Welcome to the Descartes quarterly results call. My name is Adrian, and I'll 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. During the question- and- answer session, if you have a question, please press star then one on your touch-tone phone. Please note this conference is being recorded. I'll now turn the call to Scott Pagan. Scott Pagan, you may begin.
Thanks, and good afternoon, everyone. Joining me remotely on the call today are Ed Ryan, CEO, and Allan Brett, CFO. I trust that everyone has received a copy of our financial results press release that was issued earlier today. Portions of today's call, other than historical performance, include statements of forward-looking information within the meaning of applicable securities laws. These statements are made under the safe harbor provisions of those laws.
These forward-looking statements include statements related to our assessment of the current and future impact of the COVID-19 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 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 is required by law. With that, let me turn the call over to Ed.
Thanks, Scott, and welcome everyone to the call. Thanks for joining us today. This has certainly been a quarter with a unique work environment. This call is also unique for us because each of Allan, Scott, and I are in different locations. Please bear with us as we remotely coordinate to provide answers for any of your questions later in the call. Similar to past calls, here's a roadmap for the rest of the call. First, I'll start with some opening comments, primarily focused on what happened over the last quarter and some steps we're taking to keep our business strong. I'll then hand it over to Allan, who will go over Q1 financial results in detail.
I will then come back and provide some perspective on how we are looking in the current quarter and beyond, and then we will open it up to the operator to coordinate the Q&A portion of the call. With that, let's get to it. We have delivered great financial results in what is likely one of the most challenging business environments we have ever had to deal with. Our commitment over the past 10+ years has been to grow adjusted EBITDA 10%-15% per year. In Q1, we grew adjusted EBITDA 15% over the quarter a year ago. We were able to do that because we run a business with a high degree of recurring and visible revenues. With that visibility comes the ability to set our expenses at manageable levels to continue to hit our profit targets.
We think that business discipline is going to serve us well as we weather this period while the world's economies recover. There's some businesses out there, many of them customers of ours, who've done very well over the past two to three months. Businesses involved in the manufacture and delivery of personal protective equipment and medical supplies have done well. Businesses involved in food and grocery replenishment and distribution have been very busy. E-commerce businesses have seen record holiday- style volumes as people move to online purchases and quarantine rather than going in- store. Other businesses, some of them also customers of ours, have struggled in the quarantine environment. Passenger airlines that move air cargo in the belly of their planes have seen passenger demand plummet. This impacts the ability to price and price of moving air cargo and mail.
Retail stores and shopping malls have been temporarily shuttered, impacting not only the stores but also the entire ecosystem that supplies and delivers to them. Customs brokers and other intermediaries have been impacted as cross-border shipments and demand become more complex. For Descartes, we serve all of those types of customers. Fortunately, by design, we're extremely diversified. We cover all modes of transportation, air, truck, ocean, and rail, so we're not fatally exposed when one mode is hit. We have a broad geographic footprint, so we continue to serve customers as economies retract, expand, and recover at different times.
We cover many logistics functions in the different solution pillars that we have, so we're not unduly reliant on any one particular service. We cover many industries, allowing us to be flexible to assign our resources where they're needed as different customers see ebbs and flows in demand.
We're diversified by design, that makes us resilient. That diversification has also allowed us to be a big part of the efforts to help people get through this quarantine period. We've been right there helping people deliver food, medical supplies, and personal protective equipment. As our customers went to remote work, they relied on our solutions to allow them to remotely manage logistics functions and shipments securely and efficiently. That's what these solutions were designed to do. We each owe a ton of gratitude to the thousands of medical professionals and other frontline workers that have been helping us over the past months.
We equally owe a huge debt to the logistics and delivery workers, the drivers, the warehouse workers, the support staff who have helped in getting essential goods where they need to be. We're very proud that our company could play a small part in helping them.
COVID-19 has had a big impact on how everyone does business, and we're certainly no exception. Since I last spoke to you in March, when we released our year-end financial results, we've transitioned to our entire company working from home. We canceled our global user conference in Florida, and we have suspended all global travel. We've transitioned all of our marketing activities to online participation. COVID-19 has not changed the other important things that we do. We continue to provide top- quality service and support to all of our customers. We continue to engage with customers on helping them roll out projects that will bring them increased automation and remote management capabilities. We continue to investigate combining with other businesses that will make our diversified company even stronger.
By continuing to do well the things that we always have, we were able to deliver another solid financial quarter consistent with our commitment to sustained profitable growth. This past quarter, we had record services revenues of $74.1 million. We had record income from operations of $15.7 million. Our cash flow from operations was 83% of our adjusted EBITDA. Our adjusted EBITDA grew 15% over Q1 last year, and our adjusted EBITDA margin was above 39%. We finished the quarter with more than $50 million in cash and almost all of our $350 million debt facility available to us. We produced excellent financial results and ended in a very strong financial position. As I said before, this wasn't easy. Particularly in April, we saw transaction volumes over our network hit, and we were managing many requests from customers who were struggling in this environment.
I'm typically pretty frank in telling you when I know something and when I don't know something. I know that many of our customers have struggled. I know that many economies around the world are starting to reopen from a period of lockdown. I don't know how quickly we'll see recovery in each of the different industries, and when we'll be at what many of us would consider full recovery for the entire world. Our job is to manage our business with the best information that we have. We've assumed that the recurring revenue run rate that we saw in April will be the revenue run rate that we see in each month of Q2. Overall, that run rate is down 5% from what we would have expected to see in a typical month at this time of year.
As we described in the press release, we've recalibrated our expenses to come down by reducing our workforce by 5% and closing a few offices. Allan will go into more detail about that restructuring later. Anytime you have to make decisions that impact members of your team, it's tough. However, they're also the right decisions for our business right now, and the decisions that we believe our shareholders expect that we would make in this environment. It's possible that economies, our customers, and our business recover quickly, and that April ends up being the month where our revenues were most impacted.
If that's the case, then we're at a cost base from where we can ramp up investments for the future. It's also possible that we end up in further lockdowns in the future and that April is appropriately reflective of what will happen to our business.
If that's the case, then we think we've got the right cost base to weather that going forward. We view this temporary period until the world sees a full economic recovery and a vaccine as a period that's going to distinguish the most resilient of companies. We're striving to be one that will continue to perform for our stakeholders during this challenging period. Over the longer term, we believe that there are going to be some very positive trends that will benefit a technology company like ours. Our business easily accommodates a remote workforce. Our business focuses on delivering solutions that help customers manage their supply chain operations remotely while removing manual processes, including paper-based processes that require physical contact.
Our business thrives on helping customers with changes in their logistics operations and supply chains. We think that in the coming years, there will be big changes in how and where companies source and ship goods. Most importantly, we've proven to be a resilient and reliable service provider that will be there for our customers during any tough times for the future. For now, our business remains head down, hardworking, and helping our customers. Our job is to do what is expected from us, expected from our customers, our partners, and our stakeholders. As we've shown in the past and we're showing now, that's what Descartes does. Thanks to all the Descartes employees for everything they've done, and I know that they will do to help our customers and company during these difficult times.
I feel we're even more aware now of the importance of what we do for our customers. With that, I'll now turn the call over to Allan to go through our Q1 financial results. Allan?
Thanks, Ed. As indicated, I'm going to walk you through our financial highlights for the first quarter of fiscal 2021, ended April 30th. We are pleased to report quarterly revenues of $83.7 million this quarter, up 7% from revenues of $78.0 million in the first quarter of last year. With the continued strengthening of the U.S. dollar against almost all other currencies, we are once again hit with a negative impact from foreign exchange. Without the impact of foreign exchange on revenue, we would have come in almost $1 million higher this quarter when compared to the first quarter of last year. Our revenue mix continues to be very strong, with record services revenue of $74.1 million or 89% of total revenue in the first quarter, an increase of 11% from services revenue of $67.0 million or 86% of revenue in the same quarter last year.
In addition, license revenues came in at $1.8 million or 2% of sales in the quarter, while professional service and other revenues came in at $7.8 million or 9% of total revenues for the first quarter of this year. Gross margin was solid at 74% of revenue for the quarter, which is consistent with the gross margin achieved in the first quarter of last year. From an operating cost perspective, while we did not qualify for any significant benefits from the government support programs that were introduced across our operating regions related to the pandemic, consistent with our standard operating approach, we were able to quickly make some changes to our operating cost structure in an effort to address the estimated impact of the pandemic on our business.
From early March, these cost-saving activities included a general freeze on the hiring of new staff members, a ban on all travel, and a pause on most external marketing events, including the cancellation of our own user group event, which had been scheduled to occur this past quarter. As a result of these adjustments to our cost structure, as well as some continued growth in revenue for the quarter, we were able to achieve a record adjusted EBITDA of $33.0 million, or 39.4% of revenue, up 15% from the adjusted EBITDA of $28.7 million, or 36.8% of revenue in the first quarter of last year.
With the onset of the pandemic, we were also able to quickly react with an increased effort on the collection of receivables from our existing customers. We also have the benefit of providing services that are generally very essential to the operations of our customers.
As a result, our days sales in receivables increased only slightly from 38 days of revenue at the end of the fourth quarter last year, increasing to just 39 days at the end of Q1. As a result, cash flow generated from operations came in at $27.5 million, or approximately 83% of adjusted EBITDA in the first quarter of this year, which is within our target range and pretty comparable to the operating cash flow of $23.4 million or 82% of adjusted EBITDA in Q1 last year. Going forward, subject to unusual events and quarterly fluctuations, including the challenges that the pandemic creates on the general economy and our customers, we expect to continue to see operating cash flow conversion to be in the expected range of 80%-90% of our annual adjusted EBITDA over the balance of fiscal 2021.
From a GAAP earnings perspective, net income came in at $11.0 million or $0.13 per diluted common share in the first quarter, an increase from net income of $7.3 million or $0.09 per diluted common share in the same quarter last year. As Ed said, overall, we are pleased that we are able to continue to generate solid operating results in the first quarter, despite the significant headwinds that arose as a result of the pandemic. If we look at the balance sheet, our cash balances totaled $56.0 million at the end of the first quarter, while borrowings under our revolving credit facility were $9.7 million, for a net cash position of just over $46 million at the end of April.
In addition, we continue to have just over $340 million available to be drawn on our existing credit facility, with the ability to expand that line of credit by an additional $150 million if needed. We also have approximately $500 million in additional capital that can be raised under our existing base shelf prospectus. We continue to be very well capitalized, to allow us to consider all acquisition opportunities in our market consistent with our business plan. We look to the second quarter of this year, we should note the following. After incurring approximately $1.0 million in capital additions in Q1, we expect to incur approximately $4 million-$5 million additional capital expenditures for the balance of the year. With this balance is expected to include further enhancements to our network security and infrastructure.
We expect amortization expense will be approximately $39.3 million for the balance of fiscal 2021, with this figure being subject to adjustment for FX changes and future acquisitions. Our income tax rate came in at approximately 28% of pre-tax revenue in the first quarter, which is slightly higher than our statutory tax rate. This is due to the impact of certain permanent tax differences, which are mainly related to stock-related compensation that is non-deductible in Canada and the U.S. Going forward, we expected our consolidated tax rate will continue to trend in the range of 27%-30% of pre-tax income over the balance of the year. 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 also expect stock-based compensation that will come in approximately $4.6 million-$4.8 million for the balance of fiscal 2021, subject to any forfeitures of stock options or share units. Finally, as Ed mentioned earlier, in order to further address the potential impact of the pandemic on our business, subsequent to the end of the quarter, on May 19th, we implemented a 2021 restructuring plan that will reduce our global workforce by approximately 5% while also providing for the closure of several office facilities across the business where we determine that employees can permanently work remotely or alternatively work from other Descartes offices. We expect the total cost of this plan to be approximately $2 million. While these restructuring activities are substantially advanced, we expect that they will be completed over the next six months.
Once complete, we expect that these activities will result in savings of between $6 and $7 million on an annual basis. With that, I'll turn it back to Ed to wrap up with our baseline calibration.
Great. Thanks, Allan. Similar to past calls, I'd like to now address our calibration for Q2. As it has been many years, and it is still the case right now, even through these challenging times, our target for our business is to grow our adjusted EBITDA by 10%-15% per year. We do this through a combination of organic operations and combining with complementary businesses. We use this 10%-15% target as a guide for helping us set our expense level. As I mentioned earlier in the call, to set the expense level for our business during this pandemic, we've assumed that the run rate of April recurring revenues that are down about 5% from a typical month, will be the run rate of recurring revenues for each of May, June, and July. We undertook a restructuring around May 19th to also lower our expenses by about 5%.
While we typically give you a calibration as of the first day of the quarter, calibration here is instead as of May 19th, the day we started the restructuring. I know that some of you have, in the past, used our calibration to give you a view to where our actual results will be. I just want to caution you on doing that this quarter. Our calibrated revenues are intended to reflect the visibility that we have to our revenues as we enter the quarter. As I just told you, there is more uncertainty than in prior periods in our revenue visibility this quarter. The comparison between our Q2 calibration and the Q2 actual results may be much different than it has been in the past quarters, especially on the revenue front. With that, let's talk calibration.
We've provided a comprehensive description of baseline revenues, baseline calibration, and their limitations in our quarterly report that we filed today. To summarize how we see things as of May 19th, 2020, using foreign exchange rates of $0.72 to the Canadian dollar, $1.10 to the euro, and $1.22 to the U.K pound, and considering our run rate of recurring revenues in April 2020 and incorporating our fiscal 2021 restructuring plan, we estimate that our baseline revenues for the second quarter of 2021 are approximately $77 million, and our baseline operating expenses are approximately $50.5 million. We consider this to be our baseline calibration of approximately $26.5 million for the second quarter of 2021, or approximately 35% of our baseline revenues as of May 19th, 2020. As we've indicated previously, that the adjusted EBITDA operating margin range for our business is 35%-40%.
Those of you that have made a habit of comparing our baseline calibration to our actual results may note that it's challenging to grow adjusted EBITDA 10%-15% and stay in that operating range. The math is probably going to work out that way, so we expect that we'll probably exceed our operating range for at least the next quarter as our business buckles down to help our customers during the next months. Even with the operating margins temporarily above our normal operating range, we intend to still look for opportunities for investment, either in our existing businesses or by bringing other businesses into the Descartes portfolio. Earlier in the year, you saw us announce our acquisition of Peoplevox, a company that complements our Pixi business by focusing on e-commerce warehouse management technologies.
As I mentioned earlier, we've seen strong performance from e-commerce- related businesses over the past few months, so we'll continue to see how we can best help customers there. We've also seen challenges in our customer base in booking freight and visibility, as they've struggled with finding air cargo capacity. We'll see what we can do to help them in other modes of transportation. We've also continued to see strong demand for our tariff and duty content and the third-party screening solutions, which we think will be even more important to people as they rethink their supply chains moving forward. Things have certainly changed in the world, and wherever there's change, there's opportunity for Descartes. With that, thanks to everyone for joining us on the call today. For those shareholders on the call, we'll be hosting a virtual annual general meeting tomorrow at 9:00 A.M.
Separately, 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. With that, operator, I'd like to turn it over for questions.
Thank you. We'll now begin the question- and- answer session. If you have a question, please press star then one on your touch-tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. There'll be a delay before the first question is announced. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then one on your touch-tone phone. Our first question comes from Paul Treiber from RBC Capital Markets. Your line is open.
Thanks very much. Good afternoon. Just wanted to better understand some of the trends that you saw in April. You mentioned, I believe it was transactions or maybe volumes were down 5%. Could you speak to what type of transactions where you saw the greatest slowdown, and particularly in regards to, maybe the annual minimums or the minimums that you have in place with customers, how that may have impacted revenues as opposed to volumes?
I think, as you might have expected, the people that were hit the hardest were the airlines and, closely followed by retailers that were in the business of operating retail stores. Those were the two areas that we kind of noticed significant hits. Without commenting too much on individual airlines' minimums, some hit their minimums, some did not. It depended on the circumstances. If you've been reading the news, some of the airlines have put back passenger planes into cargo service. That certainly helped, but still didn't suck up all of the demand for cargo. I think that's going to continue. I hear more and more plans from airlines of converting larger planes to cargo for the foreseeable future. I think we'll see more and more of that. As far as retailers in malls, we just have to see when these malls open.
We're starting to see signs of it right now. For example, malls near me still are not open. I know they are in some places in the United States and around the world, but we'll be watching this, guys, closely.
In your discussions with customers, have any requested changes to the minimums that may be placed in the contracts? How would you manage those negotiations? I think in the past you talked about there's a possibility of trying to upsell additional services during those negotiations. Can you give us some insight into how that's progressing?
We haven't gotten a ton of that. We'll see what happens in the coming months. The impending recession, or maybe the recession that's just started now, could change that for different industries that we don't anticipate right now. There's a lot of unknowns, even for us, with a lot of access to data. You're right. Certainly, if someone's coming to us asking to change something that they don't really have a right contractually to do, that's the first thing we're asking them is, "What else might you want to buy from us that might change our mind about changing something in the contract?" At the same time, there haven't been a ton of these conversations yet. We've had some of our airline customers who certainly were in trouble.
Most of the other businesses we do business with were still operating in some form or fashion and still needed the service to do that.
Lastly from me, could you speak to your ability to conduct M&A in this environment? I imagine you can do a lot of the process virtually. How would you anticipate, or do you anticipate closing deals in the near term, just given travel restrictions and other challenges around social distancing?
Well, I don't think anything that's going on right now would preclude us from doing this. Remember, we're in the technology business, and our whole business is predicated on getting people to move processes online. A lot of the people that we might buy, we certainly know them pretty well from past experience, and oftentimes they're people we've known for years. Seeing them face to face isn't necessarily the most important thing to us. I don't want to say there's no impact to that, but certainly we're able to still operate in that environment.
Great. Thank you. I'll pass along.
Thanks, Paul.
Your next question comes from Paul Steep from Scotiabank. Your line is open.
Great. Thanks. Hey, Ed, could you talk a little bit about what you saw from clients in terms of demand for e-commerce and routing, whether we've seen an uptick in demand, and how those cycles sort of might progress? I got two quick follow-ups.
Well, our e-commerce business has been doing quite well during this period of time. I mentioned, I think, in the prepared comments. We were on a call a couple of weeks ago, and someone's going, "Hey, last Thursday was like Black Friday," in terms of volume on our network, just to give you kind of an example. It's been going very well for us. The routing business, there hasn't been much impact on that. Most of the trucks are still driving around, making deliveries. Some customers of ours needed to buy more licenses to make big deliveries or more deliveries because their business was going nuts. We had a bunch of people in the medical device and the DIY space that, they needed more.
Most of the businesses out there were making deliveries, and even if they weren't, the way they pay for their service is probably, and maybe they use less trucks for a month or two, but their contract is such that they buy a certain number of trucks from us for an extended period of time in a contractual commitment. Not a whole lot of impact on our routing and scheduling business. E-commerce, on the other hand, has been the shining star of this for us.
Great. I noticed you've made an addition to the executive team. You added a gentleman to take care of sales leadership, a role that I don't think Descartes had for a while. Obviously, you've managed sales well. Maybe talk about, is this just more of the evolution of the business? As you grow, what, if anything, do we read into it? I got one final one.
We think that our sales will continue to remain strong. We did pretty well through this period. We believe, and I don't know any better than anyone else, but we believe we may be through the worst of it, and we thought we sold pretty well through that period of time for business. A lot of our sales are not something that shows up next month. It's something that shows up over the next several years, and those sales continued. We certainly had some areas of the business where there were a lot more sales than normal. Tariff and duty content, anything in e-commerce was really selling very well. People buying more and more stuff from us. We had some things that were down a bit. Certainly, if you were trying to sell something to an airline in the past three months, it was difficult to get their attention.
Net-net, we thought we did pretty well.
Great. Last one, just on the office footprint, how are you thinking about sort of recalibrating that going forward? Several offices, but how would you think about maybe moving even more of the staff virtual? Thanks.
Well, yeah. Thanks, Paul. We'll have to see. We did close a couple of offices in this restructuring. They weren't gigantic offices or anything. They were things that maybe made sense in the long run anyway. We'll just have to see how this goes. Probably, we're not very dissimilar from other companies, and we probably don't know right now what the impact on offices will be . I did notice how quickly we were able to move from, I'd say, in the normal time of maybe about 30% of our workforce works online or at home, I should say. All of a sudden, 100% of our workforce was asked to move home.
I was surprised and really proud of our people, how fast that happened, and how smooth that transition was. We'll just have to see when they go back, and how many people feel like going back to an office.
For a company like ours, it's never been something we've been particularly concerned about. At the same time, you have lots of employees, and I know it was difficult for them, and I've talked to them personally about it, where they go, "Hey, I got two little kids at home, and they're screaming, and they're not in school right now." It's difficult to work from home for those people, so they need an office. I don't think you're going to see offices go away for us, but I think we may come out of this with a little higher percentage of our employees saying, "Hey, I can work from home," or, "I can work from home three days a week." We'll just have to see what happens there.
Thanks, Ed.
Our next question comes from Matt Pfau from William Blair. Your line is open.
Hey, guys. This is Dave Robinson on for Matt. I just had a question on the Restructuring Plan. I was wondering if you can maybe shed some more light on where those workforce reductions would be coming from. Would that be more on the sales side or research and development? Just hoping for some more clarity there.
It was more operational things. The biggest area, it makes sense if you think about it. We were getting a lot less calls in customer support through this period of time. As a result, you need less customer support people to handle the volume. We get a lot of calls every day that we have to have people available to handle, and all of a sudden, the calls went down. That was probably a good example of areas that we did that. Otherwise, it was minor, a pretty small percentage of our workforce. Minor areas across the entire business. A couple of areas where, like support, where we had less work to do, was a more obvious place to make some cuts.
Okay, thanks.
Thanks, Dave.
The next question comes from Justin Long from Stephens. Your line is open.
Thanks. Good afternoon.
Hey, Justin.
Maybe to follow up on the restructuring commentary and that question. I was curious if you could provide a little bit more color on how you came to the conclusion that 5% was the right number in terms of the headcount reduction. I know, Ed, you gave the commentary on how you're thinking about the second quarter, but maybe you could talk bigger picture, what kind of recovery scenario is or a downturn, and then the recovery scenario is being factored in as you thought about the magnitude of that reduction? Could you flex down more if this ends up being longer or more pronounced in terms of the magnitude than you expect right now?
Sure. The answer to that is pretty simple and straightforward. We looked at what happened in April, and we went, "Hey, most of the world was shut down in April, beginning to end." That should be a pretty good indication of where our transactions and subscription revenue would be at its worst case. We're not positive of that. I told you when we did calibration, we assumed that May, June, and July would be just like April from a revenue perspective. That's how we came up with the 5%. Our revenues were down 5%. We took our cost down 5% to match that. We're hopeful that it could be better than that, and we have a little expression around here that we've said for years as we recovered 15- 20 years ago from the way the business was performing back then.
We'd always say, "Plan for the worst and hope for the best." I think we're doing a little of that right now, right? We kind of went, "Hey, I think April is going to be the worst of it." Certainly, now in May, you see businesses opening back up. Hopefully, April's the worst of it. Our revenue was down 5% in April, and we went, "Hey, let's take our cost down 5% too, so that we can line up with that." I'm hopeful that May or June, July actually end up better than that, but we're planning for it to be just like April. Otherwise, I don't know what's going to happen going forward any better than anybody else does, right? Will the recession actually be worse than it was in April?
Later on in the year, will we end up having to go back into quarantine at some point? I don't know. We figured it was a fairly conservative approach to it to kind of plan for April being the worst of it.
Okay. Great. Just a couple of follow-ups. One on e-commerce. Obviously, you're seeing strength there, but I was wondering if you could help us out by sharing the percentage of your business that you feel like is tied to e-commerce today. Just to follow up on acquisitions, curious if you could comment on valuations that you're seeing in the pipeline today, if those have moderated at all with the macro pressure we've seen.
E-commerce roughly is around 10% of our business. We have seen some indications that there's a change in how valuations might be considered going forward, in that a bunch of processes that had bankers and private equity firms involved that had pulled the process. I think they were looking for top dollar, and they kind of acknowledged, "I'm not going to get top dollar right now." We'll have to see what happens long term. My experience in the past has been that this takes 6- 12 months to kind of balance itself out, right? No one believes that their business has been impacted significantly today, and they think if it has, they think it's coming back quickly.
They have to probably see what happens over time and realize, hey, this business that's up for sale is never going to be the same, or it's not going to be the same for some period of time before they're willing to change the purchase price. We've seen some indications of it, certainly not everything that we might expect to see in the long run.
Okay. That's helpful. I appreciate the time.
Hey, thanks, Justin.
Our next question comes from Deepak Kaushal from Stifel. Your line is open.
Oh, hey. I think that was Deepak, not Peter, but I am from Stifel, so maybe I'll just go ahead.
Hey, Deepak . How are you doing?
Hope you guys are doing well.
Yeah, we're doing well. How are you doing?
Just a quick follow-up on one of the previous questions. You mentioned e-commerce is strong and certain sectors were strong, healthcare, and what have you, that are part of the pickups in post-COVID. How much of that pickup is permanent? Does some of this pickup go away when economies go back to kind of the old ways of things?
Good question. I don't know. I have a theory that it's somewhat permanent, right? Grandma got used to ordering stuff online and went, "Oh, wow, this is kind of easy. Maybe I should keep doing this." I suspect that e-commerce took a jump because of this and that it's never going back. I don't know any better than anybody else. I've certainly read some things to that effect, but I don't know that the guys that wrote that know any better than I do, either. It would just feel that way to me. Once you start to go, "Hey, I can order this stuff online. I can order food online." Once the stores get used to doing that, why go back? We'll have to see what happens, but that's kind of what I expect.
Got it. Okay. A couple more questions. Curious, I think you mentioned earlier that you saw some sector pickup in demand in denied party screening. I'm kind of curious about that business and the trade content business, and in particular, Visual Compliance, now that you've had the business for over a year.
Yeah, those businesses have been doing very well.
Yeah. What's driving that in this environment?
I think the biggest driver was the government saying there's no tariff on half the tariff book because of COVID. They dropped big portions of their tariffs. If you make any glove right now or any mask, you are trying to classify it in a way that has you not pay tariffs and duties anymore because everyone dropped their gloves and masks tariffs and duties. You're probably seeing a lot of work gloves being classified as gloves that could be used to protect your hands, and as a result, not have to pay any tariffs and duties on it.
To figure that out, you need access to our database, and so I think we're seeing more and more people who hadn't thought to buy it because they were in a sleepy business that maybe didn't make a bunch of products, all of a sudden thought, "There's a lot of value in that database. I should get hold of it right now." We've seen those sales certainly accelerate.
Got it. In terms of denied party screening in particular, or just general trade data content sales as opposed to customs and tariffs, what's been the impact on that side?
That business is hanging in there. I wouldn't say it's accelerated like the tariff and duty content, but it's certainly done pretty well. Most of those customers are fixed annual subscriptions to the service, so it's not necessarily impacted on a day-to-day basis.
Got it. Okay, my last question. Last quarter, you kind of cited the observations from China as a bit of a preview of what you might expect in the rest of the world as they shut down and then restarted, and China recovered quite quickly and fully. What's happened now in the kind of demand lull of that recovery? Have things stabilized at those high previous levels, or have they settled down to a lower level? What might we read through from that?
China seems to be going. From our perspective, I'm not talking about what I'm reading in the news, because one of my concerns about China is that maybe some of the news we were getting wasn't 100% accurate. On our network, the stats I was getting were 100% accurate, and we definitely saw a big hit in China for a couple of weeks and then a recovery, and that recovery continues. I don't know that it's exactly back to normal, but it's close. I also don't know that the rest of the world's going to follow that exact pattern.
Okay. Well, thank you for taking my questions. I guess we just have to wait and see how the world plays out.
Yeah.
Keep well, guys.
Yes, we will. All right, thanks, Steve. You too.
Okay, our next question comes from Scott Group from Wolfe Research. Your line is open.
Hey, good afternoon, guys. It's Rob on for Scott. Ed, in terms of the revenue run rate update you gave us for April, can you give us a sense of directionally how that's trended kind of month to date, and what the typical seasonality? I realize there's absolutely nothing typical about what we're going through. What would that be, kind of in May, June?
I'm throwing seasonality out the window for the moment because it's all different right now. Normally, April, May are good months, by the way. I kind of said it in the prepared comments that we are assuming that May, June, and July are going to be the same as April, and that I'm hopeful that we do better than that. In terms of our calibration, that's what we planned for so that we can be sure that we're running our business conservatively. We have seen slight impacts as economies opened up in May, but certainly not enough for us to change that answer. Time will tell in the next couple of months how that improves over time. I would expect that it would, but I don't know exactly how these economies are all going to open up, and I didn't want to guess too much.
We didn't see enough in the beginning of May to change that commentary, let's say.
All right. Really helpful. Allan, in terms of the restructuring that you called out, how much of the benefit should we be expecting in kind of the fiscal second quarter? Just so that we're calibrating our models properly in terms of the benefit in the fiscal third quarter, before you get the full run rate benefit in the fiscal fourth.
Yeah, I think you've got it. There's a partial impact in the second quarter. We obviously started this restructuring, implemented it on the 19th of this month. In the majority of the quarter, but then the full effect will come into the third quarter. There's a slight if you take the run rate, the annual run rate as we work it out, there'll be a slight decrease to that on a quarterly. It's a lower impact in the second quarter and then the full impact in the third.
All right. That's helpful. Then I guess the final one on our end, can you remind us, kind of today, where your contractual versus transactional split of the business is, and if we should be thinking about any changes in the back half, just given kind of the updated run rate that you provided us?
I think it's 41% transactional, 47% subscription, if that's the question you're asking. I don't anticipate that that would change substantially.
Appreciate the time, guys.
Thanks, Rob.
Our next question comes from Steven Li. Your line is open.
Hey, Ed.
Hey, Steven. How are you?
Good. You are among the lucky ones that get to report both March and April. You said April was down 5%. What was the linearity in February and March?
Sorry, what was the what, Mark?
What was the linearity in February and March? You said April was down 5%. Was March down more than 5%?
No, April's the worst of it. I don't have off the top of my head what March was down, but March was not down much at all. April, because remember, most things, at least here in North America, most things started shutting down around the 19th, 20th. I think people were just getting their heads around that. Our March numbers were pretty strong, or at least not significantly down. April was a big hit because that's when no one was working during April, pretty much, unless you were an essential service provider.
Got it. You said so far in May is very similar to April, what you're saying, so down 5%?
We're seeing a slight uptick, but it's not enough for us to change that conservative approach to providing the calibration numbers.
Got it. Okay. The restructuring, Ed, this cost savings at $67 million once completed, is it 50/50 people and real estate?
No, I think it's much more people. I don't know, Allan, if you want to comment specifically on that.
Yeah, Steven, a heavy portion of it is people-related. The facilities portion was a much smaller percentage of that annual savings.
Okay. Right. My last question, the pandemic restrictions are impacting your due diligence, so we should see a pause until things open up, maybe Q4 on the M&A side?
Well, without getting too specific, no, our M&A activities continue. Someone else asked you a question a minute ago that, are the challenges in it? Yeah, it's easier if you can go meet them in person. Some of the processes have been pulled, but certainly some of the ones that we've been working on for a long time, and similar way that we do tuck-ins all the time, right? Businesses we've known for a long time, owners that we know personally. There's nothing stopping us from getting those deals done. No, I wouldn't think you'd see us stop our activity. Certainly, all the things that we do to get them to happen are continuing.
Great. Thanks, guys.
Thank you.
Your next question comes from Robert Young. Your line is open.
Hi. Maybe just an additional M&A question. Seems like some of the more attractive targets that you've been following for the long term shake out in difficult times. I was wondering if you could talk about maybe any thoughts you have on things you've been following for a while, maybe that becomes more likely in the near term or medium term.
We haven't seen that yet, and I probably couldn't tell you if we did, so you'll hear when the deal gets announced. I do have a belief that that kind of thing might happen. It's no one's walking in right now and saying, "Oh, I'll sell it to you for half of what I would sell it to you for two months ago." It just takes people longer to get their head around that than the short period of time that we've had. We will see what happens in the future. It depends on what happens in the economy over the next bunch of months. If it continued down and companies didn't recover much, I could see it certainly making its way into the M&A market, but it doesn't usually happen that fast.
Okay. Then it seems as though there's a larger demand for tracking, and the stuff that has been moving, people are a little more concerned about it. Even toilet paper, I think, people are probably tracking. Are you seeing an uptick in value-added services on top of messaging, and could that stick around? Is there any cultural change in the way people are thinking about the tracking?
I think that tracking will continue to play a more and more important role as we go forward. This has probably helped. I think maybe, moreover, maybe even more importantly, the e-commerce thing that we just mentioned earlier, I think that's here to stay. I think that if you look at what we do at a very high level, we help people manage logistics processes remotely, and everyone in the world just got told that they need to be remote for some period of time. I think that's going to play very well for us in the long run. We very much look at this as, we would rather it didn't happen, but this could be some short-term pain for long-term gain for us.
In that the things that we do to help people handle the complexity of their supply chain, the things that we do to help people remotely figure out what's going on in their supply chain, just got more important because of this. In the long run, that will be a tailwind for us.
Okay. The last one is just that pro services were a little bit weaker than I was expecting. Is that a general slowdown, or is it customers maybe delaying some work, or is it just harder to get some work done with social distancing? Is there anything to read into that? I'll pass it on.
I didn't see it as very far down, but no, I think our projects continue. No, I don't think we have any fundamental problem there. I didn't even think of them as down very much, honestly.
Yeah. Great. Thanks.
Thanks, Rob.
Our next question comes from Daniel Chan from TD Securities. Your line is open.
Hi, guys. Thanks for taking my question. Look, I know you're restructuring given the uncertainty from the pandemic, but are there any areas where you're adding resources, since there may be opportunities to grow them coming out of the pandemic?
Well, we just laid off a bunch of people, so no. The first thing we did when this all happened was, for the most part, stop all new hires. You probably won't see us change that in the next couple of months, just because we just laid off a bunch of people. I think in the long run, sure. We expect our business to keep growing long-term, and we'll get back to it in full swing as soon as the economies of the world recover a little bit. When we do, we'll be hiring people. Between now and then, it's going to be specific instances where we go, "Hey, we got something that's doing really well here. We'll get some more people to help sell that or modify the product to meet more customer demand," things like that.
It's not the first thing on our mind right now.
Okay. Do you have an estimate on your exposure to end markets that may have the highest exposure to the pandemic? You outlined, or you highlighted, airlines as well as retail. What's your exposure to some of these higher- risk verticals?
We're pretty big in the air business. I don't know what the percentages are. Retail, we have some exposure to, but half of that exposure is e-commerce, right? While we have some customers that are really struggling in retail space, we have a fairly decent size, maybe disproportionate size, customer base that's doing quite well because e-commerce sales are doing well, because we've made a bunch of investments in e-commerce over the last five years, giving us maybe more exposure to that than we might otherwise have. I'll leave it at that.
Great. Thank you.
Thanks, Dan.
That concludes our question- and- answer session. I'll turn the call back over to the speakers for final remarks.
Hey, great. Thanks, everyone. We look forward to reporting back to you in Q2, on Q2 in September. Otherwise, have a great week. If you're looking for meetings with us, please feel free to call in and schedule. We look forward to talking to you.
Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating, and you may now disconnect.