Earnings Call: Q3 2018

Nov 29, 2017

Welcome to the Quarterly Results Call. My name is Adrienne, and I'll be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note this conference is being recorded. I'll now turn the call over to Scott Pagan. Scott Pagan, you may begin. Thanks, and good afternoon, everyone. Joining me on the call today are Ed Ryan, CEO and Alan Brett, CFO. I trust that everyone has received a copy of our financial results press release that was issued earlier today. Portions of today's call, other than historical performance, include statements of forward looking information within the meaning of applicable securities laws. These statements are made under the safe harbor provisions of those laws. These forward looking statements include statements related to Descartes' operating performance, financial results and conditions Descartes' gross margins and any growth in those 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 MD and A 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. Great, Scott. Thanks, and good afternoon, everyone, and welcome to the call. Thanks for joining us today. We continued our momentum with another great quarter here in Q3. As we talked about on our last call, we had a key addition to the Descartes family with the acquisition of MacroPoint at the beginning of the quarter. These guys are really hitting the ground running here. Our ongoing investments in the business both organic and inorganic continue to drive growth in line with our long term operating strategy, and our investment strategy is designed with the current and future business environment in mind. Global trade continues to change and commerce as we know it has fundamentally shifted and with these changes consumer and business expectations for delivery and services are increasing. Our job is to isolate our customers from the complexity of this changing environment and to help them with tools to take advantage of these market conditions, and the strategy is working. New customers and businesses are joining our global logistics network every day, while existing customers continue to do more and more with us as we add more solutions and services for them to manage the life cycle of their shipments. All in all, the business is doing really well, and I look forward to giving you some more perspective on what we've been up to as we go through the call. Before we do that, I'll start by speaking to some of the brief financial highlights from the quarter. Then following my business update, Alan will take us through the financial results in a little more detail, and then I'll finish up with some comments about our calibration for Q4 and our operating plans moving forward. So let's start by going through or going over some of the key financial highlights for the Q3 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 $20,600,000 of adjusted EBITDA, an increase of 16% over Q3 of last year. Revenue for the quarter was up 20% from Q3 of last year, coming in at $62,000,000 Our revenue mix remains very healthy. For years, we've talked about our continued focus on returning revenue and deemphasizing license revenues, and this is evident in our results with services revenues accounting for roughly 96% of our total revenues. We're also very happy with our margins. Adjusted EBITDA as a percentage of revenue was 33% this quarter. This was consistent with what we expected given that we just recently added MacroPoint, which we're in the process of getting up to the more traditional Descartes margin levels and because of recent movements in FX, which impact our revenues but not our adjusted EBITDA. We generated $18,900,000 of cash in the quarter and consistent with our long term operating plans, we've been investing cash back into our business by combining with complementary businesses. I'll come back to that in a minute. So to summarize, it's a great quarter. We're really proud of the business and where it is right now, and we're really excited about where it's heading next. With that, I'd like to talk a little bit about how we manage the business and plan our investments as we continue to grow, and then I'll provide an update on some of the recent acquisitions and other business activities. So how do we look at the business? Well, we're an acquisitive company. We've combined with a lot of companies over the last 10 years, and we believe there are opportunities to combine with a lot more companies in the next ten. We work very hard to integrate acquisitions quickly, and we think of the business holistically as we manage our growth targets and investment plans. And then we've built one network where customers can come to manage the lifecycle of their shipments from researching and planning who to do business with through to execution and monitoring of those shipments in real time. The reality is that there are many different business processes that we're helping our customers with. Some of those business processes are very dynamic and changing all the time. These areas of our business will typically grow faster than others. Other business processes may be more established with minimal changes on an ongoing basis. And as we grow and become a bigger business, we need to manage the different types of growth across our business. For instance, we have legacy transactional businesses with customers who've been using our solutions for 20 plus years. Those businesses are growing well, perhaps even better than growth in GDP, but it's still up 2% to 4% growth range. On the other end of the spectrum, we are rapidly growing businesses headlined by having brought in MacroPoint, where we need to think about managing double digit growth rates and capturing market share in a very dynamic environment. And we have different parts that are in the middle, each with their own growth trajectories. Trajectories impacted by the mode of transportation they serve, the time of year, macro trends impacting the space and improvements in technological solutions. Each different growth trajectory brings with it different considerations for investment in people and infrastructure to support the growth along with opportunities to consider acquisition investments in the areas where our customers need us most and where we see the future of the market. We're fortunate in that we're now very experienced in making prudent forward thinking investments to achieve our goals. But even with the addition of high growth businesses to the cards such as MacroPoint and our investments like ShipRushing e commerce space, our goals remain the same. We want to build up business forever, a business for the long term. And for us, that means delivering sustainable, profitable growth across the entire business. If we grow too slowly, we fall behind. If we grow too quickly, we may not be able to keep up with the pace. So we've historically targeted 10% to 15% adjusted EBITDA growth per year. We still are. We believe that is the sweet spot for growth in this business, and we think our historical results and those announced today prove that out. We're always aiming higher and you've seen us deliver more points in the past, but we believe that sweet spot is the right range for us for the long run. We believe that we should continually reinvest any over performance back in the business, particularly in the fast growing areas of our business. Speaking of some of those fast performing areas, let's talk quickly about the MacroPoint business and e commerce in general. For specifically, we want to continue to support that business with investment to take advantage of the opportunities for growth that they've historically experienced. We believe we can do that and still achieve our aggregate growth goals. I'm sure I'll get some questions on this call about how MacroPoint is doing, so let's spend some time on that right now. So let's start with the recap of what they do and then we'll talk about how they're doing. MacroPoint runs a connected network of over 2,000,000 trucking assets and drivers. They connect to trucks through integrations to onboard electronic logging devices, ELDs, transportation management systems and or any cell phone, whether that be through GPS enabled smartphone applications or location based mobile phone triangulation. MacroPoint uses this data to help transportation brokers, logistics service providers and shippers track the locations of deliveries and trucks. They can also use this content to provide transportation brokers and shippers with predictive freight capacity to help identify early opportunities for additional freight moves. The business itself continues to grow quickly. As a standalone business, it was doing very well and we're really already seeing the benefits of coming together with MacroPoint in the cross selling going on between our businesses. Sometimes when we combine with the company, it may take some time to cross train sales reps to spot opportunities and to have the team start working together. But we've seen some great uplift out of the gate with MacroPoint. Our sales teams have already started to work together to uncover joint opportunities. We've got some deals that we're working on right now. Our partner community is also very excited. MacroPoint was an immediate discussion point with many of our larger large partners right out of the gate. We've seen we've since made a lot of progress with those partners to start settling setting up integrations for their customers to access the MacroPoint network. We're really excited about the opportunities with our partners here and I look forward to discussing this more on future calls. With respect to the bottom line, we don't talk much about the individual contributions from acquisitions across our business because we look at the business holistically we look to integrate quickly. But as I mentioned on the last call, we plan for MacroPoint to operate at lower margins for the time being. We expect its margin to improve over time and come in line with our core business, but we're going to do that in an appropriate pace to support its high growth trajectory. We're happy with the Q1 performance and I'm sure we'll talk more about this business on future calls. Moving on to another fast growing area for the business, let's talk about e commerce quickly. With Cyber Monday just passing and showing another monster year of sales and growth, there continues to be more transactions trending online. Customers now expect goods when and where they want them and they often don't want to pay for that privilege. Obviously, this impacts different companies in different ways depending on what they're selling and to whom. Whether it's a retailer trying to compete on home delivery with the likes of Amazon using our route planner and reservations technology or a small e commerce company using e commerce fulfillment and parcel solutions or something in between, we've been investing across the board to help customers of all sizes address this omnichannel landscape. So let's talk a little bit today about customers using our e commerce solutions and in particular those geared to the parcel market, which continues to grow in size and importance. We're starting to bring together our e commerce portfolio where customers can work on the fulfillment side of our e commerce focused WMS solution, Pixie. From there, we now have deep capabilities in the parcel execution side. Our investments in Oz and most recently Shiprush allow our customers to integrate with front end commerce systems and parcel shipping providers for seamless package labeling, rating, tracking and postage processing. By combining these businesses with our global logistics network and the community of its participants, it allows us to present a highly differentiated offering for this segment of the market and we're seeing some great and very strong growth here. There's a common thread in each of these high growth areas for our business. They have a strong partner community that is hungry to tap into our global logistics network. So with that, let's just talk for a few minutes about our partners. We're really happy with the progress we've made strengthening our partnerships over the last few years. Selling through and with our partners is now part of our DNA, much more than it was, say, 5 years ago. Like our customers, our partners are looking to do more with us as well. For instance, with each of SAP and Oracle, we have a very strong set of partnerships on the content side of the business, where we help power their global trade management systems with our global trade data content. But now these guys are locking are looking to tap into more and more services on our global logistics network as well, whether that's connecting to our transportation community to execute or track shipments or leveraging our extensive customs connectivity arrangements with governments around the world, there's more business out there for us. And as I said previously, there's a strong interest in connecting to the MacroPoint network to facilitate real time truckload tracking. We also continue to see growth in opportunities within our small and medium sized business community, SMB working with NetSuite. We continue to strengthen our relationships there and think that there are opportunities to do more off the back of our ongoing investments in e commerce. Beyond that, we have a number of other partners, whether it's hardware, technology partners or partners in the parcel market space, and we continue to see transactions, traction in deals and opportunities to grow the business further. I want to thank everyone internally for working hard to foster those relationships and equally thanks to our partners for putting the time and attention needed to make this all work. Before I hand the call over to Alan to talk a little bit more about our financial results, I'd like to thank more 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 great results and that's why we have a successful business. I want to thank our customers who continue to place confidence in Descartes as their network of choice. And finally, thank you to our shareholders for continuing to have confidence in Descartes. And with that, let me turn the call over to Al. Okay. Thanks, Ed. As indicated, I'm going to take you through the financial results for our Q3 ended October 31 this year. As Ed mentioned, we are pleased to report record quarterly revenue of $62,000,000 this quarter, up 20% from record of $51,500,000 dollars in the Q3 last year and also up 8% sequentially from the Q2 of this year. Year to date, revenue this year has come in at $173,800,000 which is an increase of 15% from revenue of $151,000,000 in the same period last year. Consistent with the trend for the past number of quarters, service revenue remained strong coming in at $59,700,000 up 21% from $49,400,000 in the Q3 last year, representing 96% of our total revenue in each of these periods. Gross margin also continued to be very strong, coming in at 73% of revenue for the Q3, consistent with the Q2 of this year and with the Q3 of last year. As a result of the continued revenue growth and strong cost control, we experienced adjusted EBITDA growth of 16% to 20,600,000 dollars or 33.2 percent of revenue in the 3rd quarter compared to $17,800,000 or 34.6 percent of revenue in the same period last year. As a percentage of revenue, adjusted EBITDA was negatively impacted this quarter by a weakening of the U. S. Dollar against most other currencies, including the euro and Canadian dollar as well as from the impact of the recent MacroPoint acquisition, as Ed mentioned. Looking at the 9 month results, adjusted EBITDA was $59,400,000 or 34.2 percent of revenue, 15% higher than adjusted EBITDA of $51,600,000 in the same period last year. As a result of these solid operating results, cash flow from operations came in at $18,900,000 in the 3rd quarter, representing 92% of adjusted EBITDA. Year to date, cash flow from operations came in at $52,500,000 or 88 percent of adjusted EBITDA, down slightly from operating cash flow of $53,000,000 in the same period last year. The slight decrease in cash flow from operations this year has occurred mainly as a result of the payment of deferred purchase price retention bonuses related to the 2015 purchase of MK Data. Excluding these payments, cash flow from operations has increased consistent with our business plan and would have been approximately 93% of adjusted EBITDA year to date. Moving to GAAP net income. We came in at $6,200,000 or $0.08 per diluted common share in the 3rd quarter, an increase of 5% from net income of 5,900,000 dollars or $0.08 per diluted common share in the Q3 last year. Year to date, net income was 20,200,000 dollars or $0.26 per diluted common share this year, up 14% from $17,700,000 or $0.23 per share last year. As Ed already mentioned, overall, we are really pleased with these continued strong operating results in the Q3. If we look at the balance sheet, we ended the Q3 with a cash balance of $33,300,000 While we drew $80,000,000 on our credit facility early in the Q3 to complete the purchase of MacroPoint, we were able to repay $25,000,000 on this facility during the balance of the quarter, such that we ended the quarter with $55,000,000 drawn on our 100 $50,000,000 line of credit. With our cash balance and a $95,000,000 currently remaining undrawn on the revolving credit facility, as well as the expectation of continued cash flow from operations, we certainly remain very well capitalized. As we look to the balance of this year, the Q4, to round out our financial picture, we should note the following. At this point, we see a very minor impact on revenue from FX in the Q4. And as always, we continue to be fairly naturally hedged to FX impacts on our adjusted EBITDA and our operating cash flows. Our income tax rate came in at 22.2 percent of pretax income in the 3rd quarter and now sits at 22.9% year to date. We would expect that it will continue to be in the range of 21% to 25% of pretax income in Q4. We also expect to incur approximately $1,000,000 to $2,000,000 of additional capital expenditures for the balance of the year, and these expenditures are expected to be continually primarily focused on investments in our network. We currently expect the amortization expense will be around $8,100,000 for the 4th quarter, with this figure being subject to FX changes and the completion of any additional acquisitions. And finally, we expect stock based compensation expense will be approximately $800,000 for the Q4 of this year. So I'll now turn it back over to Ed to provide our calibration and to wrap up. Okay, great. Thanks, Alan. So I'll start with calibration for Q4. Similar to previous quarters, we don't provide guidance, but we use our baseline calibration as a key metric to the ongoing health and strength of our business. Our calibration for Q4 assumes the following exchange rates CAD0.78, €1.16 to the U. S. Dollar and a 1.32 GBP to U. S. Dollar. Our calibration for Q4 is $59,400,000 invisible recurring contracted revenues or our baseline revenues. We have some operating history now with MacroPoint and they're entering their peak season, so we're comfortable including a greater proportion of their revenues in our calibration. We have $42,500,000 in baseline operating expenses. This gives us a baseline calibration of $16,900,000 of adjusted EBITDA for Q4. Some other key points related to how we're positioned for the remainder of fiscal 2018. First, we're very well capitalized. We have a healthy business that is well calibrated. And as Alan mentioned, we also have a healthy balance sheet. We are profitable and cash generating. We have low capital needs within our organic business. Our primary uses of capital are for continued use in acquisitions. We've completed 38 acquisitions since 2,006 and 3 so far this year. And we have access to additional capital should we need it. Alan mentioned that we have $55,000,000 drawn on our line of credit of $150,000,000 and the previously filed shelf perspectives for up to $500,000,000 if capital was needed to be raised by other mechanisms. We also have a strong acquisition pipeline. You'll see there continues to be a lot of industry activity right now with consolidation continuing in our market. With 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 as it 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 valuation, but we're confident in our ability to deploy capital effectively. As a reminder, for our plans for the remainder of FY 2018, we continue to target 10% to 15% 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 plan to come through a combination of organic and inorganic activities. Acquisitions, as always are not incremental to this plan. We intend to continue to focus on recurring revenues and deemphasize one time license sales. If you recall, on the last call, we increased our planned operating margin range to 32% to 37%. 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 a quick update on our annual user conference. I mentioned on the last call that the date for our user group, Descartes evolution is a bit earlier than usual. We're running it from March 6 to March 8, 2018, and the location again is the Hilton in West Palm Beach, Florida, right next to the convention center. If you're interested in learning more about our business, the people that make it all happen and the customers and partners that are part of our community, then it's a must attend event. The team is working really hard to make it even better than last year, so please do book yourself in soon, particularly if you want a spot at the hotel itself, because we generally take over most of that hotel and then end up with overflow in the nearby hotels. Registration information and the agenda for the conference can be found on our website. And finally, as always, we'll continue to make ourselves available to shareholders to answer any questions. We think we've got a great business. We want to be available to help people learn about that business and we'll continue to spend time and resources to get the word out and we hope you'll do the same. So with that, let's open it up to your questions. Operator, if you could open the line. Thank you. We'll now begin the question and answer And our first question comes from Steven Li from Raymond James. Please go ahead. Thanks. Hey, guys. A couple of questions for me. So Alan, the FX in on the impact on the revenues in the quarter, do you have approximately how much it was? Yes. It's just a little bit above $1,000,000 if we look at Q3 compared to Q3 the year before. And that was a tailwind, right? That is a positive, yes. Yes. Okay. And do you have an approximate organic growth in the quarter? You know what, we don't. We obviously run the business. We've integrated MacroPoint. We've integrated Shiprush and PCS tracks, which the other businesses we bought this year. Overall, the business is performing as we would expect. We always expect a balance of internal growth and acquisitions to combine to that overall EBITDA growth, but we haven't split it out, Stephen. Steven. But you do provide in your 10 Q, I saw it, like you do provide some disclosures. And if I do the math there, I get about 4%. Does that sound about right? That's in the range. Yes. That note that you're talking to gives you an idea of what if we owned every business we bought from the beginning of the accounting period. So it's not a perfect calculation, but roughly and looking at foreign exchange rates in that mid single digit rate is a fair range. Okay. And how much would it have been if you excluded the U. S. Census? Would it add a couple of points? It would add a little bit to it, not a couple of points, but would add a little bit to the we obviously weathering that from last year, yes. It would have added a little bit to the business as far as growth rate. Okay. And this is the last quarter you have this unfavorable comparison, correct? That is correct. And our next question comes from Brian Essex from Morgan Stanley. Please go ahead. Hi, good afternoon and thank you for taking the question. Maybe, Ed, if I could ask, as we've seen obviously a tremendous Black Friday, Cyber Monday, and you've increasingly made investments to expose yourself to omnichannel delivery. And I think we've had the conversation before in terms of some in the supply chain seem to be a little bit challenged with their exposure. I mean, can you offer a little bit of color in terms of who you see, whether it's on the partner side or the customer side that's maybe a little bit more challenged and who tends to be faring better and how you might be exposed to omni channel trends? Well, without commenting on specific customers, you probably since I do as what retailers are doing better than others. The results that you're seeing and a lot of the things that led up to it, because remember, all that stuff that's sold in the store shipped in our Q3. You can probably tell by the numbers at a glance even that our networks are humming right now. And it's busy times for us. And this is always a good time of year for us, but this year is going great. When that stuff sells in the stores, that means our shipping volumes are usually up and we're certainly seeing that and you can probably see it in the results that we just submitted today. So it's exciting times for us. So let's hope it continues. Are those in the supply chain? I mean, obviously, we know which retailers are doing poorly. But I mean, from a supply chain and partner perspective, are there some that are doing better or worse than others that you might have exposure to? Well, I mean, the guys that are doing home delivery have really had a big pickup in the last couple of years. And certainly, as you see these volumes right now, anything that's online shopping is getting shipped to the home. So you can probably guess who's benefiting from that. For us, we're exposed to some of the retailers in our running and scheduling business, but moreover, we're exposed to just about every transportation provider in the world. And so no matter which retailer ends up winning, we usually end up doing well if the retailers in aggregate are selling a lot of stuff and that's what's going on right now. Okay. And then on MacroPoint, could you highlight maybe who their primary competitors are? I mean, are they going up against guys like FleetMaddox or is it completely different ballpark in terms of their customer exposure and solution that they're looking at? Fleetmatics is a partner that provide data along with every other guy that provides electronic logging device in a truck. There's FleetMaddix and 20 others like them. They all provide MacroPoint with data. MacroPoint's biggest competitor really ends up being doing nothing because what most people were doing before Macro Point showed up. They just weren't getting great tracking information about those trucks. That's why we bought them because we went out, wow, this is something that everyone needs and it's just getting started right now. I mean, they just they had tremendous growth before we bought them, but we looked at it and went, that's tip of the iceberg. This is just getting started and most companies we're walking into don't do anything right now about it. And so we're able to go in and pretty quickly say, hey, we have this ability to tell you where all of your 3rd party trucks are and when they're going to get there and give you a prediction of exactly when that you think that driver is going to end up at the DC. And most customers we walk into look at us and go, that's fantastic. How do I get that? And so it's a setting times for us. Okay. Maybe last one and then I'll hop back in. But on the macro point OpEx, we have some visibility for impact in the quarter. How should we think about where your leverage points are going to be? I think you've got what a couple of months of the quarter, so maybe 2 thirds of a quarter of OpEx in there. How do we think about scaling that out over the next year or so? What do we might see leverage and where we might expect to see a little bit slower cost savings as you might support the growth of that company going forward as you put it? Well, we continue to invest in that company. It's a little different most of the acquisitions we've done where we're probably looking and saying what synergies can we get out of this acquisition and how do we keep them growing at the rate that they're growing and still take advantage of those synergies. In MacroPoint's case, they're growing so quickly, we're reluctant to do much of that. We're mostly looking for them to grow their way into our profitability range, keeping their costs somewhat fixed, although they're not completely fixed. They continue to grow because they keep needing to add more people to onboard carriers and they need to keep adding more salespeople to go out and address the market opportunity that exists. So it's a little different for us and I think we said a couple of times on this call and the last one that we're cautiously proceeding through this so as not to get in the way. And since the last call, I can tell you once our sales reps start to get a hold of this, they're looking at the MacroPoint guys and going, hey, if I look at this long list of big retailers and manufacturers you want to get into, we do business with a lot of them already. So that's become a real opportunity for us for our sales guys to walk in and say, hey, do you need this? Let me bring 1 of the MacroPoint guys in with me and we'll tell you how you can benefit from that. That's helpful. Thank you. Thank you, Glenn. And your next question comes from Paul Treiber from RBC. Please go ahead. Thanks very much and good afternoon. Thanks Paul. I just wanted to focus on the trade content business. How's the progress been in terms of cross selling trade content into your existing customer base? And then also the longer term opportunity of expanding trade content to new sort of nontraditional markets? Well, I know our existing customer base, it's going quite well. That was one of the reasons we bought into those to those spaces we went with. We do business with a large percentage of the world's customs brokers, 3rd party logistics providers, freight forwarders and big retailers and manufacturers that need that data content. We also have partnerships with SAP and Oracle that we think we could probably use to drive faster growth in those businesses. That's why we bought them. And we're certainly seeing the effects of that over the last few years. Beyond that, I think we've looked for that to continue and really try to continue to expand those relationships with SAP and Oracle and NetSuite and try and drive our data content into every one of their sales processes. And on top of that, our network into those into their sales process, right? They're selling transportation management systems all day long, and we've liked our network to be behind those license sales on SAP or Oracle's part. We've got a little more traction on the latter part of my comments there with SAP, but we're making some progress with Oracle as well. Okay. And then, similarly on MacroPoint, I mean, you mentioned earlier about the potential to cross sell that into your installed base. To what extent is there a customer overlap between MacroPoint and your existing customer base? Well, there's some. I mean, they do business with a lot of trucking companies, a lot of third party logistics providers that we also do business with. In some cases, we had bigger relationships with them. In some cases, MacroPoint had bigger relationships with them. I think the short answer is we have stuff of ours that we can sell them. We have stuff of theirs that we can sell them. And we'd like to make sure that over the next couple of years we do both. On the retail and manufacturing side, when we bought MacroPoint, they were just getting started in that space. And we do business with thousands and thousands of manufacturers and retailers, most of whom make full truckload moves all over North America. And we saw that as a big opportunity. And I don't know if that's completely come to fruition yet, but it's certainly getting started right now. I'm excited about what we've seen so far. Okay. And then just lastly, just looking at baseline for revenues versus actuals this past quarter, it seems a little bit wider than typical, maybe around 109%. Is that attributable to MacroPoint? And then should we expect a similar gap going forward? Or do you think that should narrow over time? Yes. Paul, I think what happened last quarter on the call, we mentioned that we had because we had just purchased MacroPoint, we had it for 2 weeks when we gave you calibration last quarter, we were a little uncertain about that business and how it would play out. And so I think part of the result you're seeing is a 9% growth from calibrator revenue is partly to do the fact that we were uncertain and results have come in nicely. We have more predictability. So I don't expect to see a gap like that as big. The quarter before that, we had a bigger gap that was heavily foreign exchange. So barring some other acquisition or foreign exchange changes, I don't expect to see a gap as big as on revenue that we had this quarter. Maybe if you look back historically, you can see the gap over the last several years is probably more than normal. Okay. Thank you. That's helpful. Thanks, Paul. And our next question comes from Philip Wong from Barclays. Please go ahead. Hey, guys. Thanks. Good, good. Thanks for taking my question. I was wondering if you guys can provide what the macro point margin was at the end of the quarter? Or is this too early kind of look at, just to think about that? Well, if you recall, we bought the business. It was essentially a breakeven. We are profitable with the business. It does not approach our EBITDA margins. And as Ed referred to, we do believe with revenue growth over time, we will get it to the Descartes margins. But it is nicely double digit positive, but lots of work to do, and we will grow that business and get it up to our margins. Okay. And in terms of timing, I hate to kind of keep ARPU on the point, but do you think that that's doable by, say, August 2018? Or Yes. Certainly, we have plans to do that within a year. It's possible it takes a little longer, but subject to investments, subject to the growth rate, we certainly see it approaching our EBITDA ratios near that time frame or slightly beyond that. Got it. And then on the M and A side, just wanted to get an update on your views on the opportunities for I know you guys talked about a lot of activities in the market. Wanted to get your take on opportunities for transformational deals relative to tuck ins at the moment. Have you observed any interesting shifts in terms of market conditions or valuations, anything like that? Thanks. Pretty similar to what we've seen over the last year or so, The valuations on the large transformational style deals are oftentimes what we believe to be too expensive. We don't mind paying good multiples for a good business. What we don't like is having someone say to us, hey, I want a great multiple for a very average business. And the reason is because it's bigger than the other ones that you've looked at. And I kind of look at that and say that doesn't really make sense to me. I don't know why we would do that. So we try to remain prudent. We look at everything that becomes available in our space on the larger side. We participate in whatever process we feel is appropriate, but we're not willing to pull the trigger unless we think it's going to meet our hurdle rates for our ability to pay the business off with a ROIC over a period of time that's north of 15% or 16%, which is what we're normally looking for. On the smaller tuck in size, business as usual, right? There's hundreds of companies we're talking to at any point in time and handful of them seriously and that's been the same for many years now. We think we're good at it. We're good at going into convincing small business owners that we're the best home for their baby and we see that nothing's changed really in that market. That's very helpful. If I could sneak one last one in on macro points again. You mentioned there are some more investments that you anticipate to help drive its growth. Obviously, training of sales and customers part of that equation. I was wondering if you had other items in mind in terms of investments into the business aside from the training of sales and customers? Thanks. Well, we're integrating into a number of our products. For example, our doctor scheduling product, if I don't know how familiar you are with that, but we basically provide a tool that lets big retailer manufacturer running in DC to have their trucking companies schedule slots in their distribution centers so that they can operate those distribution centers efficiently. If you think about how that works, you would love to know if that guy that booked an appointment for 5 o'clock is not going to be there at 5 o'clock and that's exactly what MacroPoint tells you, right. Today what happens is someone comes in and books an appointment for 5 o'clock and if they don't show up at 5 o'clock you sit there waiting for them, thinking they're going to show up any minute now. And he might wait till 6 o'clock and then finally give up. Well, there were 3 people that were supposed to work that door and an empty door sitting there and you're waiting for a truck that's not going to show up and you don't know because you don't have MacroPoint yet. All of a sudden we buy MacroPoint and say, hey, what if I could tell you that that guy is going to be there on time or he's not going to be there on time. And so there's things like that that we're doing integrations where we're walking into some of our biggest customers and saying, much like Amazon says at the bottom of the page, people that bought this usually buy this too. We're walking in saying the same thing to our customers. Hey, you buy doctor scheduling from us, you really got to look at this MacroPoint thing. And there's a couple of solution sets where we're kind of doing that integration, and we think it's going to pay dividends for us in the long run. Great. So on that example you just provided, it sounds like it serves that you so you invest upfront and then is this something that you can charge additionally? Or is it something that is all part of the contract that gets negotiated with this particular customer? Am I looking at it In the case where a customer has doctor scheduling already, we're charging them additionally. Nothing unfair, right? We're charging them for the MacroPoint solution that they didn't use to buy from us. We're walking in and saying to them, hey, I can do this for you now. What if I could put these two things together and then we're charging them for by the transaction to get all that MacroPoint data available to the doctor scheduling system. We're you probably heard in our talks as we've gone around with you over the years. When we have good ideas, we try to get them out to our customers' hands and not let price get in the way, right? We're not holding people up for high prices because we can. We're going into our customers and saying, hey, look, I wanted to buy 30 products for me. So on product sale number 15, I want them to think they got a great deal. So that they buy 2016 and 2017 and 2018 for me. And I think you'd see us take the same approach here. Great. Got it. Perfect. Thanks very much guys. Thank you. And the next question comes from Matt Pfau from William Blair. Please go ahead. Hey, guys. Hey, Matt. How are you doing? I'm good. Thanks for taking my questions. First one, wanted to drill on the retail busy season a bit in context of MacroPoint and then some of the routing and telematics solutions that you have. So does that business slow down during this time? So when you think about like ramping up the selling of MacroPoint, is it going to be sort of on hold till next year? Or does it not really matter that a lot of those customers have their are at their sort of peak seasons right now? No. Funny enough, just the opposite, right? I mean, they're in their peak seasons. We get paid by the transaction. This is a good time of year for us. More people are moving with more stuff right now in anticipation of the Christmas holiday season and that ends up being good for Descartes as you've seen in the past. It also ends up being good for Macro Point. Got it. And then I guess in terms of what you're seeing on that side of the business too with retailers and how they're handling more deliveries and then e commerce being a larger portion of their business. Are you seeing an expansion of private fleets or are more retailers sort of opting to outsource those to third parties? And I guess, from your perspective, does it really matter one way or the other in terms of the impact on your business? Different impacts. So if we're routing people's trucks and they need to buy more trucks to handle the Christmas holiday overflow, They're usually leasing those trucks and adding them to our truck count when they're purchasing our routing solutions. There are other situations where companies say, hey, I've got my own fleet, say I've got 1,000 trucks, I am going to handle the overflow using 3rd party carriers. That's where MacroPoint benefits, right? Because if you take a big retailer and they say, I've got 1,000 trucks and all of a sudden I need for 4 weeks I need 1300 trucks. Instead of actually leasing those trucks and trying to control them themselves, they just move the loads for those trucks with 3rd party fleets and MacroPoint tends to benefit from that. When we say that their transaction volume goes up in the holiday season, that's why. Got it. And one last one for me, just in terms of I want to hit on the macro point investments again. I think you mentioned some investments in sales. To prior acquisitions that you've had, a lot of times you kind of just leverage the existing sales force and those relationships to push the product. So I guess what's different with MacroPoint that requires a higher investment and then sales and maybe prior acquisitions that you've done? Just the demand is significantly better. We're hiring we're still hiring specific MacroPoint sales guys as we speak because there's more people that want to buy it than we have people to address that. And that's complicated by the fact that Descartes reps are now coming in and saying, hey, I've got a customer you should come see as well. And it's putting pressure on that sales force. And so we're trying to expand that sales force at the same time, which as you pointed out, is abnormal for us, right? Normal where we're going, hey, maybe we can handle this more efficiently within our own sales force. And in the Maximal Point case, it's just it's growing faster than that. We think we would be stifling the business if we took the normal approach here. So that's what you hear in our voice is when we're saying, hey, instead of doing our normal looking for synergies and trying to make sure that we integrate those businesses together such that we get those synergies more quickly. In this case, we're going, I don't think that's the best thing to do here. I think we should keep investing in this business and spend a little money now. Since our business is doing pretty well, it's easy for us to spend a little extra money on it and hopes that that's going to pay off in space in the future. Great. That's it for me guys. Thanks a lot. Thank you. And the next question comes from Paul Steves from Scotia Capital. Great. Ed, can you just talk a little bit on the partner side, what the initiatives are there to maybe accelerate growth from where they are today and maybe what percentage of revenues you'd think of today as being partner influenced? Thanks. Sure. So number of partners, you hear us talk a lot about the big ones, SAP and Oracle, they certainly drive a lot of the growth in our partner pipeline over the last couple of years. And that just keeps getting better every quarter for us. If you've been on these calls for several years now, you heard us talking about SAP and Oracle being good ideas many years ago, good ideas that really weren't generating a lot of revenue. Well, now they are generating a lot of revenue. And I think that opportunity is going to continue to expand. I mean, now that they're doing business with us and their sales reps start to get to know us and go, oh, I know what I can tell my customers, I can tell them about this Descartes thing and I can sell that as a part of some solution set that I'm trying to sell, get my sale over the line and we start to see that happen more and more. I mentioned earlier on the call and I've probably done it in the last couple of calls, I mentioned that SAP is now reselling our GLN and recommending that to their customers in relation to their transportation management sales. That's great news for us. It's still early days in that relationship, but 5 years ago it was early days in our trade content relationship with them and now it's expanded rapidly. It's becoming a big part of our business. And I hope to tell you one day that the same is true for TMS in that same space selling our global logistics network. We're making some progress with Oracle in that regard as well. And hopefully sometime in the next couple of years we'll be in the position with them on the global logistics network that we are in with SAP. I would point out though that Oracle is probably coming along very quickly on their global trade management business. They were not nearly as big as SAP in the beginning, although they're starting to catch up quick. So that's exciting for us. Great. Thank you. Thank you. And our next question comes from David Hynes from Canaccord. Hey, thanks guys. Good, Ed. How are you? Yes, very well. Good. Curious, the success you're seeing with MacroPoint, has that in any way changed kind of how you think about approaching the M and A landscape? And I guess, the real question is, does it make you any more willing to kind of take on future deals that fit more of the growth mold? Or should we expect you to kind of focus on that traditional EBITDA optimization plays that you've successfully executed in the past? Well, if you see another MacroPoint come along, we're interested. I don't know that it changes our philosophy about it. We paid up for MacroPoint because we thought it was a fantastic business. If we saw another fantastic business, we'd probably do the same thing. What we're not interested in doing is paying fantastic prices for okay businesses. And there's a lot of temptation to do so, right. I mean, there's a lot of bankers out there, a lot of private equity firms that are coming along going, hey, I've got this fantastic business and I look at it and go, yes, that's what you say, but that business is no macro point. And so we've probably always been willing to pay up to buy something we thought was great, but everyone walks in the door and says what they've got is great. They say, I've got this piece of gold in my hand, Just pay me enough money, I'll give it to you. And we're very wary of those things. But certainly, it's just all in the MacroPoint case, when we see something that we think is is a really fantastic business, we're willing to pay what we think it's worth because we look and go do the math downstream and go, hey, I think this could pay off for our shareholders with a really great return on investment over the next 10 years or so. And I think we should do that. But just the same, if someone's coming in with something that we have our doubts about, we haven't changed our philosophy at all about it. It. Yes. Okay. That makes sense. I'm sure the Canaccord folks only show you awesome businesses. They do, yes. Right. Yes, right. And then in the past, I think you've alluded to some internal or organic data initiatives. Obviously, the sets of data that you have access to are now getting better and better with MacroPoint and some of the previous acquisitions. Can you just talk about kind of progress on that front, where those organic efforts are focused, how you could think about monetizing them? Any color that you have on what you're doing from an R and D perspective on that front would be helpful. Sorry, on what front? Which business is you're in? Well, just kind of I think you've talked in the past about having internal teams focused on building organic kind of data oriented products. Yes. Yes, just for I mentioned the one with MacroPoint and our doctor scheduling business a minute ago. There's another one I mentioned in the last call in our data content business where we looked at our network and said, hey, most of the data that goes over our network is private, but we might be able to aggregate some of it and share with our customers, not customer specific information, but aggregated information that would make that trade content business more valuable to them. And I mentioned that on the last call and said we're working on it. We're actually going to have a new version of a product coming out here this quarter that will start to do that for our customers and hopefully it gets good traction. What I don't think you'll see us doing is starting a macro point from scratch, right. We're probably not there from scratch guys. If you look at most of our product development, we are either enhancing an existing product or trying to take 2 products that we have and put them together and make something better out of it. We think we're better at that. We think there's a lot more opportunity for us in that. And we think we can grow a lot faster doing it that way than trying to start incubate some of these things from scratch. There's a reason we do these tuck in acquisitions because if we bought 10 tuck ins in the last 4 or 5 years that we thought were good businesses. There were probably 40 businesses that got started that we didn't buy. They got whittled down to 10 that we were real interested in. And that's a nice way of saying it's it could be painful living on the bleeding edge. And we are reluctant to do that in our own business, right. We're trying to run stuff profitably and we take chances, but they're not gigantic chances. And for the product development, you'll see us work on is stuff where we're pretty certain like the doctor scheduling thing, like the trade content business I just mentioned when I go, I know these customers pretty well. If I put these 2 things together, I think I'm going to have a bunch of guys that want it. And I don't think I'm going to have to work very hard to get them to do it. I think I'm going to have to tell them about it and show it to them and they're going to go, yes, that's great. How do I get that? That's the kind of investments that we like to make. Otherwise, we're buying small companies going, hey, look, 10 of your start up trying to do something, I'd like to buy the one that succeeds. And that takes the risk off the table for us and for our shareholders. Yes, yes, makes perfect sense. Okay, thanks for the color guys. Great, thank you. And our last question comes from Ruben Chekian from GMP Securities. Please go ahead. Thanks for taking my question. Just quickly going back to MacroPoint, are you seeing accelerating growth in revenue from being part of Descartes network? Yes, sure. It's early days yet, so we only have them for what, 3 months now, something like that. I probably don't see it specifically in the revenue yet, I see it in the pipeline, right. I see us bringing in customers that we had that MacroPoint wanted to meet, but hadn't met yet, and our sales guys going, oh, I can bring you into that customer, I can bring you into this customer, and let's go in and tell the story together. I think that's going to come to bear in the next 12 months in spades. But today, it's I see the early steps going on right now that I think are going to lead to significant revenue growth in the future. Great. Thanks. That's helpful. And more of a sort of a high level question. Descartes has previously been benefiting from themes like the e commerce, security, data, the trade data. Are you seeing any emerging pillars of growth that will lead to long term growth opportunity for Descartes? Well, within the ones that we're in, we see lots of opportunity, right. I mean, we see more opportunity in the trade content space. We see more opportunity in the network space. We see more opportunity, we've seen us taking advantage of this in the last couple of years in the transportation management space and the routing local telematics businesses. And I think you see us do more of the same. I'm probably not going to announce a new pillar until we announce it. But in the meantime, just know that in the pillars that we're already in, we see a lot of opportunity. And if we decide that there's going to be a new pillar that we're going to get into, probably because it's right next door to the ones that we already have, We'll tell you when it happens probably not before then. Remember this is a competitive space and it's a public call. So it's probably something we're not going to preannounce. That's helpful. Perfect. That's all the questions I had. Okay. Thanks. Nice to meet you, Rupert. Nice to meet you. We have no further questions at this time. I'll turn the call back over for final remarks. Great, guys. Thanks for your time today. We look forward to reporting back to you next quarter on our Q4 results. And in the meantime, if you have customers, investors that want to see us, please reach out and we'll be happy to try and see them with you. Thanks. Have a great day. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating and you may now disconnect.