The Descartes Systems Group Inc. (DSGX) Q3 2018 Earnings Report, Transcript and Summary

Welcome to the quarterly results call. My name is Adrianne, 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, this conference is being recorded. And I’ll now turn the call over to Scott Pagan. Scott Pagan, you may begin.

Thanks, and good afternoon, everyone. And 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 condition, Descartes’ gross margins and any growth in those gross margins; cash flow and use of cash; business outlook; baseline revenues; baseline operating expenses; and baseline calibration; anticipated and potential revenue losses and gains; anticipated recognition and expensing of specific revenues and expenses; potential acquisitions and acquisition strategy; cost reduction and integration initiatives; and other matters that may constitute forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties, assumptions and other factors that may cause the actual results, performance or achievements of Descartes to differ materially from the anticipated results, performance or achievements implied by such forward-looking statements. These factors are outlined in the press release and in the section entitled Certain Factors That May Affect Future Results in documents filed and furnished with the SEC, the OSC and other securities commissions across Canada, including our 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. And with that, let me turn the call over to Ed.

Okay, great, Scott. Thanks, and good afternoon, everyone, and welcome to the call. Thanks for joining us today. We continued our momentum with another great quarter here in Q3. As we talked about in our last call, we had a key addition to the Descartes family with the acquisition of MacroPoint at the beginning of the quarter. These guys are really hitting the ground running here. Our ongoing investments in the business, both organic and inorganic, continue to drive growth in line with our long-term operating strategy. And our investment strategy is designed with current and future business environment in mind. Global trade continues to change, and commerce, as we know it, has fundamentally shifted. And with these changes, consumer and business expectations for delivery and services are increasing. Our job is to isolate our customers from the complexity of this changing environment and help them with tools to take advantage of these market conditions, and the strategy is working. New customers and businesses are joining our Global Logistics Network every day, while existing customers continue to do more and more with us as we add more solutions and services for them to manage the life cycle of their shipments. All in all, the business is doing really well, and I look forward to give you some more perspective of what we’ve been up to as we go through the call. Before we do that, I’ll start by speaking to some of the brief financial highlights from the quarter. Then following my business update, Allan will take us through the financial results in a little more detail, and then I’ll finish up with some comments about our calibration for Q4 and our operating plans moving forward. So let’s start by going over some of the key financial highlights for the third quarter of fiscal 2018. We had another record quarter of revenue, and we’re very happy with our key metrics. Our adjusted EBITDA continues to grow in line with our plans of 10% to 15% per year. For the last quarter, we generated $20.6 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 $62 million. Our revenue mix remains very healthy. For years, we’ve talked about our continued focus on recurring revenue and deemphasizing license revenues, and this is evident in our results with services revenues accounting for roughly 96% of our total revenues. We’re also very happy with our margins. Adjusted EBITDA as a percentage of revenue was 33% this quarter. This was consistent with what we expected given that we just recently added MacroPoint, which we’re in the process of getting up to the more traditional Descartes margin levels, and because of recent movements in FX, which impact our revenues but not our adjusted EBITDA. We generated $18.9 million of cash in the quarter, and consistent with our long-term operating plans, we’ve been investing cash back into our business by combining with complementary businesses, and I’ll come back to that in a minute. So to summarize. It’s a great quarter. We’re really proud of the business and where it is right now. And we’re really excited about where it’s heading next. With that, I’d like to talk a little bit about how we manage the business and plan our investments as we continue to grow. And then I’ll provide an update on some of the recent acquisitions and other business activities. So how do we look at the business? Well, we’re an acquisitive companies. We’ve combined with a lot of companies over the last 10 years. And we believe there are opportunities to combine 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. And then we’ve built one network where customers can come to manage the life cycle of their shipments from researching and planning, who to do business with through to execution and monitoring of those shipments in real time. The reality is that there are many different business processes that we’re helping our customers with. Some of those business processes are very dynamic and changing all the time. These areas of our business will typically grow faster than others. Other business processes may be more established with minimal changes on an ongoing basis. And as we grow and become a bigger business, we need to manage the different types of growth across our business. For instance, we have legacy transactional businesses with customers who’ve been using our solutions for 20-plus years. Those businesses are growing well, perhaps even better than growth in GDP, but it’s still a 2% to 4% growth range. On the other end of the spectrum, we have rapidly growing business headlined by having brought in MacroPoint, where we need to think about managing double-digit growth rates and capturing market share in a very dynamic environment. And we have different parts of there in the middle, each with their own growth trajectories, trajectories impacted by the mode of transportation they serve, the time of year, macro trends impacting the space and improvements in technological solutions. Each different growth trajectory brings with it different considerations for investment in people and infrastructure to support the growth along with opportunities to consider acquisition investments in the areas where our customers need us most and where we see the future of the market. We’re fortunate in that we’re now very experienced in making prudent, forward-thinking investments to achieve our goals. But even with the addition of high-growth businesses to Descartes such as MacroPoint and our investments like ShipRush in the 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. So we’ve historically targeted 10% to 15% adjusted EBITDA growth per year. We still are. We believe that is the sweet spot for growth in this business, and we think our historical results and those announced today prove that out. We’re always aiming higher, and you’ve seen us deliver more points in the past where we believe that sweet spot is the right range for us for the long run. And we believe that we should continually reinvest any overperformance 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 ecommerce 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, so let’s spend some time on that right now. So let’s start with the recap of what they do, and then we’ll talk about how they’re doing. MacroPoint runs a connected network of over two 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, logistic 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 stand-alone business, it was doing very well. And we’re really -- or already seeing the benefits 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 team start working together, but we’ve seen some great uplift out of the gate with MacroPoint. Our sales teams have already started to work together to uncover joint opportunities, and we’ve got some deals that we’re working on right now. Our partner community is also very excited. MacroPoint was an immediate discussion point with many of our larger -- large partners right out of the gate. We’ve seen -- we’ve since made a lot of progress with those partners to start settling -- setting up integrations for their customers to access the MacroPoint network. We’re really excited about the opportunities with our partners here, and I look forward to discussing this more on future calls. With respect to the bottom line, we don’t talk much about the individual contributions from acquisitions across our business because we look at the business holistically, and we look to integrate quickly. But as I mentioned in the last call, we’ve planned for MacroPoint to operate at lower margins for the time being. We expect its margin to improve over time and come in line with our core business, but we’re going to do that in an appropriate pace to support its high-growth trajectory. We’re happy with the first quarter performance, and I’m sure we’ll talk more about this business on future calls. Moving on to another fast-growing area for the business. Let’s talk about ecommerce quickly. With Cyber Monday just passing and showing another monster year of sales and growth, there continues to be more transactions trending online. Customers now expect goods when and where they want them, and they often don’t want to pay for that privilege. Obviously, this impacts different companies in different ways, depending on what they’re selling and to whom. Whether it’s a retailer trying to compete on home delivery with the likes of Amazon using our route planner and reservations technology or a small ecommerce company using ecommerce 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. So let’s talk a little bit today about customers using our ecommerce 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 ecommerce portfolio where customers can work on the fulfillment side of our e commerce focused WMS solution, pixi. From there, we now have deep capabilities in the parcel execution side. Our investments in Oz, and most recently, ShipRush, allow our customers to integrate with front end commerce systems and parcel shipping providers for seamless package labeling, rating, tracking and postage processing. By combining these businesses with our Global Logistics Network and the community of its participants, it allows us to present a highly differentiated offering for this segment of the market, and we’re seeing some great and very strong growth here. There’s a common thread in each of these high-growth areas for our business. They have a strong partner community that is hungry to tap into our global logistics network. So with that, let’s just talk for a few minutes about our partners. We’re really happy with the progress we’ve made, strengthening our partnerships over the last few years. Selling through and with our partners is now part of our DNA, much more than it was, say, 5 years ago. Like our customers, our partners are looking to do more with us as well. For instance, with each of SAP and Oracle, we have a very strong set of partnerships on the content side of the business, where we help power their global trade management systems with our global trade data content. But now these guys are locking, looking to tap into more and more services on our global logistics network as well. Whether that’s connecting to our transportation community to execute or track shipments or leveraging our extensive customs connectivity arrangements with governments around the world, there’s more business out there for us. And as I said previously, there’s a strong interest in connecting to the MacroPoint network to facilitate real-time truckload tracking. We also continue to see growth and opportunities within our small and medium-sized business community, SMP, working with NetSuite. We continue to strengthen our relationships there and think that there are opportunities to do more off the back of our ongoing investments in e-commerce. Beyond that, we have a number of other partners, whether it’s hardware technology partners or partners in the parcel market space, and we continue to see transactions, traction in deals and opportunities to grow the business further. So 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. So thanks to our employees for all the hard work they put in to make sure our customers get results. Our customers continue to get great results, and that’s why we have a successful business. I want to thank our customers who continue to place confidence in Descartes as their network of choice. And finally, thank you to our shareholders for continuing to have confidence in Descartes. And with that, let me turn the call over to Allan.

Okay. Thanks, Ed. As indicated, I’m going to take you through the financial results for our third quarter ended October 31 this year. As Ed mentioned, we are pleased to report record quarterly revenue of $62 million this quarter, up 20% from record of $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 $173.8 million, which is an increase of 15% from revenue of $151 million in the same period last year. Consistent with the trend for the past number of quarters, service revenue remains strong, coming in at $59.7 million, up 21% from $49.4 million in the third quarter last year, representing 96% of our total revenue in each of these periods. Gross margin also continue 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 $20.6 million or 33.2% of revenue in the third quarter compared to $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 US dollar against most other currencies, including the euro and Canadian dollar, as well as from the impact of the recent MacroPoint acquisition, as Ed mentioned. Looking at the 9-month results. Adjusted EBITDA was $59.4 million, or 42, 34.2% of revenue, 15% higher than adjusted EBITDA of $51.6 million in the same period last year. As a result of these solid operating results, cash flow from operations came in at $18.9 million in the third quarter, representing 92% of adjusted EBITDA. Year-to-date, cash flow from operations came in at $52.5 million or 88% of adjusted EBITDA, down slightly from operating cash flow of 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 have been approximately 93% of adjusted EBITDA year-to-date. Moving to GAAP net income. We came in at 6.2 million or $0.08 per diluted common share in the third quarter, an increase of 5% from net income of 5.9 million or $0.08 per diluted common share in the third quarter last year. Year-to-date, net income was 20.2 million or $0.26 per diluted common share this year, up 14% from 17.7 million or $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 33.3 million. While we drew 80 million on our credit facility early in the third quarter to complete the purchase of MacroPoint, we were able to repay 25 million on this facility during the balance of the quarter such that we ended the quarter with 55 million drawn on our $150 million line of credit. With our cash balance and the 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, and as always, we continue to be fairly naturally hedged to FX impacts on our adjusted EBITDA and our operating cash flows. Our income tax rate came in at 22.2% of pretax 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% to 25% of pretax income in Q4. We also expect to incur approximately $1 million to $2 million of additional capital expenditures for the balance of the year, and these expenditures are expected to be continually primarily focused on investments in our network. We currently expect amortization expense will be around 8.1 million for the fourth quarter with this figure being subject to FX changes and the completion of any additional acquisitions. And finally, we expect stock-based compensation expense will be approximately 800,000 for the fourth quarter of this year. So I’ll now turn it back over to Ed to provide our calibration and to wrap up.

Hey, great. Thanks, Allan. So I’ll start with calibration for Q4. Similar to previous quarters, we don’t provide guidance, but we use our baseline calibration as a key metric to the ongoing health and strength of our business. Our calibration for Q4 assumes the following exchange rates: CAD0.78, €1.16 to the U.S. dollar and a £1.32 to U.S. 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 of 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, and as Allan mentioned, we also have a healthy balance sheet. We’re 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 3 so far this year. And 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 perspective -- 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 see there continues to be a lot of industry activity right now with consolidation continuing in our market. With this capital capacity and our execution capabilities, there are still a number of acquisition opportunities to expand the geographic reach, functional capabilities, trade data and content or community of participants on our network. We continue to see a lot of interesting opportunities out there to continue or even accelerate our pace of profitable growth. We’re seeing both larger and smaller opportunities. And while we review everything as it comes our way, we’re not buyers for buyers’ sake. The fact that we have an acquisition line of credit and a shelf [ph] funnel 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 ‘18, we continue to target 10% to 15% annual adjusted EBITDA and adjusted EBITDA, per share growth [ph]. 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 deemphasize onetime license sales. If you’ll recall, on the last call, we increased our planned operating margin range to 32% to 37%. Given the current performance of the business and mindful of the FX environment, that remains our target range, even as we integrate MacroPoint into our business. But please keep in mind, this could vary if we buy other businesses that need fixing up, which would impact that metric in the short run. And a quick update on our annual user conference. I mentioned on the last call that the date for our User Group Descartes Evolution is a bit earlier than usual. We’re running it from March 6 to March 8, 2018, and the location again is the Hilton in West Palm Beach, Florida, right next to the convention center. If you’re interested in learning more about our business, the people that make it all happen and the customers and partners that are part of our community, then it’s a must-attend event. The team is working really hard to make it even better than last year, so please do book yourself in soon, particularly if you want to spot at the hotel itself because we generally take over most of that hotel and then end up with overflow in nearby hotels. Registration information and the agenda for the conference can be found on our website. And finally, as always, we’ll continue to make ourselves available to shareholders to answer any questions. We think we’ve got a great business. We want to be available to help people learn about that business. And we’ll continue to spend time and resources to get the word out, and we hope you’ll do the same. So with that, let’s open it up to your questions. Operator, if you could open the line.

[Operator Instructions] And our first question comes from Steven Li from Raymond James. Please go ahead.

A couple of questions from me. So Allan, the FX in -- on the impact on the revenues in the quarter, do you have approximately how much it was?

It’s just a little bit above $1 million, if we look at Q3 compared to Q3 the year before.

And that was a tailwind, right?

That is a positive, yes.

Yes. Okay. And do you have an approximate organic growth in the quarter?

You know what? We don’t. We obviously run the business. We’ve integrated MacroPoint. We’ve integrated ShipRush and PCSTrac, which are the other businesses we bought this year. Overall, the business is performing as we would expect. We always expect a balance of internal growth and acquisitions to combine to that overall EBITDA growth, but we haven’t split it out, Steven.

But did you provide in your 10-Q -- I saw it, like you do provide some disclosures. And if I do the math, then I get about 4%. Does that sound about right?

That’s in the range, yes. That note that you’re talking to gives you an idea of what if we owned every business we bought from the beginning of the accounting period, so it’s not a perfect calculation. But roughly and looking at foreign exchange rates in that mid-single-digit rate is a fair range.

Okay. And how much would it have been if you excluded the U.S. Census? Would it add a couple of points?

It would add a little bit to it. Not a couple of points but would have added a little bit to your -- we’re obviously weathering that from last year. Yes, it would have added a little bit to the business as far as growth rate.

Okay. And this is the last quarter you have this unfavorable comparison, correct?

That is correct.

And the next question comes from Brian Essex from Morgan Stanley. Please go ahead.

Maybe, Ed, if I could ask. As we’ve seen, obviously, a tremendous Black Friday, Cyber Monday, and you’ve increasingly made investments to expose yourself to omni-channel delivery. And I think we’ve had a conversation before in terms of some in the supply chain seem to be a little bit challenged with their exposure. I mean, can you offer a little bit of color in terms of who you see, whether it’s on a 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, I -- without commenting on specific customers, you probably are just as I do as what retailers are doing better than others. This -- I mean, the results that you’re seeing and a lot of the things that led up to it because remember, all that stuff is sold in the store, shipped in our Q3. You can probably tell by the numbers, at a glance even, that our networks are humming right now. And it’s busy times for us. And it -- this is always a good time of year for us, but this year’s going great. When that stuff sells in the store, that means our shipping volumes are usually up, and we’re certainly seeing that, and you can probably see it in the results that we just submitted today. So it’s exciting times for us. So let’s hope it continues.

Are those in that supply chain? I mean, obviously, we know which retailers are doing poorly. But I mean, from a supply chain and partner perspective, are there some that are doing better, worse than others that you might have exposure to?

Well, I mean, the guys that are doing home delivery really had the big pickup in the last couple of years. And certainly, you see these volumes right now, anything that’s online shopping is getting shipped to the home, so you can probably guess who’s benefiting from that. For us, we’re exposed to some of the retailers in our running a scheduling business. But moreover, we’re exposed to just about every transportation provider in the world. And so no matter which retailer ends up winning, we usually end up doing well if the retailers in aggregate are selling a lot of stuff, and that’s what’s going on right now.

Okay. And then MacroPoint. Could you highlight maybe who the primary competitors are? I mean, are they going up against guys like Fleetmatics? Or is it a completely different ballpark in terms of their customer exposure and solution set that [indiscernible].

No, no. Fleetmatics is a partner. Fleetmatics is a partner. They’ll provide data along with every other guy that provides electronic logging device in a truck. There’s Fleetmatics and 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, wow, this is something that everyone needs, and it’s just getting started. Like just, they 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. And so 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 is going to end up at the DC. And most customers we walk into look at us and go, that’s fantastic. How do I get that? And so that’s exciting times for us.

Okay. And maybe last one, and I’ll hop back in. But 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 the 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 just 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 rate that they’re growing and still take advantage of those synergies. But 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 needed to keep adding more salespeople to go out and address the market opportunities that exist. So it’s a little different for us. And I think we said a couple of times on this call and the last one that we’re cautiously proceeding through this so as not to get in the way. And since the last call, I can tell you, once our sales reps start to get a hold of this, they’re looking at the MacroPoint guys and going, hey, I look at this long list of big retailers and manufacturers you want to get into. We do business with a lot of them already. So that’s becoming a real opportunity for us, for our sales guys to walk in and say, hey, do need this? Let me bring one of the MacroPoint guys in with me and we’ll tell you how you can benefit from that.

And the next question comes from Paul Treiber from RBC. Please go ahead.

I just wanted to focus on the trade content business. Now how’s the progress been in terms of cross-selling trade content into your existing customer base and then also the longer-term opportunity of expanding trade content to new sort of nontraditional markets?

Well, I know our existing customer base is going quite well. That was one of the reasons we bought into those spaces. Which is 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. And we’re certainly seeing the effects of that over the last few years. Beyond that, I think we’d look for that to continue and really try to continue expand those relationships with SAP and Oracle and NetSuite and try and drive our data content into every one of their sales processes, and on top of that, our network into their sales processes, right. They’re selling transportation management systems all day long, and we’d like our network to be behind those license sales on SAP or Oracle’s part. We’ve gotten a little more traction on that latter part of my comments there with SAP, but we’re making some progress with Oracle as well.

Okay. And then assuming on MacroPoint, and you mentioned earlier about the potential to cross-sell that into your install base. To what extent does the customer overlap between MacroPoint and your existing customer base?

Well, there’s some. I mean, they do business with a lot of trucking companies, a lot of third-party logistics providers that we also do business with. In some cases, we had bigger relationships with them. In some cases, MacroPoint 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, and we’d like to make sure that, over the next couple of years, we do both. On the retail and manufacturing side, when we bought MacroPoint, they were just getting started in that space. And we do business with thousands and thousands of manufacturers and retailers, most of whom make full truckload moves all over North America. And we saw that as a big opportunity. And I don’t know if that’s completely come to fruition yet, but it’s certainly getting started right now. I’m excited about what we’ve seen so far.

Okay. And then just lastly, just looking at baseline for revenues versus actuals this past quarter. It seems a little bit wider than typical, maybe around 109%. Is that attributable to MacroPoint? And then should we expect a similar GAAP going forward? Or do you think that should narrow over time?

Yes, Paul, I think what happened last quarter on the call, we mentioned that because we had just purchased MacroPoint, we had it for two weeks when we gave you a calibration last quarter, we were a little uncertain about that business and how it would play out. And so I think part of the result you’re seeing is a 9% growth from calibrator revenue is partly to do 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. So I don’t expect to see a GAAP like that as big. The quarter before that, we had a bigger GAAP that was heavily foreign exchange. So borrowing some of their acquisition or foreign exchange changes, I don’t expect to see a GAAP as big as -- on revenue that we had this quarter.

Maybe if you look back historically, you can see the GAAP over the last several years is probably more the norm.

And the next question comes from Phillip Huang from Barclays. Please go ahead.

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 kind of look at -- to think about that?

Well, if you recall, we bought the business. It was a -- essentially a breakeven. We’re profitable with the business. It does not approach our EBITDA margins. And as Ed referred to, we do believe with revenue growth over time, we will get it to the Descartes margins. But it is nicely double-digit positive but lots of work to do. And we will grow that business and get it up to our margins.

Okay. And in terms of timing -- I hate to kind of keep harping on the point, but do you think that, that’s doable buy, say, August 2018? Or...

Yes. Certainly, we have plans to do that within a year. It’s possible it takes a little longer. But subject to investments, subject to the growth rate, we certainly see it approaching our EBITDA ratios near that time frame or slightly beyond that.

Got it. And then on the M&A side, just wanted to get an update on your views on the opportunities for -- I know you guys talked about a lot of activities in the market. 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?

Pretty similar to what we’ve seen over the last year-or-so. The valuations on the large transformational style deals are oftentimes what we believe to be too expensive. We don’t mind paying good multiples for a good business. What we don’t like is having someone say to us, hey, I want a great multiple for a very average business, and the reason is because it’s bigger than the other ones we’ve looked at. And I kind of looked at that and say, that doesn’t really make sense to me. I don’t know why we would do that. So we try to remain prudent. We look at everything that becomes available in our space. On the larger side, we participate in whatever process we feel is appropriate, but we’re not willing to pull the trigger unless we think it’s going to meet our hurdle rates for our ability to pay the business off with a ROIC over a period of time that’s north of 15% or 16%, which is what we’re normally looking for. On the smaller tuck-in sides, 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 in and 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 drive its growth. Obviously, trending of sales and customer is 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?

Well, we’re integrating it into a number of our products. For example, our dock door scheduling product. I don’t know how familiar you are with that, but we basically provide a tool that lets 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. I mean, 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, and that’s exactly what MacroPoint tells you. So hey, 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. And you might wait till 6:00 and then finally give up. Well, there are 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. And so there’s things like that, that we’re doing. Integrations where we’re walking into some of our biggest customers and saying, much like Amazon says at the bottom of the page, people that bought this usually buy this, too. We’re walking in and saying the same thing to our customers. Hey, if you buy dock door scheduling from us, you really got to look at this MacroPoint thing. And 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. And so on that example you’ve just provided, it sounds like it serves that you -- so you invest upfront and then -- is this something that you can charge additionally? Or is it something that is all part of the contract that gets negotiated with this particular customer? Am I looking at it the right way?

In a case where a customer has dock door scheduling already, we’re charging them additionally. Nothing unfair, right. We’re charging them for the MacroPoint solution that they didn’t use to buy from us. We’re walking in and saying to them, hey, I can do this for you now. What if I could put these two things together, and then we’re charging them for part of the transaction to get all that MacroPoint data available to a dock door scheduling system. We’re -- you probably heard in our talks as we’ve gone around with you over the years, when we have good ideas, we try to get them out 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 wanted to buy 30 products from me. So 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.

And the next question comes from Matt Pfau from William Blair.

First one, I wanted to drill on the retail busy season a bit in context of MacroPoint and then some of the routing and telematics solutions that you have. So does that business slow down during this time so when you think about like ramping up the selling of MacroPoint, is it going to be sort of on-hold till next year? Or does it not really matter that a lot of those customers have their -- or at their spread peak seasons right now?

No. Funny enough, just the opposite, right. I mean, they’re in their peak season. We get paid by the transaction. This is a good time of the year for us. More people are moving more stuff right now in anticipation of the Christmas holiday season. And that ends up being good for Descartes, as you’ve seen in the past. It also ends up being good for MacroPoint.

Got it. And then I guess in terms of what you’re seeing on that side of the business too with retailers and how they’re handling more deliveries and then ecommerce being a larger portion of their business, are you seeing an expansion of private fleets? Or are more retailers sort of opting to outsource those to third parties? And I guess, from your perspective, does it really matter one way or the other in terms of the impact on your business?

Different impact. So if we’re routing people’s trucks and they need to buy more trucks to handle the Christmas holiday overflow. They’re usually leasing those trucks and adding them to our truck count when they’re purchasing our routing solutions. There are other situations where companies say, hey, I’ve got my own fleet. Say, I’ve got 1,000 trucks. I am going to handle the overflow using third-party carriers. That’s where MacroPoint benefits, right. Because if you take a big retailer and they say, I’ve got 1,000 trucks, and all of a sudden, I need, for 4 weeks, I need 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. And 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. And I guess, thinking back to prior acquisitions that you’ve had, a lot of times you kind of just leveraged the existing sales force and those relationships to push the product. So I guess, what’s different with MacroPoint that requires a higher investment in sales and maybe prior acquisitions that you’ve done?

The demand is significantly better. We’re hiring, we’re still hiring specific MacroPoint sales guys as we speak because there’s more people that want to buy it to address that. And that’s complicated by the fact that Descartes reps are now coming in and saying, hey, I’ve got a customer. You should come see as well. And it’s putting pressure on that sales force, and so we’re trying to expand that sales force at the same time, which, as you pointed out, is abnormal for us, right. Normal where we’re going, hey, maybe we can handle this more efficiently within our own sales force. And the MacroPoint case, it’s just, it’s growing faster than that. We think we will be stifling the business if we took the normal approach here. So that’s what you hear in our voices when we’re saying, hey, we’re, instead of doing our normal looking for synergies and trying to make sure that we integrate those business together, such that we get those synergies more quickly. In this case, we’re going, I don’t think that’s the best thing to do here. I think we should keep investing in this business and spend a little money now. Since our business is doing pretty well, it’s easy for us to spend a little extra money on it and in hopes that that’s going to pay off in spades in the future.

And your 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 that maybe accelerate growth from where they are today? And maybe what percentage of revenues you think of today as being partner-influenced?

Sure. So a number of partners over the years talk a lot about the big ones, SAP and Oracle. They certainly drive a lot of the growth in our partner pipeline over the last couple of years, and that just keeps getting better every quarter for us. If you’ve been on these calls for several years now, you heard us talking about SAP and Oracle being good ideas many years ago, good ideas that really weren’t generating a lot of revenue, well, now they are generating a lot of revenue, and I think that opportunity is going to continue to expand. And 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 part of some solution set that I’m trying to sell, help get my sale over the line. And we start to see that happen more and more. I mentioned earlier on the call, and I’ve probably done it in the last couple of calls, I mentioned that SAP is now reselling our GLN and recommending us to their customers in relation to their transportation management sales. That’s great news for us. It’s still early days in that relationship. But 5 years ago, it was early days in our trade content relationship with them, and now it’s expanded rapidly. It’s becoming a big part of our business. And I hope to tell you one day that the same is true for TMS in that same space, selling our Global Logistics Network. We’re making some progress with Oracle in that regard as well. And hopefully, sometime in the next couple years, we’ll be the in same position with them on a global logistics network that we are in with SAP. I would point out though that Oracle is probably coming along very quickly on their global trade management business. They were not nearly as big as SAP in the beginning, although they’re starting to catch up quick. So that’s exciting for us.

And our next question comes from David Hynes from Canaccord.

So curious. The success you’re seeing with MacroPoint, has that in any way changed kind of how you think about approaching the M&A landscape? And I guess, the real question is, does it make you any more willing to kind of take on future deals that fit more of the growth mold? Or should we expect you to kind of focus on that traditional EBITDA optimization plays that you’ve successfully executed in the past?

Well, if you see another MacroPoint come along, we’re interested. I don’t know that it changes our philosophy about it. We paid up for MacroPoint because we thought it was a fantastic business. If we saw another fantastic business, we’d probably do the same thing. What we’re not interested in doing is paying fantastic prices for okay businesses. And there’s a lot of temptation to do so, right. I mean, there’s a lot of bankers out there, a lot of private equity firms that are coming along going, hey, I’ve got this fantastic business, and I look at it and go, yes. That’s what you say, but that business is no MacroPoint. And so we’ve probably always been willing to pay up to buy something we thought was great. But everyone walks in the door and says what they’ve got is great. They say, I’ve got this piece of gold in my hand. Just pay me enough money and I’ll give it to you. And we’re very wary of those things. But certainly, you guys just saw on the MacroPoint case, when we see something that we think a really fantastic business, we’re willing to pay what we think it’s worth because we look and go, do the math downstream and go, hey, I think this could pay off for our shareholders with a really great return on investment over the next 10 years-or-so, and I think we should do that. But just the same, if someone’s coming in with something that we have our doubts about, we haven’t changed our philosophy at all about it.

Yes. Okay, that make sense. I’m sure the Canaccord folks only show you awesome businesses.

Thank you, yes. Right.

Yes, right. And then in the past, I think you’ve alluded to some internal or organic data initiatives. Obviously, the sets of data that you have access to are now getting better and better with MacroPoint in some of the previous acquisitions. Can just talk about kind of progress on that front? Where those organic efforts are focused? How you can 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? And which businesses [indiscernible].

Well, just kind of -- I think you’ve talked in the past about having internal teams focused on building organic kind of data-oriented products.

Yes. Yes, so for instance -- yes, just for -- I mentioned the one with MacroPoint and our dock door scheduling business a minute ago. There’s another one I mentioned in the last call in our data content business, where we looked at our network and said, hey, most of the data that goes over our network is private, but we might be able to aggregate some of it and share with our customers not customer-specific information but aggregated information that would make that trade content business more valuable to them. And I mentioned that on the last call and said we’re working on it. We’re actually going to have a new version of our product coming out here this quarter that we’ll 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 there 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, and we think we can grow a lot faster doing it that way than trying to start -- incubate some of these things from scratch. There’s a reason we do these tuck-in acquisitions because if we bought 10 tuck-ins in the last four or five years that we thought were good businesses, there were probably 40 businesses that’s got started that we didn’t buy, that got whittled down to 10 that we were real interested in. And that’s a nice way of saying it’s -- it can be painful living on the bleeding edge. And we are reluctant to do that in our own business, right. We’re trying to run stuff profitably and we take chances, but they’re not gigantic chances. And so the product development, you’ll see us work on is stuff where we’re pretty certain, like the doctor rescheduling thing, 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. And I don’t think I’m going to have to work very hard to get them to do it. I think I’m going to have to tell them about it and show it to them, and they’re going to go, yes, that’s great. How do I get that? That’s the kind of investments that we like to make. Otherwise, we’re buying small companies, going, hey, look, 10 of you start out trying to do something. I’d like to buy the one that succeeds. And that takes the risk off the table for us and for our shareholders.

And our last quarter comes from Ruben Sahakyan from GMP Securities.

Just quickly going back to MacroPoint. Are you seeing accelerating growth in revenue from being part of Descartes network?

Yes. Sure. And it’s early days yet still. 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 have that MacroPoint wanted to meet but hadn’t met yet, and our sales guys going, oh, I can bring you into that customer. I can bring you into this customer, and let’s go in and tell the story together. I think that’s going to come to bear in the next 12 months in spades, but today, it’s -- I see the early steps going on right now that I think are going to lead to significant revenue growth in the future.

Great. That’s helpful. And more of a sort of a high-level question. Descartes has previously been benefiting from themes like the e-commerce, security, data, the trade data. Are you seeing any emerging pillars of growth that would lead to long-term growth opportunity for Descartes?

Well, within the ones that we’re in, we see lots of opportunity, right. I mean, we see more opportunity in trade content space. We see more opportunity in the network workspace. 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. And 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. But in the meantime, just know that in the pillars that we’re already in, we see a lot of opportunity. And if we decide that there’s going to be a new pilar that we’re going to get into, it’s 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. Just remember, this is a competitive space, and it’s public call, so it’s probably something that we’re not going to preannounce.

We have no further questions at this time. I’ll turn the call back over for final remarks

Great. Guys, thanks for your time today. We look forward to reporting back to you next quarter on our Q4 results. And in the meantime, if you have customers, investors that want to see us, please reach out, and we’ll be happy to go try and see them with you. Thanks. Have a great day.

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating, and you may now disconnect.