Earnings Call: Q4 2018

Mar 5, 2018

Welcome to the Descartes Quarterly Results Call. My name is Brandon, and I'll be your operator for today. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note this conference is being recorded. And I will now turn it over to Scott Pagan. You may begin, sir. Thanks and good afternoon everyone. Joining me on the call today are Ed Ryan, CEO and Alan Brecht, CFO. I trust that everyone has received a copy of our financial results press release that issued earlier today. Portions of today's call, other than historical performance, include statements of forward looking information within the meaning of applicable securities laws. These statements are made under the Safe Harbor provisions of those laws. These forward looking statements include statements related to Descartes' operating performance, financial results and conditions, Descartes' gross margins and any growth in those 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 OFC 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. And with that, let me turn the call over to Ed. Hey, great. Thanks, Scott. Good afternoon, everyone, and welcome to the call. Thanks for joining us today. As some of you may know, we're hosting our call this quarter from beautiful West Palm Beach, Florida. We're about to kick off our Evolution 2018 Descartes Global User and Partner Conference. It seems fitting that we're about to kick off our biggest conference ever with record attendance from customers and partners at the same time as we announced another record quarter and fiscal year. The theme of this year's conference is consistent with one of the larger factors impacting our business. The conference theme is titled Logistics, The Engine of E Commerce. Not many people would argue that the rise of e commerce is putting traditional business models at risk. And while it may very well make our lives as consumers simpler in many ways, the business environment is getting more and more complex. Increasingly, demanding consumer buying expectations are now finding their way into the B2B market. This brings complexity into business and we're here to help isolate our customers from this complexity and to help them thrive in this challenging environment. Our focus on helping our customers manage the lifecycle of shipments across transportation modes, geographies and commodities on one platform continues to resonate in the market, and we've grown as our customers and partners have supported our vision. In the fiscal year just ended that we're announcing today, we added even more customers and solutions to the global logistics network and we've already kicked off 2019 with a new addition to the family with Aljex, an acquisition that complements our ongoing investment in our MacroPoint business. We're working on some pretty exciting developments in this area and I'll speak to that a bit later in the call. In fact, we've got lots of exciting developments across the business. And today, I'll walk you through some of those business highlights. And if you happen to be here in Palm Beach, you can see for yourself and talk to us about what's going on. But before I speak to that, I'll start the call by taking you through some of the highlights from our record financial results this quarter. Following my business update, Alan will then take us through the financial results in a little more detail, including a recap of the full fiscal year results, then I'll finish up with some comments about our calibration for Q1 and our operating plans moving forward. So let's start by going over some of the key financial highlights for the Q4 of fiscal 2018. We had another record quarter of revenue and we're very happy with our key metrics. Our adjusted EBITDA continues to grow in line with our plans of 10% to 15% per year. For the last quarter, we generated $21,400,000 of adjusted EBITDA, an increase of 16% over Q4 of last year. Revenue for the quarter was up 20% from Q4 last year, coming in at $63,600,000 We converted 92% of our adjusted EBITDA into cash generating $19,600,000 of cash in the quarter and consistent with our long term operating plans we've been investing cash back into our business through focused R and D investments and by combining with complementary businesses. So to summarize, great quarter round off a great year. We're really happy about where the business is right now and we're really excited to kick off our global user conference, which promises to be a great event. With that, I'd like to talk a little bit about some of our innovations and investment, many of which we'll be showcasing this week at our Global User Conference. Our customers are brought together by our global logistics network and mission. We want to help people move shipments of all sizes to and from anywhere in the world, whether it's domestic partial shipment or international cargo or something in between. The GLN is a place where shippers, transportation carriers, logistics intermediaries and government agencies share information and leverage that information to make better decisions. The network is key because logistics is a multi party problem and it's complicated. Regulations are changing every day, customers are asking for more options every day and companies like Amazon are disrupting the status quo. We're looking to isolate our customers from complexity and give them a competitive advantage in the market. And how we do it with the global logistics network by bringing together a wide range of capabilities, content, connections all in one place so the customers can number 1, research and plan who to do business with and how 2, connect to a global trading community to collaborate and share information 3, execute and monitor shipments and react in real time to changes and 4, analyze data with business intelligence tools to improve for next time. So you can think of each area of our business through that lens. Each of our solutions help 1 or more multiple likely multiple parties improve processes in the lifecycle of a shipment. And while all of our customers are part of the global logistics network, we have several different solution sets that our customers use in various combinations. I want to highlight some of our key investments and developments in the 5 different solution tracks that we're showcasing here at our user group. The first track I'll speak to is our private and dedicated fleet track. Descartes has a long history of helping fleet owners improve route optimization. Specifically considering the impact of e commerce, we have solutions that help retailers transform their delivery operations and customer experience into a truly omnichannel offering. This has been a great area of growth for us. We continue to be the go to company for retailers who are looking to distinguish their business based on their logistics operations. Our customers can use our dynamic scheduling home delivery solutions to enhance their customer experience right from the online delivery appointment booking through to the mobile monitoring and delivery at the customer's door. Some key innovations that will be showcased here at User Group relate to our mobile and telematics offerings that are integrated with our route planning solutions. And that leads me to our 2nd major solution track, purchase transportation. Our transportation management solutions or TMS as you'll hear them referred to help companies of all sizes manage purchase transportation. This can range from managing small partial shipments to less than truckload and full truckload shipments as well as air, ocean and rail shipments. 2 exciting areas for development for us in this track relate to MacroPoint and our most recent acquisition Aljex. With respect to MacroPoint, I'm sure many of you are looking for an update on how the business is progressing and I'm happy to report that it's continuing to grow. We've been successfully integrating the product with our Descartes solutions and we've worked hard to achieve some quick synergies on the customer side where we continue to land some really interesting deals with both freight forwarders, freight brokers and shippers. Our partner community has been very interested as well. We've been working hard to put integrations in place with the larger partners like SAP, whose customers are increasingly asking for shipment visibility. At our conference, we'll be demonstrating the investments we were making to leverage MacroPoint's content to provide transportation brokers and shippers with predictive freight capacity to help identify early opportunities for additional freight moves. Unlocking transportation capacity represents one of the greatest opportunities for freight brokers, carriers and shippers to really improve service while reducing transportation costs. And it gets even more interesting when you think about how this fits together with Aljex, our most recent acquisition. Aljex provides back office transportation management solutions for freight brokers and transportation providers, helping customers manage shipments from order creation through to execution, including real time tracking on our MacroPoint network. Both MacroPoint and Aljex acquisitions illustrate our commitment to the freight broker community on our global logistics network. Aljex helps freight brokers every day run their business and manage shipments and MacroPoint is focused on giving the same brokers visibility to those shipments while they're in motion. We strive to continue to deliver solutions that help intermediaries serve the logistics market even more efficiently. This is a really exciting time for this part of our business. Welcome to all the objects employees, customers and partners as they join our ecosystem here at Descartes. 3rd solution track I'll speak to is our freight forwarder broker and customs track. Every quarter I hear of new startups that are looking to disintermediate the freight forwarders 3PLs from the logistics process. We are not trying to do that. We believe the freight brokers, 3PLs, customs brokers, NVOCCs and any other intermediary will continue to play a key role in international trade well into the future. As a result, we continue to expand the solutions we offer this important group of industry players. This is one of the reasons why we invested in MacroPoint and Aljex to provide tools to our customers to help them be even better service providers. We have targeted solutions for forwarders and brokers that can help them interact with carriers, other intermediaries and their customers. And they can also make use of the wider solution sets on the GLN such as our content tools and our e commerce footprint. We also continue to build out solutions for our customs filings and security compliance. As we've talked about on these calls before, rules and regulations are constantly evolving and we have a team of people dedicated to staying on top of this and providing solutions that help isolate our customers from complexity in this ever changing landscape. And you don't need to look far for changes in trade flow. We've been talking for over a year now about Brexit and I'm sure everyone read about the potential trade war as heightened steel and aluminum tariffs may come into play for imports into the United States. I can't tell you exactly how this plays out, but we do know that when duties and tariffs change, supply chains adapt and people need tools and data to help them make better decisions. And that's what we're here to do. And that leads nicely to the 4th solution track, which is our global trade content track. To make informed decisions, you need timely and relevant data. As it relates to duties and tariffs, our customers, our customs info content team is continually gathering, cleansing and normalizing duties and tariff data for more than 160 countries around the world. This timely data is critical for companies managing large international supply chains. And if it turns out that you're going to modify your supply chain as a result of any changes in duties and tariffs, you may need to look for new suppliers or potential buyers, and you can do that using our data mine tools. While you're at it, you'll also want to leverage our MK data content to perform denied party screen to determine if any of your potential new trading partners is on any denied party list around the world. And that's just one example of how our content tools are used every day. For those that attended the conference last year, you may have seen that our data mine sessions generated a lot of excitement. Since then, the business has been doing very well and we've continued to look for ways that our team of logistics trade data domain experts and data scientists can help us think about the data already flowing through the GLN in different ways. We'll be demonstrating our first result of that work here at User Group, whereby we'll be giving an advanced preview of an upcoming air content product. Last but not least, given this year's theme of logistics at the end logistics as the engine of e commerce, let's talk quickly about our e commerce focused solutions. We've talked earlier in the call about consumer buying patterns changing and how that's making its way into the B2B market. We've also talked about how our focus on helping customers with all types of shipments, large or small. We've recently made investments into this space and in particular investments to build comprehensive omni channel solutions to help small and medium businesses deal with the complexities of e commerce fulfillment and parcel shipment execution. Without a comprehensive omni channel strategy that includes advanced parcel shipping capabilities, e commerce retailers and small and medium businesses alike can be left with escalating costs and poor delivery execution that can impact customer satisfaction. This is something we recognized a while back. Our e commerce portfolio now combines our e commerce fulfillment solutions from Pixy with our parcel execution capabilities from Oz and Shiprush. To give an example, our customers can integrate with front end e commerce systems, collect order information, translate that into a mobile driven pick and pack process within the warehouse and initiate the shipment to the customer with seamless package labeling, rating, tracking and postage processing. This is a highly differentiated offering and we're going to market with our e commerce solutions very effectively with partners, which is driving some very nice growth in this part of our business. Before I hand the call over to Alan to talk a bit more about the financials, I'd like to thank some of the people that continue to contribute to the strength of our business. So thanks to our employees for all the hard work they put in to make sure our customers get results. Our customers continue to get results and that's why we have a successful business. So thank you. Thanks to our customers who continue to place confidence in Descartes as their network of choice and thanks to those who made the trip down to Florida here for User Group. Thank you to our partners for helping us continue to expand our ecosystem and a special thanks to those that are here at User Group as sponsors. Thank you to our shareholders for continuing to have confidence in Descartes. And finally, thanks to everyone involved in prepping for this user group conference. It's going to be a very special event. And with that, I'll turn the call over to Alan. Okay. Thanks, Ed. As indicated, I'm going to take you through our financial highlights for the Q4 and our year ended January 31, 2018. As Ed mentioned, we are pleased to report record quarterly revenue of $63,600,000 this quarter, up 20% from revenue of $52,800,000 in the Q4 last year and up 3% sequentially from the Q3 of this year. Service revenue remains strong coming in at $61,600,000 also up 20% from the same period last year and consistent at 97% of total revenue. Gross margin was also strong coming in at 73% of revenue for the Q4, and this was consistent with the Q3 of this year and up slightly from 72% in the Q4 of last year. As a result of the continued revenue growth and strong cost control, we experienced adjusted EBITDA growth of 16% to $21,400,000 or 34 percent of revenue in the 4th quarter compared to $18,500,000 or 35 percent of revenue in the same period last year. As a percentage of revenue, adjusted EBITDA was adversely impacted again this quarter by a weakening of the U. S. Dollar against most other currencies, including the euro, the pound and the Canadian dollar. As a result of these solid operating results, cash flow from operations came in at $19,600,000 or 92% of adjusted EBITDA in the 4th quarter, up slightly from the Q4 of last year. Looking at our tax rate, we've reported a positive impact of approximately $700,000 in the 4th quarter related to the implementation of the new U. S. Tax rules. However, we also had some smaller one time items that partially offset this positive impact in the quarter. As a result, our income tax rate came in at 22% of pre tax profits in the 4th quarter, slightly lower than the 22.2% rate recorded in Q3 and down nicely compared to the tax rate of 24.3% in the 4th quarter last year. As a result of all the previously mentioned items, GAAP net income came in at $6,700,000 or $0.09 per diluted common share in the 4th quarter, an increase of 10% from net income of $6,100,000 or $0.08 per diluted common share in the Q4 last year. If we look at our results of operations for the entire year, revenue came in at $237,400,000 in fiscal 2018, up 16% from revenues of $203,800,000 last year. Gross margin was 73% for the year, again, up slightly from gross margins of 72% last year. Adjusted EBITDA for the year was $80,800,000 compared to 70 $100,000 in fiscal 2017, an increase of 15% and consistent at 34% of revenue in each period. Cash flow from operations was solid at $72,100,000 or 89 percent of adjusted EBITDA this year compared to $72,600,000 or 104 percent of adjusted EBITDA last year. We should note that we continue to expect cash flow from operations come in between 85% 95% of adjusted EBITDA. But as we saw last year, sometimes we will experience unusual items that will cause us to see results outside this range. Our tax rate for the year came in at 22.7%, down from 24.3% in fiscal 2017. GAAP net income for this year came in at $26,900,000 or $0.35 per diluted common share compared to $22,800,000 or $0.31 per diluted common share in fiscal 2017, which represented an increase of 13%. As Ed has already mentioned, overall, we are really pleased with these continued strong operating results as we closed out our fiscal 2018 year. If we look at the balance sheet, we ended the year with a cash balance of $35,100,000 while we had $37,000,000 drawn on our credit facility. As a result, we ended the year with a very small net debt position of $1,900,000 During the Q4, we were able to repay $18,000,000 on our credit facility. As you recall, we drew $80,000,000 on our credit facility in August to complete the MacroPoint acquisition and now have repaid $43,000,000 of this total in the last 5.5 months of the year. Finally, on our debt balance, we should also mention that we drew an additional $33,000,000 on our credit facility just after year end to complete the Aljex acquisition. As a result, as of February 1, we had about $70,000,000 drawn against our $150,000,000 credit facility. We continue to believe that with our current cash balances, the $80,000,000 currently remaining undrawn on the credit facility, our ability to expand the credit facility by an additional $75,000,000 as well as the expectation of continued cash flow from operations, we remain very well capitalized. If we look to fiscal 2019 to round out our financial picture, we should note the following. At this point, we see a minor positive impact on revenue from FX in the Q1. And as always, we continue to see to be fairly naturally hedged to FX impacts on our adjusted EBITDA and operating cash flows. Beginning this year, we will begin to adopt the new revenue recognition rules as outlined under ASC 606. We currently expect that there will be very little impact to our revenue recognition from the adoption of this new standard. However, we do expect to see an impact on our recording of sales commissions. Up until now, we have always expensed sales commissions as they were earned. And under the new accounting standard, going forward, we will be required to defer and amortize these sales commissions over the expected life of the customer relationship. In the Q1, we expect to record a deferred commission asset of between $2,000,000 3,000,000 dollars net of any tax impact, and we will adjust opening returning earnings, sorry, by the same amount as a result of this change in accounting policy. And although we will expense that deferred commission asset into our income statement over time, going forward, we would expect there to be a small yet positive impact on net income and adjusted EBITDA from this new revenue standard as future commissions are deferred and expensed over time under the new accounting rules. As I mentioned earlier, our tax rate was 22.7% for the year in FY 2018. And going forward, we would expect that it will be in the range of 20% to 23% of pre tax income, and this is inclusive of the positive impact of the new U. S. Tax rules. As always, our tax rate may be impacted quarter to quarter by any unusual or one time adjustments in any of our international operations. After spending $5,100,000 on capital assets in fiscal 2018, we expect to incur between $6,000,000 $8,000,000 in additional capital expenditures this year, and these expenditures are expected to continue to be primarily focused on investments in the network, including the area of cybersecurity. We currently expect amortization expense will be $35,000,000 for fiscal 2019, with this figure being subject to adjustment for FX changes and the completion of any additional acquisitions. This number is inclusive of the Aljex acquisition, however. And finally, we expect stock based compensation will be in the range of $2,200,000 to $2,600,000 in the coming year. I will now turn the back over to Ed to give calibration and wrap up. Hey, great. Thanks, Alan. So let's talk about calibration for Q1. Similar to previous quarters, we don't provide guidance, but we use our baseline calibration as a key metric relating to the ongoing health and strength of our business. Our calibration for Q1 assumes the following exchange rates, CAD 0.81, a €1.24 to U. S. Dollar and a €1.42 to U. S. Dollar. Our calibration for Q1 is $62,300,000 in visible recurring contracted revenues, our baseline revenues. This is impacted by the positive movement in FX rates and the addition of Aljex. While on the flip side, we're coming off our peak season, which benefits from holiday shipment volumes, particularly on the small parcel side. We have $44,700,000 in baseline operating expenses. This gives us a baseline calibration of $17,600,000 for adjusted EBITDA for Q1. Some other key points related to how we're positioned for fiscal 2019. First, we're very well capitalized. We have a healthy business that's well calibrated. And as Alan mentioned, we also have a healthy balance sheet. We are profitable and generating cash. We have low capital needs within our organic business. Our primary use of capital is for continued use in acquisitions. We've completed 39 acquisitions since 2000 and 6 and one already here in fiscal 2019. And we have access to additional capital should we need it. Alan mentioned that after Aljex, we have about $70,000,000 drawn on our line of credit of $150,000,000 We have the ability to expand that line of credit to around 220,000,000 dollars 225,000,000 excuse me, and we have a shelf prospectus for up to $500,000,000 of capital was needed to be raised by other mechanisms. We also have a strong acquisition pipeline. Bill has seen there continues to be a lot of industry activity right now with consolidation continuing in our market. This capital capacity and our execution capabilities, there are still a number of acquisition opportunities to expand the geographic reach, functional capabilities, trade data and content or community of participants on our network. We continue to see a lot of interesting opportunities out there to continue or even accelerate our pace of profitable growth. We're seeing both larger and smaller opportunities. And while we review everything that comes our way, we're not buyers for buyers' sake. The fact that we have an acquisition line of credit and a shelf filing in place doesn't change how we view acquisitions. We intend to continue to be prudent on evaluations, but we're confident in our ability to deploy our capital effectively. Looking ahead to fiscal 2019, we've completed our planning process as we do every year around this time. Should be no surprise to anyone that our plans are very similar to the past. We continue to target 10% to 15 percent annual adjusted EBITDA and adjusted EBITDA per share growth. As in the past, we intend to invest any over performance back in the business. Our growth is planned to come through a combination of organic and inorganic activities. And as always, acquisitions are not incremental to this plan. We intend to continue to focus on recurring revenue and deemphasize one time license sales. Our planned operating margin range remains in the 32% to 37% range. Given the current performance of the business and mindful of the FX environment, that remains our target range even as we integrate MacroPoint into our business. But please keep in mind, this could vary if we buy other businesses that need fixing up, which would impact that metric in the short run. And finally, as always, we'll continue to make ourselves available to shareholders to answer any questions. I think we've got a great business. We want to be available to help people learn about our business. We'll continue to spend time and resources to get the word out and we hope you'll do the same. So with that, let's open the call up for questions. Operator? Thank you. We will now begin the question and answer session. From Barclays Capital, we have Philip Wong. Please go ahead. Yes, thanks. Good afternoon. Good afternoon. Good afternoon. Good. Thanks. How are you? On MacroPoint, I was wondering if you could provide a bit more color around the progress on that. Obviously, broaden your network, reach and partnerships, and you previously indicated that there's strong interest in the product. I was wondering if you could give an update on the growth you're achieving there. I'm not sure if I missed in your remarks, but I think you previously indicated 16% growth in the past. Was there any maybe you can update us on that? Yes. We're real happy with that business. It's not only as it continued the growth that we saw before the acquisition, but it's been a big help in our business. We have tremendous amount of interest from some of our partners, the likes of SAP and Oracle, who are looking to provide that type of service to their customers. When we bought MacroPoint, they were looking to go after big retailers and manufacturers and it kind of scaled up to do that. But we're in early days after the acquisition, we were able to turn that on to our sales force and get them out in front of the 17,000 customers on our network and start to help accelerate the growth in that portion of their business. All that's come together to make a very exciting acquisition for us and we're real happy with it. Are you able to provide us maybe a range of growth that you think is achievable in the near or even mid term? Are we talking about sort of 50% plus head growth? Or is it something that is perhaps a little bit less meaningful once we think about as you ramp up the whole process? No, Phil, it's Alain Brett here. I think as Ed indicated, we're really happy with the business. We have expectations of the business. We would hope to see it double over a period of around 3 years, and I think that's still consistent with what we'd expect. Got it, got it. Okay. And then on the cost side, is it fair to assume that the costs related to macro points are now largely fixed? You've got sort of all the salespeople in place. How and I'm asking this because I'm just wondering how we should think about margin contribution in the coming quarters. Well, I think we said when we bought it that we were going to try and eventually get this into line with our operating metrics. We made some moves right out of the gate to get off to a good start there. We continue to invest in that business in that it operates below our average operating margins because we think it's a great business and it's growing very rapidly and specifically in the area of adding new customers or activating new customers on the network. We want to make an investment to make sure that we get all the freight workers and transportation providers on the network as fast as we possibly can. So we continue to invest in that area. But as we said the day we bought it, we plan to get it to our operating margins within a year or so. And I expect beyond that it could potentially even be more profitable like a lot of the other areas of our network. Got it. That's helpful. And one final question for me. Just looking at the pipeline, as you look at the pipeline of opportunities, do you see a greater abundance of opportunities that offer bigger revenue synergies that might also be a bit more expensive given that it might be initially margin dilutive? And I say that just because both MacroPoint and Aljek seem to offer very strong revenue synergies even if it requires a bit of upfront investment on the cost side. Thanks. Thanks, Phil. We look at all different types of businesses. We bought all different types of businesses. We look at each of them individually and trying to examine their thesis and figure out what it's worth to us. And that's what we pay people. If there's others out there that think they can do more with that business, they're probably going to win that deal. If we think we can do more with it than anybody else, we're probably going to win because we're going to be willing to pay more than others to get it. We think of ourselves as prudent investors. We don't like overpaying for stuff. We like to think that we got a good value for something when we bought it and a fair deal for both sides of the party because we have to work with these guys after we acquire the company. When we're buying businesses that are in great shape, all recurring revenue growing fast, highly profitable, yes, that's worse up than us and we're willing to pay to get that. On the flip side, we've got businesses that are in trouble and need some help to get fixed up. And in those situations, we're looking to pay pretty low multiples for something in hopes that we're going to be able to fix it up better than the current owners could and turn it into a big win for our shareholders. We also know that's a lot of work. So we try to factor that into our valuations. But don't think anything has ever changed for us in this evaluation. We think of it the same way all the way through, right? We're looking at each individual acquisition and going, is that something we should own? And if so, what are we willing to pay for it? And we're very prudent about sticking to our guns when that's the case. Right. Thanks very much. Helpful color. Thank you. From William Blair, we have Matt Pfau. Please go ahead. Hey guys, thanks for taking my questions. First, Ed, I wanted to touch on customs info and MK Data, which have been in the mix for some time now. Where do you think you stand in terms of the opportunity to sell those within your existing customer base? And I guess if that penetration is still relatively low, what do you need to do with those two products to sort of increase that penetration or conversion? Yes. We continue to sell into our customer base and I think we're doing that quite effectively right now. There's still lots to go, lots more customers that don't use this service yet. We have to establish a need within our customers' mind for that service, right? One of the ways that's happens is you get in trouble, right? We have customers that get in trouble for not understanding the tariffs and duties or not understanding that they weren't allowed to ship something to someone. And that's an obvious case for us to get a new customer. All of our international freight forwarders, we go out and spend time with them explaining how they can make this a service in their business, right? And they can take the service that we provide and mark it up and provide it as a service to their customers. So we continue to educate them to get that to be the case. It's probably still early days, I would say. We see the growth in those businesses continuing for a long time to come. Got it. And then wanted to hit on the routing business and in terms of what you've seen the impact from Amazon getting into you to more types of deliveries and doing more deliveries themselves, how has that impacted the ability to sell solutions for private fleets? And then I guess within your existing customers, have you seen them expand the number of vehicles they have in their fleets or have those contracted? Typically they're expanding over time as their businesses are as they're getting into e commerce and selling more and more. Amazon has been a big help desk because it's created a need within the broader retail community to be able to deliver to the home. You take the cases of Best Buy or Home Depot, they want to get good at doing this before Amazon gets good at doing it for them. And I think if you can read Best Buy's releases on your own, but they've done quite well in this e commerce space in the last couple of years. We probably played a little bit of a role in that. We'd like to think we did at least in helping them manage this process more efficiently. Got it. Okay. And then last one for me just on cash flow, Alan. It sounds like based on your commentary in terms of the normalized and be more in line with EBITDA going forward? And then this year was a bit of anomaly with the tough comp from the prior year. Is that correct? Yes. Yes. This year is compared to last year because we were over 100% of adjusted EBITDA in the operating cash flow in FY 'seventeen, it would have made it a bit tougher. But going forward, we would expect it in that 85% to 95% range. Most of our EBITDA should end up in cash at the end of each year. That's the consistent view. Okay, great. That's it for me guys. Thanks a lot. Thanks, Paul. Thanks, Matt. From Morgan Stanley, we have Brian Essex. Please go ahead. Hi, guys. It's Thomas Robb on for Brian Essex. Good morning, Tom. Good morning. Good morning. Good morning. Good. How are you guys doing? I wanted to kind of dig into the possible trade sanctions that's kind of hitting the news right now. And I think it's kind of only been like a few days. But when this kind of stuff hits the news, do your customers kind call you and see what you guys think? Or are you guys hearing anything from your clients on what this could mean for their business or kind of how you can help manage it? We're typically not getting calls from them asking what the Trump administration or any other government's going to do about trade regulations other than we might get them months from now as we start negotiating those trade regulations, then we'll have some information from them about it. But when it's in the news like you and I are reading right now, we tend to not know anything more than anyone else until the rubber starts to hit the road and government start to take action, then we start to see some of the advanced actions and we'll advise our clients about that. More broadly, I think change is usually good for our business in this. People are talking about the changes in rates that may occur in the future that since we have a database that tells people what the rates are that usually puts more focus and more value in our data content, which is generally a good thing for us. Got it. And then I guess when you think about your EBITDA growth framework for fiscal 2019, are there any big moving pieces that could push that to the lower end or the higher end of that 10% to 15% range? Well, I mean acquisitions are always play a role in it, right? Our organic growth in EBITDA tends to be fairly consistent, but an acquisition can affect it positively or negatively, right? If we buy a company that's making 15% EBITDA margins and we're making 34% or so, that obviously provides a temporary drag on it. We don't tend to buy businesses where we don't think we can get it back to our levels at some point, but on the day we buy it, they're not always there. Conversely, we bought businesses like MK Data or Customs Info that we're making a lot more than we were as a percentage of revenue and they impact us positively. Alan has mentioned earlier, FX can impact it as well. Big increases or changes in FX over the course of a quarter or 2 can change our profit margins a percent or 2 and we try to point that out when it happens. Got it. Thanks guys. Thank you. From RBC Capital Markets, we have Paul Treiber. Please go ahead. Thanks very much and good afternoon. Just on e commerce, it does seem like the messaging around e commerce is rising in prominence, just given your comments today and then also at the user conference this week. How does the go to market strategy differ for e commerce versus your traditional business? And are there new partnerships you need to consider or other channels to go through to address to better address e commerce? Yes, sure. And I've mentioned this before over the last couple of years as we've gotten into the likes of Oz and Pixy and Chiprush, Customs Info and Data Mine for that matter. Those companies go after a smaller customer base. Instead of going after customers that we traditionally went or typical customer of ours might be spending $5,000,000 or $10,000 or $15,000 or $50,000 or $100,000 a month with us, some of these businesses are going after customers that they might pay $300 or $500 or $1,000 a month and it causes a different go to market strategy, different marketing, different sales processes. If someone's going to pay you $100,000 a month on the end, you can at the end of it, you can have a lot of sales calls with that customer trying to show them the value that you bring to the table. If someone's going to pay you $300 a month, you can't. And I think we've done a very good job in the last couple of years of getting acclimated to that environment and starting to get good at it. We still have some ways to go, but I see significant changes in our organization as we've gone from 6,000 or 7,000 customers to 17,000 or 18,000 customers over the past 5 years in the way we go to market to attack both the big guy that wants to do a lot of sophisticated stuff with us and can save a lot of money and the small guy who's got a booming e commerce business, but relative to the major retailers of the world, they're still quite small and needs help from someone like us, but it's not a major solution. And I think we continue to evolve and get better at that, but I'm quite happy with the progress we've made so far. And how do you think about e commerce in terms of different geographies? So I mean, obviously, we think about North America quite a bit because we're here. But is the opportunity and is the growth as rapid in Europe? And really, what are you seeing in Europe and outside of North America? Yes. I mean, I don't know if the growth is as rapid as it is in North America, but it's certainly moving now quite a bit. You saw us by PIXI over in Germany that has an e commerce solution that provides warehouse management tools and transportation management tools. Oz did business all over the world with partners, and we see e commerce listen, think about it. In those foreign countries, the U. S. And maybe North America has had big box retailers for many years in place where you could go to a store and get just about anything you want. You go to some of these smaller countries around the world. That doesn't exist. And e commerce is a big way for them to catch up over time. So I think you're going to see those areas continue to grow as consumers in those countries realize they can get their hands on just about anything through a good e commerce site. And just a last one for me. Just on baseline, baseline for the next quarter includes Aljex. We're thinking in the past you didn't include acquisitions in baseline, at least initially out of the gate. What's different with Aljex that you felt comfortable giving it in baseline? Yes, Paul. I think actually what we've typically done is that when we've done the acquisition well in advance of the quarterly release, we have included it in our baseline as we know about it. And we've many times adjusted that date and said, as of the date of the acquisition, we knew this much. Just be as clear as we can be about revenue if we know it. So we've done that this time. As of February 1, we start our quarter and we will be able to feel for the Aljex business. And so we'd rather give a much more consistent inclusive picture. Thanks for that clarification. Thanks, Paul. From Scotia Capital, we have Paul Steep. Please go ahead. Great, thanks. Ed, could you talk a little bit about, I guess, go to market now that you've got MacroPoint and soon we'll have Aljex on the system in terms of broadening it out now that you've got a much stronger road product in North America. How customers have responded and maybe what you've changed in terms of the go to market? Sure. Yes, we've spent a lot of time with the MacroPoint management team and our sales force trying to figure out exactly how we're going to go out. We know a ton of retailers in this space and manufacturers that procure full truckload shipments and how we're going to get in front of them faster and show them what MacroPoint has to offer and get them signed up to the MacroPoint services. I think we're well on our way there. We still get a lot of potential opportunity in the next couple of years, but excited about the prospects that it brings. And we think it's a great offering. And it's a relatively short sales cycle compared to selling something like our transportation management or our routing and scheduling tools. It's more something where we go in and tell them about it, and they go, wow, that's really great. How do I get some of that? And we're just trying to educate our salespeople and get them out in front of their customers as quickly as possible and then get them signed up to contracts and activated and rolled out so that we can start to see it become a new revenue stream for us. And what should we think about in terms of expectations, Ed? In your mind, is 'eighteen, I think it's calendar 'eighteen really year of integrate, get everybody acclimatized in 2019 is when you'll start to sort of maybe increase investment behind it or no, do you think we'll go a little faster maybe this year? I think we're going to continue as we did in 2018. You're somewhat right. We were we've spent the 1st couple of months trying to figure out how to educate everyone on our team about it, so they can get out in front of the customers. I think you're going to see us getting out in front of the customers more and getting more customers signed up and then having to get them activated, etcetera, in 2019 and beyond. But I don't expect any significant new investment in that business. In fact, we're trying to make that business make more and more money every day like the rest of our network businesses. Great. And then just last one for me. You commented in your opening remarks about the M and A environment. Other than activity level, obviously picking up a couple of your competitors getting active and buying things, has anything else changed in the environment, Ed? Or is it just still more of the same? Thanks. Thanks, Paul. Well, I mean, for several years now, we thought there's been a lot of acquisitions potentially, especially on the larger size acquisitions that in our mind were overpriced or fully priced. And we look at all of them. We were wary to we don't believe that those companies are worth what the seller thinks and we usually back away from them. You have seen us buy, let's say, higher quality assets in the last couple of years and certainly paid for them when we did. I think that's a philosophy we always had. We just saw more of them come available in the last couple of years and jumped on them when we did. MacroPoint was a great acquisition, but it was by our normal standards expensive. We hope to show people over the coming years that that was actually a great price that we paid for that given what we got. But on the day we did it, we were well aware. We have a lot to prove to people that that's what's going to happen. And we were fully expecting that we would prove that to people. Great. Thank you. Thank you, Paul. From Canaccord, we have David Hynes. Please go ahead. Hey, thanks guys. So I want to ask strategic question. Maybe it's relevant, maybe it's not. But we hear folks like IBM talking about blockchain technology in the supply chain. Just curious, how does that flow into logistics world? Is there stuff that you need to do to ready your products? Just help us think about kind of the puts and takes of that potential evolution. Sure. We're in the middle of it, right? We're in a bunch of blockchain pilots. And I think this is like the 10th standard that's come along over the past 20 years where people said this is going to be the new way that everyone does things. What I've seen in the past is it just becomes another way that people need to communicate with each other because not everyone does it. And I think blockchain is going to be the same, right? Just think back to XML. If everyone just did XML and we all use the same transaction sets, we all communicate seamlessly with each other. Well, that was the promise. That didn't turn out to be the way it worked, right? Some people use XML. Some people use traditional EI. Some people use flat files. One day some people are going to use blockchain transactions and they all have to communicate with each other. Yet they're all going to be using different ways to communicate. That's where we come in. We take that data, we put it in a standard format in our network and pass it to someone else in the form and format that they want to load directly into their back office system. I don't think blockchain is going to be any different from that perspective. There'll be people that want to process blockchain transactions and when they do we'll be there to help them. I can tell you this about blockchain, It's fairly expensive, right? I mean you looked at Bitcoin and you see do you ever look at there's a little mobile app that shows you the power consumption used to encrypt blockchain ledgers? I think it's now reached the size of the Argentinean power consumption, just for the limited blockchain involved in Bitcoin. That's pretty expensive. And you'd have to ask yourself, are you willing to pay the price to 128 bit encrypt a bill of lading because it's expensive? And I think the answer to that's going to be probably not. I can see some places where it might be a more natural fit like government agencies saying, hey, this is the way I'm going to accept these transactions. That type of customs filing transaction may have a need to be more secure. It's also mandated by our government. So if you want to ship into that country, you kind of need to follow their rules. So they have a better chance of mandating it. And if that's the case, we're going to be there to help our customers do it. So yes, I mean, we see a role for it. I just like we saw a role for XML and EDI before that. And I could go back and mention 10 different types of standards that came to play in our industry and I think blockchain is going to be another one. Don't show your age on this call. And then Alan, maybe just a tactical question for you. So the change in expensing commissions, how long are those commissions being amortized over now and how did you come to that decision? Sure, sure. So we've done a bunch of work in this area, obviously working with our auditors. It will be a 5 year period that we amortize the commissions over and that's just a function of life of technology, life of customer relationships, technologies, a lower life or shorter life than our customer relationships, and that's where we ended up. So long answer, over 5 years. Yes. I think that's almost becoming the standard. Awesome. Okay. Well, thanks. Good luck with the show this week, guys. Thanks, TJ. From Raymond James, we have Stephen Lee. Please go ahead. Thanks, guys. Alan, on this on the deferred commission assets, so $2,000,000 to $3,000,000 so that's how much I should think your EBITDA is going to pick up given there's going to be little amortization in the Q1? No. I think what we're thinking, there'll be a small positive impact to this. And mainly as we amortize this asset or expense this asset into our P and L over the remaining life, we'll have to defer the future commissions or the commissions we pay in Q1, Q2, etcetera. You should see this asset grow. That number that we quoted $2,000,000 to $3,000,000 is net of the tax impact. So as you see that number grow, you would see the impact of what would have been expensed going through the going on to the balance sheet. So we think it's going to be a fairly small number, but it should that asset should grow over the next two and a half years or so until we sort of reach a stable level of deferred commissions. But in that Q1, let's say, in Q1, so you're differing between $2,000,000 $3,000,000 but then you're not really amortizing much, right, because it's you're only starting now? Is that am I understanding this correctly? We are going to defer we will put an asset on the balance sheet. The will go to retained earnings, and we will start to amortize that asset in the Q1. Okay. All right. Okay. And then, Ed, on the calibration ratio, your baseline revenues to actual revenues has been in a tight range, 107%, 109%. Does the timing of some of your acquisition for that ratio off a little bit for Q1? Or it should be about the same? Stephen, I'll answer that. It's calibration typically does fall into a fairly tight range. Where you've seen it go off a little bit might be where we close an acquisition in a quarter after our conference call. That can happen. That might drive a number that's 9% or 10%. But typically it falls into a reasonable range. Subject to any future acquisitions this quarter, we would there's nothing that we would expect to see anything different as far as how we operate the business. And therefore, the ranges probably end up similar. It actually may fall into a tighter range than you even imagine, right, because the timing of those acquisitions might have made it 9% versus 7%. Without the acquisition, it might have been an even tighter range. Right. Okay. That helps. Thanks. Thank you, Steve. From GMP Securities, we have Reuben Sahakian. Please go ahead. Hi, guys. Thanks for squeezing in my question. On a more of a macro level, are you seeing any trends in the conversions of logistics and supply chains? And is this impacting you today? And how do you think about it? And how do you prepare for it? Well, so I mean our mission is we actually state our mission is to be the global leader in logistics and supply chain technology. We absolutely believe there's a convergence between those two things. You can see it in this e commerce space completely, right? These e commerce companies have really combined those two concepts. And we've thought about it that way for a long time as well, where we go, hey, these are 2 separate things, but they certainly over time, I think are going to work hand in hand. And the companies that are that think of it that way, hopefully our customers, we think are going to take advantage of the companies that don't realize that's the way it is. We've tried to build technology that helps them manage these processes and hopefully make them the best at it. Perfect. And the last question. How do you go about growth in Asia? How do you go about it? Is this something you guys are looking at? And what have you seen so far? Well, there's a bit of a misnomer in the way we report because we report where our customers are based and then the revenue that they generate. So it looks like a lot of our revenue comes from North America and Europe, where most of the world's large logistics and transportation companies are based who happen to be our biggest customers. If you look at the shipments that they're processing over our network, they are fairly well distributed between EMEA, Asia and North America because a lot of the shipments are coming in and out of Asia because that's a low cost manufacturing center. So from our perspective, we already have a lot of business in Asia. We do. Our customers are moving shipments every day in and out of Asia. That's why they're using our network. You see this there were a couple of acquisitions over the past few years in Asia. I think as we get more of a footprint there on the ground, you'll see us do more. But fact of the matter is most of the world's logistics and transportation companies are not based in Asia. There's a much higher percentage based in North America and Europe. And that's why you see our revenue numbers reported that way because that's where the customers are based or headquartered and that's where we report their revenue. Perfect. That's helpful. That's it for me. Great. Thanks, Ruben. From CIBC, we have Stephanie Price. Please go ahead. Hi. Hi, Stephanie. How are you doing? Hey, I'm good. Thanks. You had mentioned early customer synergies with MacroPoint in your prepared remarks. Could you elaborate a bit on that and talk a bit about what you're seeing in the sales cycle there? Sure. So when we bought MacroPoint, they had a real push on to go out and sell big retailers and manufacturers who had full truckload move. They had captured the market for freight brokers and 3PLs who are the largest, let's say, customer base for transportation tracking transactions because they were going out and selling to a lot of retailers and manufacturers. And so if you want to get a lot of retailers at once, you go sell a freight broker who's got 500 different retailers already doing business with him. But MacroPoint saw an opportunity with the largest retailers and manufacturers who may not use freight brokers as much, may do a lot of their own purchase transportation. And as Descartes was buying them or we're really convincing them to sell MacroPoint to us, we were pointing out, hey, we know these guys already, right? We already do business with a number of these retailers and manufacturers and in fact have significant relationships with them. So you're spending all this time to get in the door at a big retailer. We're already doing business with them and have a significant relationship with them and would think we could get in there faster. And that's going very well for us right now. We've established a bunch of new relationships and think we'll see a lot more of that in the coming years. Great. Thanks. And then could you also talk a bit about your optimal capital structure at this point? As far as capital structure, I mean, we are as we said, we ended the year net debt $1,900,000 We will never feel that we will get excessive with debt, but we would feel comfortable up to 2 and in certain conditions up to 3 times debt to EBITDA. So that wouldn't fuss us. We have a cash flow generating business. So as we buy and as you saw with the MacroPoint acquisition, we buy, we borrow $80,000,000 in 5.5 months, we repay $43,000,000 of that. And that typical sort of use of a credit line is how we would look at it. But we've said many times, I think, our first choice to deploy capital, our only need for capital is really for acquisitions. Our first choice is out of existing cash flow. Our second choice is and third choice is also of existing cash flow, but we will use some level of debt. And any transactions that were bigger than that, as mentioned, we have a shelf perspective. We wouldn't hesitate to go out and raise additional capital for deals that outstrip our existing cash flow and our debt capacity. Great. Did that answer your question? It did. That's perfect. Thanks, Sung. Thanks, Steph. From Echelon Wealth Partners, we have Ralph Garcia. Please go ahead. Hey, guys. Thanks for taking my questions. Just two quick ones. On the CapEx side, the incremental $2,000,000 or $3,000,000 is that just network build out or IT systems upgrades on the targets? And on the cybersecurity side, again, is that for the GLM network or for some of your latest acquisitions? Yes. Our CapEx is we're not capital intensive, So $6,000,000 to $8,000,000 of CapEx is a reasonable range. It's slightly higher than last year. So it will be more of the same of what we do. We run a network. We take the security of that network extremely seriously. We spend a lot of effort and we spend dollars there, and that will be part of where we spend our dollars. So other than being slightly higher on the CapEx because we run now a slightly bigger business and we integrate these acquisitions and want to make sure that security over their networks is up to the same level as ours. There's no change in how we're operating and looking at cybersecurity or CapEx. Okay. And then on the M and A side, would you look at strategic alternatives in the U. S. To sort of hedge against whatever happens on the NAFTA side? Or with regards to Europe, I mean, do you look at stuff in the UK or on the continent depending on what happens with Brexit and where trade flows go? I don't think we spent a ton of time thinking about it from that perspective. From where are we going to acquire because of some rule that's changing. We think about those rules changing and its impact on our business, but probably not particularly going after individual acquisitions based on it, I don't know if we think that would be prudent or not. When we're going out to buy companies, we're trying to buy good companies that have recurring revenue that make money, that are growing, that we think are going to be good fits on our network. And if those things are all true, we're interested in buying it. Now we'll look at these kind of macroeconomic trends that you're talking about and see if they have any positive or negative impact on them. But I think our thesis more revolves around whether we think this is a good business and whether we think it's a good fit for our network. And then lastly, do we think it's going to be a good business going forward given the macroeconomic trends that are going on? Because look, these things could all change a couple of years from now, right? We're talking about tariffs and trade tariffs right now and potential trade wars, but that could all change depending on who runs each country and those things tend to get decided every couple of years. So, I don't think you'll see us executing acquisitions based on that. Okay. Thank you. Thank you, Rob. Thank you. We will now turn it to Scott Pagan for closing remarks. Hey, guys. It's Ed Ryan. Thanks for joining the call today and we look forward to reporting back to you in a couple of months on next quarter. Have a great day. Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.