The Descartes Systems Group Inc (DSGX) Q1 2020 Earnings Call Transcript

The Descartes Systems Group, Inc. (DSGX)
Q1 2020 Earnings Call
May 29, 2019, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the quarterly results call. My name is Adrianne, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question and answer session. If you'd like to ask a question during today's presentation, please press *1 on your touch-tone phone. Please note this conference is being recorded. I will now turn the call over to Scott Pagan, Chief Operating Officer. Mr. Pagan, you may begin.

Scott Pagan -- President and Chief Operating Officer

Thanks and good afternoon, everyone. Joining me in the call today are Ed Ryan, CEO, and Allan Brett, CFO. I trust that everyone has received a copy of our financial results press release that was issued earlier today.

Portions of today's call, other than historical performance, include statements of forward-looking information within the meaning of applicable securities laws. These statements are made under the Safe Harbor provisions of those laws. These forward-looking statements include statements related to Descartes' operating performance, financial results and conditions, Descartes' gross margins and any growth in those margins, cash flow and use of cash, business outlook, baseline revenues, baseline operating expenses, and baseline calibration, anticipated and potential revenue losses and gains, anticipated recognition and expensing of specific revenues and expenses, potential acquisitions and acquisition strategy, cost reduction and integration initiatives, and other matters that may constitute forward-looking statements.

These forward-looking statements involve known and unknown risks, uncertainties, assumptions, and other factors that may cause the actual results, performance, or achievements of Descartes to differ materially from the anticipated results, performance, or achievements implied by such forward-looking statements. These factors are outlined in the press release and in the section entitled "Certain Factors That May Affect Future Results" in documents filed and furnished with the SEC, the OSC, and other securities commissions across Canada, including our Management's Discussion and Analysis filed today.

We provide forward-looking statements solely for the purpose of providing information about management's current expectations and plans relating to the future. You're cautioned that such information may not be appropriate for other purposes. We don't undertake or accept any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements to reflect any change in our expectations or any change in events, conditions, assumptions, or circumstances on which any such statement is based, except as required by law.

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

Edward J. Ryan -- Chief Executive Officer

Hey, great. Thanks, Scott. Good afternoon, everyone, and welcome to the call. Thanks for joining us today. As you'll see from our results, we had a great Q1 to kick off our fiscal year. Our customers continue to benefit from our investment that have expanded the global logistics network with new technologies, content, and trading partners. Happy customers are more likely to buy more stuff, and we have lots of happy, engaged customers. For those of you that attended user group, you would've had the chance to see that for yourself. Engaged customers are also more likely to share their ideas about how you can help them solve more problems, and we feel very fortunate to have customers that are passionate about sharing their ideas on acquisitions and enhanced solutions that can benefit the broader global logistics network community.

I mentioned the broader GLN community on purpose because, remember, we're not just focused on one type of customer; we build solutions and tools for the entire community of participants in the supply chain -- shippers, carriers, and logistics intermediaries -- and we connect them to government agencies as well. Logistics is a multi-party, multi-process challenge, and if you want all the participants in the supply chain to join your network, you're gonna be more successful if you can add value with specific tools for each participant. We've had this vision for a while, and we continue to execute against our plans. As things get more complicated in the global trade landscape, customers increasingly see the need to collaborate with their trading partners in real-time with automated tools that leverage reliable data and content to help them make better decisions.

So, I'd like to start today's call by thanking our customers for doing more stuff with us and for continuing to share their great ideas about where to invest for the future. I'll speak to some of those investments on the call, including an update on Visual Compliance, and I'll provide some comments on our latest acquisition, CORE. Allan will then provide a detailed overview of our quarterly financial results, and I'll then finish up the call talking about our calibration for Q2 and our operating plans moving forward. But first, let's start by going over some of the key financial highlights for the first quarter of fiscal 2020.

We had another great quarter of operating results, and we're very happy with our key metrics, fueled by our continued organic growth and our ability to successfully integrate acquisitions. Our adjusted EBITDA continues to grow nicely. For the quarter, we generated $28.7 million of adjusted EBITDA, an increase of 30% over Q1 of last year. A partial quarter of Visual Compliance was a contributor. As many of you will recall, we earlier said that for the fiscal year, we expect to grow more than our longer-term plan for 10-15% growth in adjusted EBITDA.

Revenue for the quarter was up 16% from Q1 of last year, coming in at $78 million. We continue to convert our EBITDA into cash, generating a record $23.4 million of cash in the quarter and consistent with our long-term operating plans, we've been investing cash back into our business through focused R&D investments and by combining with complementary businesses. All in all, another great quarter here at Descartes to kick off the new fiscal year. We have a stable, cash-generating business, and we're well positioned to continue our growth.

So, with that, let's talk about some of the investments our customers continue to encourage us to make and how we believe those investments will help us build out our network for shippers, carriers, and logistics intermediaries to connect to and collaborate with each other so that they can move goods efficiently and securely.

I'd like to start with some comments around our organic investments and the role that an engaged customer base can have to help set up your strategic direction. In late March, we held our annual user and partner conference in Florida, Descartes Evolution. It's an opportunity for our customers and partners to come down and share their ideas with each other and while getting direct access to the team of the main experts from Descartes that build and support the products they use. Those of you that attended will have had a chance to see this in person, but for those that weren't there, maybe I can provide a bit of color as to what you would've seen.

You would've seen leading carriers, shippers, and logistics intermediaries engaged with each other, sharing ideas about how they leveraged Descartes tools in their own business, but also sharing ideas more generally about the challenges and opportunities they faced in their industries. We consistently hear from our customers that having a chance to meet with their peers and trading partners is extremely valuable. You would've seen a number of sessions where we had a great attendance and some with standing room only, such as our MacroPoint visibility and capacity matching sessions, our Trade Data Content sessions, including Visual Compliance, and our sessions focused on e-commerce and omni-channel retailing. You would've seen an engaged partner community as part of these discussions in sessions, our partners remaining an important part of our go-to-market strategy.

You would've also seen these customers and partners not just listening to our ideas but engaging in discussions with Descartes personnel, sharing their ideas about areas to improve existing products and investment in new products. This feedback is critical for our ongoing investment strategy, but it's also important to note that it doesn't start and stop at user group. We are continually engaging with customers about product development and areas to strengthen our global logistics network. And as I mentioned off the top, these investment areas aren't just for our product development strategy but also for acquisition targets. Our customers are a great source of acquisition ideas and sometimes even introductions. With their help, we've been able to build a robust pipeline of acquisition opportunities, and we're pretty excited about the landscape of opportunities in front of us today.

So, with that, let's talk about our two most recent acquisitions. I'll start with Visual Compliance, as I'm sure everyone is keen to hear about how things are going there. Let's start with a reminder as to what Visual Compliance does and how they fit within our global logistics network. Visual Compliance provides software solutions, content, and services to automate customs, trade, and fiscal compliance processes, with a focus on denied and restricted party screening processes and export licensing.

The acquisition followed other recent investments in trade content, including Datamyne, CustomsInfo, and MK Data, a business that was also focused on denied party screening. Adding Visual Compliance not only gave us more scale in denied party screening space, but it's also complementary to our MK Data solution, as it adds new functionality for us to bring to market. MK Data is very strong in supporting large-batch screening and powering SAP and Oracle global trade management platforms, whereas Visual Compliance offers a more robust transactional system, which can be helpful in markets such as e-commerce.

Looking at market dynamics, denied party screening is an area where we're excited to invest further in. You don't need to look too hard to find news about the latest trade agreements and disagreements with lists of sanctioned companies and products changing literally every day. Denied and sanctioned party screening has become a critical must-have for companies for every business dealing that they have, whether it be for shipments of products abroad or relationships with new and existing customers, partners, suppliers, and employees. We anticipate that the future may include regulatory mandates on certain businesses to conduct these types of screen activities. In the meantime, those that don't have some sort of screening solution in place put themselves at risk. We've seen demand for more screening services from our direct customer base as well as from our partners such as SAP and Oracle.

Now that we're three months into the integration with Visual Compliance, we can provide a little color as to how things are going, and we're really pleased with where that business is at. From a financial perspective, we're really pleased with the continued growth of the recurring revenues of the business and the financial profile remains very healthy. We've come out of the gate strong, and the business is performing ahead of our plans. But perhaps more importantly, as we look ahead, we're really pleased with how the integration is going and how that will set us up for further success in the market.

From a go-to-market perspective, we've been working quickly to cross train the sales teams on either side, and we're seeing some early traction in a few areas, including solid demand for visual compliance in Europe. From an operations perspective, we've also made some good progress on our plans to bring the content teams together so we can align our processes and streamline content collection and normalization. By doing so, we can become more efficient, and we can free up resources to create more content and product offerings to take to market. More generally, we're also really pleased with the attitude of the incoming team. They've been a pleasure to work with, and we're really happy to have them as part of Descartes.

More recently, in early May, we announced the acquisition of CORE. So, what does CORE do and how do they fit in? CORE's an electronic transportation network that provides global air carriers and ground handlers with shipment scanning and tracking solutions. Customers use CORE's network to accurately track international mail, parcel, and cargo shipments as well as U.S. domestic mail and parcel shipments. As U.S. domestic and international e-commerce continues to grow, more demands are being placed on carriers and their partners to deliver efficiently and report events in real time.

The CORE acquisition complements our recent investment in Velocity Mail, helping us to better serve the logistics service provider community, working with postal authorities around the world. In fact, we learned about CORE as a result of the Velocity Mail acquisition, and that's something you see quite often when we combine with someone in that it presents new opportunities for additional expansion. For instance, following our acquisition of BearWare a few years back, we then acquired another leading pool-distribution software provider, PCSTrac. We brought the two businesses together and combined the best of both worlds, and we've seen tremendous success in that space over the last couple years as a result.

Looking ahead to the combination with CORE, we're not only strengthening our position in the growing domestic and global e-commerce market by bringing two leaders together, CORE solutions also extend beyond mail and parcel shipment tracking with air cargo tracking solutions. We will be adding these air cargo tracking capabilities to our global logistics network, which we believe will present a compelling opportunity for our global air cargo community to enhance real-time tracking and visibility of air shipments. It's still early days here with CORE, but we're excited about what they bring to the table, and I'd like to take this opportunity to welcome the CORE employees and customers to our global logistics network.

Before handing the call over to Allan to talk a little bit more about the financials, I'd like to thank some people that continue to contribute to the strength of our business. So, thank you to our employees for all the hard work they put in to make sure our customers get results. Our customers continue to get results, and that's why we have a successful business. For the second time on this call, thank you again to our customers who continue to place confidence in Descartes as their network of choice. Whether you're a shipper, logistics intermediary, carrier, or even a government agency, thanks for connecting and helping our community grow and thanks for your continued engagement. I'd like to thank our partners for helping us continue to expand our ecosystem, and finally, thank you to our shareholders for continuing to have confidence in Descartes.

And with that, I'll turn the call over to Allan.

Allan Brett -- Chief Financial Officer

Thanks, Ed. As indicated, I'm gonna walk you through our financial highlights for the first quarter of fiscal 2020. We are pleased to report record quarterly revenues of $78.0 million this quarter, up 16% from revenues at the $67.0 million in the first quarter of last year. Due to the general strength in the U.S. dollar versus the euro, the pound, and Canadian dollar, there was a negative impact to revenue from foreign exchange of approximately $1.7 million when compared to the same quarter last year. So, excluding this FX impact, revenue would've increased by approximately 19% year-over-year.

Our revenue mix continues to be very strong with services revenue representing 86% of total revenue, or $67.0 million in the first quarter, compared to $57.8 million in the same quarter last year, an increase of 16% and consistent at 86% of sales. License revenues came in at $2.3 million, or 3% of sales in the quarter, up slightly from license revenue of $1.9 million in Q1 last year and consistent at 3% of revenues, while professional service and other revenue came in at $8.7 million, up 19% from revenue in this category of $7.3 million in the first quarter last year, but again, consistent at 11% of revenue.

Gross margin was solid at 74.5% of revenue for the quarter, which is an increase from gross margin of 72.3% of revenue in the first quarter last year. This increase is mainly due to the addition of the Visual Compliance business acquired in mid-February, as well as the continued growth in revenue with existing customers. Despite continued planned investments in product development this quarter, as well as additional sales and marketing activities, including hosting our annual user group during the quarter, we've continued recurring revenue growth and leverage from the acquisition of Visual Compliance.

We continue to see strong adjusted EBITDA growth of almost 30% to $28.7 million, or 36.8% of revenue, compared to $22.1 million, or 32.9% of revenue, in the first quarter of last year. As a result of these solid operating results, cash flow generated from operations came in at $23.4 million, or approximately 82% of adjusted EBITDA in the first quarter, and this compares to operating cash flow of $18.9 million, or 86% of adjusted EBITDA, in Q1 of last year. Going forward, subject to unusual events and quarterly fluctuations, we expect to continue to see strong operating cash flow conversion of approximately 80-90% of our adjusted EBITDA for the balance of fiscal 2020.

From a GAAP earnings perspective, net income came in at $7.3 million, or $0.09 per diluted common share, in the first quarter, an increase from net income of $7.0 million, or $0.09 per diluted common share in the same period last year. Net income in the first quarter was impacted by increased interest expense and amortization of the tangible assets this quarter, both related to the Visual Compliance acquisition. Overall, we are very pleased with the solid operating results in the quarter as strong revenue growth allowed us to continue to make increased investments in the business while achieving a 30% growth in adjusted EBITDA year-over-year and strong cash flow from operations.

If we now look at the balance sheet, our cash balances totaled $29.6 million at the end of the first quarter while borrowings under our revolving credit facility were $242.7 million, for a net debt position of approximately $213 million at the end of Q1. Note that we used our cash flow from operations to repay approximately $20 million on the credit facility during the first quarter, while subsequent to the end of the first quarter, we borrowed approximately $22 million on the credit facility to complete the core acquisition, as Ed mentioned. As a result, we currently have approximately $265 million outstanding on a $350 million revolving credit facility. As always, our base shelf perspectives allows us to offer and issue up to $750 million in additional capital. So, in short, we continue to be very well capitalized to allow us to consider all acquisition opportunities in our market consistent with our business plan.

As we look to the second quarter of this year, we should note the following. After incurring approximately $1.4 million in capital additions in Q1, we expect to incur approximately $4.5 million to $6.5 million in additional capital expenditures for the balance of the year, with this balance expected to include further investments in our network security and infrastructure. We expect amortization expense will be approximately $52 million for the balance of FY20, with this figure being subject to adjustment for FX changes and future acquisitions.

Our income tax rate came in at approximately 26% of pre-tax income in the first quarter, as we trend toward our statutory tax rate in Canada and the U.S., our two largest markets. Going forward, we would expect that our tax rate will continue to trend in the range of 24-27% of pre-tax income over the balance of the year, although, as always, we should add that our tax rate may fluctuate from quarter to quarter from one-time tax items that may arise as we operate internationally across multiple countries. We expect stock-based compensation will be approximately $4 million for the balance of the year, subject to any forfeitures of stock options or share units.

And finally, in the past, we've indicated that we are comfortable that we would operate the business with an adjusted EBITDA range of 32-37% of sales. As a result of the strength from recent acquisitions and the continued operating leverage from revenue growth within our business, we now expect that we will achieve adjusted EBITDA operating ratios in the range of 35-40% of revenue in the quarters ahead.

With that, I'll turn it back over to Ed, who will wrap up with our baseline calibration.

Edward J. Ryan -- Chief Executive Officer

Great. Thanks, Allan. So, calibration for Q2 FY2020, 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 Q2 assumes the following exchange rates: $0.74 Canadian dollar, 1.12 euro to U.S. dollar, and 1.3 GBP to U.S. dollar. Our calibration for Q2 is $76 million in visible, recurring contracted revenues, our baseline revenues. Our baseline operating expenses are $52.2 million. This gives us a baseline calibration of $23.8 million for adjusted EBITDA for Q2.

Some other key points related to how we're positioned for fiscal 2020, we have a solid financial footing. We have a healthy business that's well calibrated, and we have a healthy balance sheet. We're profitable and cash-generating. We have low capital needs within our organic business, and as you've seen from our recent historical financial results, we have solid growth in our organic business. Our primary uses of capital for continued use and acquisitions, we've completed 43 acquisitions since 2006, and we have access to additional capital quickly, should we need it. Allan mentioned that following the acquisition of CORE, we have about $265 million drawn on our line of credit of $350 million, leaving $85 million of capacity available immediately. We've also filed a preliminary shelf prospectus for up to $750 million if capital was needed to be raised by other mechanisms.

We have a strong acquisition pipeline. There continues to be a lot of industry activity right now with the consolidation continuing in our market. With our capital capacity and our execution capabilities, there are still a number of acquisition opportunities to expand the geographic reach, functional capabilities, trade data and content, or community of participants on our network. We continue to see a lot of interest in opportunities out there to continue or even accelerate our pace of profitable growth. We're seeing both larger and smaller opportunities, and while we'll review everything as it comes our way, we're not buyers for buyer's sake. The fact that we have an acquisition line of credit and a shelf filing in place doesn't change how we view acquisitions. We intend to continue to be prudent on valuation, but we're confident in our ability to deploy capital effectively.

Furthermore, we don't see the recent larger acquisition of Visual Compliance impacting our ability to continue executing on our plan. As I just said, we're confident in our ability to deploy capital, as you've just seen with our acquisition of CORE, and we have a robust integration methodology in place to help us quickly and efficiently integrate incoming businesses. As a reminder for our plans for the remainder of fiscal 2020, as we've said in the past, our belief for sustainable growth in the long-term is 10-15% growth in adjusted EBITDA. However, given the scale of Visual Compliance and that acquisition, for fiscal 2020, we're planning for a growth rate in adjusted EBITDA in the mid-to-high 20s.

As in the past, we intend to invest any overperformance back in the business. Our growth is planned to come through a combination of organic and inorganic activities, and acquisitions are not incremental to this plan. We intend to continue to focus on recurring revenue and de-emphasize one-time license sales, given the current performance of the business and mindful of the FX environment. As Allan mentioned, we are increasing our planned operating margin from 32-37% to a range of 35-40%, but please keep in mind, this could vary if we buy other businesses that need fixing up or if the FX environment changes, both of which would impact that metric in the short run.

And finally, as always, we'll continue to make ourselves available to shareholders to answer any questions. We think we've got a great business. We wanna be available to help people learn about our business. We'll continue to spend time and resources to get the word out, and we hope you'll do the same.

...

So, with that, let's open it up to your questions. Operator?

Questions and Answers:

Operator

Thank you. We'll now begin the question and answer session. If you have a question, please press *1 on your touch-tone phone. If you wish to be removed from the queue, please press #. There will be a delay before the first question's announced. If you're using speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have an audio question, please press *1 on your touch-tone phone.

And our first question comes from Paul Steep from Scotia Capital. Your line is open.

Paul Steep -- Scotia Capital -- Software and Media Research Analyst

Great. Thanks. Ed, can you maybe talk just a little bit about how we wanna think about your capital allocation strategy right now? You mentioned a strong M&A pipeline. What's the comfort with taking the level up if the right opportunity sort of appeared from taking leverage toward maybe three times or looking at other options?

Edward J. Ryan -- Chief Executive Officer

Well, I think, as always, we're gonna do exactly what we think we should do in terms of we find a company that we think would be a good acquisition and make money for our shareholders. We view it as our job to make sure we have the access to capital to do that. I think you've seen us do that a number of times in the past, and I think that'll continue into the future.

Paul Steep -- Scotia Capital -- Software and Media Research Analyst

And if we move onto CORE, the contingent consideration there was fairly high. What's gonna trigger that consideration? Should we think that it's more revenue growth story, or is there a bigger opportunity, maybe on building up maintenance revenue? We're curious about that one given the combination with Velocity Mail.

Edward J. Ryan -- Chief Executive Officer

We don't really like earn outs, but when we do have them, they're typically focused on stuff that we can measure, and revenue's the most obvious one, and that is the case here. I think I could say this for every one we've ever done. We would always be happy if they hit the earn out -- be happy as they are.

Paul Steep -- Scotia Capital -- Software and Media Research Analyst

Great. And just a final clarification on that one. What's the opportunity with putting it together with Velocity Mail? It basically looks like it gives you effectively a great global platform there. How should we think about the timing to maybe get toward that consolidated product? Thanks.

Edward J. Ryan -- Chief Executive Officer

Thanks, Paul. We're working on it right now. They come at the problem from a little different angle with CORE being focused on some technology that let's you scan shipments in and readers that help you do that. We think with those two acquisitions, we're the global leader in this space, and we do business with just about every airline in the world, so it's something we think we can carry around the world and maybe potentially find more opportunities for that. On the cost side, that wasn't really our intention in buying it. There may be ways for us to operate more efficiently over time with the two businesses, but that certainly wasn't the driving focus behind the acquisitions, more trying to become the dominant player in our space in that part of our business.

Paul Steep -- Scotia Capital -- Software and Media Research Analyst

Thank you.

Edward J. Ryan -- Chief Executive Officer

Thanks, Paul.

Operator

And the next question comes from Paul Treiber from RBC. Your line is open.

Paul Treiber -- RBC Capital Markets -- Equity Research Analyst

Thanks very much and good afternoon. Just in the MD&A, the disclosure in Visual Compliance is at a contributed $5.7 million in revenue in the quarter. Is the right number if we annualize that? Is that the right number to assume for the full year, or is there any unusuals or adjustments that may have impacted Q1 that may not be recurring through the rest of the year?

Allan Brett -- Chief Financial Officer

Paul, it's Allan. I think you have to keep in mind that the Visual Compliance we had in for a partial quarter, so we'll have it for a full quarter in Q2. And there's also an impact from the accounting for deferred revenue that you have to take with the accounting rules, so those will impact us for the first year. But other than being a partial quarter and those accounting rules, which will affect us for a year, it's a reasonable number for the run rate going forward, and we hope to grow off that.

Paul Treiber -- RBC Capital Markets -- Equity Research Analyst

And just to clarify, the deferred revenue write down, is that the typical -- or roughly typical -- 20% of total revenue?

Allan Brett -- Chief Financial Officer

Of deferred revenue, yes. So, it wouldn't 20% of the total revenue in this case, but it's a significant number in this business because a lot of the business was built in advance. You'll see a big increase in our deferred revenue number, a lot of that coming from Visual Compliance, and unfortunately, we have to lose part of that in the purchase price accounting, which I think you understand then we pick up next year.

Paul Treiber -- RBC Capital Markets -- Equity Research Analyst

That's helpful. Just another accounting one. I asked this last quarter, but just wanted to clarify. Just on the new lease accounting standard, was there any impact to disclose on EBITDA?

Allan Brett -- Chief Financial Officer

No. You'll see it in the balance sheet about $10.5 million worth of leases go in and a lease obligation offsetting that in the liabilities, but very, very insignificant impact to net income or EBITDA.

Paul Treiber -- RBC Capital Markets -- Equity Research Analyst

Thank you. And then just one more from me for Ed, just on IBM's blockchain initiative, TradeLens, a couple additional ocean carriers joined that. I think you talked at length about it in the past. Does a couple more carriers change your view on that initiative?

Edward J. Ryan -- Chief Executive Officer

No. I mean, look, we're participating in a number of blockchain initiatives as well, and any ones that are successful I'm sure we'll be right in the middle of. It's another way that customers can communicate. This is my personal opinion, just looking at that form of communication versus some of the other ones that are out there, I think if you come back 10 years from now, I think it's unlikely to be the way that the world communicates with each other, but to the extent that we have customers that wanna communicate that way, it's our job to do that with them, and we stand ready to participate with them in doing it. I just don't see a lot of blockchain transactions going on right now. It's a lot of talk, not a lot of action. And so, if that changes, we're gonna be right in the middle of it, but until it does, we're gonna treat it as we see it.

Paul Treiber -- RBC Capital Markets -- Equity Research Analyst

Thank you. I'll pass the line.

Edward J. Ryan -- Chief Executive Officer

Thanks, Paul.

Operator

And the next question comes from Matt Pfau from William Blair. Your line is open.

Matt Pfau -- William Blair -- Equity Research Analyst

Hey, guys. Thanks for taking my questions. I wanted to ask on the capacity matching solution, obviously a lot of interest there at your user conference. How did that convert into users on the platform, and then when could this product become a more material portion of revenue for you?

Edward J. Ryan -- Chief Executive Officer

We were really pleased with how it went at user group. We had a bunch of people that were very interested in it, and even existing customers, they were talking about expanding their usage of the solution. And so, we're excited about it because it's taking off quickly. But still, it's early days yet, right? I think we have a little north of 30 customers working on it with us right now, and we continue to go and add more participants carefully to that solution. But I think it'll be a ways off before it's a material part of our revenue. It's exciting to us because we're starting from zero and building stuff from the ground up that we think has a lot of legs, but when you're starting from zero, it also takes a long time to impact the revenue of a company of our size.

Matt Pfau -- William Blair -- Equity Research Analyst

Got it. And then just wanted to ask on the Amber Road acquisition and E2open with their acquisition of INTTRA and then Amber Road. It seems like they're starting to have some overlap with you. How does that impact you at all, if any?

Edward J. Ryan -- Chief Executive Officer

The INTTRA one, we're expanding our partnership with them, so that's great. I don't view them as a competitor there. We're working together to get more and more people communicating electronically in the ocean space. The Amber Road side is maybe less of an issue for us, and we don't directly compete with Amber Road. We work alongside SAP, Oracle, NetSuite, and a couple others to go head-to-head with Amber Road and 15 or 20 other companies like them in that global trade management space, and we didn't really have a ton of opinion on whether Amber Road's a public company or Amber Road's owned by E2open. It wasn't material issue for us.

Matt Pfau -- William Blair -- Equity Research Analyst

Got it. That's it for me, guys. Thanks a lot.

Edward J. Ryan -- Chief Executive Officer

Hey, thanks, Matt.

Operator

Your next question comes from Steven Li from Raymond James. Your line is open.

Steven Li -- Raymond James -- Technology & Clean Tech Equity Analyst

Thank you. Quick one for Allan. Give us the FX impact on the revenue. How about the EBITDA, Allan?

Allan Brett -- Chief Financial Officer

Very insignificant, Steven. As you know, we're very much naturally hedged operating in the various currencies. So, a little bit of [inaudible] which offsets the impact in the pound and the euro, so around $100,000 positive impact to EBITDA from the $1.7 million revenue impact.

Steven Li -- Raymond James -- Technology & Clean Tech Equity Analyst

Thanks. And just if you can give us an update -- a regulatory update on [inaudible], so ACE and whether it's started to impact your business, your compliance business? Thank you.

Edward J. Ryan -- Chief Executive Officer

I mean, you've heard us talk about [inaudible] for the last several years. We're getting into the exciting part for us, which is when the government starts enforcing it, and really every customer has to join. I think sometime later this summer, you're gonna see fines kicking in, which drags the last group of participants into it and kind of puts us in a situation where all the people that need to do this are going to be doing this, and hopefully most of them with us. So, we're excited about it, ready for it. We've been years coming, getting our customers ready for this, and most of them are already in the middle of it, but this'll be the last round of customers coming in I think as the penalty phases kick in I believe toward the end of the summer.

Steven Li -- Raymond James -- Technology & Clean Tech Equity Analyst

Would you say the majority of your customers is still yet to come in or you've done quite a fair bit of that already?

Edward J. Ryan -- Chief Executive Officer

No, I think the majority of our customers are in, well over 50% are in. There'll be some guys that come in toward the end, and there'll also be customers that are in that don't buy all their shipments because they don't have to, so they'll still find paper ways to do it when they have some kind of issue with their system. But by the end of the summer, everyone's gonna have to be doing it electronically, which is great news.

Steven Li -- Raymond James -- Technology & Clean Tech Equity Analyst

Great. Thanks.

Edward J. Ryan -- Chief Executive Officer

Thanks, Steven.

Operator

And our next question comes from Deepak Kaushal from GMP. Your line is open.

Deepak Kaushal -- GMP Securities -- Equity Research Analyst

Hey, thanks. Hey, guys, how are you guys doing?

Edward J. Ryan -- Chief Executive Officer

Hey, great. Thanks, Deepak.

Deepak Kaushal -- GMP Securities -- Equity Research Analyst

Sorry, that was my first question. I've got a couple more.

Edward J. Ryan -- Chief Executive Officer

We're doing great. Yes, thanks.

Deepak Kaushal -- GMP Securities -- Equity Research Analyst

I'm not as funny as Scott, but I try. Visual Compliance, I just wanted to dig into that a bit more. So, you guys in the past with MK Data, the way I understood it with my simple mind, you supplied the data to SAP and Oracle platforms, and they serve the customers, whereas Visual Compliance actually had their own platform that served customers directly. Will those kind of be competing with each other or are they complementary? What benefit does Oracle and SAP get now that you own Visual Compliance?

Edward J. Ryan -- Chief Executive Officer

No, we bought it because it was complementary, right? And it's a little different than you're describing. Directionally correct, but I'll give you a little more detail on it. So, an SAP or Oracle customer buys their global trade management system, and as part of that, they then come directly to us to buy data content. They buy two types of data content: tariff and duty information that they can use to feed the day-to-day changes in the rate information so that the companies that are using those global trade management solutions are always calculating accurate tariffs and duties, and then the second piece is on the denied party screening side where we're supplying them with the list that they can have fed directly into their SAP and Oracle systems.

Visual Compliance does not have a system that competes against SAP and Oracle, but they sell to customers that either have built their own global trade management system or use a third party that's not SAP and Oracle, and they do it in a way that was very interesting to us, which was to have a transactional processing engine where they send us names and shipment information and say, "Can I send this shipment to this guy?" and they give us all the information about the person they're shipping it to and what they're shipping, etc., and we come back with an answer -- Visual Compliance comes back with an answer specifically. And that transactional system I think opens us up to a much broader slot of the market that is the people that are not using SAP, or Oracle, or NetSuite, and so that was our reason behind doing it.

We're a dominant player in that market as a result of owning both of them, and we're pretty excited that now we kinda have all the bases covered in terms of the different ways the customers wanna do this and our ability to service them.

Deepak Kaushal -- GMP Securities -- Equity Research Analyst

That's actually quite helpful. And then I wanted to ask you on that further, on the pricing strategy, I didn't get full details, but at your user conference, I kind of picked up that the pricing strategies between what you had with MK Data and your existing content business versus Visual Compliance is slightly different. Is this related to the fact that it's a different type of customer base and different application, or is there a fundamentally --

Edward J. Ryan -- Chief Executive Officer

It's a different service.

Deepak Kaushal -- GMP Securities -- Equity Research Analyst

How do you reconcile the different pricing strategies?

Edward J. Ryan -- Chief Executive Officer

It's a different service, right? One guy's doing it one way and another guy's doing it an entirely different way, and I don't really see any problem with that. I thought they were both priced pretty fairly. But one guy in effect is buying bulk, and I'm giving them bulk distribution in everything, and the other guy's paying transactional prices. And as we looked at it, they were close enough. I think the customers are getting a pretty good deal on both sides of it, so for the foreseeable future, we're leaving that mechanism in place.

Deepak Kaushal -- GMP Securities -- Equity Research Analyst

That's helpful. And then on the capacity matching, I think on the previous question, you said you were at 30 customers but careful to add new ones. Maybe you can talk about the challenges in scaling the customer base too quickly and if you're at the stage if you're pushing back demand or how we should think about that?

Edward J. Ryan -- Chief Executive Officer

We're doing a couple things. One, we're trying to get our customers to do more with us. They don't all give us all the capacity to match, and so as our solution gets more and more capable or robust, we're rolling that out within the existing customer base, and we're also listening to them trying to get feedback so that when we bring this out to market in a broader sense that we have all the functionality that the driver wants, that the broker wants, and that the broker's customers want in managing this process for them. So, that's why you see us proceeding cautiously here. That's why you see us making a lot of investment to make sure this is a great service for the long run. We don't launch a whole lot of new services at Descartes. Most of the time, we are buying new services and enhancing them. In this case, we're launching a brand new one out of the gate, and we're being real careful about how we do that to make sure our customers like the service and remain happy with us.

Deepak Kaushal -- GMP Securities -- Equity Research Analyst

Good. Well, that's good to know, and it's good to know that you're starting to launch some new ones on your own. I have a final question for Allan. Again, it's a follow-up. We talked about the deferred revenue related to Visual Compliance. So, if you're increasing your EBITDA growth guidance to 30%, I would assume that the cash flow, given the deferred revenue issue, would lag it, or would the cash flow grow in kind of the same pace?

Allan Brett -- Chief Financial Officer

No. First off, EBITDA --

Deepak Kaushal -- GMP Securities -- Equity Research Analyst

Did I reveal my accounting stupidity in that question?

Allan Brett -- Chief Financial Officer

No, no. So, what we did talk to you about is increasing the range of EBITDA as a percentage of revenue that we feel comfortable operating the business at 35-40% of revenue, so that is something we did do. As far as the deferred revenue impact, it has an impact of suppressing revenue in the first year post-acquisition. This happens in every acquisition. This one's a little bit bigger with most of the revenue being built annually in advance on contracts, so it will have an impact. It will not have as big of an impact on cash, but overall, that won't change our thought process on cash flow conversion. We'll still convert about 80-90% of our adjusted EBITDA, if that answers your question.

Deepak Kaushal -- GMP Securities -- Equity Research Analyst

Yes. Well, I thought I heard you say that you expect EBITDA to increase this year 30% year-over-year versus typical 10-15% range. And so, the question was does cash flow --

Allan Brett -- Chief Financial Officer

Ed did mention that EBITDA would increase in the high-20s I believe, and we were 30% up this quarter. So, good --

Deepak Kaushal -- GMP Securities -- Equity Research Analyst

And so, cash flow should follow that?

Allan Brett -- Chief Financial Officer

-- strong performance. Yes.

Deepak Kaushal -- GMP Securities -- Equity Research Analyst

Sorry, cash flow should follow that? Okay. Excellent. Thank you. I appreciate it. Thanks for taking my questions.

Edward J. Ryan -- Chief Executive Officer

Thanks, Deepak.

Operator

And that concludes our question and answer session. I'll turn the call back over to the speakers for final remarks.

Edward J. Ryan -- Chief Executive Officer

Great. Thanks, everyone. We appreciate your time this afternoon and look forward to reporting back to you on our results for Q2 in a couple months. Have a great day.

...

Operator

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

Duration: 41 minutes

Call participants:

Scott Pagan -- President and Chief Operating Officer

Edward J. Ryan -- Chief Executive Officer

Allan Brett -- Chief Financial Officer

Paul Steep -- Scotia Capital -- Software and Media Research Analyst

Paul Treiber -- RBC Capital Markets -- Equity Research Analyst

Matt Pfau -- William Blair -- Equity Research Analyst

Steven Li -- Raymond James -- Technology & Clean Tech Equity Analyst

Deepak Kaushal -- GMP Securities -- Equity Research Analyst

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