Welcome to the quarterly results call. My name is Adrian. I'll be your operator for today's call. At this time, all participants are on listen-only mode. Later, we'll conduct a question and answer session. If you would like to ask a question during today's presentation, please press star 1 on your touchtone phone. Please note this conference is being recorded. I'll now turn the call over to Scott Pagan. Scott Pagan, you may begin.
Thanks. Good afternoon, everyone. Joining me in the call today are Ed Ryan, CEO, and Allan Brett, CFO. I trust that everyone has received a copy of our financial results press release that was issued earlier today. Portions of today's call, other than historical performance, include statements of forward-looking information within the meaning of applicable securities laws. These statements are made under the safe harbor provisions of those laws. These forward-looking statements include statements related to 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&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.
Hey, great, Scott. Thanks. 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. Our investment strategy is designed with the current and future business environment in mind. Global trade continues to change. Commerce as we know it has fundamentally shifted. 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. This 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 lifecycle of their shipments. All in all, the business is doing really well. 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.
Following my business update, Allan will take us through the financial results in a little more detail. I'll finish up with some comments about our calibration for Q4 and our operating plans moving forward. Let's start by going over some of the key financial highlights for the third quarter of fiscal 2018. We had another record quarter of revenue. We're very happy with our key metrics. Our adjusted EBITDA continues to grow in line with our plans of 10%-15% per year. For the last quarter, we generated CAD 20.6 million 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 CAD 62 million. Our revenue mix remains very healthy.
For years, we've talked about our continued focus on recurring revenue and de-emphasizing license revenues. 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. Because of recent movements in FX, which impact our revenues but not our adjusted EBITDA. We generated CAD 18.9 million of cash in the quarter. 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. 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. 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 10. We work very hard to integrate acquisitions quickly, and we think of the business holistically as we manage our growth targets and investment plans.
Though 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. 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 a 2%-4% growth range.
On the other end of the spectrum, we have 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. 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.
Even with the addition of high-growth businesses to Descartes such as MacroPoint and our investments like ShipRush and e-commerce space, our goals remain the same. We want to build a 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. We've historically targeted 10%-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. You've seen us deliver more at 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 MacroPoint 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. Let's spend some time on that right now. Let's start with a recap of what they do, and then we'll talk about how they're doing.
MacroPoint runs a connected network of over 2 million 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. We're already seeing the benefits of coming together with MacroPoint in the cross-selling going on between our businesses.
Sometimes when we combine with a company, it may take some time to cross-train sales reps to spot opportunities and to have the teams start working together. 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 large partners right out of the gate. We've since made a lot of progress with those partners to start setting up integrations for their customers to access the MacroPoint network. We're really excited about the opportunities with our partners here. 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. 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. We're going to do that at an appropriate pace to support its high growth trajectory. We're happy with the first quarter performance. 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, 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 omni-channel landscape. 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, pixi.
From there, we now have deep capabilities on 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, 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. 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, five 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. Now these guys 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. 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 and 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, we continue to see 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 Allan to talk a little bit more about our financial results, I'd like to thank some more people that continue to contribute to the strength of our business.
Thanks to our employees for all of 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. Finally, thank you to our shareholders for continuing to have confidence in Descartes. With that, let me turn the call over to Allan.
Okay, thanks, Ed. As indicated, I'm going to take you through the financial results for our third quarter, ended October 31st this year. As Ed mentioned, we are pleased to report record quarterly revenue of CAD 62 million this quarter, up 20% from record of CAD 51.5 million in the third quarter last year, and also up 8% sequentially from the second quarter of this year. Year-to-date, revenue this year has come in at CAD 173.8 million, which is an increase of 15% from revenue of CAD 151 million in the same period last year. Consistent with the trend for the past number of quarters, service revenue remained strong, coming in at CAD 59.7 million, up 21% from CAD 49.4 million in the third quarter 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 third quarter, consistent with the second quarter of this year and with the third quarter of last year. As a result of the continued revenue growth and strong cost control, we experienced adjusted EBITDA growth of 16% to CAD 20.6 million or 33.2% of revenue in the third quarter, compared to CAD 17.8 million or 34.6% 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 nine-month results, adjusted EBITDA was CAD 59.4 million or 34.2% of revenue, 15% higher than adjusted EBITDA of CAD 51.6 million in the same period last year.
As a result of these solid operating results, cash flow from operations came in at CAD 18.9 million in the third quarter, representing 92% of adjusted EBITDA. Year-to-date, cash flow from operations came in at CAD 52.5 million or 88% of adjusted EBITDA, down slightly from operating cash flow of CAD 53.0 million 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 plans and would've been approximately 93% of adjusted EBITDA year-to-date.
Moving to GAAP net income, we came in at CAD 6.2 million or CAD 0.08 per diluted common share in the third quarter, an increase of 5% from net income of CAD 5.9 million or CAD 0.08 per diluted common share in the third quarter last year. Year to date, net income was CAD 20.2 million or CAD 0.26 per diluted common share this year, up 14% from CAD 17.7 million or CAD 0.23 per share last year. As Ed already mentioned, overall, we are really pleased with these continued strong operating results in the third quarter. If we look at the balance sheet, we ended the third quarter with a cash balance of CAD 33.3 million.
While we drew CAD 80 million on our credit facility early in the third quarter to complete the purchase of MacroPoint, we were able to repay CAD 25 million on this facility during the balance of the quarter, such that we ended the quarter with CAD 55 million drawn on our CAD 150 million line of credit. With our cash balance and the CAD 95 million 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 fourth quarter, 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 fourth quarter, 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% of pre-tax income in the third quarter and now sits at 22.9% year to date. We would expect that we will continue to be in the range of 21%-25% of pre-tax income in Q4.
We also expect to incur approximately CAD 1 million-CAD 2 million of additional capital expenditures for the balance of the year. These expenditures are expected to be continually primarily focused on investments in our network. We currently expect the amortization expense will be around CAD 8.1 million for the fourth quarter, with this figure being subject to FX changes and the completion of any additional acquisitions. Finally, we expect stock-based compensation expense will be approximately CAD 800,000 for the fourth quarter of this year. I'll now turn it back over to Ed to provide our calibration and to wrap up.
Great. Thanks, Allan. 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: 0.78 Canadian dollar, 1.16 euro to the US dollar, and 1.32 GBP to US dollar. Our calibration for Q4 is $59.4 million in visible 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 $42.5 million in baseline operating expenses. This gives us a baseline calibration of $16.9 million 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, as Allan 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 2006 and three so far this year. We have access to additional capital should we need it. Allan mentioned that we have $55 million drawn on our line of credit of $150 million and the previously filed shelf prospectus for up to $500 million if capital was needed to be raised by other mechanisms. We also have a strong acquisition pipeline. You'll have seen 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%-15% annual adjusted EBITDA and adjusted EBITDA compared to 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. Acquisitions, as always, are not incremental to this plan. We intend to continue to focus on recurring revenues and de-emphasize one-time license sales. If you'll recall, on the last call, we increased our planned operating margin range to 32%-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. 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. 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 6th to March 8th, 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. 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 into nearby hotels. Registration information and the agenda for the conference can be found on our website.
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. We'll continue to spend time and resources to get the word out, and we hope you'll do the same. 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 session. If you have a question, please press star then one on your touch-tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. There'll be a delay before the first question is announced. If you're using speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then one on your touch-tone phone. Please stand by while the queue populates. Anybody have a question? Our first question comes from Steven Li from Raymond James. Please go ahead.
Yeah. Thanks. Hey, guys. A couple questions for me. Allan, the FX on the impact on the revenues in the quarter, do you have approximately how much it was?
Yeah. It's just a little bit above CAD 1 million if we look at Q3 compared to Q3 the year before.
That was a tailwind, right?
That is a positive, yes.
Yeah. Okay, thanks. 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 PCSTrac, 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. We haven't split it out, Steven.
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, yeah. 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. 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. 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 overall. We obviously are weathering that from last year. Yes, it would have added a little bit to the business as far as growth rate.
Okay. This is the last quarter you have this unfavorable comparison, correct?
That is correct.
Okay, thank you.
Thanks, Steven.
Our next question comes from Brian Essex from Morgan Stanley. Please go ahead.
Hi, good afternoon, thank you for taking the question. Maybe, Ed, if I could ask, as we've seen, obviously, a tremendous Black Friday, Cyber Monday, you've increasingly made investments to expose yourself to omni-channel delivery. 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. 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 can probably-
Right
as 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. It's busy times for us. This is always a good time of year for us, but this year's 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. It's exciting times for us, so let's hope it continues.
Are those in the supply chain? Obviously, we know which retailers are doing poorly, but 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, 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 routing and scheduling business, but moreover, we're exposed to just about every transportation provider in the world. 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.
On MacroPoint, could you highlight maybe who their primary competitors are? Are they going up against guys like Fleetmatics, or is it a completely different ballpark in terms of their customer exposure?
No. Fleetmatics is a partner. Fleetmatics is a partner that provides data along with every other guy that provides electronic logging device in a truck. There are 20 others like them. They all provide MacroPoint with data. MacroPoint's biggest competitor really ends up being doing nothing because that's what most people were doing before MacroPoint showed up. They just weren't getting great tracking information about those trucks. That's why we bought them, because we went, "Oh, wow, this is something that everyone needs, and it's just getting started right now." They had had tremendous growth before we bought them, but we looked at it and went, "That's the tip of the iceberg." This is just getting started, and most companies we're walking into don't do anything right now about it.
We're able to go in and pretty quickly say, "Hey, we have this ability to tell you where all of your third-party trucks are and when they're going to get there and give you a prediction of exactly when that we think that driver's going to end up at the DC." Most customers we walk into look at us and go, "That's fantastic. How do I get that?" It's exciting times for us.
Okay, maybe last one, and then I'll hop back in. On the MacroPoint 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 two thirds of a quarter of OpEx in there. How do we think about scaling that out over the next year or so, where 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 than 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 rates 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. It's a little different for us, and I think we've 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. 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." That's become-
Right
a real opportunity for us, for our sales guys to walk in and say, "Hey, do you need this? Let me bring one 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, Brian.
Your next question comes from Paul Treiber from RBC. Please go ahead.
Thanks very much, and good afternoon.
Hey, Paul.
Just wanted to focus on the trade content business. How has 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 into new, non-traditional markets?
Well, under our existing customer base, it's going quite well. That was one of the reasons we bought into those spaces. We went, "Geez, we do business with a large percentage of the world's customs brokers, third-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. We're certainly seeing the effects of that over the last few years. Beyond that, I think we look 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. On top of that, our network into their sales processes.
They're selling transportation management systems all day long. We'd like our network to be behind those license sales on SAP or Oracle's part. We've got a little more traction on that latter part of my comments there with SAP. We're making some progress with Oracle as well.
Okay, similarly on MacroPoint, you mentioned earlier about the potential to cross-sell that into your install base. To what extent is there a customer overlap between MacroPoint and your existing customer base?
Well, there's some. 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 have bigger relationships with them. In some cases, MacroPoint have 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. 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. We do business with thousands and thousands of manufacturers and retailers, most of whom make full truckload moves all over North America. We saw that as a big opportunity.
I do not know if that's completely come to fruition yet, but it's certainly getting started right now, and I'm excited about what we've seen so far.
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? Should we expect a similar gap going forward, or do you think that should narrow over time?
Paul, I think what happened last quarter on the call, we mentioned that because we had just purchased MacroPoint, we had it for two weeks when we gave you calibration last quarter. We were a little uncertain about that business and how it would play out. I think part of the result you're seeing is a 9% growth from calibrated revenue is partly to do with the fact that we were uncertain and results have come in nicely. We have more certainty with that business now. We have more predictability. 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. Barring some other acquisition or foreign exchange changes, I don't expect to see a gap as big 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.
Our next question comes from Philip Wong from Barclays. Please go ahead.
Hey, guys. Thanks.
Hey, Philip.
Good. Thanks for taking my question. I was wondering if you guys can provide what the MacroPoint margin was at the end of the quarter, or is this too early to look at to think about that?
Well, if you recall, we bought the business, it was essentially a break-even.
We are profitable with the business. It does not approach our EBITDA margins. As Ed referred to, we do believe with revenue growth over time, we will get it to the Descartes margins. 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. In terms of timing, I hate to keep harping on the point, but do you think that's doable by, say, August 2018, or?
Certainly we have plans to do that within one 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 timeframe or slightly beyond that.
Got it. On the M&A side, just wanted to get an update on your views on the opportunities. I know you guys talked about a lot of activities in the market. I 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 one 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," the reason is because it's bigger than the other ones that you've looked at, I look at that and say, "That doesn't really make sense to me." I don't know why we would do that. 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.
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 a 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 MacroPoint, again. You mentioned there are some more investments that you anticipate to help derive its growth. Obviously, training of sales and customers, part of that equation. 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.
We're integrating into a number of our products. For example, our dock scheduling product. I don't know how familiar you are with that, but we basically provide a tool that lets a big retailer manufacturer running a 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 5:00 is not going to be there at 5:00. That's exactly what MacroPoint tells you, right? Today, what happens is someone comes in and books an appointment for 5:00, and if they don't show up at 5:00, you sit there waiting for them, thinking they're going to show up any minute now. You might wait till 6:00 and then finally give up.
There were three people that were supposed to work that door, and an empty door is 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's going to be there on time, or he's not going to be there on time?" 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, if you buy dock scheduling from us, you really got to look at this MacroPoint thing. There's a couple 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.
Right. On that example you just provided, it sounds like a service that you invest up front, 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 the right way?
Well, in the case where a customer has dock scheduling already, we're charging them additionally. Nothing unfair, right? We're charging them for the MacroPoint solution that they didn't used 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?" Then we're charging them by the transaction to get all that MacroPoint data available to the dock scheduling system. 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 into 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 want them to buy 30 products from me.
On product sale number 15, I want them to think they got a great deal so that they buy 16 and 17 and 18 from me." I think you'd see us take the same approach here.
Right. Got it. Perfect. Thanks very much, guys.
Thank you.
The next question comes from Matthew Pfau from William Blair. Please go ahead.
Hey, guys.
Hey, Matt, how 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. Does that business slow down during these times when you think about 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 are at their sort of peak seasons right now?
No. Funny enough, just the opposite, right? 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 more stuff right now in anticipation of the Christmas holiday season. That ends up being good for Descartes, as you've seen in the past. It also ends up being good for MacroPoint.
Got it. 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? I guess, from your perspective, does it really matter one way or the other in terms of the impact on your business?
It has different impacts. 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 today. I've got 1,000 trucks. I am going to handle the overflow using third-party carriers." That's where MacroPoint benefits, right? If you take a big retailer, and they say, "I've got 1,000 trucks, and all of a sudden, for four weeks, I need 1,300 trucks." Instead of actually leasing those trucks and trying to control them themselves, they just move the loads for those trucks with third-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. One last one from me, just in terms of, I want to hit on the MacroPoint investments again. I think you mentioned some investments in sales related to MacroPoint. I guess, thinking back 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. I guess, what's different with MacroPoint that requires a higher investment in sales than maybe prior acquisitions that you've done?
The demand is significantly better. 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. 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." It's putting pressure on that sales force, and we're trying to expand that sales force at the same time, which, as you point out, is abnormal for us, right? Normal, where we're going, "Hey, maybe we can handle this more efficiently within our own sales force." In the MacroPoint case, it's grown faster than that. We think we would be stifling the business if we took the normal approach here.
That's what you hear in our voices 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 in hopes that that's going to pay off in spades in the future.
Great. That's it for me, guys. Thanks a lot.
Thank you.
Our next question comes from Paul Steep 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 % of revenues you'd think of today as being partner influenced? Thanks.
Sure. A number of partners, you 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. 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. Now they are generating a lot of revenue, and I think that opportunity is going to continue to expand. 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 to help get my sale over the line." 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, 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 five 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. 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. Hopefully, sometime in the next couple of years, we'll be in the same 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. That's exciting for us.
Great. Thank you.
Thank you.
Our next question comes from David Hynes from Canaccord.
Hey, thanks, guys. Good, Ed, how are you?
Yeah, very well.
Good. Curious, the success you're seeing with MacroPoint, has that in any way changed how you think about approaching the M&A landscape? I guess, the real question is, does it make you any more willing to take on future deals that fit more the growth mold or should we expect you to focus on that traditional EBITDA optimization plays that you've successfully executed in the past?
Well, if we 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.
Yeah.
There's a lot of temptation to do so, right? 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." I look at it and go, "Yeah. That's what you say, but that business is no MacroPoint." We've probably always been willing to pay up to buy something we thought was great. 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." We're very wary of those things.
Certainly as you saw in the MacroPoint case, when we see something that we think 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." I think we should do that. 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.
Yep. Okay. That makes sense. I'm sure the Canaccord folks only show you awesome businesses.
They do, yes. Right.
Yeah, right. 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 in some of the previous acquisitions. Can you just talk about 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&D perspective on that front would be helpful.
Sorry, on what front? Which businesses are you referring to?
I think you've talked in the past about having internal teams focused on building organic kind of data-oriented products.
Yeah.
Yeah.
Yeah. Just for example, I mentioned the one with MacroPoint and our dock scheduling business a minute ago. There was another one I mentioned on 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." 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 MacroPoint from scratch, right?
We're probably not the from-scratch guys. If you look at most of our product development, we are either enhancing an existing product or trying to take two 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. 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 four or five years that we thought were good businesses, there were probably 40 businesses that got started that we didn't buy.
Yeah.
That got whittled down to 10 that we were real interested in. That's a nice way of saying it could be painful living on the bleeding edge, and we are reluctant to do that in our own business, right?
Yeah.
We're trying to run stuff profitably, we take chances, but they're not gigantic chances. For the product development, you'll see us work on is stuff where we're pretty certain, like the dock scheduling thing.
Yeah
like the trade content business I just mentioned when I go, "Geez, I know these customers pretty well. If I put these two things together, I think I'm going to have a bunch of guys that want it, 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, 'Yeah, 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 you start up trying to do something. I'd like to buy the one that succeeds." That takes the risk off the table for us and for our shareholders.
Yep. Makes perfect sense. Okay. Thanks for the call, guys.
Great. Thank you.
Our last question comes in. Ruben Sahakyan 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?
Yeah, sure. It's early days yet, so we've only owned them for, what, three 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. Today 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. 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? We see more opportunity in the trade content space. We see more opportunity in the network space. We see more opportunity, you've seen us taking advantage of this in the last couple of years in the transportation management space and the routing mobile telematics businesses. I think you'll see us do more of the same. I'm probably not going to announce a new pillar until we announce it. In the meantime, just know that in the pillars that we're already in, we see a lot of opportunity. 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. It's probably something we're not going to pre-announce.
That's helpful. Perfect. That's all the questions I had.
Great. Thanks. Nice to meet you, Ruben.
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. 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. You may now disconnect.