Scott Pagan - President and Chief Operating Officer Ed Ryan - Chief Executive Officer Allan Brett - Chief Financial Officer.

Matt Pfau - William Blair Brian Essex - Morgan Stanley Paul Treiber - RBC Capital Markets Paul Steep - Scotia Capital David Hynes - Canaccord Michael Urlocker - GMP Securities Ralph Garcea - Cantor Fitzgerald Blair Abernethy - Industrial Alliance.

Welcome to the quarterly results conference call. My name is John. I will be your operator for today’s call. [Operator Instructions] Please note the conference is being recorded. I will now turn the call over to Scott Pagan..

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 today.

Portions of today’s call, other than historical performance, include statements of forward-looking information within the meaning of applicable securities laws. These statements are made under the Safe Harbor provisions of those laws.

These forward-looking statements include statements related to Descartes’ operating performance, financial results and condition, Descartes’ gross margins and any growth in those gross margins, cash flow and use of cash, business outlook, baseline revenues, baseline operating expenses and baseline calibration, anticipated and potential revenue losses and gains, anticipated recognition and expensing of specific revenues and expenses, potential acquisitions and acquisition strategy, cost reduction and integration initiatives and other matters that may constitute forward-looking statements.

These forward-looking statements involve known and unknown risks, uncertainties, assumptions and other factors that may cause the actual results, performance or achievements of Descartes to differ materially from the anticipated results, performance or achievements implied by such forward-looking statements.

These factors are outlined in the press release and in the section entitled certain factors that may affect future results in documents filed and furnished with the SEC, the OSC and other securities commissions across Canada, including our Management’s Discussion and Analysis filed today.

We provide forward-looking statements solely for the purpose of providing information about management’s current expectations and plans relating to the future. You 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.

And with that, let me turn the call over to Ed..

Thanks, Scott. Good morning, everyone and welcome to the call. Thank you for joining. Okay. So, we continued our momentum for Q1 to round off a great first half of FY ‘17.

Our financial results have continued to grow in line with our plans with strong adjusted EBITDA and cash flow growth driven by our focus on generating sustainable profitable recurring revenues.

Our business model is designed to allow us to invest these profits and cash flow in our Global Logistics Network by adding solutions and scale for our community of global logistics participants and we still see a lot of runway to keep investing and building our platform to do more for our customers.

Furthermore, we believe this model has the bright future and we should keep investing these profits and cash flow back into our business, primarily because our customers need us to keep doing more for them.

So you might ask, why do they feel that way? First, it’s the complex and fragmented logistics technology landscape that is changing rapidly and they need trusted, financially stable technology service providers rather than a myriad of small vendors some with suspect futures.

Second, customers are forcing everyone to think differently about how things are delivered to them and those changes are making their way into the business-to-business world. One certainty for our customers is that how they delivered in the past will be the same as how they deliver in the future. And finally, delivery used to be an afterthought.

It used to be part of a fine print at the end of a purchase transaction. Now, delivery is a part of a product. We used to service a smaller market of delivery-sensitive customers and now that delivery sensitivity applies to almost every market that our customers serve.

These are important growth drivers for our business and I will speak more to some of them later in the call. But first, I will go through our financial results and some investment areas at a high level before handing over to Allan to talk the results in more detail.

I will then finish up the call by talking about our calibration for Q3 and the landscape in front of us. So, let’s start by talking or by going over some of the key financial highlights for the quarter and for the first half of the year. We had another record quarter across our key metrics. Our adjusted EBITDA continues to grow in line with our plans.

For the quarter, we generated $17.2 million in adjusted EBITDA, an increase of 18% over Q2 last year and for the first of the year, we were up 17% of the year – 17%, generating $33.8 million in adjusted EBITDA. On a per share basis, we grew adjusted EBITDA 16% compared to the same quarter last year and 16% for the first half of the year.

Revenue for the quarter was $50.5 million, which was up 12% from last year and for the first of the year, we were up 11%, generating $99.4 million in revenue. Our services revenues for the quarter were again very high at 96% of our overall revenues as we continue to focus on recurring revenues and deemphasizing license sales.

This is up 95% – up from 95% at this time last year. Year-to-date, services revenues are 97% of our overall revenues. We don’t expect that the license line to go to zero anytime soon and we still have customers that want to buy that way.

In fact, you may see a jump around a bit from time-to-time as it has in the past, particularly if we complete an acquisition of a business with license revenues. But in general, if you look at the trends over the last few years, we have done a very good job focusing our team on growing recurring revenues.

Remember, it’s not any kind of recurring revenue that we are looking for, we are looking for profitable growth and we will not just grow revenue for the sake of growing revenue. I think we are doing a really good job here.

And as a result, we continue to see the leverage in our business model, our adjusted EBITDA margins for the quarter and for the first half of the year were 34%, up from 32% last year. That margin expansion is very important.

If you remember just a few years ago, we were in the mid 20 range and we continue to see margin expansion in our business as our network effect takes hold. When I look at the quarter, we have got record revenues and record adjusted EBITDA. Our recurring revenue mix is very healthy. Our margins are improving.

And to top it off, we have also got record cash generated from operations. Generating cash is very important to us. There is a lot of creative ways that other companies define EBITDA or adjusted EBITDA. At the end of the day, we feel it should be a good proxy for the cash flows of the business.

And in our case, we continue to see strong conversion metrics. For the quarter, we converted 97% of adjusted EBITDA into cash. And for the first half of the year, we converted 96% of adjusted EBITDA into cash. This won’t be north of 90% every quarter.

But if you look over the past 10 years, we will see it’s very healthy at a conversion rate of north of 85%. And as I mentioned off the top, as we generate that cash, we are reinvesting it in our business both in our operations and in complementary solutions through acquisitions.

So with that, I would like to highlight few areas of our business where our investments are contributing to these superior financial results and I will overlay that with some of the examples of recent events and trends we are seeing in the market. One of the areas that we continue to invest in is in our customs and compliance business.

As we have discussed on past calls, moving goods from point A to point B can be very complex, one that often involves multiple modes of transportation and parties. This process gets even more complex when you are crossing borders and in many moves multiple borders.

There are roles in each country relating to statistical data collection, customs declarations, so the countries can collect tariffs and duties and security filings so that people can protect their borders. There are number of different rules for imports and exports for each party involved in the movement of goods and by mode of transportation.

Moving goods internationally is complex. Our Global Logistics Network helps isolate our customers from this complexity. We gather information from multiple parties to system generate the applicable filings and workflow so that our customers can handle the transactions they are handling on behalf of their customers.

We help our customers do this everyday and our customers rely on us everyday and that’s not just because our system works, because rules and regulations are always changing and it’s impossible for our consumers to stay on top of everything without help from someone like Descartes. By way of example, we have the recent UK Brexit vote.

The reality is that no one knows yet what’s going to come from Brexit. Will Britain remain a part of the single EU market? If not, what would the new trade deal look like with the new EU? What will the new trade deals look like with the U.S. or Japan or anyone else? And while we don’t know exactly what will change, we do know there will be change.

When regulations change, that impact how – that impacts how business is being done today and it becomes more complex for our customers. Anyone moving goods in or out of Britain is going to have to consider these changes from a number of angles.

Just to name a few, what will this mean from a security perspective, how will my duties and taxes be calculated and how will this impact my documentation? What does this mean for total land cost of my shipments? Will drivers and trucking companies operate in Britain were moving in and out of Britain from Europe be subject to different hours of service regulations and other current EU wide initiatives, et cetera.

As I said, it’s our job at Descartes to isolate our consumers from that complexity. We make complex problems manageable in the business environment. This requires continued investment in our core operations to be current.

We are always investing in our customers’ regulatory systems, our trade data content and other solutions to make sure our customers have a seamless transition as regulations change around them. And Brexit is just an example.

Regulations are always changing, particularly if countries around the world continue to wrestle with how to secure their borders without choking trade. You can see this today in the way that various domestic economies and politics are turning on issues related to borders, including the upcoming U.S. election.

Our customers need tools that can help them, help them research and make informed decisions about who to do business with, help them classify goods appropriately and submit compliance documentation, help them move goods efficiently and work with a broad ecosystem of parties and finally, do it all cost effectively and in a secure manner.

So that’s our Global Logistics Network, taken us awhile to get to get to where we are and we are very proud of it, but we are not done yet. We continue organic and inorganic investments. We will add more for our customers and help them thrive in a phase of an ever changing landscape of competitors and regulatory initiatives.

So let’s move on from the regulatory world and into another area of investment for us, e-commerce and home delivery. Consumers continue to set expectations around how they want things to be bought and delivered. 10 years ago, it was okay to deliver to them whenever it was convenient for the seller.

Today, that convenience has shifted to the customer as part of the buying process. Consumers expect choice of delivery mechanism and the timing. Consumers are spooled for choice too.

They can buy from any number of channels, if they don’t find the price or delivery mechanism that they want on one site or a particular store they can probably find it somewhere else. This evolution isn’t new for us.

We have been helping our customers navigate these changes for years, starting with home deliveries of groceries in the UK and then on to the U.S., etcetera. More recently as more companies adopt an online presence, we see companies struggling with the logistics and delivery portion of their service offering.

E-commerce and omnichannel retail are about much more than just having a website within delivery times or having new website in sync with bricks-and-mortar store, if you have one or listing your goods on Amazon or eBay.

You need to consider the logistics of delivery, what you are selling and those issues can vary depending on the size of your company, the goods and services you are offering and the geography or geographies you are operating in.

Two other things that generally need to be considered in this slate are the size of what’s being bought, the availability of location of the goods and stock, the channel it’s been bought on, any applicable tariffs and duties, regulatory considerations and filings, the method of delivery, the requested time window for the delivery and the potential requirements for additional services during the delivery.

This can get pretty complex pretty quickly. And remember, we are here to help isolate our customers from that complexity and to turn challenges like this into a competitive advantage for them. And as I just mentioned, the problems are different for each company, where a large international retailer needs to do to go truly omnichannel.

It’s going to look very different than what the small guy’s shipping stuff out of his garage will need. So let’s consider the two potential types of Descartes customers. First, the small and medium sized business shipping goods that generally fit the parcel, for example, these shippings could be going UPS, FedEx, DHL Parcel, USPS, etcetera.

These guys may or may not have a sort store but likely have some inventory in their warehouse or someone else’s. And to differentiate from that or let’s consider also a large retailer that has a big store presence and owns the fleet of vehicles.

We are very well suited to help both of these types of constituents as a result of our continued investments into the business. For instance, for the small to medium-sized business moving parcels, we have a number of solutions to help them go to market more efficiently.

If you take a look at our pixi* platform for a minute, if you recall, pixi* was a German based company we acquired back in April. Their platform collects order information from an e-commerce website, web front translates that into the scanner driven pick and pack process within the warehouse.

It initiates the shipment to the customer and synchronizes all of this information with the customers financial system for invoicing and shipment tracking. This is a big deal for their customers. The efficiency savings are incredible and it helps the typical SMB customer with one of their biggest problems, which is scaling the business efficiently.

The typical pixi* customer can process 3x as many shipments with the same resources after putting our system in place and that’s a big advantage for them. Taking that a step further, if you think about the pixi* platform combined with our existing e-commerce solutions, it’s very complementary.

Specifically as we combine it with our Global Logistics Network and our e-commerce and our ERP integration capabilities from our combination with Oz Development, that allows us to present highly differentiated offering for this segment of the market. We are really excited about the opportunities that these things all coming together present for us.

Equally, we see a lot of opportunities at the other end of the market for large retailers, helping them creating an efficient omnichannel program based on our state-of-the-art Home Delivery solutions.

In many cases, these retailers may be competing with the same small to medium sized businesses that I was just talking about depending on the size of the goods. But there is a – but either way they are almost certainly competing with the likes of an Amazon.

What that means is they need to have the same capabilities and provide a great customer experience. Customers maybe go into the shop to look at some goods but if they buy on the web, they want it to deliver quickly and at the time that’s convenient for them with mobile monitoring and tracking and all at a good price.

This is exactly what we hope a large retailer do. We strongly believe that we have the premier routing and delivery schedule solution on the market help customers with these more complex delivery problems and we look forward to continuing to invest in this part of our business for continued growth.

Those are just two of the current areas of investment for our business that are driving the success reflected in our financial results today. Before I hand over to Allan to talk a little bit more about the financials, I would like to thank some of the people that made another great quarter possible for Descartes.

So thanks to our employees for all the hard work they are putting to make sure our customers are getting great results. Thank you to our customers, who continue to place confidence in Descartes as their network of choice. Thanks to our partners for helping us continue to expand our ecosystem.

And finally, I would like to thank our shareholders for continuing to have confidence in Descartes. And with that I’ll turn it over to Allan.

Allan?.

Thanks Ed. As indicated, I am going to walk you through our financial highlights for our second quarter ended July 31, 2016. So we are pleased to report record quarterly revenue of $50.5 million this quarter, up 12% from revenue of $45.2 million in the second quarter of last year and up 3% sequentially from the first quarter of this year.

As Ed mentioned, consistent with the past few quarters, we continue to decrease the dependency of our business on license revenue.

With license revenue being paired down to $1.9 million in the second quarter, down from $2.4 million in the second quarter of last year and I should note that this is despite the fact that the recent acquisition of the pixi* added some license revenue to our business.

As a result, service revenue represented 96% of our total revenue this quarter, up from 95% of total revenue in Q2 of last year. Gross margin continue to be very strong, increasing to 73% of revenue for the quarter, which is a solid increase from gross margin of 70% in the same quarter of last year.

We continue experience operating leverage from our network revenue growth as well as achieving strong gross margins from our recent acquisitions.

As a result of the continued revenue growth, gross margin improvement and strong operating cost control, we also generate – we also continue to see strong adjusted EBITDA growth of 18% to $17.2 million or 34% of revenue in the second quarter compared to $14.6 million or 32% of revenue in the same period last year.

Adjusted EBITDA was also up 4% sequentially from adjusted EBITDA of $16.6 million in the first quarter of this year.

As a result of these solid operating results and strong collections of accounts receivable, cash flow generated from operations came in at $16.6 million or approximately 97% of adjusted EBITDA in the second quarter, an increase of 30% from operating cash flows of $12.8 million or 88% of adjusted EBITDA in the second quarter of last year.

GAAP net income came in at $5.8 million or $0.08 per diluted common share in the quarter, an increase of 14% from net income of $5.1 million or $0.07 per diluted common share in the second quarter of last year.

As Ed has already mentioned, overall, we are pleased with these solid operating results in the second quarter and our year-to-date operating results in general. If we turn our attention to the balance sheet, we ended the second quarter with the cash balance of $69.6 million.

During the quarter, we used $2.4 million to repay a portion of our Europe based advance that we took on our revolving debt facility earlier in the quarter, earlier in the year, sorry as we close the pixi* acquisition.

With this cash balance and $142 million currently remaining un-drawn our revolving credit facility as well as the expectation of continued cash flow from operations, we remained very well capitalized in order to allow us to execute on our business plan.

As we look at the second half of this year, to round out our financial picture, we should note the following for you. Our income tax rate came in at 26% in the second quarter and we would expect that it will continue to be in the range of 24% to 28% of pretax income over the balance of this year.

We expect to incur between $3 million and $4 million in additional capital expenditures for the balance of this year and these expenses are expected to be focused mainly on investments in cyber security and our network infrastructure.

We expect amortization expense will come in at approximately $13.7 million for the balance of this year with this figure being subject to adjustment for FX changes and the completion of any additional acquisitions. We currently expect that acquisition related to costs will be approximately $800,000 over the balance of the year.

And finally, we expect the stock-based compensation will be approximately between $1 million and $1.2 million for the balance of fiscal 2017. So with that, I will turn it back over to Ed to wrap up..

CAD$0.77, €1.12 to U.S. dollars; and £1.32 to U.S. dollars. So to turn to Q3, as of August 1, 2016, for Q3, we had $48.6 million in visible recurring contracted revenues or our baseline revenues. We had $34.7 million in baseline operating expenses. This gave us a baseline calibration of $13.9 million for adjusted EBITDA for Q3.

Some other key points relating to how we are positioned for Q3 and beyond, we are very well capitalized, as Allan just mentioned. We have a healthy business that’s well calibrated and we also have a healthy balance sheet. We are profitable. We are cash generating. We have low capital needs with our organic business.

Our primary uses for capital are for continued use in acquisitions, we completed 32 acquisitions since 2006, and we have access to additional capital should we need it. Allan mentioned the undrawn portion of our credit line of more than $140 million.

And we also filed a shelf prospectus for up to $500 million if capital was needed to be raised by other mechanisms. We have a strong acquisition pipeline.

You will have seen that there is a lot of industry activity right now with consolidation happening in our market, but this capital capacity and our execution capabilities are still a number of acquisition opportunities to expand the geographic reach, functional capabilities, trade data and content or community of participants on our network.

We continue to see a lot of interesting opportunities out there to continue or even accelerate our pace of profitable growth. We are seeing both larger and smaller opportunities and while we review everything as it comes our way, we are not buyers for buyers sake.

The fact that we have increased our line of credit recently involved for the new shelf doesn’t change how we view acquisitions. We intend to continue to be prudent, but we are confident in our ability to deploy capital effectively.

As a reminder, for our plans for the remainder of FY ‘17, we continue to target 10% to 15% annual adjusted EBITDA and adjusted EBITDA per share growth. As in the past, we intend to invest any over-performance back into the business.

Our growth is planned to come through the combination of organic and inorganic activities and acquisitions are not incremental to this plan. We intend to continue to focus on recurring revenue and deemphasize one-time license sales.

If you recall in FY ‘16, we increased our planned operating margin from 30% to 35% given the current performance of the business and mindful of the FX environment we expect to continue to operate in that range for the balance of FY ‘17.

But please keep in mind, this could vary by businesses that needs fixing up, which would impact that metric in the short run. As a quick update on our annual user conference, we set the date for our 2017 Evolution user conference in West Palm Beach, Florida.

We managed three days from March 28 to 30, 2017, the same place that we went last year if you are in attendance last year. The event provides a great opportunity to see our business at work from products to customers to partners to Descartes members and there is several on this call been to the event in past and hope they found it worthwhile.

We will be sending out registration information next week, so keep an eye up for that. And finally, as always, we will continue to make ourselves available to shareholders to answer any questions. We believe we have got a great business.

We want to be available to help people learn about our business, we will continue to spend time and resources to get the word out and hope you will do the same. So with that, let’s open it up for questions. Operator, could you do that for us, we would appreciate it..

Thank you. [Operator Instructions] And our first question is from Matt Pfau from William Blair..

Hey, Matt.

How are you doing?.

Hey, good. Thanks for taking my questions guys. Just wanted to start off on the routing mobile and telematics business, Ed, so obviously, Verizon has been out there on a bit of buying spree recently.

Just want to know if there is any impact to your business from the consolidation that Verizon has been doing in the space?.

Not directly. I mean, we are pretty excited about it. We see Verizon as a potential partner for us. I think Verizon historically you see them with wireless, with internet and with TV. When they think of markets established, they try and get in and become the market leader in that business if they think that’s what the customers want.

I suspect that’s what they have done here. The types of businesses that they bought were not necessarily direct competitors of ours, but they do go a long way towards putting Verizon in a position where they can say, hey, I am the market leader in this space.

And if you think about what we think is valuable, which is we want to know where the trucks are so that we can help our customers reduce their costs by taking trucks off the road by telling them how to operate them more efficiently. Knowing where the trucks are is an important part of that process.

And we were kind of excited when we saw Verizon doing, because we thought alright that probably means more trucks are going to have telematics units in them that we will be able to use that data to help our customers take trucks off the road and get operational efficiency. So in general, view by us is pretty good news..

Got it.

And then just I know you mentioned a bit about the acquisition pipeline, but just sort of wondering, I guess from what you are seeing out there, where our valuation expectations from some of these companies in your pipeline? And I guess has recent consolidation in the SaaS space at least some of the public companies sort of impacted expectations or willingness to sell within the companies in your acquisition pipeline?.

It’s pretty similar to how we thought about the last few quarters there is a lot of stuff for sale. I think that will continue for some time. As long as interest rates remain low and people have cheap access to money, they are willing to pay. So, for a seller that’s probably viewed as a good time to sell and that brings more stuff to the market.

For guys like us, we need to be careful in that process. We need to continue to be prudent in investors, because – just because everybody else is overpaying for stuff doesn’t mean we think that’s a good idea. So, we just try to stick to our guns.

This really impacts the higher end of the market, the larger deals our bread and butter that’s kind of smaller tuck-in deals. We don’t see that playing a role, because the same players aren’t present and a lot of the companies were buying smaller tuck-ins. They are sole-sourced.

We are going in and talking them into selling their company and negotiating the price with them directly and it’s oftentimes more about price, right? These are family-owned businesses, family members work there, friends work there.

They want to know more than just how much are we going to pay? And we have gotten quite good at that being able to give them the comfort that we are going to be good stewards for their business.

And if you get works here as a good employee who is going to have a job for a good long time working with us and we are going to be around for the long run and that’s played very well for us in the past and I think it will continue to be that way in the future..

Perfect. Thanks for taking my questions, guys..

Thank you, Matt..

Our next question is from Brian Essex from Morgan Stanley..

Hey, Brian.

How are you doing?.

Hey, good.

How are you?.

Yes, very well..

Yes, just want to touch quickly on capital deployment. So I mean, in line with your commentary of 10% to 15% adjusted EBITDA growth, you are certainly tracking well ahead of that in the first half of the year here.

And we didn’t really see a lot of M&A this quarter, so I guess with an understanding that R&D is a little bit elevated, but not tremendously so.

What is your philosophy? I know you highlighted a few areas where you are making investments in customs and compliance and e-commerce and home delivery, but maybe a little bit of color around your strategy for capital deployment, investment, what are you investing in and how to get balanced organic investment or internal investment versus M&A and your outlook for the remainder of the year?.

Yes. So, we are looking at typically 20, 30 companies in anytime. We might have 4 or 5 that we are directly talking to trying to get signed up to an LOI. We try to be prudent investors if we are involved in deals and we think people are paying too much for those deals, we tend to move to the sideline.

If we think there is a good company with an ability to generate good profits for us in the future and it’s something our customers are telling us they want, we think that’s going to be a good addition to our network. We aggressively pursue those types of opportunities and I think that will continue into the future.

The areas we have outlined them a bunch of times including today, but the data content businesses is a big area for us.

Certainly, routing mobile telematics, the MRN business is the big area for us and any kind of network processing business in the logistics world that we think would be a good fit for our Global Logistics Network is an obvious target for us. We tend to be pretty selective.

We look at a lot of companies before we buy and we certainly feel no pressure to buy anything today or tomorrow because we have to.

We don’t spend a long time trying to get ourselves in a position where we don’t have to do things like that and now that we are here, we try to be make the best decisions we can for our company and our customers and our shareholders.

As far as organic versus inorganic, just about everything we buy before we get deep into the acquisition process, we take a look at things, is this something we should build ourselves or is this something that we would be better of getting a head start by buying this company.

And the answer comes up depending on the acquisition, comes up different every time, sometimes we are saying we probably just built out ourselves and get into that market on our own. We already think we have a dominant position there. And other times we say, you know what, I think this is a good business to be in.

And I think this company that we are looking at would provide us with a good head start and we head that route. So we think about it every time. We certainly build a lot of new features into our products. Every year, we come out with new products. Every year, there are usually expansions of things we already do for our customers.

And as you see, we oftentimes buy things that we think could be added to our network and help our customers get further faster to that acquisition. So we spend a lot of time thinking about that here. Again as I said, we bought 32 companies in the last 10 years. If you are going to do that, you have to spend time thinking about these things..

Got it.

And you have often commented around your network as being the mode around the business, is there any way to quantify that in terms of how large the network is, maybe we can track it going forward and the benchmark it appears that may be offering some kind of competition on that side?.

I think we break down our services revenue, which is largely our – the combination of our network traffic and the activations to get people on to the network with the bulk of it being the network transaction and subscription revenue.

So that’s our attempt to do that, I don’t know if you have any other comments on that Allan?.

Just roughly network revenues themselves direct 20% to 25% of our total revenues. But it doesn’t end there. Obviously, our network is very, very tied to those subscription revenues that we get that make up that 97%. So that helps to quantify the network for you. That’s the direct connection to the revenue stream..

Okay, that’s helpful. Maybe I can sneak one last one in.

I think as Allan mentioned consolidation in the market work on NetSuite have any impact on you on the partner side?.

I think in the long run, I mean right now, Oracle has kind of told us they are leaving NetSuite separate for a while. I think they think that business is a strong one and it’s growing rapidly and they don’t want to get in its way. We are partners with both NetSuite and Oracle and so we were excited about their acquisition.

I don’t think it’s going to – in their attempt to make themselves stronger, it’s probably going to make us stronger too. I don’t know what exactly what the long-term implications of it will be.

But I think given that we have partnerships, strong partnerships with both of them, it will probably strengthen that partnership with Descartes in the long run..

Okay, very helpful. Thank you..

Thank you, Brian..

And our next question is from Paul Treiber from RBC Capital Markets..

Hi Paul, how are you doing?.

Hi, good and yourself?.

Yes..

Just hoping that you could comment further on Brexit, do you have any customers to-date, have any discussions on how to handle any of the potential changes or make investments in their business.

And then also on the flip side, have any customers put any potential deployments on hold just pending more visibility to Brexit?.

The quick answer to both is no. We haven’t had any customers come to us and say, what are you going to do about this because they don’t know what’s going to happen yet. And I think it’s going to be a while before they do.

For us, I think in the long run, it creates another border, which is a whole different set of rules in a different set of filings, which is probably a little helpful to us. It’s only one country, so it’s not going to make a major change in our business.

It’s a new set of rules that our customers are going to have to deal with whenever they come out and when they do, we plan on being there to help them. It certainly hasn’t – there is no customer coming to us saying hey, what are you going to do about this, because they don’t know what the rule is going to be yet.

And there is certainly no customer saying, hey I am walking away from you because there is no reason to do that..

I don’t think I have ever seen it broken out in the MD&A, but what’s the UK as a percent of total revenue?.

We don’t break it out specifically. Paul, its part of the European segment, which as we segment the European revenues, EMEA, in around the 30% range. So part of that not more than 10% of our overall revenues..

Okay. Good to know. The – just thinking of the broader spending environment among shippers and logistics customers.

It seems like there is a number of catalysts as you have mentioned in the compliance regulations and omnichannel retail, but the overall – how do you describe the overall shipping environment, I mean it doesn’t seem just based on some of the public indices that are out there, overly robust.

How does that – how do those two dynamics play out and what have you seen over the last several years regarding those?.

Generally, I mean since the great recession, it’s been trending up. That continues and we see fairly good numbers coming out of our network and they are not the best ever, but they are not bad either. We see various reports and other – you saw hands in glove business or declare Chapter 15 a week or two weeks ago.

But for guys like us, that just move the transaction volume to other carriers. They go out and other carriers, you saw yesterday, [indiscernible] put ships in the – more ships in the Pacific trade lines directly as a result of hinging going out.

That ends up moving the transaction volume from one carrier to the other, but it doesn’t really make a material impact to us. I think you see – air markets struggling a little bit, but it’s not – it’s still kind of moving up every year. So I don’t see a major trend developing one way or the other right now.

It’s kind of business as usual for the last six month or so..

Okay.

And then just one last one on hinge and just given that you mentioned it, do you have any direct exposure to them?.

Not much and we do a little bit of business with them. But as I said, the pure transaction processing, really just moves to other carriers. You will still have to move that freight whether [indiscernible] business or not. I don’t think we had a ton of exposure to them directly not something where it’s going to be..

Very, very little, Paul..

Okay, thanks. I will pass it on..

Thank you..

And our next question is from Paul Steep from Scotia Capital..

Hi, Paul.

How are you doing?.

Great. Good morning.

So the first one, I guess Ed, maybe you could talk a little bit about we have seen e-AWB or electronic airway bills that get adopted and it’s just finishing up what have we seen and maybe in the use of webDocs or may be looking back to prior cycles if I close in terms of up-take of new initiatives like that?.

Remember, all the airway bills are already electronic and they have been for years. There is new countries coming on every year and then the air carriers and ocean carriers that come along with them and that’s a tailwind for our business, so that’s good news.

When you see that the e-AWB or e-Airway Bill initiatives coming out, what they are referring to is airway bills that are only electronic. In other words, there is no paper following them.

Put this in simple terms, when you get off a plane, an international flight, the first of that plane literally the first thing is a manila envelope full of a bunch of paperwork and attended from the flight attendant to the gate agent at the receiving airport.

That’s a bunch of paper backup that is talking about the passengers and the cargo on that plane. It is in addition to all of the electronic documents that we are processing for our customers.

When you talk about the e-Airway Bill initiatives, those are initiatives that are going airport-by-airport, country-by-country and trying to eliminate that paper as part of the process. And it’s really early days in that part.

You probably have 20 airports or 30 airports around the world that are participating in that and that’s got to be a participation from a participating airport to a participating airport. So it’s a very limited number at the moment. But I think over time that will expand and it will eventually become the way of the world.

And for us, that’s good news, that’s exactly what we want to happen. So we look forward to that..

Great. And just the second one for me today would be on R&D and the allocation to sort of key projects and how you think about that, we are tracking towards about $40 million in total R&D spend, how do we think a little bit about the split between new functions and maintenance.

Obviously, we saw lots of user conference this year, but what are some of those key projects that you are allocating new R&D dollars to just in broad terms without specifics? Thanks..

Yes, the bulk of it is maintaining and updating existing products, but certainly a decent portion of it goes to building new stuff.

The areas are – tend to be that the areas that our customers tell us they want investment in, the mobile – the routing mobile technology, that’s getting a decent new investment dollar these days as our customers come out with more and more requirements.

A lot of times driven by the Amazon and the eBay is the role that are trying to deliver stuff to the home same day and next day and we have built more capabilities into our products that let them handle that.

Certainly, the trade content space since we have bought those businesses as we continue to invest in technology around finding ways to slice and dice that trade content to make it more effective for our customers.

And obviously on our network, we keep adding on value-added services on top of that network, so that our subscription revenues can go up and so that our customers get the services that they need to make them or help them make better sense of the data that they are sending through our network..

Great. Thanks, guys..

Our next question is from David Hynes from Canaccord..

Hi, David.

How are you doing?.

Hey, good.

How are you doing, Ed?.

Yes, very good..

So, you have spent some time in the prepared remarks talking about on the home delivery side, how you guys are well positioned for both SMBs and large retailers.

So I guess curious, a) how does that business kind of split today SMB versus the large retailers? And then b) on the large retailers side, how often is that a replacement sale versus implementation technology for the first time for those guys?.

So, the SMB is growing quite a bit with our acquisitions of Oz and pixi* and a couple of other guys. If you were here 10 years ago, we didn’t have very many SMB customers. If we did, they were in the freight-forwarding space, so they were small companies, but big freight-forwarders for us.

And now you see us with the bunch of these acquisitions we have gotten into SMBs for retailers and manufacturers that are – we used to only do business with companies that were north of $1 billion in sales and oftentimes much bigger than that.

In the last couple of years, you see us do a business with people that are $50 million, $100 million, $150 million in revenue as we develop out of solution set to help those guys. On the large retailers and manufacturers, as I mentioned a minute ago, that’s always been our bread and butter.

Those guys – you see with a bunch of the wins in the last couple of years to Sears and then Home Depots and the Best Buys of the world, they continue to do more and more with us.

As they get challenges put on them to have websites that are just as good as their store sites, they need to find ways to deliver that cargo, the washing machine that you buy at a big box retailer has to get delivered and it has to get delivered efficiently.

And their fear is that hey, one day Amazon might get into doing that and they might – if they do it better than me, they might beat me there and I don’t want that to happen. So, they are buying our technology to head that off of the past and that’s been a good business for us and I think it’s going to continue for sometime.

We see more and more of it coming and more retailers are thinking that’s something they have to do and that’s going to fed into the growth in that business for us..

Yes, okay. And then maybe one for Allan, so we have seen gross margins kind of explode upwards here over the last 18 months.

Is that just a factor of these data businesses ramping up? I guess what’s driving that, is it just scale on the network and then I guess the derivative question to that is how high is up for gross margins as you look forward?.

Yes, sure. I think it’s the two things you mentioned. First, network growth is a long solid steady evolution for us and then we will continue to see a benefit from that on the gross margin line. It’s not a huge impact every quarter, but slow and steady increasing slowly and steadily increasing gross margins.

The bigger jump up from, let’s say, a year ago, 70 up to 73. The bigger portion of that’s going to be the strength of the acquisitions that we made, the trade content, some of these e-commerce businesses where we have got good margins.

So, without acquisitions, slow and steady improvement, it was what we would expect subject to a number of other factors and then it adjusts from there based on the acquisitions we make..

Okay, got it. Great. Thanks, guys..

Thank you, David..

And our next question is from Michael Urlocker from GMP Securities..

Thanks..

Hi, Mike.

How are you doing?.

I am well and you?.

Yes, very well..

So, I would like to follow-up just on the dialogue that you are having earlier about e-commerce and omni-channel. If we look at the two parts of the market say SMB and pixi*, etcetera and then later, we look at the larger part of the business.

When you look at pixi*, what would be your measure of the progress you are getting to show that, that part of the business is growing and healthy, what are the kind of anecdotal observations you have there?.

Well, we are off. I mean, internally, we are looking at how many customers they sign up each month and each quarter. But right now, they are in Germany and they continue to get a lot of German customers, we are trying to get them to expand out into other countries.

If we are successful there in combining pixi* in-house development we hope we can take all the things that how it does in the U.S. and all the things that Germany or the pixi* does in Germany. And take those two things, put them together and expand them into each others markets. We are hopeful we are able to do that over the next couple of years.

If we do we think that deal – those two deals will go from very good deals to homeruns. If we are not successful in that, we still think there will be good deals, but we think they could be fantastic deals for us in our shareholders if we are able to bring those feature sets around the world to all its customers..

Okay, thank you. That’s helpful. And then if we look at – I assume these are larger companies. So, if we look at the larger part of your business with bigger customers doing omni-channel. Just again, anecdotally, I always think about furniture stores, guys selling fridges, guys selling big TVs.

If you look at that market opportunity, how far penetrated do you think it is? Like if you think of say the major U.S.

retailers who sell big heavy stuff, how many of them are adopting not just your solutions, but your types of solutions?.

We – some of the biggest ones have done this already and in certain markets, like furniture, people are on to with a little faster than other markets. One of the guys tried to answer your question I didn’t completely answer a minute ago as well in the process. These – we are going into these retailers. They often have a routing solution already.

It’s not just a dynamic optimization routing solution. And so it’s rare that we walk into a guy like Best Buy and didn’t have anything. Best Buy testing have something else there, just wasn’t the same type of solution. It was a batch planning solution where they kind of took yesterday’s sales and at midnight, they kind of built a plan for tomorrow.

They weren’t looking at each incremental sale and figuring out the best time to deliver each of those companies and they weren’t looking at all the mobile and handheld data telematics data that came back from the trucks and watch what they were doing all day and proactively informing their customers of an exact delivery time in the middle of the day.

And with our dynamic optimization solution, we are able to come in and tell the customer hey, if you just do batch planning, you are leaving a lot of money on the table.

So, you may think you have a routing solution and you got all this figured out, but let me show you how you can save instead of 7%, 8%, 9% on your delivery costs that can save you 15%, 16%, 17%. If I take all those things into consider and consideration of my new dynamic planning solution.

And we think that market is underway right now, but we think its early days still..

Okay. And if you see the furniture guys are the earliest adopters, what are some of the…..

The grocery guys were the earliest. Furniture is in the last couple of years really get into this need for dynamic optimization, because they want to give a customer delivery time that’s a narrow time window, while they are on the phone or while they are on their website.

And if we are a furniture guy, they have the problem of if you go and buy the bed or the couch at the store this weekend, they spend a lot of money to get you there in advertising, etcetera and they pay the sales guy a lot of commission to sell it to you.

If you are not that there when the delivery is attempted to be made, they know that it’s 10% of those orders that the way the delivery window is missed, it can’t. And so, they really want to avoid that happening.

So, they have been on this, because that’s a high cost to them and if we can proactively inform their customers, hey, I know we told you 9 to 12 for delivery window, but we think we are going to be there at 11 to 15. We have a much better chance of making sure that customer is there when we go to make the delivery..

Right.

So, if those guys are kind of now engaging and getting into it, what would be the other future markets that are just starting to develop for this?.

Electronics, white goods are things that are underway. We have got some of the big guys, but there is lots of smaller ones in there. We see further expansion into the furniture markets.

And then you have got the things that are just getting started from lumber, building supplies to who need to do jobs like deliveries with builders and they would like the builder to be there when they make the delivery, where do you put this 20 foot by 60 foot stack of lumber and roofing material and stuff like that, they want to know that before they – so they would – like the builder there when they come to make the delivery and they are realizing that that’s important to them.

And there is all kinds of markets cement delivery, etcetera things that we have been in for a while and that we are traditionally batch planning that we are going back now and saying hey, you guys should do this with dynamic optimization. Bottle and soda delivery, propane, oil and gas, those are the markets where this is just emerging.

Where they thought they thought they only need batch planning up until very recently. We are now locking in and saying hey, dynamic optimization can save you a lot more money. You should take a look at this..

Thank you. I understand that. That’s very helpful..

Great. Thanks Michael..

And our next question is from Ralph Garcea from Cantor Fitzgerald..

Hi guys..

Hi Ralph, how are you doing?.

Thanks for taking my questions.

Following up on that pixi*-Oz comment, to really integrate those two products and sell it across the regions, do you have to do full software rewrite or what can you do quickly to sort of really gain the leverage of bringing those two assets together?.

Well, they are both integration tools. So they are detained with the ability to do that. By the way, the Oz guys told us about pixi*. We bought Oz and the first thing that the management there are saying is they used to take a look at this other company. And they were aware of each other obviously already.

And because they are both integration tools, they have functionality in them that kind of let them interoperate. So there is work to do, but it’s not a lot of new development work. It’s probably more advanced configuration work than anything.

And then the obvious, getting the sales force, that they know how to say it, finding good ideal customers for those products and other countries and getting overall the hurdles of language barriers and things like that..

I mean you get that right, you can turn that up in a couple of quarters right, just from once the sales force is comfortable of selling both products?.

I hope, yes..

Okay.

And then not asking you to pick who you are going to vote for November 8, but heaven forbid, Trump wins and I will say that being a Canadian, if you get a more protectionist policy in the U.S., I mean what does do for your business, i.e., like you said, with Brexit creating more borders or…?.

Yes. More rules in the border usually is a good thing for us. I don’t have any particular comment on the election, obviously. But I don’t know that it’s going to make a massive difference in our business one way or the other.

But yes, when people are sitting there talking about the border and we got to protect the border, that’s usually a good thing for us..

I mean and if you look at the customs filing in North America, if you look at your Canadian and U.S.

business, I mean sort of the volume wise can you give ballpark figures where you were in Q2 this year versus last?.

I don’t off the top of my head, but I would venture to guess it’s not a massive change. There are not being any major initiatives that are rolled out in the last year. There are a couple of coming, with Canada has a border filing coming up. U.S. just extended third pilot for ACAS.

You could view that as a good news because it’s an advancement I kind of took it as bad news, because I did want to go further faster, but they keep coming with it. So I have no doubt that, that’s going to eventually be the rule of the land for air freight forwarding and forwarders have to make the filing.

Certainly a lot of our larger customers are already participants in that project and I would think that all of our customers will eventually enter it once the government in the U.S. decides to mandate it. We were hopeful that they were going to mandate it soon.

Instead they extended to a third pilot to a larger group of freight forwarders and that’s an advancement for us, but not everything we were hoping for..

Yes.

And then just one last one for Allan, I mean you were in the sort of mid to high 40s on DSOs, I mean do you have a [indiscernible] can you get it down to the low 40s as you bring some of these latest acquisitions onboard and convert them to sort of recurring revenue?.

Yes. I mean our DSOs came down nice in the quarter. Internally, we look at anywhere 45 to 55 is reasonable. 30% plus of our business is in Europe, I think you understand there is longer terms over there. I think we are at 44 this quarter and that’s pretty comfortable and a couple of days better and could be a couple of days higher, but nothing drastic.

It will not move drastically unless our revenue profile shifts significantly..

Okay, thank you..

Thanks Ralph..

Our next question is from Blair Abernethy from Industrial Alliance..

Hi Blair, how are you doing?.

Good morning and thanks for taking my question.

Ed, one quick one here just on the retail side again, can you just outline for us what your current thinking is in terms of your go-to-market strategy in the small, medium sized business retail and really who do you see as our competition there in the U.S.?.

So it’s different from the big retailers, big retailers or manufacturers. We go to market with our home delivery solutions for those guys. With the small and medium sized businesses, we are bringing together the content capabilities we got from MK Data and Customs Info.

We are bringing – and then we picked up a lot more with Oz and hopefully will bring pixi* into the U.S. one of these days soon here.

But with the different types of solution for those guys, because they are doing mostly partial deliveries, we are helping them integrate from their NetSuite and other web based small company ERP systems into transportation management systems, warehouse management systems that either we sell them or that they buy from a third-party and we are helping them to extract data from their ERP and get it into those tools.

And that’s kind of way we go to market in that space. It is not as an expensive solution doing something for Home Depot or Sears or a Best Buy is a big initiative that cost a lot of money and not just with us but with all bunch of service providers as you try to [indiscernible] home delivery capability if you are one of those guys.

But the smaller guys, you are talking customers of anywhere from $100 to $1,500 a month and that’s a whole different business model that we are getting good at now. But there is a lot of customers need to get to do that, right. And there is good and bad in that.

When you are signing, we used to sign a couple of hundred customers a few years – 5 years to 6 years ago, we are signing like 50 a month. All of a sudden now it’s hundreds and getting close to thousands per month.

And just smaller deal sizes and being able to deal with customers like that effectively is something I have talked about on previous calls as we are trying to get good at. I think we are getting better at it. And I hopefully one day we are as good at it as we are with these big guys, I expect that will happen.

But we are on our way, but we still got some ways to go..

That’s great, Ed. That’s helpful.

And just who do you see as your closest competitors in that markets, in that sub-segment?.

It’s a whole bunch of little guys, so much so that their names barely bubble up to the top. What we are – writing the telematics business, it’s plainly obvious. We have got six, seven, eight competitors that we talk about everyday in that Customs Info, MK Data, pixi*, a lot of small players in that market and that’s good for us.

Those are acquisitions targets for us. Those are people that we potentially can beat as we start to educate our sales force unlike hey, there is a big advantage to being the big guy. We are not going have business. We are going to be here next year doing this.

It’s more reassuring for customers to know that you are in it with someone that’s in it for the long haul and we try to bring that advantage to bear in the market..

Okay, great. Thanks very much..

Thank you, Blair..

And we have no further questions at this time..

Great. Thanks John. Thanks to everyone for attending the call today. As always, we will be on the street talking to customers. If you have requests for us to do that, please let us know, we will be happy to schedule some time to meet shareholders and otherwise, have a great day. Thanks..

Thank you, ladies and gentlemen. That concludes today’s call. Thank you for participating. You may now disconnect..