Earnings Call: Q2 2021

Sep 9, 2020

Earnings release

Welcome to the Descartes Quarterly Results Call. My name is Adrienne, and I'll be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded. I'll now turn the call over to Scott Pagan. Scott Pagan, you may begin. Thanks, and good afternoon, everyone. Joining me remotely in the call today are Ed Ryan, CEO and Alan Brecht, CFO. We 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 our assessment current and future impact of the COVID-nineteen pandemic on our business and financial condition 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 achievement 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. Thanks, Scott, and welcome everyone to the call. Last quarter, I mentioned how the call was unique for us since we were doing it with each of us remote from each other as opposed to being in one room. Well, we're doing it remotely again this quarter and it may end up being the way we do it in the future. Hopefully, the call will proceed without technical challenges. However, please bear with us in the Q and A portion of the call as we may need to coordinate to provide answers. Similar to past calls, here's a road map for the rest of this call. I'll start with some opening comments, primarily focused on what happened over the last quarter and some of the trends we've seen. I'll hand it over to Alan, who will go over the Q2 financial results in detail. I'll come back and provide some perspective on how we're calibrated and looking at the current quarter and beyond. And we'll then open it up to the operator to coordinate the Q and A portion of the call. So with that, let's get to it. We had a great quarter, especially in light of everything that's been going on in the world. It continues to be one of the more challenging business environments that we've ever had to operate in. It's been great to see the logistics industry identified as an essential service industry with emphasis on the continued movement of freight. It's been an active industry with new priorities being placed on different types of goods and goods flowing from different sources via different modes of transport and to different destinations. The industry has not fully recovered from the strains of the pandemic with areas like air cargo still having a way to go to recover. But we've seen the hard work and dedication of logistics and supply chain workers assisted by technology help all of us continue to have the goods and supplies we need for businesses, communities and families. We all we owe all of these workers a tremendous debt of gratitude. For Descartes, we've kept the same business focus that has served us well in the past. We ensure that we are delivering secure and reliable technology services to our customers so that we have all the goods we need. We operate our business profitably so our customers can comfortably rely on us as a viable long term technology partner. And we invest in our business through acquisitions and otherwise so our customers have the benefit of the latest technologies to make them competitive and efficient. Our focus in each of these areas is on our customers' needs and we believe that by doing so, we put ourselves in the best position to deliver predictable and quality financial results for our broader stakeholders. And it's that focus that led us to have another great quarter in Q2. We had record services revenues. We had record cash from operations and excellent cash flow conversion of more than 100% of our adjusted EBITDA. We grew adjusted EBITDA by 13% year over year. Our adjusted EBITDA as a percentage of revenues exceeded 40% and we had revenues that exceeded our forecast for the quarter. All in all, our team rallied together in one of the most challenging business environments they've dealt with to deliver a great quarter. Thanks to the entire Descartes team for everything they did. And while we're reporting to you what ended up happening as we hit July 31, I think it's worthwhile to rewind a bit to recap how we got here. In April, the last month of our Q1, we saw revenues at a low point as the world shut down. April revenues were down about 5% from where we would expect them to be. We took numerous internal steps to manage our costs through Q1 and May during this sudden downturn. We stopped travel. We stopped participating in external marketing events. We suspended hiring of new employees and all of these efforts helped, but they weren't enough. As a business, we remain committed to growing our adjusted EBITDA 10% to 15% per year. We also needed to assume that April revenue numbers that were down 5% would continue as a trend through Q3. So we decided we needed to take additional cost reduction initiatives. In May, we announced a restructuring that will reduce our costs by approximately $6,000,000 per year or $1,500,000 a quarter. We did this by letting approximately 5% of our workforce go and shutting some office facilities. We immediately took actions on that plan so that our costs were reduced in Q2. That partially contributed to our performance in Q2. Ultimately, as we got to July 31, we saw better revenues than we originally forecasted for. As mentioned, April revenues were down about 5%, so we were planning for revenues at that level for May, June July of Q2. In May, we saw revenues up a little bit from April, but not significantly. However, we saw better recovery in revenues in June July as businesses got back to work, particularly in the United States. And looking at the business in general, we've seen good revenue traction in the following areas: Businesses related to e commerce or small packaged goods. In some of those businesses, we've seen volumes that wouldn't typically be seen until the Black Friday holiday period. I'll talk more a bit about e commerce later in the call. Businesses moving food, medicine and other essential goods also saw good revenue traction. And finally, businesses focused on real time tracking of the location of goods. We've also seen slower recovery in the following areas. 1st and foremost, air cargo, in particular, some of our businesses are tied to the number of cargo flights. Often cargo is moving in passenger planes. So we've seen a depressed number of flights as people have been reluctant to travel internationally. That area still has a way to go for recovery as cargo capacity slowly comes back online. It's less of a demand issue at this point. Retail businesses and shopping malls, this is starting to recover. There are portions of our businesses that help with the replenishment at mall stores and they were impacted while malls were closed. With some reopenings in the United States, we're starting to see some recovery there. And finally, shipments of commodities and automotive supply chain goods, several auto manufacturers suspended production for a period of time. Those businesses are also now recovering. We remain committed to growing our business even when we need to take action to reduce our cost base. I was thrilled to see our business respond with revenue growth from our existing business. But we also showed that we can continue to compete, complete and integrate acquisitions even in a challenging business environment. In June, we added Containers to the Descartes team via acquisition. Containers is a digital freight platform allowing logistics service providers to have a branded interface for their customers to get quotes, book shipments, track shipments and analyze performance. In the last 6 months, have shown how quickly the world can change and the shift to digitization is accelerating as a result. Logistics service providers operate on tight margins. Those that don't move quickly to digitize their customer experience will be faced with higher cost to serve. Without the proper real time connections between client facing platforms and the quoting, rating and booking systems that this digitization brings, logistics service providers will struggle to efficiently meet customer demand in today's dynamic market. And this is exactly what we can do with the combined decarte and containers offer. The acquisition was very well received by the market and our customers. In fact, we've already closed several incremental deals with the combined Descartes Containers team. So with that, I welcome everyone who joined from Containers in the United Kingdom and Ireland. We remain committed to growing our business through acquisitions. There's lots of things for sale right now, including some very high quality assets. I suspect those things being for sale reflects the valuations that many technology companies are seeing. As we've shown, it's possible to get acquisitions done in this market. However, there are new dynamics to be dealt with, including evolving valuation expectations and the challenges of remotely sourcing and completing acquisitions. We're confident in our ability to execute and given our familiarity with many of the parties in our market, believe it gives us a leg up on others as we complete remote acquisitions. And I think that reflects one of the core themes of Descartes' historical success. We're dynamic and adjust professionally and quickly to changing markets. You've seen it in our operations with our quick transition to remote working and a reduced cost base, ensuring our continued superior operating performance. You've seen it in our acquisition performance with us getting the deal done in this past quarter and you've seen it in how we interact with our stakeholders as we quickly transition to holding our 1st virtual user conference and our 1st online annual general meeting. In short, we're experienced with dynamic environments. You can see it in our historical performance, and we believe we're well structured to show it in the future. And with that, I'll turn the call over to Alan to go through our financial results for the past quarter. Alan? Thanks, Ed. As indicated, I'm going to walk you through our financial highlights for our Q2 of fiscal 2021, which ended on July 31. We're pleased to report revenues of $84,000,000 this quarter, up 4% from revenues of $80,500,000 in Q2 of last year. Our revenue mix continues to be very strong with services revenue increasing 5% to a record $75,300,000 which is now 90% of total revenue in the 2nd quarter. And this compares to services revenue of $71,400,000 or 89 percent of total revenue in the same quarter last year. License revenues came in at $1,300,000 or just over 1% of sales in the quarter, while professional service and other revenue came in at $7,400,000 or 9% of revenue in the Q2 of this year. Gross margin was solid at 73% of revenue for the Q2, which is down just slightly from gross margin of 74% in both the Q2 of last year and the Q1 of this year. As we mentioned last quarter and Anadha just indicated, in order to address the slowdown in our revenue experience in April as the impact of the pandemic started to hit parts of our business, In late May, we completed a restructuring plan where we reduced approximately 5% of our labor force, while we also closed a few of our smaller offices where we concluded that the staff would not need to return to the office even when the pandemic subsides and is determined safe to do so. We should note that the annual cost savings from this restructuring plan are expected to be approximately 6,000,000 dollars while we also recorded a $1,900,000 special charge in the quarter related to the cost of putting this restructuring plan in place. These costs were not recorded sorry, were recorded in other charges on the income statement this quarter. So with continued growth in revenue and continued strong cost control, including the savings of approximately $1,000,000 this quarter from the restructuring plan just mentioned, We continue to see a strong adjusted EBITDA growth of approximately 13% to 34,000,000 dollars or 40.5 percent of revenue when compared to adjusted EBITDA of $30,200,000 or 37.5 percent of revenue in the same period last year. As a result of these solid operating results, cash flow generated from operations came in at a record $34,100,000 or just over 100% of adjusted EBITDA in the Q2 of this year. This is up 27% compared to operating cash flow of $26,900,000 or 89% of adjusted EBITDA in Q2 last year. Cash flow this quarter was aided by really strong collections from customers as well as from the decrease in cash taxes paid during the quarter. Our strong cash collections are both a reflection of the hard work by our AR team after the pandemic as well as a reflection of the critical nature of most of our services to our customers. Quarterly fluctuations that may result in things like this quarter's 100 percent conversion rate. But for the most part, we expect to continue to see operating cash flow conversion in our more typical range of 80% to 90% of adjusted EBITDA per quarter going forward. From a GAAP earnings perspective, net income came in at $10,500,000 or $0.12 per diluted common share in the 2nd quarter, up 22% from net income of $8,600,000 or $0.10 per diluted common share in the same period last year. Overall, we're very pleased with these solid operating results in the Q2 as services revenue improved month by month through the quarter and increased to 90% of our total revenue, while we achieved 13% growth in adjusted EBITDA and generated strong cash flow from operations. If we look at the balance sheet, our cash balances totaled $81,900,000 at the end of the second quarter. During the quarter, we repaid $10,100,000 that was outstanding on our credit facility and we did that late in the quarter, while we also used $5,200,000 to complete the acquisition of containers that Ed mentioned that occurred in June of this year. Late in the quarter, as our previous short form base shelf prospectus expired, we filed a new shelf prospectus that will allow us to issue up to $1,000,000,000 in various forms of debt and equity capital until August of 2022. So with our cash balances, the new shelf in place and our unused $350,000,000 line of credit, we continue to have the capital capacity to allow us to consider all acquisition opportunities in our market, consistent with our business plan. So as we look to the second half of the year, we should note the following as outlined in the outlook section of our MD and A. After incurring $3,000,000 in capital additions in the first half of the year, we expect to incur an additional $2,000,000 to $3,000,000 dollars of further capital expenditures for the balance of this year, with this balance expected to include further investments in our network security and infrastructure. We expect amortization expense would be approximately $27,000,000 to $28,000,000 for the balance of fiscal 'twenty one, with this figure being subject to adjustment for FX changes and future acquisitions. Our income tax rate came in at approximately 28.5% of pre tax income in the first half of the year, and this is very close to our statutory tax rate in Canada and the U. S, which are our 2 largest markets. Going forward, we would expect our income tax rate will continue to trend in the range of 27% to 31% of pre tax income over the balance of the year. Though as always, we should add that our tax rate may fluctuate from quarter to quarter from one time items that may arise as we operate internationally across multiple countries. And finally, we expect stock based compensation will be approximately $3,100,000 to $3,300,000 for the balance of this year, subject to any forfeitures of stock options or shared units. And with that, I'll turn it back over to Ed for some closing comments, including our baseline calibration for Q3. Great. Thanks, Alan. Before I address calibration, as we look forward to Q3 and beyond, I thought it would be good to recap some of the principles we use in planning and executing in our business. We plan for our business to grow adjusted EBITDA 10% to 15% annually. We plan to grow through a combination of organic and acquisitions. When we over perform, we expect to reinvest that over performance back into our business. We focus on recurring revenues and establishing relationships with customers for life. We thrive on operating a predictable business that allows forward visibility to our revenues and investment paybacks. But we also know that while there are short term challenges for all businesses as we deal with the pandemic, there are some medium and longer term tailwinds. For example, Brexit, there's a new customs regime coming for the UK. At a high level, that's like having a brand new country for all of our global customers to have to do business with. This impacts imports to and exports from the United Kingdom. When you look at a business like ours, whose services include particular strengths in cross border shipments and in providing tariff and duty databases, there are very good opportunities for growth for us as people ramp up to operate in this new environment. Right now, the government is planning for a January 1, 2020 transition. So we'll be working with our customers to hit that or any revised date. 2nd tailwind is e commerce. While people have been talking about e commerce for some time, its relevance as the world has gone through this pandemic has evolved from an emerging issue to a dominant reality. I've seen this impact even in my own extended family. My own parents were not buying very much online and this pandemic has been a catalyst for it. It's like the whole extended world just now got access to what can be bought online. I've heard people talk about when things get back to normal as if it's a sure thing that things will go back to how they used to be. We believe in the case of e commerce that will be a permanent shift in preferences, which will continue to see an increasing number of goods bought on line. That's why you've seen us make recent investments in this space, including our acquisitions of Shiprush, PeopleBox, Pixie and Oz. Next tailwind is supply chains and global trade. Supply chain relevance has also been vaulted to the forefront because of the pandemic. The best way to understand this is to look around and see how many businesses are having to rethink their supply chains as a consequence of the lockdowns and global trade restrictions. Businesses need to consider the global trade climate and consider whether they're in the ideal locations for manufacturing and supply. Businesses need to be constantly updating their decisions based on changes in global tariffs and restricted party sanctions. And businesses now need to consider lockdowns and pandemics as no longer a black swan event and more of a business playing reality to ensure essential goods and supplies can still be delivered in the midst of lockdowns. Descartes is right in the crosshairs of supply chain and global trade and we stand ready, willing and able to continue helping our customers with these challenges. The next tailwind is automation. We've seen continuous moves towards business automation with recognition that technology can assist more in ensuring critical business tasks are done on a timelier and more cost efficient basis. Leveraging new technologies like artificial intelligence and machine learning, optimized choices can be automatically made to replace educated guesses. We've made significant investments in particular in our routing, scheduling and transportation management solutions to make sure Descartes remains relevant and our customers remain leaders. Next tailwind is remote working. Before worldwide lockdowns, our business was already operating with a portion of our workforce remote. It's somewhat of a natural thing for us considering the business that we have is moving things from remote places to remote places. Our customers are distributing remote offices all over the world as they collaborate to move goods, so our business has historically been less about in person meetings and more about remote conference calls and meetings to make things happen. With the lockdowns, our business quickly transitioned to being almost entirely remote. And as you've seen from the restructuring we previously announced, where we closed some offices, there are some roles that will never return to be in a corporate office. Our customers have gone through the same experience and are reaching those same conclusions. They need to be able to continue to manage freight with remote employees. And in the same way that Zoom and Teams help with remote meetings, our technology is designed to help with the remote management of freight, whether it be research, booking, tracking, invoices or analytics. We expect to move the move to freight management technology systems will continue to be a tailwind coming out of the pandemic. Even with these tailwinds, when we look at the business for Q3 and beyond, we're cautious as we always are. Our caution comes from concerns with some businesses still not being back to operating at full capacity, for example, air cargo and the possibility of a second wave of viruses as schools and businesses reopen further. We've already seen some increased infection levels in Europe. We're also keeping an eye on the global recovery as governments potentially pull back some of the financial stimulus programs that have helped soften the blow for employees and businesses impact did by the pandemic around the world. We've provided a comprehensive description of baseline revenues, baseline calibrations and their limitations in our quarterly report that we filed today. But to summarize how we saw things at August 1, 2020, using foreign exchange rates of CAD 0.74 to the Canadian dollar, a CAD 1.18 to the euro and a CAD 1.31 to the UK pound, we estimate that our baseline revenues for the Q2 of 2021 are approximately $80,500,000 and our baseline operating expenses are approximately $53,000,000 We consider this to be our baseline calibration of approximately $27,500,000 for the Q3 of 2021 or approximately 34% of our baseline revenues as at August 1, 2020. We've indicated previously that the adjusted EBITDA operating margin range for our business is 35% to 40%. As mentioned in our actual results for Q2, which had us at 40.5%. It's possible that we exceed that operating range again in Q3 as we continue on our commitment to 10% to 15% adjusted EBITDA growth. But we don't yet see this as a permanent change in our preferred operating range and more because we're being cautious in our levels of investment until there is a more stable environment that provides better revenue predictability. Thanks to everyone for joining us on the call today. As always, we're available to talk to you about our business by phone or virtual meeting and we hope sometime sooner rather than later in person. And with that, I'll turn the call over to questions. Operator? Thank you. We'll now begin the question and answer session. And the first question comes from Matt Pfau from William Blair. Your line is open. Hey, guys. Thanks for taking my questions. I just wanted to ask on the outperformance that you saw relative to your expectations in the quarter. Was that driven by some of the positive areas that you highlighted being unexpected or performing better than expected? Because it seems like on the transaction volume side that that kind of trended with what your expectations were and didn't really improve that much in the quarter. So just curious what drove that outperformance relative to your expectations? Yes, I think a little both. We certainly had some really good performance in the global trade areas and e commerce areas and most of the rest of the business held in pretty strong. We obviously had some weaker air cargo results as a lot of planes that fly passengers weren't in the air and therefore the bellies of those planes wasn't available for cargo, which hurts our air cargo numbers. Okay. And within your broker customer base, just curious, prior to the pandemic, there was obviously a need for these businesses to digitize. They were under pressure, various factors, one of them startups trying to sort of disintermediate them. So wondering how they're reacting in this type of environment. Are they putting some of those digitization initiatives on hold? Are they accelerating them? And then how does that relate to like macro point capacity matching and then the containers business that you acquired that would help them digitize? I think not just brokers, I assume you're talking about freight brokers, not customs brokers, but not just brokers really, a whole bunch of our customers, I think realized they needed to automate everything in their business come April when they had to send their employees home and anything that wasn't automated became a real problem. And I think you could see that in some of our results, right? They gravitated towards systems like ours that enabled them to do that. And I think that's going to continue for the foreseeable future, maybe perhaps even outside this pandemic. Got it. That's it for me. Thanks for taking my questions guys. Thank you, Matt. Have a good day. And the next question comes from Paul Treiber from RBC Capital. Your line is open. Thanks very much and good afternoon. Last quarter, you indicated the baseline was based on April's volume. What's your assumptions for Q3 baseline? Are you using single month, the average score last quarter? Anything there could be helpful. Yes. Ed, I'll jump in and take that. I think we gave that baseline call as of August 1. So it's really reflective of what we see in the business to that point. We continue to see some improvement in parts of the network and slower recovery in other parts of the network. So it's really the current information, including a stronger July that we saw. So it incorporates everything we know to August first. And your comments on the linearity of transaction volumes through the quarter are very helpful. You mentioned recovery in June July was April was down 5% below your expectations. How is June July, you quantify that a little bit further in terms of how that compares versus what you'd normally see through June July? Yes. I'll start and Ed can jump in. We're seeing I think it really touches on Ed's comments earlier in the prepared statements. I mean, you're seeing certain product lines where our numbers are better than June, July last year, certainly in the e commerce area in parts of our content space. And we're seeing other parts like air traffic, which just reflective of anything you read out there in the air freight world. We're not seeing those numbers come back to the levels that they were at. Overall, we've seen a step up from April in both June July, but wouldn't say we're back to full pre pandemic levels. Ed, anything you want to add there? No, I think that's a pretty good description of it. Okay. And last one for me. In regards to your comment on MA valuations, it seems like valuations have been going up for a couple of years or several years and it's been an area that's been a challenge. Is that uniform across the board or is it are you seeing more expansion in certain segments and less in others? And how are you looking in terms of prioritizing allocating capital? Are there segments where you're willing to pay higher multiples where you think it's attractive and strategic and others where you think it's less relevant to your business? Or are you looking at potentially putting slowing the pace of M and A just given that the valuations across the board are more expensive? Well, there's more for sale now than ever. I think some of that's a function of valuation and bankers and therefore companies seeing that people are paying up for some assets right now. And as a result, everyone's rushing to market. We try to ignore that, although it's nice for us to get a look at a whole lot of businesses at once. Certainly, the larger assets, as we've seen in the past, are demanding top dollar. Any asset that is doing well right now in the pandemic, they're out selling and they're trying to sell for premium valuation because a lot of other businesses have been harmed by this pandemic, some in certainly going certainly going for higher rates. In our typical tuck in type smaller acquisitions, the ones where we've known the people for a while, the prices are still in a range that we think is competitive. And just to address your last part of your question there, I think we've always looked at all these businesses and said, what do we think they're worth? We're willing to pay up for something like a MacroPoint and maybe some of the other assets that we bought when we think 1 plus 1 equals 3 or 4. And we say, okay, well, this may look expensive to everyone right now, but we know enough to know that's actually a good price. And so we continue to look at everything that comes up for sale and evaluate it to this very similar metrics to the way we have in the past. E commerce has done very well for us. That's something that if we look to add an e commerce business, we may be willing to pay more for that because we kind of think we've done quite well in it. We suspect we could do well in the next one as well. Other businesses where we don't see any kind of growth or any kind of significant step change in growth, our valuation metrics remain the same. Thanks for taking my questions. Hey, thanks Paul. And your next question comes from Raimo Lenschow from Barclays. Your line is open. Hey, guys. This is Frank on for Raimo. Thanks for taking my question and congrats on the quarter. Just one for me. I know that you mentioned the continued tailwinds, even as the reopening pick up on the e commerce side. I was wondering if you could dig a little bit deeper and talk about what the reopenings, what kind of an impact they have on the rest of the areas of your business? Yes, sure. I mean, I mentioned a little of this in the calls, but almost everything in the world was shut down in April. So e commerce was booming in that period of time. And it is, I still say, doing very well, but slowed down since then when all the other stores around the world opened up and people had more choices to where to buy things. And I think you might see some of that flow through to the rest of the business, right? A lot of our retailers that weren't open during the 1st month or 2 of the pandemic. As they open back up, their revenue started to come back and improve. Things that are laggards, I mentioned airlines earlier. There are planes in the air. There's just not nearly as many as they used to be and there's not nearly specifically as many international flights as they used to be. Now airlines have switched some of their planes to handle cargo, but that's not enough to bring them back to the steady state of normal. I think air cargo demand is every bit as robust as it was before. What you see right now is air cargo prices have gone up considerably, but the volumes are down because they don't have capacity available to them. They still have customers that want to buy it. They just don't have planes to fly them in because there's no passenger flights or not enough passenger flights moving. So So without getting into every specific business, most of them are business as usual, frankly. But those are some of the ones that I might highlight as being a little different than normal. Okay, thanks. That's all for me. And your next question comes from Deepak Kaushal from Stifel. Your line is open. Hey guys, good evening. Thanks for taking my questions. Can you hear me? Yes. How are you doing? Excellent. Yes, we can hear you, Deepak. All good. Cheers. So yes, a couple of follow ups. Just on the M and A side, Ed, with valuation and expectations getting higher for some of the quality assets, does that change the way you look to deploy capital? You think you might lean on a bit more debt or even use your own valuable paper to make acquisitions instead of cash? Any shifts on that No, nothing's changed in our mind. We would prefer to use our own cash from operations to buy companies. And only when we need more than that would we look to finance in some other way. Our first choice with interest rates where they are would be to use our debt facility. And after that, a distant third would be an equity offering to pay for it. But that all depends on the size of the deals, right? I mean, if we buy something very large, that all changes because we can't only use our cash flow and we can't only use debt to do it. But for our normal deals, our 1st, 2nd, 3rd choices is cash from operations. And with interest rates where they are right now, debt is a clear second choice to us and equity offering is a distant third. Got it. And then, you mentioned that you're seeing some high quality assets for sale. Is there something new here that's come out as a result of COVID? Or is it just the general because valuations are going up that's bringing some more things to Well, I think there's been a rush to technology because people think technology companies or businesses are going to benefit from this, some more than others, right? You're in e commerce business right now, you're rushing out and trying to sell your company right now. We're a little wary of that, right? We see in our own business that there was a massive jump in April and maybe May, but that's come off a bit. It's still a step function up from normal, but it's come up as other stores have opened up. Those businesses are trying to sell as fast as they can and for more money than people might think they're worth. We try to bring the same logic to the table that we've always had, which is how are we going to get our money back from our shareholders on this deal. If you want more money from your company, we need to know how we're going to get more money back quickly. And so that's the argument we're looking for when someone says they want a lot of money for their business. Show me what I'm missing here. Is there some way that I'm going to get the money back even faster now that COVID happened? If that's the case, we're interested. If it's not the case, we say sell it to somebody else. Got it. So it's not putting a new piece of the puzzle on the table that wasn't necessarily there before that becomes a new opportunity for you guys to grab that piece? No, I don't think, yes, that's not normally we're looking for. I mean, if something comes across the table that we think is interesting, I mean, e commerce came across like that 5 years ago to us, right? We started looking at it. We saw a couple of businesses for sale. We thought we think we can mix up into this and we added it. I don't know that we're out looking for that so much and we're out looking for good businesses that we think will be good fits with our business. And in the process, if we see something that's close to what we do and maybe a little different, we'll obviously consider as we always have. Now you see us expand the number of pillars that we have in our arsenal over the years and that's kind of how it happens. I don't know that we're out looking for that so much. We're out looking for good businesses and when ideas come up, we start thinking about it and seeing if we should take the next step. For us, it's kind of business as usual, even though sometimes people are asking us to change our mindset because they want banker wants more money for his asset and he's trying to get us to think of it differently. But we'll listen to it, but not necessarily inclined to change our way of thinking. Shocking, a banker wants more money. I did have a question about your data content business, particularly data mine. I know that you made an announcement of a deal recently, if I'm not mistaken. Given that there's been such a demand for greater visibility with all the moving parts with COVID, how progressing? Are you seeing a pickup on the content side generally from your existing customers and even new customer base? Yes. All the data content businesses are really doing well right now. Data mines is no exception. As people source goods from different places because of this pandemic, they need access to that information to make good decisions. As they do that, they need to then move it across borders that they're not used to moving it across and they need our content to figure out what the tariffs and duties are on that. As they're shipping to new suppliers, they might not have done in the pandemic, they need to do more restricted party screening. And so that data content business, all three aspects of it has been performing quite well in this pandemic. Okay, excellent. Thanks again for taking my questions. I'll pass the line. Have a good evening. Hey, thanks, Deep. Have a good day. And your next question comes from Scott Group from Wolfe Research. Your line is open. Hey, thanks. Good afternoon, guys. So just a couple of follow ups here. On the calibration as of August 1, is it fair to assume that you've seen some further improvement in trends throughout August and in early September just as freight broadly has improved? No, that calibration is done as of August 1 and all the knowledge we had as of August 1. We definitely saw June July slight upticks and we kind of to provide that calibration, we took everything we knew through the end of July. Okay. But do you think are we missing something with an assumption that things as of September 1 in theory are better than they were as of August 1? The calibration is not intended to be a commentary on it. That's why we picked the date in it. Okay. And then on the 35% to 40% EBITDA margins target, I understand we're a little bit above that now. So maybe some caution on spending, but do you think there should be some operating leverage as revenue improves that should give you some confidence in sustaining 40% plus outside of the large acquisition? Look, I think I said in the prepared comments, why we think it's there right now, right? We cut costs to deal with the pandemic and then revenue improved. And then we're being very prudent about adding incremental costs, not knowing what's going to happen in the future. I think you'll see us continue with that thought process, right? We will continue to add costs to grow our business when we're comfortable that the revenue is growing and the growth is here to stay. And there's a lot of unknowns right now. And if you followed us for a while, you know that we proceed pretty cautiously compared to most tech companies. And that's why we kind of have the profit margins that we have. And if we can see this continue, yes, I think you'd see our margins continue to improve. We've always said we thought this number could improve over time. Just weren't sure exactly when it's going to happen. Maybe some of the things that happened in the pandemic caused this growth in EBITDA margin to accelerate a little faster than normal. But I think you're going to see us continue to be cautious about adding costs back into the business until we have more certainty about what's going to happen on the revenue side. Okay. And then just last question, curious your views about near shoring or reshoring back to the U. S. Or Mexico. Do you think this is going to be a big supply chain theme going forward the next few years? And how do you think your position positively or negatively if that happens? I mean, the concept of bringing everything back in the United States seems a little farfetched to me. I see stuff moving around right now, but it's really moving from China to Southeast Asia. And I suspect that will continue, especially as Southeast Asia gets more sophisticated in their manufacturing processes. From our perspective, we get paid transaction fees to help people move stuff all around the world. And we do better when they keep changing where the places are, right, because they have to use our services to figure out how to best do that, how to deal with the change that's been created. This pandemic accelerated some of that change, you see that in some of our results. And I think in the long run, that if people keep moving manufacturing sites around and I think they will, it probably benefits us. If they're talking about moving it back to the United States, I'm not saying no one's going to move back to the United States, but I suspect if you're making yo yos and you can make them for $0.20 in Vietnam and you can have to make them for $1.50 United States, you're probably not moving it back to the United States. It's a cute story on CNN, but it's not really something I think is going to have a massive impact in our industry. Okay. Thank you for the thoughts. Appreciate it. Thanks, Scott. And your next question comes from Steven Limon from Raymond James. Your line is open. Hey, guys. I have a couple of questions. Alan, how much was the FX headwind this quarter? Yes, it was fairly minor, Stephen. There was a small negative from FX compared to Q2 of last year, but very minor in around the $500,000 range. And but yes, rates were off a little bit. We'll start to see, I think, here if we look at Q3, a little bit of strength in the Canadian dollar or let's call it a weakness in the U. S. Dollar, so that will reverse itself a little bit, but a minor negative headwind in Q2 compared to Q2. Okay, got it. And then just sort of based on your MD and A, it looked like there wasn't much organic growth. And Ed, I know you mentioned weaker air cargo in the quarter. Any other segments struggle or was air cargo the major factor? Air cargo is certainly by far the largest factor in this. Retail sales were weak early on in the quarter, but started to come back. But when I look at what was the big headwind that we were facing, it was air cargo, for sure. Hi, Steven. Did you have another question? Yes. Can you hear me? Yes. We can hear you, yes. Yes. Okay. No, I was asking, so how about Visual Compliance? How was it year over year? I don't know the specific year over year numbers, maybe Alan could comment on that. But in general, still very well. That business has been everything we hoped for and more. It's been growing and it was a great fit with our existing MK Denial business and we're making more money than it ever made before and it was pretty darn profitable to begin with. So we've been very happy. Yes. Ed nailed it. It's been a great performing business for us, Stephen. And both on the revenue side as well as, as Ed mentioned, sort of on the cost side as we pulled that business together with that product line together with the MK Data product line offering. Okay, got it. Thanks guys. Hey, thank you, Steve. And your next question comes from Robert Young from Canaccord. Your line is open. Hey, The first one, sorry if I missed something at the beginning, I joined late. But the I think you reiterated the 10% to 15% EBITDA growth target and give some information around valuations on M and A. So I guess the first question would be, as you look at the opportunities out there for M and A, are you seeing good opportunities at lower valuation? Or would you say that it's just higher valuation everywhere? I'm assuming trade content duty, tariff and duty, anything in e commerce is all going to be high valuation, but there are likely some other areas. So are there opportunities for M and A in the near term? There are. And listen, a couple of things. One, yes, there's opportunities with our smaller tuck in businesses and maybe some of the stuff that's not booming right now. But moreover, even some of the stuff that is booming and is asking for higher valuations, we try to look at each of them and say, hey, is there something we could do with this business that would improve the business and improve its valuation if it became part of the Descartes ecosystem? And so we'll look at them like that. I mean, we're looking for when someone is asking for us to what we think of as overpay in our mind, We're looking at it going, all right, we'll consider that. Does 1 plus 1 equal 3 or 4 here? Because if it does, maybe I'm wrong about it being over patient for it, right? I mean, look at some of the ones that we've done where we've paid higher multiples, Visual Compliance, MacroPoint. We were pretty confident going into them that while everyone thought this was a really high price that we were going to be able to make this look like a low price later. And that certainly happened in those two cases and that was our thesis going in. And we got comfortable enough during the acquisition process to say, yes, okay, we'll pay something, a valuation for multiple for something that's outside the normal band that we are comfortable operating in. But we were doing that with the understanding that we thought that was going to be a great business fit with our business and 1 plus 1 would equal 3 or 4. And that's why we pulled the trigger. Now, if we go and look, you walk in, you're a banker and you walk in and say, hey, I've got this great business and I'm charging an arm and a leg for it. And we don't see that 1 plus 1 equals 3 or 4, we're not. We're going to walk away. And nothing's changed about that. Okay. And then I guess relative to that 10% to 15% EBITDA growth target range. I mean if you're looking into a better environment and organic growth can return, that's one driver there. 2nd driver would be M and A. But if you find yourself in a situation where valuations are high and where organic growth is constrained, like where do you start to look at handicapping that 10% to 15% EBITDA growth target? Or is it something you can still drive towards? And then I'll pass the line. No, thanks. I mean, just listen, we reiterated it today. So I don't I'm not going to sit here and guess as to the circumstances to why I might not feel that way in the future. But we feel that way now. We think we're in a position where we can continue to do it. That's why we talked about it. And if that changes, we'll let you know. Okay. Thanks. Thanks, Rob. And this concludes our question and answer session. I will now turn the call back over to Ed Ryan for final remarks. Hey, great. Thanks, everyone. We look forward to reporting back to you on our Q3 results in November, and have a great day. Appreciate your time. Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.