Welcome to The Descartes Systems Group Quarterly Results Call. My name is Paulette 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. Mr. Pagan, you may begin.

Thanks and good morning everyone. Joining me on the call today is 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 this morning. 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, 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 Securities and Exchange Commission, 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 are cautioned that such information may not be appropriate for other purposes. We do not 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 required by law. With that, let me turn the call over to Ed.

Great, thanks Scott, good morning everyone, and welcome to the call. Thanks for joining. This is another great quarter here at Descartes. We have another set of outstanding financial results. We continue to grow our network profitability and with it, our global logistics community. Hopefully, everyone will have seen our announcement last week of the acquisition of Oz Development. I'll speaking more about that in a minute. But, we're really excited about what these guys bring to the table. And that's a very large community of small-to-medium sized businesses that are playing in a larger part of e-commerce initiatives of the world and resulting evolution of the supply chain, along with a ton of expertise about how to deal with the logistics and supply chain issues the small and medium businesses face. Before I speak to that and some of the other trends in our business, I'll start with some financial highlights for the quarter. Allan will then talk through our financial results in detail and I'll finish up the call by talking about our business calibration and the landscape that we see in front of us. So, let's start by going over some of the financial highlights for the past quarter and the first nine months of the year. Our primary focus continues to be on growing our adjusted EBITDA. This quarter, we generated $15.8 million of adjusted EBITDA, an increase of 20% over last year and for the first nine months of the year we were up 17%, generating $44.6 million in adjusted EBITDA. Consistent with what we've seen in the past, our natural FX hedge meant that the continuing FX volatility hasn't really impacted our bottom line. However, similar to last few quarters, FX rates continue to have a big impact on our revenues on a year-over-year…

Thanks Ed. As indicated, I'm going to reemphasize some of our financial highlights for the third quarter. As previously mentioned, we recorded record quarterly revenues of $47.4 million this quarter, up approximately 10% from revenues of $43.1 million in the third quarter of last year. Once again, this revenue growth was achieved despite significant foreign exchange headwinds. As a result of the stronger U.S. dollar, on a sequential basis, our revenues were negatively impacted by approximately $300,000 this quarter when compared to the second quarter this year and more significantly revenues were negatively impacted by $2.7 million when compared to the third quarter of last year. As a result, excluding the impact of FX, revenues would have been almost 6% higher sequentially and 16% higher when compared to the third quarter last year. License revenue continues to be a minor portion of our revenue, representing only 4% of revenue this quarter at $1.9 million compared to $3.7 million or 9% of revenues in the third quarter last year. Gross margin continued to be very strong, increasing to 72% of revenue for the quarter, up from 68% of revenue for the same quarter last year. Higher network revenues as well as stronger gross margins from recently acquired businesses continued to contribute to the increased and improved gross margin. As a result of the revenue growth and the improved gross margins offset partially by higher amortization expenses from our recently acquired businesses, income before income taxes increased to $7.0 million in the quarter compared to $6.2 million in the same period last year. Income tax expense was $1.8 million this quarter or 25.3% of pretax income compared to $2.0 million or 32.4% of pretax income in the third quarter of last year. We continue to see improvement in our tax rate as…

Great. Thanks Allan. So, let's start with our calibration for Q4. 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. While we typically provide calibration as of the first day of the quarter, given the impact of the volatile FX environment, we will be using FX rate as of November 25, 2015 and we've also included the impact of the recurring revenue of our recent acquisition of Oz. So, let me just speak to that a little bit more. Oz is a solid business, providing ongoing subscription service to small and medium sized businesses. To do this, Oz provides implementation and activation services to these businesses. We consider these to be professional services because they are services that are provided by a human. Those revenues come in at fairly regularly and represent about one third of Oz’s business, but we don’t consider that recurring for the purposes of our calibration. So to summarize, Oz is about two-thirds recurring revenue and one-third professional services revenues. And for calibration purposes, we have only included the recurring revenue from Oz for about 2 months of the quarter but have included the full cost of the business in our calibration. So, our calibration for Q4 assumes exchange rates of C$0.75, $1.06 euro to the U.S. dollar and $1.51 GBP to U.S. dollars. If you are also comparing calibration to previous periods, you also need to keep the FX in mind, as it relates to revenue levels. As Allan just said, we are entering this quarter with almost $1 million in negative revenue pressure, given the movement in FX since last quarter. That impacts our revenue for calibration purposes. Also as a reminder of what we've…

Thank you. We will now begin the question and answer session. [Operator Instructions] And our first question comes from Brian Essex from Morgan Stanley. Please go ahead.

Thank you and good morning. I just wanted to ask, just at a high level, and you mentioned security and ACAS and other initiatives that you're involved with. But given the events that we've seen over the past quarter or two, maybe help us understand how maybe your customers and some of the agencies on an international level that you work with. I mean is the tone there changing? And even if its tone is changing near-term, what might the longer term repercussions in terms of the responsiveness or speed with which they might react to some of these events; how might that trickle into your business?

Yes. We read the newspaper just like everyone else. And while unfortunate, I think what ends up happening from this is governments get more and more serious about protecting their borders security. The bad guys have access to materials that might help them do bad things. And as governments get on this, they start to go, we need to restrict access to that, know where all of these materials are coming from and going to and who's getting them. And pay attention to what we do in our business on a daily basis. That's what we help them do. And so with each one of these incidents, I think you see governments around the world get more serious about this. When it happens in France, the French government goes; we got to do something about this. And you saw some of the things that they did immediately, like shutting down their borders and stuff like that. But over time, I think they probably start to move to stuff that's been going on in the U.S. and other countries around the world, Canada and Europe et cetera and start to crack down on it more, going who are these bad guys; how do they get stuff; how do I prevent them from getting stuff that would help them do more bad things. And to do that, they turn to initiatives that are kind of near and dear to Descartes’ heart. We help governments get -- collect information from the trade community and make sure that they're aware of who's getting what and where it's going.

How does that take though? Do they talk about accelerating some of these initiatives that they have and your customers proactively say look, we don't want our gains [ph] associated with anything that happens in this regard, so maybe they start to spend a little bit more?

Our government -- our customers spend money on this when governments tell them they have to. And I think when each of these incidence, more governments say I have to do something about this. And governments like the U.S. and bunch of the countries in Europe start to put pressure on other governments that they do business with to take this seriously as well. And all those things are good for Descartes business.

Okay. And then maybe one last if -- just on SAP and Oracle partnerships, any incremental traction with Oracle now that you’re little bit further along with SAP and how might that be reflected in your business near-term?

We continue to expand our relationship with Oracle. The MK Data acquisition was contributor to that. We -- what you saw last quarter, we announced that we were partnering now with SAP to also use our Global Logistics Network for their GTM system or Global Trade Management system, as well as the transportation management system so that -- and I'll put it in layman's terms, so that when their customers want to connect to carriers to make a booking, or get bill of letting [ph] or get status messages back, they're going to use the Global Logistics Network to do that. We're having those same discussions with Oracle, nothing’s been formalized yet. We’re trying to show them the benefit of doing this and how their customers can get further faster by using our network. And we think we'll ultimately be successful in that.

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

First, Ed, I wanted to ask you about the Oz Development acquisition. And just can you give us some more detail about your background with the company and how the acquisition came about; was this something existing customers were requesting over was this something you just felt needed to be added to your product suite?

We met these guys about a year ago, we liked the idea. Let me put it in layman's terms. So, these guys help people connect their small businesses, medium sized businesses specifically, connect their ERP systems, these are like the NetSuites of the world, to shipping systems like UPS and U.S. Postal Service and FedEx et cetera, they’re integration tools. And they sell as integration tools on a recurring basis; they charge per connection and per customer. And when you look at our Global Logistics Network and think about it, what it does, it's helping companies get connected from their back office systems into transportation management systems. Oz just makes us better at that and expands the market down from the large retailers and manufacturers that we do business with today down to the small and medium sized businesses that are increasingly within the e-commerce world having a big stake in how goods get bought and sold.

Got it. And then, you commented that your acquisition pipeline right now maybe the strongest its’ ever been. So, maybe if you could give us some more details about what you're seeing out there in your pipeline about potential acquisitions in terms of size or functionality that you're looking at? It seems like the acquisitions that you've had more recently, have been on the side of good businesses versus fix or upper. So, is that more of what you're seeing in your pipeline right now as well?

For the last couple of quarters I’ve been saying, hey, this is the strong as we've ever seen it. And that continues today and might add probably even stronger than I felt about it six months ago. You are right; we have bought better businesses in the last year or two. That maybe probably a combination of the fact that those businesses were available to us, when the acquisition pipeline is not as strong; there is not as many choices to choose from. I don't think we're averse to doing something with other types of businesses, with businesses that need to be fixed up or whatever. But when we're looking at it and we're saying okay, we’re going to do a handful of acquisitions this year and the better one to come out, and we go with these [ph] which is about as everyone, maybe a better long-term yield for our shareholders. So, we continue to look at them all. I think you’re going to see us be as aggressive as we've ever been in terms of doing this. When we see good ideas and we think we can make money for our shareholders, we think it’s our job to go make sure we get those businesses and integrate them into ours and make our Global Logistics Network all the better.

Next question comes from Paul Steep from Scotia Capital. Please go ahead.

Ed, maybe you could talk just a little -- on the SAP relationship, maybe just an update. I know we’re seven or eight months into it in terms of the latest iteration, how have we gone against the milestones would be I guess my first quick question.

Yes, I mean it's going well. We continue to get more traction with them every day. It's a big hill to climb. You’ve got to go get every SAP sales rep to know what to say when the right circumstance comes up about Descartes and how its Global Logistics Network can help their customers. That takes some time. SAP is putting a lot of work into that and we're putting lot of work into that. I see it in the actual revenue result; they are starting to generate more income for us. And I also see it in the pipeline. We're involved in more and more, larger deals with SAP where they're recommending buy my transportation management system or my global trade management system and use Descartes network to get connected to the transportation providers or the governments of the world that you need to get connected to. And better, faster, cheaper is kind of our model with them. Your customers could do this on our own, it would just take them forever; they use our network, we could do it next month.

Great. Second one from me. One, we don’t spend a lot of time talking about but might be worth just checking in. Could you talk about the overall volume on the network in terms of messages and prices, and then maybe even the number of services attached to each client, and the trends that you've sort of seen there over time as part of the broader discussion? Thanks.

Sure. Yes, without getting into specific number, just because I don’t know them off the top of my head, but generally, our network continues to grow and it’s been growing every quarter. There is a number of transactions that we process. You see that in the revenue results. And also maybe in the profit margins, right, because those last transactions cost us a whole lot less than the first transactions. And you can see with our margins expanding that growth and the network is playing a role in that. The network as it's growing; we’re adding value added services. You can see that with Oz Development, you can see that with MK Data, you can see that with the Customs Info. We’re adding other services on top of that network, so we think our customers would like. While I'm executing shipments, here on the Global Logistics Network, I would also like to check to make sure that I can ship to that guy, which is why you use our MK Data at the denied party screening service. I'd like to know how much I'm going to have to pay on tariffs and duties when I do ship that into that country. You see that in our Customs Info business. So, we keep adding things on to our network that we think our customers need to help them execute shipments more efficiently, more cost effectively and as a better service to their customers. And the growth in our network, it's to us as evident that that's working and working well.

Okay. I'll slide one last one in. We've talked a couple of times in the past about Telematics. I think it’d just be nice to go back and sort of revisit your thoughts on where that piece of the business is and how it's been performing and maybe how it adapts to some of the new trends there. Thanks guys.

Yes, sure. Thanks Paul. So, Telematics business is a good business for us in all, but one perspective; and I’ve mentioned this before. We do not like hardware sales. We don’t make any money on hardware sales. We have competitors out there that seem quite willing to lose money selling hardware. They have some kind of make it up on the volume strategy that we do not agree with. We have taken great strides to get out of that hardware business while remaining in the Telematics business. So much like we have with our handled solutions for years, where we sell a software package that you can load on to 15 or 20 different handled devices; we tell our customers go pick from this list and tell us when you get the phones and we’ll install our software on it. We are moving to that strategy with our Telematics business as well, so we are saying here. And right now, it's only three or four but hopefully someday 10 or 15 Telematics solutions you can buy, install them and then I'll load my software on it, you can work. When we put our software on our Telematics box or a handled for that matter, we’re charging a recurring fee, 30 bucks a month or 50 bucks a month and a penny on what they are buying from us. And we like that business; I think it’s a great business. Selling someone a $600 piece of hardware for $450 is not a business we think we should be in.

And our next question comes from David Hynes from Canaccord Genuity. Please go ahead.

Alright, thanks guys. So Ed, I think you gave us what we need in terms of FX impact and Oz revenue composition to think about the calibration. But I don’t think you talked about kind of revenue run rate or margin profiles of Oz. Is there anything you could share on that front to help us?

Well, I think we haven’t disclosed that yet. You will probably see something on our annual statements as we always do for acquisitions. But right now, we put it in the calibration. I think I spent a bunch of time explaining how I did put it in the calibration or how we put it in the calibration. I think that should give you enough to get the answers that you are looking for.

And then second question I guess kind of two parts. As we think about new bookings in a given quarter, what percent typically comes from new logos and what's back into the installed base. And I guess the second part is where are we in terms of wallet share of your customer’s logistic tech spend? I realize you guys are steadily adding to the portfolio but help us think about how big this business could be, I guess just with the products and customers you currently have?

Yes. So, we -- and this is just me looking at our close deal report which I get every Thursday, and I midnight wait up for it and read it. And I'd say on the retail and manufacturing side, it's about 75% of the new deals or new logos, 25% being new sales to existing customers. Conversely in the logistics and transportation side, it's just the opposite; it's up about 75% are new deals to existing customers and 25% are new deals with new customers. Those numbers may change, as we bring in Oz. Oz got a whole bunch of customers that were probably up, I don’t know if we've said this but were north of 15,000 customers now with Oz, maybe even higher. And so that -- we add a bunch of customers that now that -- the next thing we sell to that guy is not going be a new sell to new customers, it’s going to be a new sell to the existing customer. So that number may change a little bit over time. I don’t think that really matters in the grand scheme of things. What does matter is that we continue to take more and more wallet share of our existing customers’ logistics and supply chain technology spend. And I think we are really just beginning to that and we will probably take a DHL who is a very big customer of ours. We do a lot of stuff for them but they do a lot of stuff otherwise, a lot of stuff on their own, a lot of stuff with other suppliers. We think we're just at the start of it. There's a lot of money that we can help our customers save, if we can combine all these services into our global logistics network and give them one stop shopping and better prices, as a result. And we continue to strive to do that. I think that runway is, we're just at the beginning of it.

And our next question comes from Justin Keywood from GMP Securities. Please go ahead.

Just on the Canadian revenue, there's been a bit of pressure there over the last couple of quarters. I was just wondering, is this related to FX or are there other pressures on that business.

I’ll answer for this quarter. If you're looking at the third quarter, FX is a big part of it. It's been a big part of it for last number of quarters. If we compare third quarter to third quarter last year, we had a one of our larger license deals, was in Canada. So, there's a bigger difference third quarter over third quarter. For the most part, our business, as we talk about, very-very stable. The Canadian revenues are very stable generally.

Did you look at the percentage of Canadian revenues compared to everywhere else?

No, the actual dollar value.

Okay.

Q3 over Q3, FX impact as well as a large sale last year that was a license sale, the recurring revenue piece from Canada is very-very stable.

Okay, that's helpful. And then this may be a bit of a longer term scenario, but I was wondering if you anticipate the Trans-Pacific Partnership agreement affecting your business at all. Are customers noticing this at all when looking at some of your products that may be Customs Info?

It's an issue for our customers and we talk about it with them all the time. It doesn't really change their use of our products. They need our products to do. If you think about what the PPP was saying, was it was changing the rates that different countries charge each other for different products. I mean literally, the day they signed it, they started changing rates again, the next day. And that's why people use our system, right? If the rates were flat, fixed, and steady across all the commodities, there'd be less of a need for our products. But that's not what the PPP was doing. It was changing the rates between all of those countries, and different rates for every commodity out there. And there's hundreds of thousands of commodities and those prices change daily. That's why people use our stuff. The PPP created another set of changes, so maybe temporarily it created a little bit more need for our stuff. But I think in the long run that really not much changed. As long as countries are charging different rates for different commodities to get stuff across the borders, there's going to be a need for our solutions. And I think that's going to continue for a long-long time.

Okay, thanks. That makes sense. And then finally, just maybe a few questions for Allan. Deferred revenue dropped a bit in the quarter from last quarter, is there anything specific to account for that?

No, not really. There is going to be variability, sometimes throughout the year, some of our timing of when we do larger annuals, but no, there's nothing. FX will have an impact on some of the non-U.S. deferred revenue balances, but there's nothing unusual going on there.

And then just on gross margins, I believe there was a record in the quarter. Was there anything specific there, and can you speak to the gross margin profile going forward?

Sure, the two main drivers there are simply continued leverage from our business, as we grow our network revenues, we get leverage; the additional transactions don't cost a lot, so there's a strong impact to margins there. As well as the new businesses we bought. Some of the businesses we bought, I think someone mentioned earlier, we bought some very healthy businesses. Ed’s mentioned that as well. These things have helped us on the gross margin side.

So, would you consider like this to be a new level or would you expect that to normalize?

Yes, you know what, I think this pressure's going to be pressures both ways but 72% right now I think that's our best guess modeling going forward.

Our next question comes from Ralph Garcea from Cantor Fitzgerald. Please go ahead.

Just a quick question on Oz; I mean, what was their revenue split I guess geographically? One, and can you leverage that customer base as they ship more products either into Canada or to the EU?

Yes, mostly U.S. customer base, there might be some that do business in other parts of the world but they were primarily U.S. focused business. I think there's some opportunity for us to expand that in a couple of areas; one, to start to expand it overseas a bit, and take some of the things that they did well in the United States, as we bring it to our network and we’ve sales force and customers all over the world, we can start to bring it to them as well. And maybe more importantly in the long run, take some of the concept that they had to -- and tools that they had to integrate back office ERP systems with shipping systems in the warehouse and on the way out the door. Maybe we could start to do that for some of our larger customers. We have tools to do that already but Oz has a couple of unique things that we think might be applicable to even larger customers than they had imagined when they were building the company.

And where was their tightest [ph] relationship from an ERP perspective; is it NetSuite and…

NetSuite and D Share, [ph] and a bunch of others like them.

And then just on your comment earlier about the eManifest and the penalties starting in January, I mean how big are those penalties, just curious? And is that a big enough stick to get the rest of the base starting to use your product? I guess one; and then two, what percentage of your base is actually used in the product now and what's the potential there; what's that penalty is there…

It's a bit of a guess but we’re probably half implemented with our customers, what we've seen with the penalty phases is that the penalties are significant enough in every country to make anyone who is not doing it, start doing it immediately, as soon as they get the first fine. Typically like $5,000 fine, it starts like that and then it increases. The governments usually take the approach of like, hey, if you don't do it the first time, I'm going to give you a fine that you’re not going to want to pay; you don't do it the second time, it's going to get worse; you don't do it the third time, it's going to get -- they're trying to make it unattainable for you to not do it. And what we've seen as other initiatives are rolled out around the world is, no one ignores that for a long. You get shut out of business. There's a government treat it like an enforcement thing, like, you are not going to take this seriously, I'm going to fine you until you stop. Either stop doing business here or stop doing it incorrectly.

And are you seeing more pilots or trials of that as we move towards that deadline now in the last month or so…

Yes, we're certainly seeing more adoption of the customer base. They're starting to realize it’s coming. Canada has always been on the more lenient side. You see they've extended it a couple of times. And when they extend it, they’re extending for a period like six months or year. Just to contrast that with the U.S., when extend stuff, it’s usually 60 or 90 days and then you take an extreme example like Japan who just as, I’m not extending anything. I told you this date for a year. You are not ready that's your fault. So, we're just aware of how all the various countries handle it and run our business accordingly.

Our next question comes from Pradeep Sangha from Haywood Securities. Please go ahead.

With regards to the Oz, you mentioned that one-third is professional services. How should we think about going forward like more in the future; I mean is that one third to that; is that going to be like that or are you going to be sort of looking at that sort of declining in less professional services over time or how should we think of that?

I think we’ll continue to need to do activation services to get their customers installed and working. I don't think there’s anything wrong with that. It is very consistent in their business. It’s just not recurring, every quarter it’s new customers. I think as their business expands, you will see the amount of recurring revenue continue to go up. That was going to trend in their business for a long before we bought them. And I expect that to continue. But I don't think we'll have a different approach than they did to activations or professional services. It's a necessary part of the business that you want to do a good job for the customers and you need to do good job o implementing them, and I think we'll continue with that.

Okay. Last question, just on seasonality, so if you can help me understand the trends there. Historically Q2 has always been sort of the strongest seasonally quarter for you guys. But now with more home delivery and sort of the stuff that you’re doing in that side of the business, sort of increasing over the last little while and into the future as well, as the more home delivery going on, which tends to be stronger in Q4, is there some changes in seasonality we can start seeing maybe next year or the year after and…

I think what I've seen is over time, as our business gets bigger the seasonality goes way, now because it doesn't exist but because it gets balanced out by other seasonality in the business. And you can see the core is getting more consistent over time. And I think that's going to continue. Our business is going to keep getting better and when it does, it will probably balance out seasonality stuff. If it ever doesn't and we see something coming, we will be the first to tell you.

Any commentary with regards to home delivery in Q4 being strong quarter generally for home delivery?

Yes, I mean, that has some impacts but probably not enough that you're going to see it overall in our business any great degree. There's something -- there is things that make every quarter a little bigger and there is things that make it smaller when compared to the other quarters. And it's really started to balance itself out over time. And so, no, I don't expect that Q4, you’re going to see any big difference between any of the other quarters.

I will now turn the call back over to Scott Pagan for closing comments.

Alright, great, guys. Thanks for your time today. We appreciate it. And we'll be back with the results to you in a couple of months. Have a great day.