Welcome to the quarterly results call. My name is Adrienne, and I'll be your operator for today's call. [Operator Instructions]. Please note this conference is being recorded. I'll now turn the call over to Scott Pagan. Scott Pagan, you may begin.

Thanks, Adrienne, and good afternoon, everyone. Joining me on the call today are Ed Ryan, CEO; and Allan Brett, CFO. I trust that everyone has received a copy of our financial results press release that was issued earlier today. Portions of today's call, other than historical performance, include statements of forward-looking information within the meaning of applicable securities laws. These statements are made under the safe harbor provisions of those laws. These forward-looking statements include statements related to Descartes' operating performance, financial results and conditions; Descartes' gross margins and any growth in those gross margins; cash flow and use of cash; business outlook; baseline revenues, baseline operating expenses and baseline calibration; anticipated and potential revenue losses and gains; anticipated recognition and expensing of specific revenues and expenses; potential acquisitions and acquisition strategy; cost reduction and integration initiatives; and other matters that may constitute forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties, assumptions and other factors that may cause the actual results, performance or achievements of Descartes to differ materially from the anticipated results, performance or achievements implied by such forward-looking statements. These factors are outlined in the press release and in the section entitled Certain Factors That May Affect Future Results in documents filed and furnished with the SEC, the OSC and other securities commissions across Canada, including our MD&A 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 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.

Great. Thanks, Scott. Good afternoon, everyone, and welcome to the call. Thank you for joining us today. We had another great quarter here at Descartes. We've got a lot going on and we've really seen the impact of our network volumes as we continue to make more and more solutions available on the Global Logistics Network. Supply chain and customer delivery used to be an afterthought for most companies. Those days are gone. Today's customer wants choice and visibility for the deliveries at the point of purchase. Providing that level of choice and visibility will cripple you if you don't have the appropriate data, systems, connectivity and assets available at the right times. This is hard enough to get right in a stable business environment, but in an environment where -- of uncertainty fueled by trade wars, sanctions, Brexit and stock market volatility, it's even harder. At Descartes, this is what we do. We're very good at it, we help isolate our customers from complexity, and we help them use our supply chain as a competitive advantage. We believe this is best done by having all the participants in the supply chain connected in one place, shippers, carriers, logistics intermediaries and government agencies. In order for those parties to want to get connected, we believe there needs to be tools and content available for each type of participant. This belief drives our internal and external investment plan. We continue to add solutions to our network to help companies of all types and sizes with deliveries of all types and sizes operate more efficiently. We also believe it's a long gain. And we believe that operating a stable, profitable and trusted business that generates a lot of cash positions us very well in the market in these uncertain and dynamic times.…

Okay, sure. Thanks, Ed. As indicated, I'm going to walk you through our financial highlights for the third quarter ended October 31. As mentioned earlier, we are pleased to report quarterly record revenues -- sorry, record quarterly revenues of $70.0 million this quarter, up 13% from revenues of $62.0 million in the third quarter last year. The impact from foreign exchange on revenue was minor, with a negative impact of approximately $800,000 this quarter when compared to the same period last year and a negative impact of just over $300,000 sequentially when compared to revenue in the second quarter of this year. For the 9 months year-to-date, revenue came in at $204.1 million, which is up about approximately 17% from revenue of $173.8 million in the first 9 months of last year. Services revenue represented 87% of our total revenue for the quarter, with license revenue coming in at 2% and professional services and other revenue, which includes hardware sales, representing approximately 11% of total revenue this quarter, all of these fairly consistent with the year-to-date period as well as the same quarter last year. Gross margin continued to be very strong at 73% of revenue for the quarter and for the year-to-date 9-month period, which is consistent with both the same periods last year. While we continue to invest more resources in sales, marketing, product development as well as in systems and operations as a result of continued services revenue growth and leverage from our acquisition strategy, we continue to see strong adjusted EBITDA growth of 16% to $24.0 million or 34.3% of revenue compared to $20.6 million or 33.2% of revenue in the same period last year. For the year-to-date 9-month period, adjusted EBITDA was $68.9 million, up 16% from $59.4 million in adjusted EBITDA for the same…

Great. Thanks, Allan, great. So let's move on to 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. Our calibration for Q4 assumes the following exchange rates: a CAD 0.76, EUR 1.14 to U.S. dollar and a GBP 1.28 to U.S. dollar. Our calibration for Q4 is $67.0 million in visible, recurring, contracted revenues or our baseline revenues. We typically see seasonality impact as we transition from Q3 into Q4. Our baseline operating expenses are $47.3 million. This gives us baseline calibration of $19.7 million for adjusted EBITDA for Q4. Some other key points related to how we are positioning for the remainder of fiscal 2019. First, we're very well capitalized. We have a healthy business that is well calibrated, and as Allan mentioned, we also have a healthy balance sheet. We are profitable and cash generating. We have low capital needs within our organic business. And as you've 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 41 acquisitions since 2006. And we have access to additional capital quickly should we need it. Allan mentioned that we have about $51 million drawn on our line of credit of $150 million, and we have the ability to expand that line of credit to around $225 million. And we have filed a preliminary shelf prospective -- prospectus for up to $750 million in capital, if needed, to be raised by other mechanisms. We have strong acquisition pipeline. You'll have seen there continues to be a lot of industry activity right now with consolidation continuing in our market. With this capital capacity…

[Operator Instructions]. And our first question is from Phil Huang from Barclays.

First question on -- just on MacroPoint, was wondering if you could provide an update on that. I know you've mentioned that freight brokers and 3PLs have been among the early adopters. I just wanted to see just given the significant relationships the early adopters have whether that's how that sort of going for you guys.

As I mentioned on the last call and it continues to this day, we have been very happy with the growth of MacroPoint since the acquisition. We were hoping to continue the growth rates that we saw prior to our acquisition. And while knowing that it couldn't last forever, as the company grows, it's harder to keep up the same rate of growth. We've been pleasantly surprised that it has so far and really exceeded our expectations. And that's just on the transportation tracking side. The capacity matching stuff that I mentioned earlier in the call is all bonus for us. We're just getting that going and very optimistic about our chances of success in that market.

You mentioned in the past sort of a Phase II of the -- of that backhaul solution. Can you provide an update on -- is there like a Phase III coming? Is there like -- sort of what's -- any further update to sort of refine the software itself that you're expecting over the next little bit?

Yes, we continue to make improvements to the software. We started with a pilot that I mentioned on the last call or maybe the call before that. We're now out of that pilot in the first phase, and all the participants that participated in the first phase have now signed up as paying customers. So we're very excited about that. They've also agreed to start sharing data amongst themselves. In the initial pilot, they were only looking at their own capacity data and matching that. And we're very happy to hear that they saw enough value in the solution to begin to share data amongst the group. I mentioned -- on the call a minute ago, I used the word opt-in. That's how we do it with them. And the vast majority of the pilot participants that are now live customers of the solution have decided to opt in and not just view their own capacity but match capacity across workers in the solution, which we think is a great -- a telltale sign of how this might work in the future. And we're saving those customers a lot of money and really excited about it.

Right. And so from the pilot to the current version of the software that you -- the solution that you have, what are some of the suggestions that the early adopters have made in order to kind of sign on and opt in and begin sharing your data on this product?

Without getting into too much detail -- so there are lots of little enhancements in it. There's enhancement on the driver side to give them the ability to tell us more information about the loads they like to receive. There continue to be improvements of the algorithms to help us find matches across brokers and identify the best drivers to pick up loads and try basically connect the best drivers that are positioned to make a load with the brokers that need to make them. We're in these pilots and we have another group of brokers going to pilots with it right now. But we continue to get more and more ideas as we roll them out. We -- right now, we're trying to evaluate all those ideas and figure out which ones can we get into the product and how fast can we get them in there. But we're really excited with the enthusiasm that the customer base has shown for this. And there are now newfound willingness or what were -- they were first tentative about sharing data with each other that they're now opening up and going, "This saves me a lot of money. I am probably willing to share my data if all the other brokers are willing to share theirs." And so that's really exciting for us. We're starting to see this as a real potential high-growth business, just like the transportation tracking was for MacroPoint over the last 6 or 7 years.

Got it. No, that's very helpful. My last question is on the M&A environment. Just given how valuations have come up their highs. Just wondering what your view is of the current valuation environment within the opportunities that you've got with that. Are they -- are you finding the environment becoming more favorable in terms of going after some of the opportunities, especially with the larger ones that could potentially transpire?

Thanks, Phil. You probably watch us going for a long time as we have. The public markets usually go first, right. The stock market takes a hit. The people that own businesses that are private and the private equity firms involved in that don't necessarily feel that heat immediately. They're obviously aware that it's happening. How long does that take to start impacting deals? I don't know. But it certainly, over the long run, will impact deals because the companies that are buying up these businesses are either private equity firms that are one day looking for an exit, and that exit is often to a public company. So if public valuations go down, they know that those valuations will go down for them in the future as well. Or they're directly from public companies, which -- if they see their valuation is going down in the market, that obviously affects what they're willing to pay for companies, too, right. If I work less, why would I pay somebody else with, let's call it, old valuation. And so I don't know what's going to happen in the market in the next -- in the coming weeks and months, but what we've seen over time is as the public markets go up, the private valuations go up over time. And if the public markets go down, the private valuations go down over time. There's usually a little bit of a lag but it -- then you follow each other.

And our next question comes from Matt Pfau from William Blair.

This is David Robinson on for Matt. I just had a question around E2open. So this week, they finalized their acquisition of INTTRA. And I was wondering, since they're one of the world's largest carrier networks for ocean shipping, what impact that would have on the business going forward.

I don't expect to be much of a change. INTTRA was a big partner of ours before that acquisition. They were run by a private equity firm before that acquisition. They consult with other private equity firm. E2open, you mentioned, is a company but they're owned by a private equity firm as well. I don't -- as a big partner of ours, I don't anticipate a lot of change for us in that. We communicated with INTTRA all the time, and I expect we will independent of which private equity firm owns them. But also note that E2open is owned by a private equity firm. So that asset will eventually come up for sale as well. So I don't think a whole lot has changed from our perspective.

And your next question comes from Paul Treiber from RBC.

Just sort of about the EBITDA growth relative to the 10% to 15% outlook sort of target, EBITDA growth is above your target this quarter. What do you see primarily is driving that? And then you mentioned or you reiterated the 10% to 15% outlook. Should we expect just a slightly slower pace of growth in light of either higher investments or lower pace of acquisitions going forward?

So to your first question, you saw maybe some of the numbers that we just released today and maybe over the last couple of quarters. Our organic growth has been picking up over the last number of quarters. As our organic growth continues to grow, that usually shows up not only on the revenue line, but also in EBITDA line. And so there may be other reasons. I'll let Allan speak to them more, but that's certainly one of the big ones. In terms of acquisitions and do I see that slowing down, I mean, as I said earlier in the call, we see a robust acquisition market, lots of companies for sales, and I don't see that slowing down any time soon. We have as many out there to look at as we have in the past and we're as bullish about those spaces as we've ever been. You can see our results are -- we're doing great. And why -- we'd expect that we continue to go out and look for great companies to add to our business. And as our company gets bigger and our wherewithal handles, fields to find deals, source them, negotiate them, integrate them and effectively make them part of the Descartes team, expands, they can see us continue to do more and more. Allan, I don't know if you have anything to add on the EBITDA piece?

Paul, Ed hit it. We're obviously seeing some good growth with our networks. MacroPoint has been a very good addition to the Descartes family. And overall, while we target a 10% to 15% growth, we will and have had periods of time where we'll exceed that with a combination of that organic growth with acquisitions; so no change to the short-term or long-term plans.

Okay. Just back to you, Allan, on deferred revenue. It did -- was quite moderate headwind to cash flow this quarter. Can you just speak to either seasonality or what's driving that?

Yes. We'll see some fluctuations in that balance from time to time. What you're seeing here, a little bit on seasonality. We get different renewals at different times in the year, nothing untoward there. We had a little dip when you compare to other quarters but nothing significant, and no emerging trend. We'll continue to see that number over time grow with the growth in the business.

Another one from me. On the cross-selling and revenue synergies, you mentioned that you're seeing increased interest in trade content. Do you have any metrics that you can share in terms of cross-selling into your installed base or the adoption of trade content relative to your customer base?

I don't know if I think of it as a cross-selling activity although there's lots of cross-selling that goes on in that trade content space. But the growth that I'm seeing there is it's growing as fast as it's ever grown, and you knew we bought those businesses a bunch of years ago. They were already fast-growing businesses. And that growth continues to this day. We're very happy about that. I think a lot of what you see in the major news headlines is driving that, right. Tariffs and duties are bigger news issues than they've been since I can remember, especially in the U.S., in North America. And that puts increased emphasis on getting access to that information, and we're one of the largest players in that market. So as companies say, "Hey, I need to pay more attention to this tariff and duty information," they're increasingly coming to people like us to buy it. And as a market leader, they very often come to us.

And one last one from me. Just with regards to tariffs, some of the players in the industry are saying that they're seeing a pull forward in shipping as companies try to beat sort of the next uptick in tariffs expected on January 1. Are you seeing that yet in your network?

A good question. So we've looked at this a lot and thought about it quite a bit. We've seen great growth in the Global Logistics Network over the last year, and I read the same articles that you have that some of that could be attributed to -- or some of the growth in logistics moves could be attributed to this pull forward, get this done before tariffs go up on January 1 issue. I think that will most likely affect the ocean market, where we're not nearly as big as we are in the air market, where that might be a little less likelihood to occur given the speed with which the goods move. And the fact that they move in air in the first place, it means that they're high-value goods. So that might be something you're a little more reluctant to pull forward quickly. Most of the comments I've seen have been focused on ocean. My best guess is that, yes, that's probably is going on in the market, but most of the growth you see in our networks is probably not attributed to that.

And our next question comes from Deepak Kaushal from GMP.

Ed, when you made your opening comments, you talked about the growing complexity in the environment and the economy and how you guys help your customers reduce that complexity. I know you guys actively manage your business for good visibility and predictability. Are you seeing any changes in terms of visibility from greater uncertainty in the market? And are you changing the way that you manage your own business as a result?

What we're seeing right now is a fairly consistent upward trend of transactions on our network. I think that's partially attributable to the growth of our Global Logistics Network. It is a network, and network's effects are a real thing. I probably attribute a lot of it to that. The more people that join our network, the more people want to also join it to transact with them. That's probably the biggest driver that we see. Yes, uncertainty can impact things like the tariffs and duties that we were just talking about. I don't know if it impacts network volumes as much, maybe a little bit, but I don't know if it's the main driver of it. The more complex the world gets, where you're trying to deliver stuff to the home, it used to -- just to have to be delivered to a store, yes, that drives transaction growth on our network for sure. You see those make a bunch of investments in e-commerce space. We did that because we saw that trend coming over the last couple of years, and we think it's going to continue for a long time. And we made those investments knowing that's the case. Some of those investments, like ShipRush and PinPoint, are some of the faster growing ones that we've had and specifically, in the case of ShipRush, a very pleasant surprise in the amount of growth that we're seeing in that business. And so yes, those are the things that are probably most on our mind when we see the growth in our business in the last year.

Okay. And just a follow-up, on e-commerce trend, I think I have a good sense of that and how it's growing, but you talked about the opportunity on the B2B side. And I was wondering if you could talk a little bit more about what kind of vertical markets or industries or segments you're seeing could really pick up on the B2B side? And is this end customer related? Or is this supply chain related? Any kind of commentary you can give on that.

Yes, my comments on the B2B side were aimed at this. As consumers start to think, "Hey, if I order something, I should be able to see exactly where it is. I should be able to look on a map and see the truck driver down the road," just like you see an Uber taxi or a Lyft taxi driving down the road. As consumers become -- come to expect that, remember, most of these consumers work in a business that's taking -- that's in a business-to-business environment and they start to come to work and say, "Hey, why can't I get that at work, too?" And I think as those expectations have developed and people start to go, "Hey, I want that for my business as well," that's kind of played into our hands, right. We're the guys delivering that kind of functionality to businesses as they do business with other businesses. And as the consumers go to work and say, "I want that kind of tracking information that I have on a personal basis for my business as well," we're very often the network that gets chosen to do that. And that's been helpful to us and I think one of the drivers behind the significant acceleration that you've seeing in the past year, so in our organic growth.

Okay. And so when you think of industries that are kind of laggards in this and are picking it up, I mean, like the pharmaceuticals and food and beverage, I think you called that out in a couple of recent press releases. I wonder [indiscernible] that are laggards.

Yes, without getting in specific -- to specific verticals because I may not represent it very well, think of the value of the goods that are moving. The higher value of the goods, the more people are willing to say, "I am willing to pay money to find where the thing is every second of the day." And so you mentioned pharmaceuticals is one. Pharmaceuticals is usually high-value in a small package. And so if you're a company that is tracking that, you go, "Geez, I've got some package that's a fairly small package that has a lot of value in it. I am absolutely willing to pay to track that thing." Does someone want to track coal very specifically? They're probably not willing to pay that much to track coal because it's a big weight volume for a low value, and so they're less likely to do that. I'll stick with pharmaceutical because you mentioned it [indiscernible] track a pharmaceutical shipment. Are they willing to pay a couple of bucks to do that? Absolutely because the thing in that package -- that might be a relatively small box, might be hundreds or even thousands of dollars. And sure, "Can I pay up a couple of bucks to figure out exactly where that thing is? Absolutely. I'm willing to do that." And so those are the types of industries where we see that trend taking off first.

Okay. And then I guess lastly on that, and particularly in food service and in pharma, I mean, are you seeing customers wanting you guys to reach into the actual environment in some of their transportation network or not just what and where but what temperature and how much time and other kind of conditions and data? Or is that for other providers?

Yes, that's usually something that they're not passing over our network. They're usually more interested in where is the shipment, how much -- what was the temperature of that shipment the whole way. They're looking for that information, but they're usually looking for it directly from the trucking company. They're hired as a proof, like, "Hey, prove to me that this lettuce was always below 50 degrees the entire shipment." And they're willing to pay more for that, and they're putting the burden on their transportation providers to tell them that or certify that, usually not information that gets passed over our network.

And our next question comes from Stephanie Price with CIBC.

So Canada Border Services announced a pilot with the IBM-Maersk blockchain last month. Can you talk a bit about any impact on Descartes from the pilot and, more broadly, how Descartes is thinking about the government blockchain opportunity?

Sure. Yes, we're aware of it. They haven't started anything yet. It was announced -- we're not aware of any shipments that are going on either in that or in the IBM-Maersk partnership. It's probably more press than reality at the moment. We have a bunch of customers that have asked about potentially participating and needs our network to participate in it. I am somewhat circumspective of blockchain's ability to go in and handle a regular Russian shipment. I'm a little less so when it comes to governments that would actually think that was one of the places where you might be interested in using blockchain in the future to manage things like security filings. When you think about what blockchain's really good at, it's good at securing a transaction. Unfortunately, it's very expensive, just 128-bit encrypt something. So when I look at things like passing an ocean bill of lading back and forth and I say, "Look, it's already secured on our network." I mean, there's a lot of security that goes into protecting information on our network. But the security that blockchain provides, I might argue, is overkill for a typical ocean bill of lading just to pick one because if it's already secured, do I actually want to incur the cost? And you've been following this. You hear the people say it would cost about $7 to process a blockchain transaction with bitcoin. And I can understand absolutely why people might be willing to pay $7 to secure a financial transaction. When I look at a bill of lading, I go, "Geez, bills of lading get processed on our network for a whole heck of a lot less than $7." If I had to tell the customers it was going to be $7 and you were going…

Okay. And so from your point of view, the Descartes network would just kind of attach into that blockchain solution of the government and that's how you're kind of seeing Descartes working with blockchain. Is that fair?

We would be going to our customers and saying, "Send me your customs filing anyway you like to, and I will be turning to the Canadian government and saying how do you want to receive it?" And if they said they want to receive a blockchain transaction to do that, I would take the information that the customer sent me, put it into the government's format and send it to them, same as we do for every transaction, right. If the government tells us we have to file it with them in a certain way, we comply. And we let our customers send up the data however they want, and we send the government the data in whatever form they ask for it.

And our next question comes from Blair Abernethy.

Ed, just I want to dig in a bit more on Brexit, and I know it's largely speculation at this point. But are there opportunities there for you to build potentially new businesses around what comes out of the negotiations?

Absolutely. And I don't know that it's a new unique business, but it's going to be in this -- the opportunity, I think, is going to be new customs filings. Remember, if someone sends something from Germany to the U.K. today, they do not have to make a customs filing. And that went away with EU a whole bunch of years ago. And with Brexit, what you're talking about is the potential for a new border that did not exist -- does not exist today. And so I don't want to overblow it. It's not a completely new business. Our business opportunity there would be to do the same thing we do across every border. But if they're going to put a new border in place and say that you need to make security filings, customs filings across that border, say, from France to the U.K. or from Germany to the U.K., those transactions do not exist today. And if Brexit goes through as they said it will, that will be a new border crossing with new customs filings and new security filings, and that will absolutely be something our customers look to us to solve for them. And it will result in their new business and probably a whole new revenue stream.

Okay, great. And the next question I have is really just around your content services businesses. So you've acquired several of these businesses in the last couple of years. Obviously, you're looking at more of them. But I was just wondering, just on the businesses that you own in -- that sell data or sell content, are there opportunities or any sizable opportunities for new product development or innovation around what you're selling now?

Absolutely. I mean, we handle a certain number of countries that continues to grow every year, that increase in the number of countries that we databased, the denied party screening data that we databased with tariffs and duties, those are all opportunities for us to solve more data content to our customers that did not exist yesterday. It's partially responsible for the growth that you see in that business, one of the growth drivers in it. And as more countries put rules in place about what you're going to pay when you go across the border or things that you have to check, like a denied party screening when you go across their border, each one of those creates more opportunity for us. And we have a whole host of people that go out and look for those opportunities, database that content and then our salespeople go out and sell to our customers.

Okay, great. And last one from me, just -- Allan, I'm just wondering, looking at your gross margins in the last year have been really stable, obviously, the 72%, 73% kind of level. And I'm just wondering, are there opportunities within your business now? Or as you make a few more acquisitions in the next couple of years, are there consolidation or data center consolidation opportunities that you may be looking at that could give them that gross margin number a little bit of upside?

Yes. I would say not only that we do look at it, we do execute on. That's something that's just normal course for us. We are confidently looking and executing on those plans. What you're going to see in the gross margins, Blair, is that we will see a natural growth as we do more transactions with existing customers, and it increases the scope with existing customers. Also, in that deal, there'll be FX impacts and there'll be acquisition impacts. We may buy a company with lower gross margins, and that will affect it. But overall, we've seen some good stability there. We've seen continued strong growth in our network volumes helping that gross margin. A couple of the recent acquisitions came in slightly lower. The gross margin is still strong at the EBITDA line but slightly lower. So it's going to be a balance of those things that will predict our gross margin going forward. Hopefully, that answers it.

And we have no further questions.

Great. Thank you, everyone, and I appreciate your participation in today's call, and we look forward to updating you next quarter on our results for Q4. Have a great night.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and you may now disconnect.