenue in the same period last year. As a percentage of revenue, adjusted EBITDA was adversely impacted again this quarter by a weakening of the U.S. dollar against most other currencies, including the euro, the pound and Canadian dollar. As a result of these solid operating results cash flow from operations came in at $19.6 million or 92% of adjusted EBITDA in the fourth quarter, up slightly from the fourth quarter of last year. Looking at our tax rate, we’ve recorded a positive impact of approximately $700,000 in the fourth quarter, related to the implementation of the new US tax rules. However we also had some smaller one time times that partially offset this positive impact in the quarter. As a result, our income tax rate came in at 22% of pre-tax profit in the fourth quarter, slightly lower than the 22.2% rate recorded in Q3 and down nicely compared to the tax rate of 24.3% in the fourth quarter last year. As a result of all the previously mentioned items, GAAP net income came in at $6.7 million or $0.09 per diluted common share in the fourth quarter, an increase of 10% from net income of $6.1 million or $0.08 per diluted common share in the fourth quarter last year. If we look at our results of operations for the entire year, revenue came in at $237.4 million in fiscal 2018, up 16% from revenues of $203.8 million last year. Gross margin was 73% for the year, again up slightly from gross margins of 72% last year. Adjusted EBITDA for the year was $80.8 million compared to $70.1 million in fiscal 2017, an increase of 15% and consistent at 34% of revenue in each period. Cash flow from operations was solid at $72.1 million or 89% of adjusted EBITDA this year compared to $72.6 million or 104% of adjusted EBITDA last year. We should note that we continue to expect cash flow from operations to come in between 85% and 95% of adjusted EBITDA, but as we saw last year sometime we will experience unusual items that will cause us to see results outside this range. Our tax rate for the year came in at 22.7% down from 24.3% in fiscal 2017. GAAP net income for this year came in at $26.9 million or $0.35 per diluted common share compared to $22.8 million, or $0.31 per diluted common share in fiscal 2017 which represented an increase of 13%. As Ed has already mentioned, overall we are really pleased with these continued strong operating results as we closed out our fiscal 2018 year. If we look at the balance sheet, we ended the year with a cash balance of $35.1 million while we had $37.0 million drawn on our credit facility. As a result we ended the year with a very small net debt position of $1.9 million. During the fourth quarter we were able to repay $18 million of our credit facility. As you recall we drew $80 million of our credit facility in August to complete the MacroPoint acquisition and now have repaid $43 million of this total, in the last five and a half months of the year. Finally on our debt balance, we should also mention that we drew an additional $33 million on our credit facility just after year end to complete the Aljex acquisition. As a result as of February 1, we had about $70 million drawn against our $150 million credit facility. We continue to believe that with our current cash balances the $80 million currently remaining undrawn on the credit facility, our ability to expand the credit facility by an additional $75 million, as well as the expectation continued cash flow from operations, we remain very well capitalized. If we look to fiscal 2019 to round-out our financial picture, we should note the following

[Ed Ryan:]

Hey great. Thanks Allan. So let’s talk about calibration for Q1. Similar to previous- quarters, we don’t provide guidance but we use our base line calibration as a key metric related to the ongoing health and strength of our business. Our calibration for Q1 assumes the following exchange rates

[Operator:]

Thank you. [Operator Instructions] From Barclays Capital we have Phillip Huang. Please go ahead.

[Phillip Huang:]

Yes thanks, good afternoon. Good thanks, how are you?

[Ed Ryan:]

Great.

[Phillip Huang:]

On MacroPoint, I was wondering if could provide a bit more color around the progress on that. You know, obviously you broadened your network, reach and partnerships, and you previously indicated that there’s strong interest in the product. I was wondering if you could give us an update on the growth you are achieving there? Not sure if I missed it in your remarks, but I think you previously indicated 15%, 16% growth in the past. I was wondering if you could you just update us on that?

[Ed Ryan:]

Yeah, we’re real happy with that business. It’s not only that it continued the growth that we saw before the acquisition, but it’s been a big help in our business. We have tremendous amount of interest from some of our partners, the likes of SAP and Oracle who are looking to provide that type of service to their customers. When we bought MacroPoint, they were looking to go after big retailers and manufacturers and it kind of scaled up to do that, but we’re in early days. After the acquisition, we were able to turn that on to our salesforce and get them out in front of the 17,000 customers on our network and start to help accelerate the growth in that portion of the business, all of that’s come together to make a very exciting acquisition for us and we’re real happy with it.

[Phillip Huang:]

Are you able to provide us, maybe you know a range of growth that you think is achievable in the near to even midterm. Are we talking about a sort of 50% plus type growth of is it something that is perhaps a little less meaningful as we think about it as you ramp up the whole process?

[Allan Brett:]

No, it’s Allan Brett here. I think as Ed indicated, we are really happy with the business. We have expectations of the business. We hope to see it double over a period of around three years and I think that’s still consistent with what we would expect.

[Phillip Huang:]

Got it, got it, okay. And then on the cost side, is it fair to assume that the costs related to MacroPoint are now largely fixed? You’ve got sort of all the sales people in place. You know I am asking this because I am just wondering how we should think about margin contribution in the coming quarters.

[Ed Ryan:]

Well, I think we said when we bought it that we were going to try and eventually get this into line with our operating metrics. We made some moves right out of the gate to get off to a good start there. We continue to invest in that business in that it operates below our average operating margins. Because we think it’s a great business and its growing very rapidly and specifically in the area of adding new customers or activating new customers on the network, we want to make an investment to make sure that we get all the freight brokers and transportation providers on the network as fast as we possibly can, so we continue to invest in that area. But as we said the day we bought it, we would plan to get it to our operating margins within a year or so, and I expect beyond that it could potentially be more profitable like a lot of the other areas of our network.

[Phillip Huang:]

That’s helpful and one final question from me, you know just looking at the pipeline, if you look at the pipeline of opportunities, do you see a greater abundance of opportunities that offer bigger revenue synergies that might also be a bit more expensive given that it might be initially margin dilutive and I say that just because both MacroPoint and Aljex seems to offer very strong revenue synergies, and you know it requires a bit of upfront investment on the cost side. Thanks.

[Ed Ryan:]

Thanks Phil. If you look at all different kinds of businesses we bought, all different types of business, we look at each of them individually in trying to examine their thesis and figure out what it’s worth to us, and that’s what we pay people. You know if there’s others out there that think they can do more with that business, they are probably going to win that deal. If we think we can do more with it than anybody else, we’re probably going to win because we’re going to be willing to pay more than others to get it. We think of ourselves as prudent investors. You know we don’t like overpaying for stuff. We like to think that we got a good value for something when we bought it and a fair deal for both sides of the party, because we have to work with these guys after we acquire the company. When we’re buying businesses that are in great shape, all recurring revenue growing fast, highly profitable, yeah that’s worth something, and we’re willing to pay to get that. You know on the flip side, we bought businesses that are in trouble and need some help to get fixed up; and you know, in those situations, we’re looking to pay you know pretty low multiples for stuff in hopes that we’re going to be able to fix it up better than the current owners could and turn it into a big win for our shareholders. We also know that’s a lot of work, so we try to factor that into our valuations, but I don’t think anything’s ever changed for us in this evaluation, we think of it the same way all the way through, right. We’re looking at each individual acquisition and going, you know is that something we should own, and if so what are we willing to pay for it and you know we’re very prudent about sticking to our guns when that’s the case.

[Phillip Huang:]

Right. No, thanks very much, helpful color.

[Ed Ryan:]

Thank you.

[Operator:]

From William Blair we have Matt Pfau. Please go ahead.

[Matt Pfau:]

Hey guys, thanks for taking my questions.

[Ed Ryan:]

Hey Matt, how are you doing?

[Matt Pfau:]

Hey, I’m good. First Ed, I wanted to touch on Customs Info and MK Data which have been in the mix for some time now. Where do you think you stand in terms of the opportunity to sell those within your existing customer base? And I guess if that penetration is still relatively low, what do you need to do with those two products to sort of increase that penetration or conversion?

[Ed Ryan:]

Yeah, we continue to sell into our customer base and I think we’re doing that quite effectively right now; there’s still lots to go, you know lots more customers that don’t use the service yet. We have to establish the need within our customer’s minds for that service right. You know one of the ways that happens is you get in trouble, right. We have customers that get in trouble for not understanding the tariffs and duties or not understanding that they weren’t allowed ship something to someone and you know that’s an obvious case for us to get a new customer. All of our international freight forwarders, we go out and spend time with them explaining how they can make this is a service in their business right and they can take the service that we provide and mark it up and provide it as a service to their customers. So we continue to educate them to get that to be the case. It’s probably still early days I would say. We see the growth in this business as continuing for a long time to come.

[Matt Pfau:]

Got it. And then I wanted to hit on the routing business, and in terms of what you've seen the impact from Amazon getting into more types of deliveries and doing more deliveries themselves. How has that impacted the ability to sell solutions for private fleets? And then I guess within your existing customers, have you seen them expand the number of vehicles they have in their fleets or are those contracted?

[Ed Ryan:]

Typically they are expanding over time as their business are – you know as they are getting into ecommerce and selling more and more. Amazon’s done a big help to us because its creating a need within the broader retail community, to be able to deliver to their home. Take the cases Best Buy or HomeDepo, they want to get good at doing this before Amazon gets good at doing it for them and I think you can read Best Buy’s releases on your own, but they’ve done quite well in this ecommerce space in the last couple of years. We probably played a little bit of a role in that. We’d like to think we did at least in helping them manage this process more efficiently.

[Matt Pfau:]

Got it, Okay. And then last one for me just on cash flow, Allan. It sounds like based on your commentary in terms times of the range of cash flow as a percentage of EBITDA, you're expecting that growth to may be more normalize and be more in line with EBITDA going forward, and then this year was a bit of an anomaly with the tough comp from the prior year, is that correct?

[Allan Brett:]

Yeah, this year as compared to last year because we were over 100% of just EBITDA in the operating cash flow in FY’17 it made it a bit tough. But going forward we would expect it in that 85% to 95% range. Most of our EBITDA should end up in cash at the end of each year, that’s the consistent yield.

[Matt Pfau:]

Okay great, that’s it from me guys. Thanks a lot.

[Ed Ryan:]

Thanks Matt.

[Operator:]

From Morgan Stanley we have Brian Essex. Please go ahead.

[Thomas Robb:]

Hi guys, its Thomas Robb on for Brian Essex.

[Ed Ryan:]

Hi Tom, how are you doing?

[Thomas Robb:]

Good, how are you guys doing?

[Ed Ryan:]

Great.

[Thomas Robb:]

I wanted to kind of dig into like the possible trade sanctions that’s kind of hitting the news right now, and I think it’s kind of only been like a few days, but you know when this kind of stuff hits the news, do your customers kind of call you and see what you guys think or are you guys hearing anything from your clients on you know what this is could mean to their business or kind of you know how you can help manage it?

[Ed Ryan:]

We’re typically not getting calls from them asking you know what the Trump administration or any other government is going to do about trade regulations other than you know we might get the months from now to start negotiating those trade regulations then we’ll have some information about it. But when it’s in the news like you and I are reading right now, we tend to not know anything more than anyone else until you know the rubber starts to hit the road and our governments start to take action, then we start to see some of the advanced actions and we’ll advice our clients about that. More broadly I think, change is usually good for our business and that’s you know – people are talking about the changes in rates that may occur in the future that you know since we have a database that tells people what the rates are, that usually puts more focus and more value in our data content, which is generally a good thing for us.

[Thomas Robb:]

Got it. And I guess when you think about your EBITDA growth framework for fiscal ’19, are there any big moving pieces that could push that to the lower end or the higher end of that 10% to 15% range?

[Ed Ryan:]

Well, I mean acquisitions always play a role in it. Our organic growth in EBITDA tends to be fairly consistent, but an acquisition can affect it positively or negatively right. If we buy a company that’s making 15% EBITDA margins and we’re making 34% or so, that obviously provides a temporary drag on it. We don’t tend to buys businesses where we don’t think we could get it back to our levels at some point, but in the day we buy it they are not always there. Conversely we’ve bought businesses like MK Data or customer’s info that we are making a lot more than we were as a percentage of revenue and they impact us positively. Allen mentioned earlier FX can impact it as well, you know big increases or changes in FX over the course of the quarter or two can change our profit margins you know a percent or two and we try to point that out when it happens.

[Thomas Robb:]

Got it, thanks guys.

[Ed Ryan:]

Thank you.

[Operator:]

From RBC Capital Markets we have Paul Treiber. Please go ahead.

[Paul Treiber:]

Thanks very much and good afternoon. Just on ecommerce and it does seem like the messaging around ecommerce is rising in prominence just given you comments today and also at the user conference this week. You know how does the go-to market strategy differ for ecommerce versus your traditional business and you know are there new partnerships you need to consider or other channels to go through to better address ecommerce?

[Ed Ryan:]

Yes, and I mentioned this before over the last couple of years as we’ve gotten into the likes of Oz and pixi and ShipRush, customs info and data mine for that matter. Those companies go after a smaller customer base. Instead of going after customers that we traditionally you know when your typical customer rise might be spending $5,000 or $10,000 or $15,000 or $50,000 or $100,000 a month with us. You know some of these businesses are going after customers that might pay $300 or $500 or $1000 a month and it causes a different go-to market strategy, different marketing, different sales processes. You know if someone is going to pay you $100,000 a month, at the end of it you’re going to have a lot of sales calls with that customer, trying to show them the value that you bring to the table. If someone is going to pay you $300 a month, you know you can’t and I think we’ve done a very good job in the last couple of years of getting acclimated to that environment and starting to get good at it. We still have some ways to do, but I see significant changes in our organization as we’ve gone from 6,000 or 7,000 customers to 17,000 or 8,000 customers over the past five years in the way we go-to market to attack both the big guy that wants to do a lot of sophisticated stuff with us and can save a lot of money and the small guy who is got a blooming ecommerce business, but relative to the major relaters of the world they are still quite small and needs help from someone like us, but it’s not a major solution and I think we continue evolving, get better at that but I am quite happy with the progress we’ve made so far.

[Paul Treiber:]

How do you think about ecommerce in terms of different geographies? I mean obviously we think about North America quite a bit because we’re here, but is the opportunity and is the growth as rapid in Europe and really what are you seeing in Europe and outside of North America?

[Ed Ryan:]

Yeah, I mean I don’t know if the growth is as rapid as it is in North America, but it’s certainly moving now quite a bit. You saw us buy pixi over in Germany that has an ecommerce solution and provides warehouse management tools and transportation management tools. Oz did business all over the world with partners and we see ecommerce – listen, this about it in those foreign countries. US and maybe North America had big box retailers for many years in place where you could do to a store and get just about anything you want. Inside some of these small countries around the world, that doesn’t exist and ecommerce is a big way for them to catch up over time. So I think you’re going to see those areas continue to grow as consumers in those countries realize they can get their hands on just about anything through a good ecommerce site.

[Paul Treiber:]

I mean just the last one from me. Just on baseline, baseline for the next quarter includes Aljex. Well, I think in the past you didn’t include acquisitions in baseline, at least initial out of the gate. What’s different with Aljex that you felt comfortable giving it in baseline.

[Allan Brett:]

Yeah Paul, I think actually what we’ve typically done is that when we’ve done the acquisitions well in advance of the quarterly release we have included it our baseline. As we know about it and I think many times adjusted that data said as of the date of the acquisition we know this much. Just be as clear as we can be about revenue if we know it. So we’ve done that this time. As of February 1, we started our quarter and we – when we feel for the Aljex businesses. So we rather give a much more consistent inclusive picture.

[Paul Treiber:]

Thanks for that clarification.

[Ed Ryan:]

Thanks Paul.

[Operator:]

From Scotia Capital we have Paul Steep. Please go ahead.

[Paul Steep:]

Great thanks. Ed could you talk a little bit about I guess go to market, now that you’ve got MacroPoint and soon well Aljex on the system in terms of broadening it out, now that you got a much stronger road product in North American, how customers have responded and maybe what you’ve changed in terms of the go to market?

[Ed Ryan:]

Sure, we’ve spent a lot of time with the MacroPoint management team and our sales force trying to figure out exactly how we are going to out. We know a tone of retailers in this space and manufactures that procure full truck load shipments and how we are going to get in front of them faster and show then what MacroPoint has to offer and get them signed up to the MacroPoint services. I think we are well on our way there. We still got a lot of potential opportunity in the next couple of years. But excited about the prospects that it brings. I mean I think it’s a great offering you know and it’s a relatively short sale cycle compared to selling something like our transportation management or routing scheduling tools. It’s more of something were we go in and tell them about it and they go wow! That’s really great how do I get some of that?’ and we are just trying to educate our sales people and get them out in front of the customers as quickly as possible and then get them signed up for contracts and activated and rolled out, so that we could start to see it become a new revenue stream for us.

[Paul Steep:]

And what should we think about, in terms of exceptions Ed. In your mind, you know ’18 – I guess calendar ’18 really year of integrate, get everybody acclimatized and ‘19s when you will start to sort of maybe increase investment behind it or not, do you think it will go a little fast maybe this year?

[Ed Ryan:]

I think we are going to continue as we did in ’18. You are somewhat right. We spent the first couple of months trying to figure out how to educate everyone on our team about it, so they can get out in front of our customers. I think you are going to see us getting out in front of the customers more and getting more customers signed up and then having to get them activated etc in ’19 and beyond. But I don’t expect any significant new investment in the business. In fact we are trying to make that business make and more and more every day, like the rest of our network businesses.

[Paul Steep:]

Great and then just last one from me. You commented in your opening remarks about the M&A environment. Other than activity level, obviously picking up, couple of your competitors getting active and buying things. Has anything else changed in the environment Ed or is it just still more of the same? Thanks.

[Ed Ryan:]

Thanks Paul. Well, I mean for several years now we thought there has been a lot of acquisitions, especially on the larger size acquisitions that you know in our mind we are overpriced or fully priced and we look at all of them, we don’t believe that those companies are worth what the seller things and we usually back away from it. We have seen a spike, let’s say higher quality asset in the last couple of years and certainly paid for them when we did. I think that’s a philosophy we always had, we just saw more of the come available in the last couple years and jumped on them when we did. MacroPoint was a great acquisition but it was by our normal standards expense. We hope to show people over the coming years that that was actually a great price that we paid for that given what we got. But on the day we did it, we were well aware we have a lot to prove to people that, that’s what’s going to happen, and we are fully expecting that we would prove that to people.

[Paul Steep:]

Great. Thank you.

[Ed Ryan:]

Thank you, Paul.

[Operator:]

From Canaccord we have David Hynes. Please go ahead.

[David Hynes:]

Hey, thanks guys. So Ed, I want to ask a kind of a strategic question may be its relevant, maybe it's not. But we hear folks like IBM talking about block-chain technology and the supply chain. Just curious, how does that flow into the logistics world? The stuff that they need to do to ready your products, just help us think about kind of the puts and takes of that potential evolution?

[Ed Ryan:]

Sure. We are in the middle of it, right. We are in a bunch of block-chain pilots and I think this year like the 10th standard that’s come along over the past 20 years where people said you know this is going to be the new way that everyone does things. What I have seen in the past is it just becomes another way that people need to communicate with each other, because not every does it and I think block-chaining is going to be same right. Just think back to XML. If everyone did XML and we all use the same transactions, we could all communicate seamlessly with each other. Well, that was the promise that didn’t turn out to be the way it worked, right. Some people use XML, some people use traditionally EI, some people flat files, one day some people are going to use block-chain transactions and they all have to communicate with each other. Yet they are all going to be using different ways to communicate; that’s where we come in. We take that data, we put in a standard format in our network and pass it to someone else in the form and format that they want to load directly into their back office system. I don’t think block-chain is going to be any different from that perspective. There will be people that want to process block-chain transactions and when they do, we will be there to help them. I can tell you this about block-chain. It’s fairly expense, right. I mean if you look at BitCon and you see you know – did you every look, there is a little mobile app that shows you the power consumption used to encrypt block-chain ledgers. I think it’s now reached the size of the Argentinean power consummation, just for the limited block-chain involved in BitCon. That’s pretty expensive and you have to ask yourselves, are you willing to pay the price to a 128 bit encrypt a bill, because its expensive and I think the answer to that is going to be probably not. I could see some people where it might be a more natural fit like government agencies saying hey this is the way I’m going to expect these transactions. That type of customer filing transaction may have a need to be more secure. It’s also mandated by our governments. So if you want to ship into that country you kind of need to follow the rules. So they have a better chance of mandating. And if that’s the case, we are going to be there to help our customers do it. So yeah, I mean we see a role for it, just like we saw a role for XML and EDI before that and I could got back and mention 10 different types of standards, you know that came to play in our industry and I think block chain is going to another one of them.

[David Hynes:]

Don’t show you age on this call. And then Allan, maybe just a tactical question for you, so the change in expensing commissions, how long are those commissions being amortized over now and how do you come at that decision?

[Allan Brett:]

Sure, sure. So we’ve done a bunch of work in this area. Obviously working with our auditors in a five year period that we amortized the commission over and that’s just a function of life of technology, life of customer relationships technologies, you know a low life or shorter life than our customer relationships and that’s where we ended up. So, long answer, over five years.

[David Hynes:]

Yeah, I think that’s almost becoming the standard. Awesome! Okay, well thanks. Good luck with the show this week guys.

[Ed Ryan:]

Thanks David.

[Operator:]

From Raymond James we have Steven Li. Please go ahead.

[Steven Li:]

Thanks guys. Hey Allan, on the differed commission assets, so $2 million to $3 million. So that’s how much I should think your EBITDA is going to pick up given there has going to be little amortization in the first quarter.

[Allan Brett:]

No, I think what we are thinking, there will be small positive impact to this and mainly as we amortize this asset or expense this asset into our P&L over the remaining life. We’ll have to differ the future commissions or the commissions we pay in Q1, Q2 etc. You should see this asset grow. That number that we quoted, $2 million to $3 million is net of the tax impact. So as you see that number growth, you would see the impact of what would have been expensed growing through the, going on to the balance sheet. So we think it’s going to be a fairly small number, but that asset should grow over the next 2.5 years or so until we sort of reach a stable level of differed commissions.

[Steven Li:]

But in that first quarter, let’s say Q1 so you are differing between $2 million to $3 million but then you are not really amortizing much, right because you are only starting now. Am I understanding this correctly?

[Allan Brett:]

We are going to differ – we will put an asset on the balance sheet. The offset will be go to retained earnings and we will start to amortize that asset in the first quarter.

[Steven Li:]

Okay, all right. Okay and then Ed on the calibration ratio, you baseline revenues to actually revenues had been in a tight range, 107% or 109%. Does the timing of some of your acquisition form that ratio off a little bit for Q1 or it should be about the same?

[Allan Brett:]

Steven I’ll answer that. Calibration typically does fall into a fairly range. Wherever your seen it go off a little bit, might be where we close an acquisition. In a quarter after our conference call, that can happen. That might drive a number that’s 9% or 10%. But typically it falls into a reasonable range. Subject to any future acquisitions this quarter, there is nothing that we would expect to see anything different as far as how we operate the business and therefore the ranges probably end up similar.

[Ed Ryan:]

It actually may fall into a tighter range than you even imagined right. Because the timing of those acquisitions might have made it 9% over 7% or without the acquisition it might have been even a tighter range.

[Steven Li:]

Right, okay that helps. Thanks.

[Ed Ryan:]

Thank you, Steve.

[Operator:]

From GMP Securities we have Ruben Sahakyan. Please go ahead.

[Ruben Sahakyan:]

Hi guys. Thanks for squeezing in my question. On a more of a macro level, are you seeing any trends in the conversions of logistics and supply chains and is this impacting you today and how do you think about it and how do you prepare for it?

[Ed Ryan:]

Well, so our mission is – we actually state our mission is to be the global leader in logistics and supply chain technology. We absolute believe there is a convergent between those things. You can see it in these ecommerce space completely right. The ecommerce companies have really combined those two concepts and we’ve thought about that way for a long time as well, where we go hey, these are two separate things but they certainly over time I think are going to work hand and hand and the companies that think of it that way hopefully are customers, we think are going to take advantage of the companies that don’t realize that’s the way it is. We’ve tried to build technology that helps then manage these processes and hopefully make them the best at it.

[Ruben Sahakyan:]

Perfect, and then last question. How do you about growth in Asia, how do you go about, how do you go about, is this something you guys are looking at, and what have you seen so far.

[Ed Ryan:]

Well, there is a bit of misnomer in the way we report because we report where our customers are based and then the revenue that they generated. So it looks like a lot of our revenue comes from North American and Europe, where most of the world’s large logistics and transportation companies are based, who happen to be our biggest customers. If you look at the shipments that they are processing over our network, they are fairly well distributed between EMEA, Asia and North America because a lot of the shipments are coming in and out of Asia, because that’s a low cost manufacturing center. So from our perspective we already have a lot of business in Asia, we do. Our customers are moving shipments every day, in and out of Asia that’s why they are using our network. You see this, there were a couple of acquisitions over the past few years in Asia, I think as we get more footprint down on the ground you’ll see us do more. But the fact of the matter, most of the world’s logistics and transportation companies are not based in Asia. There is much higher percentage based in North American and Europe and that’s why you see our revenue numbers reported that way, because that’s where the customers are based or headquartered and that’s where we report the revenue.

[Ruben Sahakyan:]

Perfect that’s helpful. That’s it from me.

[Ed Ryan:]

Great thanks, Ruben.

[Operator:]

From CIBC we have Stephanie Price. Please go ahead.

[Stephanie Price:]

Hi.

[Ed Ryan:]

Hi Stephanie, how are you doing?

[Stephanie Price:]

Hey, I’m good, thanks. You had mentioned early customer synergies with MacroPoint in your prepared remarks. Could you elaborate a bit on that and talk about what you are seeing in the sales cycle there?

[Ed Ryan:]

Sure. So when we bought MacroPoint they had a real push-on to go out and sell big retailers and manufacturers who had fill truck load moves. They had captured the market for freight brokers and 3PLs who where the largest customer base for transportation tracking transaction. Because they were going out and selling to a lot of retailers and manufactories and so if you want to get a lot of retail orders at once, you sell a freight broker who has got 500 different retailers already doing business with him. But MacroPoint saw an opportunity with the largest retailers and manufactures who may not use freight brokers as much, may do a lot of their own purchase transportation and as Descartes was buying them or really convincing them to sell MacroPoint to us, we were pointing out, ‘hey we know these guys already. We already do business with a number of these manufactures and in fact have significant relationships with them. So you are spending all this time to get in the door at a big retailer. We are already doing business with them and have a significant relationship with them, and we think we can get in their faster and that’s going very well for us right now. We’ve established a bunch of new relationships, and I think we’ll see a lot more of that in the coming years.

[Stephanie Price:]

Great, thanks. And then could you also talk a little bit your optimal capital structure at this point.

[Allan Brett:]

As far as capital structure, as we said we ended the year net debt $1.9 million. We will never feel that we will get excessive with that, but we feel comfortable up two and in certain conditions up to three times debt to EBITDA, so that wouldn’t fuss us. We have a cash flow generating business, so as we buy and as you saw with the MacroPoint acquisition we buy, we borrow $80 million. In 5.5 months we repay $43 million and that typical sort of use of the credit line is how we would look at it. But we said many times I think, our first choice is to deploy capital. All we need for capital is really for acquisitions. Our first choice is out of existing cash flow, our second choice and third choice is also of existing cash flow, but we will use some level of debt and any transactions that were bigger than that, as ED mentioned we have a shelf perceptive, we wouldn’t hesitate to go out and raise additional capital for deals that outstrip our existing cash flow and our debt capacity. Did that answer your question?

[Stephanie Price:]

It did, that’s perfect, thanks.

[Ed Ryan:]

Thanks Stephanie.

[Operator:]

From Echelon Wealth Partners we have Ralph Garcea. Please go ahead.

[Ralph Garcea:]

Hey guys, thanks for taking my questions. Just two quick ones, on the CapEx side the incremental $2 million to $3 million is that just network build out or IT systems upgrade on the targets and on the cyber security side, again is that for the GLN network for some of your latest acquisitions.

[Ed Ryan:]

Yeah, our CapEx you know we are not capital intensive Ralph, so $6 million to $8 million of CapEx is a reasonable range; its slightly higher than last year. So it will be more the same – we run a network, we take the security of that network extremely seriously, we spent a lot of effort and we spent dollars there and that will be a part of where we spend our dollars. So other than being slightly higher on the CapEx, because we run now a slightly bigger business and we integrate these acquisitions and want to make sure that security over their networks is up to the same level as ours, there is no change is how we are operating and looking at cyber security or CapEx.

[Ralph Garcea:]

Okay, and then on the M&A side, would you look at your know strategic alternatives in the US to sort of hedge against whatever happens on the master side or with regards to Europe, I mean do you look at stuff in the UK around the continent depending on what happens with Brexit and where trade flows go?

[Ed Ryan:]

I don’t think we spent a ton of time thinking about it from that perspective, from where we are going to acquire, because there is some rule that’s changing. We think about those rules chaining, and its impact our business, but probably not particularly going after individual acquisitions based on it. I don’t know if think that would be prudent or not. When we are going out to buy companies, we are trying t o buy good companies that have recurring revenue, that make money, that are growing, that we think are going to be good fits of our network and if those things are all true, we are interested in buying it. Now we’ll look at these kind of macroeconomic trends that you are talking about and see if they have any positive or negative impact on them. But I think our thesis more revolves around whether we think this is a good business and whether we think it’s a good fit for our network and then lastly, do we think it’s a going to be a good business going forward given the macro economic trends that are going on. Because look these things could all change a couple of years from now right. If we talk about terrorist and trade terrorists right now and potential trade wars, well that could all change depending on who runs each country and as things tend to get decided every couple of years. So I don’t think you will see us executing acquisitions based on that.

[Ralph Garcea:]

Okay. Thank you.

[Ed Ryan:]

Thank you, Ralph.

[Operator:]

Thank you. We will now turn it to Scott Pagan for closing remarks.

[Ed Ryan:]

Hey guys, its Ed Ryan. Thanks for joining the call today, and we look forward to reporting back to you in a couple of months on the next quarter. Have a great day.

[Operator:]

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