The Descartes Systems Group Inc. (DSGX) Q4 2016 Earnings Report, Transcript and Summary

Welcome to the quarterly results call. My name is John 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. [Operator Instructions] Please note that the conference is being recorded. And I'll now turn the call over to Scott Pagan. You may begin.

Thanks and good morning everyone. Joining me on the call today is 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, 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 you achievement of Descartes to differ materially from the anticipated results, performance or achievements implied by such forward-looking statements. These factors are outlined in the press release and in the section entitled certain factors that may affect future results and documents filed and furnished with the SEC, the OSC and other securities commissions across Canada, including our management's discussion and analysis filed today. We provide forward-looking statements solely for the purpose of providing information about management's current expectations and plans relating to the future. You are cautioned that such information may not be appropriate for other purposes. We do not undertake or accept any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements to reflect any change in our expectations or any change in events, conditions, assumptions or circumstances on which any such statement is based except as required by law. And with that, let me turn the call over to Ed.

Thanks, Scott. Good morning everyone and welcome to the call. Thank you for joining. We finished the year strongly with another great quarter and we executed to our long-term operating strategy just like we said we would at the beginning of the year. We delivered another set of superior financial results, even in the face of some serious FX headwinds. We grew our business through a combination of organic and inorganic activities and added some new strategic solutions to our Global Logistics Network. We continued to focus on recurring revenue growth and deemphasize one time license sales and we saw our EBITDA margins and gross margins expand, showing the operating leverage we have in our network business. Our Global Logistics Network continues to grow and along with it our unique community of global logistics participants. We feel our Global Logistics Network and community is pretty unique and gives us a good view of the global shipping market and I look forward to giving you some more insight on this call as to what we are seeing in the market. Before I speak to that and some of the other trends in our business, I'll start with some financial highlights. Allan will then take over to talk through our financial results in detail and I'll finish up the call by talking about our business calibration for the first quarter of fiscal 2017 and the landscape that we see in front of us. So let's start by going over some financial highlights for the past quarter and the fiscal year. As we said at the beginning of the year, our primary focus continues to be on growing our adjusted EBITDA. This quarter we generated $16.3 million of adjusted EBITDA an increase of 17% over last year and for the fiscal year, we were also up 17% generating $60.9 million of adjusted EBITDA. On a per share basis, we grew adjusted EBITDA 17% for the quarter and 10% for the year. Recurring revenue for the quarter was $48 million which was up 8% from last year. The FX impact on revenues for the quarter was negative $2 million meaning that using -- if you use last year's FX rates revenues would have been $50 million which would have meant growth of 13%. Revenue for the fiscal year was $185 million which was up 8% from last year. The FX impact on revenues for the year was negative $11.7 million meaning that if you use last year's FX rates revenue would have been $196.7 million which would have meant growth of 15%. I think it's also worth noting that again this quarter our services revenues were at a high at 96% of our overall revenues up from 94% at this time last year. This reflects our continued focus on growing recurring revenues and deemphasizing license sales and hardware sales as we highlighted at the beginning of the year. With or without FX, these are as planned and a record high result for Descartes and our focus remains on profitable growth, not growth at any cost. This is also reflected in our growing adjusted EBITDA margins. We still see some companies out there chasing growth at any cost and it's always been our strategy to focus on profitable growth. At the beginning of the year, we said we saw margins moving above the 25% to 30% range and for FY 2016 our adjusted EBITDA margin was 33%, up from 30% in FY 2015. As you look deeper at the fundamentals of our business you'll see we continue to perform where it counts by generating considerable cash. Our cash conversion metrics remain very healthy. We had a strong quarter converting 99% of adjusted EBITDA into cash. We think there's lots of opportunities out there to reinvest the cash we generate in our business and FY 2016, we added some great solutions to our Global Logistics Network and we expect to present some of the more exciting additions through the course of FY 2017. To support those plans and a number of opportunities that we continue to see to add to our business, we also increased our acquisition line of credit to provide some flexibility in the event that opportunities come up that may require additional access to capital beyond our existing cash and the almost $15 million a quarter a new cash we've been generating. So with that I'd like to shift gears from our financial results and talk about some of the key trends we're seeing in our business and in the market and how that's impacting our investment decisions as we look to capitalize on these trends. On last quarter's call, we talked about eCommerce and omnichannel retailing and its impact on the wider supply chain and logistics landscape. So, let's start there again. Customers continue to increase their expectations around how things are bought and delivered. They're buying more and more stuff online and so companies need to be capable of reaching their customers through a number of channels. We've been helping our customers stay ahead of this curve over the years and helping them make sure they get the goods their customers want at the right time and at the right service levels. We continue to invest here and have a growing number of solutions for this, the type of solutions our customers need depend on a number of things. The size of what's been bought, the method of delivery, the requested time window for the delivery, the potential requirements for additional services and so on. To illustrate, I'm going to oversimplify this for a minute and split the eCommerce and omnichannel market into two main types of deliveries that require different solutions. First, you have small stuff that can fit in a parcel for example these shipments may be going via UPS or FedEx or DHL or the United States Postal Service, et cetera. Then you have larger a more complex stuff. For example, these shipments may be going on a dedicated fleet or outsourced through a white glove delivery company. For customers who require help with eCommerce fulfillment and parcel shipping we've been helping them for years with our parcel solutions, our scanned good solutions. We've recently made a large investment with the acquisition of Oz which is enhancing our ability to serve this growing market. As a reminder to what Oz does, they help customers typically small and medium size businesses connect to and integrate with leading ERP, CRM, eCommerce and supply chain platforms. Their solutions address a number of pain points with eCommerce shippers by helping integrate and automate logistics and supply chain processes including order fulfillment, inventory management, scanning and shipping. And for customers that require help with larger or more complex delivery problems we still believe we've got the premiere riding and scheduling solution on the market. Retailers to look to compete with the Amazons of the world and they can use our state-of-the-art delivery or home delivery solutions to enhance their customer experience right from the online delivery appointment booking through to mobile monitoring, delivery to the customer's door. We've invested a lot in our home delivery solutions over the years and we will continue to do so as this opportunity for more growth remains strong. Second, another area of growth and investment in our business is Global Logistics Network. As we bring more solutions and content together in one place. As I said off the top, we really think the Global Logistics Network is unique in the market and a big differentiator for Descartes. Our network brings together trading partners from around the world to help them collaborate and improve the productivity performance and security of their supply chains and logistics operations. If you think about the life cycle of a shipment it starts with a business using trade data and content to make decisions about who to buy from and where to ship to and how to classify the goods for duties and taxes, the best shipping routes, pricing and seasonal trends and other logistics related decisions, effectively helping them understand the total landed cost of a shipment. Then they need to work with the broad eco system parties to execute that shipment and they need to do this in a compliant and cost efficient manner. In order to do this that broad ecosystem of parties needs to be connected and have access to relevant information and collaborative tools. This is exactly what we have with our Global Logistics Network. Getting people connected is a large investment that we've been making for decades and it will continue. We've also been investing heavily over the last two years to make sure the connected parties on our network have the right information and content available at the right time to make the best decisions and execute shipments in a secure and efficient manner. We're going to continue invest in that area as well. One of our key investments in FY 2016 was the addition of MK Data. MK allows us to better address the need for our customers to perform denied party screen checks with their trading partners both as a part of their research phase when they're deciding who to do business with but also in real-time as they are executing shipments. This investment was very important to our customers as the regulatory environment continues to evolve. This is not something you want to get wrong or find out when your goods are at the border. This brings me to our third point and our next trend that continues in our business which is the security environment and in particular desire for governments around the world to collect more advanced data about the shipments entering and exiting their borders. We talked a lot about the regulatory environment in past calls and about how we continue to help our customers comply with the various advanced electronic information security filing requirements for international shipments. This in turn helps the governments better secure their borders. The security filing environment for shipments will continue to evolve with new initiatives for electronic data sharing. Some are currently rolling out around the world and more are expected to come in the future. I will provide an update in a minute on some specific initiatives. But many investors have asked us over time to describe the market size, where we are in a life cycle of that market and the timing of what's next. Let me start with the timing question more broadly. Timing is out of our control in most cases as these government initiatives and requirement to file and start spending money with Descartes depends ultimately on the government introducing legislation and initiatives and then enforcing those initiatives. This could take time but from our experience once a government announces that initiative it will eventually come out. Coming back to the market size, I will be trying to put more context to where we believe we are in the wider security filing landscape. First, a bit of history here. So before 9/11 this market did not exist. The first real information governments had about goods entering their borders was long before that when physical customs declarations were filed for duties and taxes purposes. This was generally done after the goods had arrived. This isn't that helpful if you're trying to screen information about incoming shipments for potential terrorist activity. So, the first initiative was the U.S. government asking carriers to file a manifest telling them what's on the plane, ship or truck, typically before the shipment left its port of origin. After the U.S. started doing this, Canada filed suit, then Europe and a number of other countries continued to roll out around the world. Some like Japan are rolling out by mode. Japan started with ocean. They will move on to air at some point in the near future. At this point, 45 or so countries have some sort of carrier related initiative in place. But, more than 160s and signed on -- 160 countries have signed on to the safe framework and are expected to over time. The safe framework is the world customs organization or the WCO; your people refer to it as, WCO initiative to encourage automated electronic processes for fiscal and security filings. Unfortunately safe doesn't have a mandatory compliance date. To go back to the U.S. for a moment and initiatives in place are for carriers only and they are for imports only. What has happened over time is that the government realized that carrier only has some of the important information related to the shipment and to maximize security efforts it will be helpful to collect more information from the freight forwarder and potentially even the actual shippers, which would mean more filing for every import. The U.S. government is also now looking to collect information on exports. So, in summary, current initiatives relate to imports only and carriers only. The transactions that are already moving through our veins. With a high number of countries around the world still expected to roll out, we see this expanding significantly even just for imports. Future initiatives are expected for imports as it relates to freight forwarders and potentially to shippers, and then, the same again for exports. So we see this going out over a long period of time and potentially growing our business in the long run. It's a long game and you'll see our investments in the space reflect that. We'll invest our business in our business as required to meet the required initiatives that the government's put in place. You'll recall that in FY 2015, we made some investments to prepare for Japan to go live and when it did go live we went from zero customers for security filing in Japan to more than 100 customers within a few weeks. In FY 2016, we invested to prepare for Canada's e-manifest for highway carriers initiative. The initiative went live in May of 2015 with penalty enforcement coming into effect just a couple of months ago. We're expecting a growing number of security filings being processed for this initiative in the coming months. Canada has a number of other initiatives in the pipe as well including freight forwarder filing and importer filing where the shipper will require to file some of the data related to the shipment in addition to the forwarder doing it and the carrier doing it. In FY 2015, we'll invest to support those initiatives and we'll also be investing to support the key initiatives in the U.S. and Europe. If you recall, in the U.S. there's a forwarder filing for air shipments in pilot called ACAS. We are continuing to pilot with customers on this initiative and we expect the pilot program to wrap up by the summer of 2016. We'll also be investing to prepare for U.S. export filings though this has a longer runway as the pilot is expected to run in the U.S. for a number of years. In Europe, the precise initiative remains the next big initiative on the horizon. It's a freight forwarder focused filing, just like the U.S. ACAS filing. Preparations still continue for it to enter the pilot phase so this is also a longer term initiative for us. As you can see, this is a long-term opportunity and will come in steps over a number of years. We feel that we're in a great position to continue to capitalize on this opportunity because we have the community already on our network and in many cases we have a lot of the data already on our network. So turning on a new country is relatively simple for our customers as these initiatives expand. It does, however, require investment because you have to prepare the systems and connection to the government in each case and we'll continue to invest in our business including looking for opportunities to expand in other geography as may be appropriate. So before I hand the call over to Allan to talk a little bit more about our financials, I'd like to thank some of the people that made this another great quarter for Descartes. So thanks to our employees for all the hard work they put in to make sure our customers get the results that they want. Thank you to our customers who continue to place confidence in Descartes as a network of choice. Thanks to our partners for helping us to continue to expand our ecosystem. And finally, I'd like to thank our shareholders for continuing to have confidence in Descartes. And with that I turn the call over to Allan.

Thanks, Ed. So as indicated, I'm going to walk you through our financial results for the fourth quarter and for the year ended January 31, 2016. We are pleased to report record quarterly revenues of $48.0 million this quarter up 8% from revenue of $44.3 million in the fourth quarter last year. And as Ed mentioned this revenue growth was achieved despite continued negative foreign exchange movement as a result of a stronger U.S. dollar compared to most other currencies in the fourth quarter. As a result of these FX changes, our revenues were negatively impacted by approximately $2 million this quarter when compared to the fourth quarter last year. So excluding the impact of FX, revenues would have increased by 13% in the fourth quarter this year over last year. License revenue continues to decline as we continue to focus on recurring revenue with only $1.7 million or 4% of our revenues coming from licenses this quarter compared to $2.8 million or 6% of revenue in the fourth quarter of last year. Gross margin continued to be very strong at 72% of revenue for the quarter, which is a solid increase from 69% in the same quarter of last year. As we continue to experience operating leverage from our network growth. With continued revenue growth driven by the leverage from our network revenues and recent acquisitions, we also continue to see solid adjusted EBITDA growth of approximately 17% to $16.3 million or 34.0% of revenue compared to $13.9 million or 31.4% of revenue in the same period last year. Similar to other quarters of last year, FX had a minimal impact on our adjusted EBITDA as we are fairly naturally hedged to changes in the U.S. dollar when it moves against the Canadian dollar, the euro or British pound. As a result of these strong operating results cash generated from operations was $16.2 million or approximately 99% of adjusted EBITDA in the fourth quarter this year. Net income came in at $5.4 million or $0.07 diluted per common share in the fourth quarter, an increase of 50% from net income of $3.6 million or $0.05 per share in the fourth quarter last year. The increase in net income [is that] [ph] effect of higher amortization of intangible assets as well as inclusion of approximately $1 million of acquisition related costs. If we turn our attention to the annual results, revenue came in at $185.0 million for fiscal 2016, up 8% from $170.9 million in fiscal 2015. Excluding the impact of a negative $11.7 million of FX impact from a strong U.S. dollar, the revenue increase for the year would have been approximately 15%. Adjusted EBITDA for the year came in at $60.9 million compared to $52.0 million last year, an increase of 17%. For the year, cash flow from operations was almost -- was $54.2 million or 89% of adjusted EBITDA, which is just above our 10 year average of 87% of cash conversion of adjusted EBITDA. Net income for fiscal 2016 came in at $20.6 million or $0.20 per share compared to $15.1 million or $0.21 per share in 2015, which is an increase of 36%. And finally, looking at the balance sheet, we continue to be very well capitalized. As Ed mentioned, we are pleased to announce today that we just signed and amended $150 million syndicated senior secured revolving credit facility which includes an additional $7.5million for permitted hedging activities. This new line of credit replaces our previously $77 million acquisition line of credit which was undrawn at the time we replaced it. We expect to use this expanded credit facility along with our year end cash balance of $37.2 million as well as future cash flow from operations to fund our continued expansion in the business. In short, we continued to be well capitalized to allow us to execute to our business plan. If we look ahead to fiscal 2017, we'd like to note the following. We expect to incur approximately $6 million and additional capital expenditures in fiscal 2017, which is expected to include investments in our network security and infrastructure. We expect amortization expense will come in at approximately $31 million in fiscal 2017 with this figure being subject to movement in FX rates. Finally, we expect stock-based compensation will come in approximately at $2 million for fiscal 2017 based on current grants and subject to any forfeiture of stock options or share units. So, now I'll turn it back over to Ed to wrap up.

Great. Thanks, Allan. So let's start with calibration for Q1. Similar to previous quarters, we don't provide guidance but we use our baseline calibration as a key metric relating to the ongoing health and strength of our business. Our calibration for Q1 assumes the following exchange rates, 0.72 Canadian dollar, €1.12 to the U.S. dollar and £1.45 to U.S. dollar. So to turn to Q1, as of February 1, 2016 for Q1, we had $46.1 million in visible recurring contracted revenues or baseline revenue. We had $32.9 million in baseline operating expenses and this gives us a baseline calibration of $13.2 million for adjusted EBITDA for Q1. Some other key points related to how we're positioned for Q1 and beyond. We're very well capitalized. We have a healthy business that's well calibrated and as Allan mentioned we also have a healthy balance sheet and access to capital. We had $37 million of cash at the end of the quarter and we also have $150 million undrawn line of credit available to the company. We have a strong acquisition pipeline. With this capital capacity there are a number of acquisition opportunities to expand the geographic reach, functional capabilities, trade data or content or community of participants on our network. We continue to see a lot of interesting opportunities out there and we need to review everything as it comes our way and we're not buyers for buyer's sake. The fact that we deployed more capital recently is a function of there being more for sale that meets our stringent criteria than a desire to increase capital deployment. As a reminder, we're looking for businesses that not only process, leverage, or supply logistics data or content, but also businesses that fit culturally with our team at Descartes. The fact that we've increased our line of credit recently doesn't change how we view acquisitions. We intend to continue to be prudent but we're confident that our ability to deploy capital effectively will continue. Looking ahead to 2017, we've completed our planning process as we do every year around this time. Should be no surprise to anyone how our plans are framed. We'll continue to target 10% to 15% adjusted EBITDA and adjusted EBITDA per share growth. We'll invest our overperformance back in the business. The growth will come through a combination of inorganic and organic activities and acquisitions are not incremental to this plan. We will focus on recurring revenue and deemphasize one time license sales. In FY 2016, we increased our planned operating profit margin range to 30% to 35%. Given the current performance of the business, being mindful of the FX environment, we expect to continue to operate in that range in FY 2017. But, please keep in mind, this could vary if we buy businesses that need fixing up which would impact the metric in the short run. We'll make you aware of that if it ever becomes the case. Before opening up for questions, I'd like to remind everyone that our user group event is coming up next month, first week of April. For those of you who haven't been our user group Descartes evolution is a great opportunity to meet with Descartes employees that build our products and the customers that use them. The conference will be April 5 to April 7 at the Hilton in West Palm Beach. Information is available on our Web site for the event if you'd like to sign up, register and join us in West Palm. And finally, as always, we will make ourselves available to shareholders. We've got a great business. We want to be available to help people learn about our business. We'll continue to spend time and resources to get the word out and we hope you'll do the same. So with that, let's open it up for questions. Operator?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question is from Matt Pfau from William Blair.

Hey, guys, thanks for taking my questions. Ed just wanted to first start out on the acquisitions. You mentioned that the pipeline is strong. But, what are you seeing here and valuations have come down in the public markets quite a bit over the past few months for software names, so what are you seeing in terms of that impact for potential acquisition in terms of their willingness to sell and also valuation expectations?

Well, on the small side where we've done a lot of tuck-ins over the years, nothing has really changed. I don't think they were impacted so much by valuations going up. But, I don't think they're going to be impacted so up much by valuations going down. It's a different game for those types of acquisitions. They're usually thinking about how much do I think my business is worth and what do I need to retire and things of that nature. On the larger side, as we've mentioned in the past, we've seen them go up significantly or valuations go up significantly over the past couple of years. And yes, we're well aware of what's happened in the public markets in the last two months. We haven't seen enough evidence yet of that affecting some of the larger potential acquisition candidates, just because not many deals have closed in the last two months. But, we do expect that that will have a similar effect over time. Usually the way these guys get the valuations moving up is they're looking at public comparables and then trying to fix their valuations off of that. I think that's why we've seen them go up over the last couple of years. And I would expect that they would go down the same way. Certainly in any of the discussions, we're having we kind of see that concept being introduced by the various bankers we might talk to.

Got it. The one other thing I wanted to hit on is, on the trade content product, I believe the Trans-Pacific partnership free trade agreement supposed to be implemented later this year. Do you expect any impact from that potentially forcing more customers or potential customers to look for a trade content solution?

I don't know that it's going to impact it one way or the other. If you think about what's happening with the TPP, it's changing a bunch of rates. The day they signed, the rates start changing again the next day anyway. So I think that particular content, tariff and duty content will continue to be more and more valuable over time as more companies realize that they need to be mindful of these issues as they're moving goods internationally and more countries put rules in place to protect their borders. TPP, you might look at it on the surface and go it's bringing those rates down. I do look at them and go it's changing the rates. And the more the rates change, the more you need to be aware of those rate changes and that's what we do for people. So I don't know that it's specifically going to impact it, but I think it's just -- it brings more attention to it and it makes more and more companies realize they have to pay attention to this on a daily basis and that's good for our business.

Got it. Thanks for taking my questions, guys.

Yes. Thanks, Matt. Good talking to you.

Our next question is from you Paul Steep from Scotia Capital.

Great. Thanks. Good morning. Ed, maybe just a follow on, could you talk about your ability internally to pursue an on-board a larger, possibly transformational acquisition. And then, second part of that I guess maybe for Allan, with the new credit line, how are you thinking about the optimal capital structure for the business in terms of employing leverage? Thanks, guys.

Okay. Great. So we're at about 1,000 employees right now. A lot of us came from acquisitions, myself included. There's a lot of experience here in doing that. It's real helpful when the people you're being acquired by have gone through it themselves and sat in your shoes. I think that helps us do a better job of acquisitions every time. And we keep growing and I think with that expand our ability to digest bigger and bigger things. You've seen us in the last two years go from buying companies that were $10 million, $15 million, $20 million to companies that were $40 million, $50 million, $60 million, $100 million. And I think that will continue over time. We do this for a living. You see we do four, five, six every year. And no promises, but I wouldn't be surprised if you see that kind of expansion continue into the future.

Sure. And Paul to your question on the debt facility or the capital structure, so we've expanded the debt facility to $150 million. If you look at our past numbers that's 2.5x our trailing EBITDA. We think debt is appropriate in our business structure. We have a very predicable business highly recurring revenue. And a modest level of debt would be very appropriate. But you'll never see us get carried away with higher debt levels. That's how we look at it.

Great. Just one other question here. Ed maybe talk about Oz and the integration and your view on the longer term opportunity to expand that possibly across your base? Thanks.

Yes, sure. Just quickly, so Oz is a business, it's funny you said the word integration, that's what they do for a living. They provide tools that help you extract data from your ERP system and get it into shipping systems just in that sense you can probably see why it's a great fit for us. We run a network that passes data between companies and their trading partners, which is the next thing that happens after you get the data into your shipping system. We thought Oz was a great addition to our network and up until now they have focused on small and medium businesses that have problems with these issues. And maybe not have the wherewithal to go out and spend tens or maybe even hundreds of millions of dollars to create those integrations. Oz does it very cost effectively for small and medium business. As that comes into Descartes, we want to obviously expand that a number of the businesses we bought in the last couple of years also serve small and medium size businesses. So, we feel like we know a lot more people that might need this stuff in the small and medium business market. We also know a lot of big companies. That's really our expertise is helping the larger retailers and manufacturers of the world deal with logistics and supply chain issues and we're hopeful over time that we can take some of that functionality that Oz has and start to expand it out just to small, medium size businesses and help the larger companies out there who was apparent to us also have these problems. And it's very expensive for them to solve those problems and if Oz's tools can help had us do that in a much more cost effective way for them, it's really a big bonus for our network. Because we get paid when those transactions get on the network and every day that that integration's going on we're not getting paid. So we want those integrations to happen as quickly as possible and we believe that Oz will help us do that.

Perfect. Thanks, guys.

Thank you, Paul.

Next question is from Brian Essex from Morgan Stanley.

Good morning, gentlemen. Thanks for taking my questions.

Hey, Brian.

I was wondering if you could touch a little bit on omnichannel, particularly coming off of what I guess would expect there to be a little bit of a seasonal quarter and signing of a couple new deals. How did your experience with omnichannel go in the quarter and is there anything there from a macro perspective that's either a headwind or providing a little bit of a tailwind as you might expand the relationships with your customers in that business.

Yes, thanks. So this Christmas season you saw the results come in after Black Friday and Cyber Monday that more transactions moved towards online and probably as expected. And what that really means is our retailers, retailer customers if any of them didn't take this seriously coming into this year they got more reason to do so thereafter. What we're seeing and a lot of the growth in that business for us has been as retailers say boy, I've got to get good at this. I've been doing this in a way for the last couple years where I wasn't so much concerned about operating my business efficiently as I was concerned about getting into the online market before the likes of Amazon and eBay do it for me. And I think what happened this Christmas is just further drives it. It's more true than ever, that if you're a big retailer you have to be able to do both and once you realize you have to do both you quickly come to the conclusion you have to be able to do both efficiently and that's when people call us. They go -- I need to be able to handle this online order as effectively as I handle it in my store and for years we were the guys that sat in a store and when you said, I want to deliver that refrigerator they would go into a system that we put on their screen that sat in the store that helped them book that delivery on a time definite basis. In the last six or seven years, we've been doing that online with our web scheduling tools and they're unique in the industry. Our competitors don't have them yet and if they do they're years behind us and that's been a big headwind for us.

Great. And then, any update on relationships with SAP and Oracle, I think that's maybe a little bit ahead of Oracle, but how are those progressing and is there anything more on there in terms of expectations for the remainder of the year?

We continue to grow our relationship with both of them. You're right; they're in two different spots a little bit but both growing pretty rapidly. SAP is a very large partner of ours. We do a lot of work on the content side with SAP. We just last year started doing work on the global logistics network with SAP. And so we're looking for that to expand over the next couple of years as they sign up each new global trade management customer or transportation management customer we're expecting to benefit on our network from the transactions that those people process and need to send back and forth had between themselves and carriers and third party logistics providers that are already on our network. That's a big opportunity for us. In Oracle, they're coming up quickly from behind. In the content business, their GTM is probably -- we're not as far advanced with them as we are with SAP, but they're catching up quickly. As their GTM rolls out and they get more customers, we're an exclusive partner with them for providing content and that's a great opportunity for us as their business expands. We haven't convinced them yet to use our network, but we've done a pretty effective job after the fact of going and talking to their customers and saying hey, you need a network and I can get you all this data and I can do it a lot more effectively than if you try and go do it on your own. Why don't you join the Global Logistics Network? And we've got a lot of traction there. And what we're trying to do right now is get Oracle to back us on that and maybe like SAP does say hey, we use the Global Logistics Network and tell their customers that's what you're going to do when you sign up for this transportation management system. So we see a lot of opportunity there with Oracle on the global trade management side. They're catching up quick on the transportation management side. We're hopeful to take the success that we've had in their customer base and maybe more further engrain it into their sales process so that we get sold along side their transportation management sales.

What are the barriers there, seem a little bit from your comments to be a little bit more hesitant to adopt.

Well, we have a transportation management system as well. As much as we've shown them that hey, we don't actually compete with you, we sell to different types of people than you sell to. People buy our transportation management solution typically when they have a private fleet of vehicles and a third party fleet of vehicles. And there's really no one else that we're talking about here that competes with us at all in that portion of TM or TMS. We've spent some time with Oracle going hey, show me the last time you saw us go head to head against a TM provider. I don't think you're going to find one. But I think there's -- you can imagine if their executive's sitting around, they look at our Web site, we're in the same business as them, why would we want to help them on the TMS side. And I think if they look a little deeper they're going of to realize we should be partners here, not competitors.

Right. Great. Thank you very much.

Thank you, Brian.

Our next question is from Steven Lee from Raymond James.

Thank you. Hey, Ed.

Hey.

We've been reading more about shipping volumes slowing down. How much of Descartes revenue would be exposed? Is it just the GLM piece? And how much resiliency is built into your model? Thanks.

Sorry. What was the last sentence?

Yes. How much resiliency is built into your model?

Got you. Got you. So it's about 40% of our business is transaction based and in theory would be exposed to movements in shipping volumes. I should point out, though, that we have underlying minimums behind nearly every one of our contracts. So it's usually 10% to 15% below what they're normally shipping with us. That's how they get the pricing that they do on our network. If they don't commit to volumes they pay full retail. If they commit to volumes they get -- the volume is dictated or the prices that are dictated by the volume that they have. Almost all of our customers are signed up to volume agreements with underlying minimums. It impacts us. Our shipping volumes go down. I don't think this is a particularly -- you're saying they're going down, but I don't really see that on our network right now. This seems steady state at the moment. We'll see what happens in the coming months. I think people worry because of what happened in the stock market, people were thinking that they were going to see some kind of slow down. And then, the numbers came out for December and January and they actually looked pretty good. So, we'll see how that translates into shipping volumes in the coming months. But, I wouldn't look for major changes in our network from these smaller changes in shipping volumes from time to time. It's not a major impact.

Thanks. That's helpful. And then any update on MK Data. The potential for cross-selling appears substantial on paper and any success you've had so far. Thanks.

What we've had is, we bought a business that was growing and it continues to do so. We then buy it and say we know a lot -- I'm just going to talk casually here. We know a lot more people that need this stuff than you guys know. So let's go try and find some of those guys. We're starting to see the results of that. We also have some very big opportunities by MK standards in the pipeline that we've generated from our own sales force. So I look forward in the coming months reporting to you our success on that. But, I like what I see so far.

Thanks.

Thank you.

Our next question is from Paul Treiber from RBC Capital Markets.

Thanks very much and good morning. Just wanted to focus on margins. This quarter margins were quite strong, above our expectations and that's despite the partial contribution from Oz. Can you just comment on the margin profile of Oz and then how quickly do you see that moving in line with your model or is it already accretive to your model?

Sure. So we brought Oz in and Oz was a good business. It has margins and I'm talking now adjusted EBITDA margins that are in or around where Descartes overall business is. What you're seeing in our adjusted EBITDA margins continue to grow is a combination of three things. One, the acquisitions we brought in have been strong, strong businesses in the last year. Foreign exchange hits our revenue, it does not hit our adjusted EBITDA so there's a benefit in the margin because of FX. And network volumes continue to he grow. Our recurring revenue continues to grow, which we get good leverage off. Every dollar of an increased transaction fee doesn't bring $0.30 of cost with it. It's a strong margin. So it's a combination of those three things. We always tell you that our margins could be impacted by an acquisition. We bought a broken business it could hurt our margins for a period of time. If FX rates swing the other way, it could hurt our adjusted EBITDA percentage. But assuming those things don't change, over time our adjusted EBITDA margin should slowly improve over time with the network effect and volume increases. Hopefully that covers the question.

I always think of it simply as the last bill of lading that comes in for a dollar doesn't cost us very much to process. So that helps drive our margins up. As our network grows, we tend to make more money.

Okay. Just wanted to shift to BearWare. It's been about six months or so since you closed that acquisition. Is that fully integrated into your mobile and Telematics offering? And then, how are you bundling that from a pricing basis? I mean do you sell it separately or is it bundled into the existing offering?

We continued to integrate it. We had a whole bunch of ideas when we bought it about ways that we could integrate as with most acquisitions we go after the simplest and most profitable ones first and we've done that. I think there are more ideas that we've even had after the acquisitions, things we might be able to take advantage of. We start talking to their people and their customers start talking to our people and our customers when we go out there is other opportunities here that we could take advantage of. And I think that will continue for some time. We didn't buy Oz -- we didn't buy BearWare with like -- let's just do this one thing and it will be done and then we'll be able to take advantage of it. We had a lot of different ideas about it because what BearWare does pretty interesting, right? They provide a big benefit to their stores, so to their retailers with this delivery concept. And a lot of the trucking companies out there want to take advantage of that and be part of it. We know a lot more trucking companies than they were already using in their pool operations. And I think that will provide a great result for our customers over the long run. So we're excited about it.

Okay. And then just lastly for me. On MK Data, outside of your existing customer base what's been the progress in terms of building a channel to launch MK Data into new verticals like legal and finance? And should we think about that -- those opportunities as something that's possible in the near term or is that more of a long-term opportunity?

We're trying. I think it's a longer term opportunity. We don't know much about selling to law firms and banks. They're pretty good at selling to us, but we're still working on selling to them. We do see it as an opportunity out there. We see a much bigger opportunity in logistics for us, obviously. Those are the places we're going first. We are making some headway into the markets you're talking about, but I don't think it's something you're going to see in the results in the next couple of months. It's probably more like the next couple of years.

Okay. Thank you. I'll pass the line.

Thanks.

Our next question is from David Hynes from Canaccord.

Hey, thanks, guys. Ed, hoping you can help us think about margin contribution for kind of each of your three core efforts. I understand they're all related but I think it would help us kind of frame your operations if we could kind of parse them out. Obviously, the data business is very profitable. I assume customs filing services are pretty similar, less clear on the omnichannel logistics effort. So any color there? And I guess I'd be curious if the margin profiles of those businesses are inversely related to the growth or if that's not necessarily the case.

I don't know that it's directly proportional to the growth. I could just comment on them each. Our data content business is very profitable and as I've described in the past, I think it's get more profitable as our business grows in that industry or that sector. Same with our network. For a different reason, but at a high level it's the same reason, right? We have a relatively fixed cost to provide our network service and as transaction volumes grow we make more money as a percentage of revenue. Content is very similar but it's a little different. The content has an almost absolute fixed cost so with each new transaction or each new customer almost all the money is helpful to our bottom line. The places where we don't have this -- higher margin profile is also important businesses for us and things we think we need to be in to help the customers get content and get on our network and start processing transactions and that's the places where we provide back office software, either routing solutions or back office forwarding solutions, rate management solutions, things like that that it's a software service. We charge per user, per month and we make good money doing it. But with each new customer usually there's costs that come along with it that are unavoidable and if we need to spend that money to make sure we keep doing a good job for them. So, the margin profiles aren't going to be as good as they are in the network or the content businesses, but let's face it. The margins there are tremendous and the margins in our core software businesses while not as good are also pretty good, just not as good necessarily as in the content or the network business. We feel those businesses are still crucial to help people get on the network and utilize the content, so we continue to be in them and we continue to invest in them as we feel as appropriate to make those customers happy so they want to do more stuff with us.

That all makes perfect sense and obviously, no pushback with EBITDA margins well over 30. So, okay, great. Thanks for the color.

Thanks, DJ.

Our next question is from Michael Urlocker from GMP Securities.

Good morning. Thanks for taking my question. So I had -- I think the description you gave of the industry factors on your business and the M&A outlook all very clear and well understood. So I wonder if I could ask a question on kind of a very different subject, little bit operational. You've been with the company many years and you're at 1,000 employees now. I don't know when it was half that but probably not too many years ago. So if you look back at the past couple of years, looking at the employee and the growth there, what's been the biggest challenge for you in dealing with large employee organizations?

Well, when you get more people you've got to have internal functions that keep up with an HR functions, financial functions and things like that that help you continue to do a good job for your customers and continue to do a good job, so that your employees stay happy and energized. I don't know if we struggle with it. We've certainly gotten better at it over time. A lot of the growth in our employee count comes from acquisitions. And I think if you were here 10 years ago versus here today, I believe we do a much better job of bringing companies in and integrating the customers and the employee base in and making them feel at home here at Descartes. We have very high retention numbers. I worked here a long time, so I'll just give you my personal comment. It's a pretty good place to work. The company is growing. We're doing well. We're fair to our employees. At least we try to be. And I think that shows up in the retention numbers. If I just think of our sales force, which is one of the places where we would really pay attention to retention very closely, we tend to keep all of our good sales guys pretty effectively. And I hope we continue to get better at it. And I know as we get bigger it will be more and more of a challenge, but it's something we certainly focus on and I think continue to get better with over time.

As the company grows say and you look forward in a couple years, are there any emerging challenges that you would identify?

Well, we just went through one with bringing in SAP and couple years ago and getting everyone comfortable with that, took a little while. You bring in a new system and everyone goes they like the old system better. And then, you try to do things to make the new system better than the old system and eventually that happens. It might take a little while. But, I think if you worked here a while as I have, and a bunch of the guys, we sit around our management team I look and go, Jesus, we've all been here like 10, 15 years. We've gotten old together. You start to go okay, this is the company that if there's something that needs to be fixed, we go and fix it. And it might not happen tomorrow, but it happens. And I think that's what makes a company a good company.

Okay.

And hopefully we keep getting better at it and we become a great company?

Thank you. I appreciate all the hard work by everyone there. Thank you.

Thanks, Mike.

Next question is from Blair Abernathy from Industrial Alliance.

Hey, Blair.

Blair, your line is open. No response. We have no further questions, Scott.

Great. Thanks everyone. Appreciate your time this morning and look forward to seeing you in the coming weeks and reporting back to you again next quarter. Have a great day.