Earnings Call Transcript - DSGX Q3 2022

Operator, Operator

Welcome to the Descartes Systems Group quarterly results call. My name is Darryl, and I'll be your operator for today's call. As a reminder, this conference is being recorded. I will now turn the call over to Scott Pagan. Scott, you may begin.

Scott Pagan, Investor Relations

Thank you, and good afternoon, everyone. Joining me remotely on the call today are Ed Ryan, CEO; and Allan Brett, CFO. And 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, and these statements are made under the safe harbor provisions of those laws. These forward-looking statements include statements related to our assessment of the current and future impact of geopolitical and economic uncertainty on our business and financial condition; Descartes' operating performance, financial results and condition; Descartes' gross margin and any growth in those gross margins; cash flow and use of cash; business outlook; baseline revenues, baseline operating expenses and baseline calibration; anticipated potential revenue losses and gains; anticipated recognition and accounting 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 don't undertake or accept any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements to reflect any change in our expectations or any change in events, conditions, assumptions or circumstances on which any such statement is based, except as is required by law. And with that, let me turn the call over to Ed.

Edward Ryan, CEO

Thanks, Scott, and welcome, everyone to the call. We had an excellent third quarter and first nine months of the year with record financial results. We're excited to discuss these results and provide insight into the current business environment. To start, I'll highlight some aspects of our financial results and how our business performed last quarter. Then, I will pass it over to Allan, who will provide more detail on the Q3 financial results and some corporate finance matters. Afterward, I'll return to give an update on the current business environment and how our business is positioned, after which we'll open it up for the Q&A session. Let’s begin by looking at Q3. As has been our goal, we aimed to grow our adjusted EBITDA by 10% to 15% annually, regardless of market conditions, and we achieved that goal again. We recorded an adjusted EBITDA of $54.5 million, representing a 13% increase from a year ago, driven by double-digit organic growth in our recurring services business. Our services revenues also reached a record high, up 13%, while total revenues increased by 12% compared to last year. We generated $50.9 million in cash from operations, which is 93% of our adjusted EBITDA. Adjusted EBITDA as a percentage of revenues was 45%. All these metrics were in line with our plans, marking a very strong financial quarter for us despite a challenging foreign exchange environment. Our revenues would have been $5 million higher if we had used last year’s FX rates, which would have reflected a 16% increase from the same quarter last year. Adjusted EBITDA would have been about $1 million higher under the same conditions, representing a 15% increase year-over-year. Allan will elaborate on this later. Overall, these strong results could have been even better in a different FX environment. By the end of the quarter, we had $237 million in cash, were debt-free, and had an undrawn $350 million line of credit that we recently extended. We are well capitalized, generating cash, debt-free, and ready to continue investing in our business. We believe our company is well positioned to thrive in current market conditions. I want to discuss two areas from last quarter before handing it over to Allan: first, the areas where our business performed well and second, our acquisition contributions. Regarding performance, our focus at Descartes is on building a consistent, predictable, and sustainable business that can withstand changes in market conditions. We are dedicated to long-term operations and aim to retain customers for life. Reflecting on our business last quarter, a few notable performance areas stand out. The first is global trade intelligence. Our global trade intelligence solutions address three key areas: tariff and duty content for trade systems, sanctioned party screening to ensure compliance with international and domestic sanctions, and historical research tools for monitoring trade and logistics trends for our clients and the industry. Our business is geared to simplify complex processes for our customers. As challenges increase, customers tend to rely on us more, which is certainly true right now. Let’s briefly touch on each area. In terms of tariffs and duties, various global government changes are driving adjustments in trade tariffs as nations modify their relationships with trading partners. Regarding sanctioned party screening, new sanctions are being implemented due to the war in Ukraine, affecting related parties; we also see increasing scrutiny on sanctions involving Western relations with China and rising tensions in Iran. For trade research, long lead times for inventory replenishment remain problematic, particularly due to ongoing sourcing challenges in the Asia Pacific region and limitations in port infrastructure. Our customers are keen to understand competitors’ sourcing and the timing involved in getting goods to warehouses or retail. The second area is market-leading real-time visibility solutions. Last quarter, we highlighted our successes in the real-time visibility segment. Our strengths lie in providing multi-modal visibility across geographies. A significant part of our services comes from our MacroPoint business, which is now part of the Global Logistics Network. We have continued to see robust performance in real-time visibility, with record volumes and successful end-to-end tracking. As supply chain lead times remain unpredictable, our visibility solutions become increasingly vital as we approach peak retail sales seasons. Though the visibility market is competitive, our extensive service, security, and stability have made our solutions favored choices. Lastly, customers are increasingly focused on cost-efficient supply chain and logistics solutions. Concerns about potential economic downturns have led customers to emphasize controlling logistics costs. Fortunately, logistics costs for international shipments have decreased from pandemic highs, especially in the ocean freight sector. However, customers are also searching for optimization opportunities within their operations, which has increased demand for our optimization solutions. These solutions enable customers to offer excellent service with fewer delivery resources, a highly attractive proposition given rising fuel costs and inflationary wage pressures. Now, regarding recent acquisitions, I want to mention XPS, Foxtrot, and NetCHB. XPS, part of our investment in e-commerce, is vital as we believe e-commerce will be a major growth driver for supply chain and logistics going forward. Despite slower growth rates from their pandemic peaks, e-commerce incentivizes companies to enhance last-mile delivery capabilities. Specifically, XPS supports our customers with partial shipments, allowing a broad range of last-mile support. We remain optimistic about its impact. Next is Foxtrot, where we have made additional investments in our optimization solutions amid the rising focus on last-mile deliveries. By improving data integration, we can enhance delivery efficiency, timing, and cost-effectiveness for our customers. Foxtrot utilizes advanced data and machine learning to improve route quality and has quickly become a significant contributor this quarter. Finally, NetCHB exemplifies the trend toward digitization within the logistics service provider industry. The era of large paper-based price lists is behind us; to remain competitive, logistics service providers need to operate quickly and transparently. We have invested in various technologies to assist in that digitization, including NetCHB, which helps automate and digitize the import process into the United States. The strong imports this third quarter have also positively contributed to NetCHB's performance. In summary, we had another record-setting quarter, fueled by significant organic contributions from global trade intelligence, transportation management, and optimization solutions. Our recent acquisitions have complemented our existing business and made immediate profits this quarter and year. We ended the quarter with $237 million in cash, $350 million available in credit, and a substantial market opportunity for continued growth both organically and through acquisitions. We are committed to profitable growth to ensure our customers have a secure, stable, and growing technology partner to address their challenges well into the future. I want to thank all Descartes team members for their hard work in achieving this great financial quarter and setting the stage for future success. Now, I'll turn the call over to Allan to discuss our Q3 financial results in more detail. Allan?

Allan Brett, CFO

Sure. Thanks, Ed. I will now discuss the financial highlights of our third quarter, which concluded on October 31. We are pleased to report a quarterly revenue of $121.5 million this quarter, which reflects a 12% increase from last year’s Q3 revenue of $108.9 million. The stronger U.S. dollar relative to other currencies we operate with, primarily the euro, British pound, and Canadian dollar, negatively affected our revenue again this quarter. Excluding the effects of foreign exchange changes, our revenue would have been around $5 million higher, and our growth rate on an FX-neutral basis would have been close to 16% compared to the same period last year. Sequentially, foreign exchange had a considerable impact, with nearly a $2 million negative effect from the second quarter to the third quarter this year, marking the largest sequential impact we have seen in our business. Although revenue from new acquisitions, including a full quarter from the XPS acquisition completed in Q2, contributed positively to our growth, the main drivers of growth this quarter compared to last year were our revenues from new and existing customers. Delving deeper into our revenue details, our revenue mix for the quarter remained robust, with services revenue increasing by 13% to $110.1 million, compared to $97.2 million in the same quarter last year. This growth made services revenue 91% of our total revenue for the quarter, up from 89% in Q3 last year. On a constant currency basis, we estimate that our growth in services revenue from new and existing customers would have exceeded 11% this quarter compared to the same quarter last year. License revenue was $1.1 million, accounting for less than 1% of total revenue for the quarter, down from $1.4 million the previous year and also down from $3.3 million in Q2 due to a couple of unusually large license deals closing last quarter. Professional services and other revenue remained at $10.3 million in both the third quarter this year and last year, as increased professional services revenue was offset by slightly lower hardware revenue this quarter. Over the first nine months of this year, revenue totaled $361 million, representing a 16% increase from $312 million during the same period last year. Excluding foreign exchange effects, revenue growth for the first three quarters would have been closer to 19%. Our gross margin for the third quarter was 77% of revenue, a slight increase from 76% in the third quarter last year. The gross margin has continued to grow slightly with the robust revenue increases we have seen from new and existing customers this quarter, despite some adverse effects from foreign exchange. Operating expenses rose approximately 12% in the third quarter compared to the same period last year, primarily due to recent acquisitions and additional labor-related costs as we continue to invest across various business areas. Similar to previous quarters, sales and marketing expenses increased in Q3, rising from 11% of revenue last year to 12% this quarter as a result of new hires in these areas. Research and Development, along with general and administrative expenses, also saw increases, but these were lower than the revenue growth experienced during the quarter. As a result of revenue growth and strong cost control, partially offset by our planned investments in sales and marketing, we continue to see significant EBIT and adjusted EBITDA growth of 13% to a record $54.5 million, or 44.9% of revenue, compared to $48.2 million, or 44.3% of revenue, in the third quarter last year. Despite being somewhat naturally hedged against foreign currencies, the sharp decline of both the British pound and euro against the U.S. dollar in the third quarter did lead to a negative impact on our adjusted EBITDA of around $1 million compared to the same period last year. Without this adverse foreign exchange effect, our adjusted EBITDA growth would have been about 15%, aligning with the upper end of our target range. For the initial three quarters of the year, adjusted EBITDA has risen by 18% to $160 million from $136 million during the same nine-month period last year. With these strong operating results and solid accounts receivable collections, cash flow from operations amounted to $50.9 million, or 93% of adjusted EBITDA in the third quarter, reflecting an 18% increase from $43.3 million in operating cash flow in the prior year’s third quarter. For the first nine months, operating cash flow stands at $142 million, or 89% of adjusted EBITDA, compared to $131 million for the same nine-month period last year. Subject to unusual events and quarterly variations, we anticipate maintaining strong cash flow conversion and generally expect cash flow from operations to fall between 85% and 95% of our adjusted EBITDA in future quarters. Additionally, the income tax expense for the third quarter was $9.0 million, roughly 25% of pretax income, which is close to our anticipated tax rate but significantly higher than last year’s tax expense of $2.1 million or 8% of pretax income, which benefited from the reversal of certain valuation allowances. With our increased operating profits balanced by the higher income tax expense, our net income for the third quarter amounted to $26.5 million, or $0.31 per diluted common share, compared to $25.5 million, or $0.30 per diluted common share, in the same period last year. Net income for the nine-month year-to-date period was $72.5 million, or $0.84 per diluted common share, compared to $67.1 million, or $0.78 per diluted common share, in the first nine months of last year, again with the rise in operating profits partially offset by higher income tax expenses. Overall, we are once again pleased with our quarterly operating results in the quarter as strong organic growth and solid performance from our recent acquisitions resulted in strong growth in both revenue and adjusted EBITDA for the third quarter despite some FX headwinds, and all the while, we continue to invest in several areas of our business. If we turn our attention to the balance sheet, as Ed mentioned, our cash balances totaled $237 million at the end of October, up from approximately $189 million at the end of the second quarter in July. The increase in cash was primarily related to the $51 million in cash flow generated from operations. And we should note that while we put in place a normal course issuer bid or NCIB program at the beginning of the second quarter, we were not active with the NCIB throughout the third quarter this year. Also, earlier today, we completed the extension of our credit facility, ensuring that we will have access to $350 million of capital, with the ability to upsize this credit facility to $500 million, and this capital will now be available to us through to December 2027. As a result of the above, we still have $237 million of cash as well as $350 million in debt capacity available to us to deploy towards future acquisitions or the NCIB as conditions dictate. So we continue to be well capitalized to allow us to consider all options in the market, consistent with our business plan. As we look at the fourth quarter, we should note the following: after incurring approximately $4.4 million in capital additions for the first nine months of the year, we expect to incur between $1 million and $2 million in additional capital expenditures for the remainder of this year. After incurring amortization costs of $45.8 million this year, we expect amortization expense to be around $14.4 million in the fourth quarter, though this may change due to foreign exchange fluctuations and future acquisitions. Our income tax rate for the first three quarters was approximately 26% of pretax income, which is close to our blended statutory rate. For the fourth quarter, we anticipate our tax rate will remain in the range of 25% to 30% of pretax income. However, it's important to recognize that our tax rate may vary from quarter to quarter due to one-time tax items resulting from our international operations across various countries. Furthermore, after incurring stock-based compensation expense of $10.3 million for the first nine months, we expect this to be about $3.5 million in the fourth quarter, subject to any forfeitures of stock options or share units. I will now hand it back to Ed for some closing remarks and our baseline guidance for Q4.

Edward Ryan, CEO

Great. Thanks, Allan. We're about a month into our next quarter and in the throes of the busy holiday shopping periods, but it seems like it's far from a business-as-usual environment right now. I wanted to share some things that we're hearing from our customers and seeing ourselves. The first is high inventory levels. For the first time in a few years, retailers have full shelves as they entered the holiday season. Because of the challenges with supply chains during the pandemic, retailers were nervous and ordered goods well in advance of the holiday peak period. The challenge for retailers this season is not whether they have inventory but whether they have the right inventory. The early ordering cycles caused lots of predictions and assumptions to be made about what consumers will want. We'll be watching with interest to see what the next replenishment cycles look like in terms of timing, content and size. The second is there's still strong consumer demand. For North America, our customers have not seen a pullback in consumers' willingness to spend money. Rather, they've indicated consumers are still flush with cash and willing to spend if the right good is available. The early returns reported by others from a strong Black Friday sales period in North America are consistent with that. We think this will continue to drive strong last-mile delivery volumes as at-home delivery is even a preferable option for those making purchases in store. For Europe, we're hearing some pullback in consumer spending through the late fall. We understand there's lots of incremental pressures on consumers from the increased energy costs, in part resulting from the war in Ukraine. The third is replenishment lead times remain unpredictable. As we come through the holiday period, we're hearing there's still nervousness about the long lead times required to replenish inventory. Right now, that nervousness isn't coming from the logistics side of things as previous backlogs seem to have worked their way through the logistics infrastructure. There are no longer boats backed up at U.S. seaports. However, the ability to source from China, in particular, is a question mark, especially in light of the various rolling lockdowns in China we've been seeing. Recent news suggests that China is scrapping its Zero COVID policy, but given all of the uncertainty, we anticipate that businesses will continue to order early and that the logistics infrastructure has caught up enough to not be debottlenecked in any delays. The fourth is uncertainty causing lots of contingency planning. If you work in the logistics and supply chain space, you've gotten used to having to be on top of news cycles to see what the latest developments will impact your business. Our customers have gotten used to contingency planning, whether it's alternative sourcing, alternative transportation or alternative routing. Global geopolitical issues and economic issues have kept people on their toes, but so have recent U.S. issues such as potential rail strikes and port labor issues. Our customers expect that they'll continue to operate with a lack of certainty for supply chain and logistics matters. And as a result, we expect they'll benefit from relationships with technology partners with a multimodal and global geographic reach. Fifth is cautiousness. The pervasive tone in what we hear from our customers is caution. To be clear, it's certainly not pessimism. It's caution in running their businesses, in part driven by the lack of certainty in supply chain and logistics that I just described. More broadly, economic factors like interest rates and inflation have put pressure on the cost side of many businesses, especially those who have leveraged their balance sheets. We have continued to see our customers invest in their businesses but often with a view towards cost reduction and/or automation. The next is ESG as a factor in our customers running their businesses. For more and more of our customers, environmental, social and governance issues are becoming relevant to how they operate their businesses. We've seen heightened attention to customers wanting to reduce the environmental impact of the deliveries they make and receive, resulting in investments in optimization solutions and environmental consciousness being a factor in third-party transportation selection. We've also seen heightened attention on compliance matters, workplace and driver safety and diversity. Descartes has published our own ESG report, which identifies how we help our customers with these types of matters, and we anticipate that it will be a continued area of investment for us into the future. So those are some of the things we're hearing from our customers and seeing in our business, things that also inform our calibration for the quarter. Our business is designed to be predictable and consistent. We believe that stability and reliability are valuable to our customers, employees and our broader stakeholders. To deliver this consistency, we continue to operate from the following principles. Our long-term plan is for our business to grow adjusted EBITDA 10% to 15% annually. We grow through a combination of organic growth and acquisitions. We take a neutral-party approach to building and operating solutions on our Global Logistics Network. We don't favor any particular party. We run our business for all supply chain participants, connecting shippers, carriers, logistics service providers and customs authorities. When we overperform, we try to reinvest that overperformance back into our business, and we focus on recurring revenues and establishing relationships with customers for life, and we thrive on operating a predictable business that allows us forward visibility to our revenues and investment paybacks. In our quarterly report, we provided a comprehensive description of baseline revenues, baseline calibration and their limitations. As of November 1, 2022, using foreign exchange rates of $0.74 to the Canadian dollar, $0.99 to the euro and $1.15 to the pound, we estimate that our baseline revenues for the fourth quarter of 2023 are approximately $108 million, and our baseline operating expenses are approximately $67 million. We consider this to be our baseline calibration of approximately $41 million for the fourth quarter of 2023 or approximately 38% of our baseline revenues as at November 1, 2022. We've seen continued operating performance above our adjusted EBITDA operating margin range of 38% to 43%. In Q1 and Q2, we were at 44%, and in Q3, we were at 45%. Given the continued strong performance we've seen in the business and the current FX rate environment, we're increasing our adjusted EBITDA operating margin for Q4 to 40% to 45% and currently anticipate that we will have the same range for fiscal 2024 starting in February. We're already very hard at work on helping our customers deal with these very complex times. We believe that if we focus on making our customers successful, it's our own best chance at achieving our own goal of being a strong and trusted business delivering superior results for customers and shareholders. I want to thank everyone for joining us on the call today. As always, we're available to talk to you about our business in whatever manner is most convenient for you. And with that, operator, I'll turn it over to you for the Q&A portion of the call.

Operator, Operator

Operator Instructions.

Matthew Pfau, Analyst

Ed, wanted to ask on your comments around customers being cautious with their own business. Is that driving any impact in terms of sales cycles or demand for your products or perhaps what products they're purchasing?

Edward Ryan, CEO

No, it's more stuff that we're hearing them talk about. In fact, you probably heard me say this over the past year that supply chain and logistics has become a whole lot more important to everyone, really. And that trickles down to our customers and oftentimes ends up in technology investments as technology tends to have the best ROI. What we're seeing is while our customers are being cautious and they may be covering the break on some other projects, that they continue in the logistics and supply chain space to make investments and continue the investments that they're already making. Our projects are rolling out. We continue to see a strong pipeline. And we think we may be unique in that regard in the business that we're in, right? That may be one of the few areas that they're continuing to have their foot on the gas, in other words. And that's what we're seeing right now.

Matthew Pfau, Analyst

Got it. And then just last one for me on acquisitions. Maybe just some comments on what you're seeing in the market in terms of, are there more deals coming into play, valuation expectations and then competition for those deals?

Edward Ryan, CEO

I think on the medium, smaller ones are kind of our bread and butter, the tuck-ins that we normally do. We're seeing similar to what we have over the last couple of years, we're doing well in that area. We're able to find acquisitions and bring them in, in a timely fashion and without a ton of competition. On the larger stuff, we're starting to see a little bit of softening. I think there's private equity firms that are out there that are a little concerned about overpaying for stuff, and we're starting to see maybe more of those deals coming out, and we'll see what happens whether we jump into them or not. But we're starting to see that market kind of loosen up a little bit if it was tight for the last six months.

Justin Long, Analyst

Allan, I think you said organic growth was around 11% in the quarter when excluding FX, but I wanted to make sure that I heard that correctly. And is there anything you can share on the trend that you saw in transactional volumes in the quarter?

Allan Brett, CFO

So yes, I did say that on a currency-neutral basis, services revenue growth was around 11%, and that's the most important thing that we look at. That's the recurring part of our business. From a transactional perspective, I think Ed hit it in his comments. I mean, we're seeing continued activity in the marketplace and a continued need for our services. So goods are flowing and no appreciable change there in the trends that we've seen coming into the quarter.

Justin Long, Analyst

Okay, got it. And to follow up on the EBITDA margin outlook that you mentioned at the 40% to 45% range for the fourth quarter and the next fiscal year. As you think about fiscal 2024, what level of organic growth is needed to support that margin outlook? And are you assuming any pullback in transactional volumes versus where we are today?

Edward Ryan, CEO

Yes. I mean, the main thing we focus on is 10% to 15% EBITDA growth. We think we're going to be able to hit those numbers in the future as well. That's certainly the way we try to run our business. And we believe we'll have the organic growth in our business to support that.

Scott Group, Analyst

Just to follow up, that 11% ex currency in services, is that inclusive of acquisitions or not? I'm just trying to get a sense of the real underlying organic.

Allan Brett, CFO

No, that's our primary focus. We run this business to grow EBITDA, which incorporates everything we do. We fully integrate the acquisitions. What I'm providing is our best guess regarding the organic growth, specifically from new and existing customers with our traditional services, and that's around 11%.

Edward Ryan, CEO

And specifically, Scott, not including acquisitions.

Scott Group, Analyst

I thought so, I just wanted to confirm. Ed, when you provided the EBITDA margin guidance in the past, you've usually increased it in larger increments. It seems you didn't do that this time. Any thoughts on why?

Edward Ryan, CEO

I believe the way we increased it this time was quite similar to our approach in the past. We may have been a bit hesitant to raise it over the past six to eight months due to considerable uncertainty. I was trying to highlight that during the process. We were indicating a range of 38% to 43% and surpassed that in the last two quarters with a 44%. Our cautious nature as operators might have led to this delay, especially with various factors at play. The fluctuating foreign exchange rates led us to question what would happen next, which certainly affects those margins. However, we aim to be precise when we provide you with that range of 40% to 45%. We recognize that changes in foreign exchange conditions could quickly bring it down. Additionally, being a highly profitable company, we could consider one or two acquisitions that might impact it, and I want to ensure we're accurate in our projections for you. That's the reasoning behind the 40% to 45% range, which I believe is a solid estimate.

Scott Group, Analyst

Okay. It seems that although the freight environment is slowing, you still feel optimistic about achieving double-digit EBITDA growth for the upcoming year.

Edward Ryan, CEO

Yes. I mean, we run our business with a very strong focus on 10% to 15% EBITDA growth and doing our best to get it to 15%. Lots of things that can impact that. We can see what FX is doing to it right now. But we feel like we're making that promise to our shareholders and we want to make sure that we get there.

Jeremy Campbell, Analyst

This is Jeremy on for Raimo. I just wanted to ask on the sanctions business line, if you can speak a bit to what led to outperformance in the quarter there and maybe just like some of the different factors in the macro that you're seeing impact that segment of the business.

Edward Ryan, CEO

Thanks, Jeremy. You can look at the news and see what’s driving the situation—wars and threats of wars. There's tension in Iran and China, and the ongoing conflict between Russia and Ukraine. These events often lead to more individuals being added to the sanctions list. The more people on the list, the more companies must pay attention and often seek services to navigate these complexities. It becomes quite challenging as these lists are updated daily, with 140 countries making changes regularly. If a company ships to someone they’re restricted from trading with, they could face hefty fines. As businesses grow more conscious of these risks and the potential consequences, they need to take action. Our company is the world's leading provider of the necessary databases for this issue. We have access to more countries and more accurate data than anyone else.

Operator, Operator

We have no more questions at this time. I'll turn it back to Ed Ryan for closing comments.

Edward Ryan, CEO

Great, everyone. Thanks very much for your time, and we look forward to reporting back to you on Q4 in a few months. Have a great day.

Operator, Operator

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