The Descartes Systems Group Inc. (DSGX) Q4 2019 Earnings Report, Transcript and Summary

Welcome to the quarterly results call. My name is Adrienne, and I'll be your operator for today's call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note this conference is being recorded. I'll now turn the call over to Scott Pagan. Scott Pagan, you may begin.

Thanks, and good afternoon, everyone. Joining me on the call today are Ed Ryan, CEO; and Allan Brett, CFO. I trust that everyone has received a copy of our financial results press release that was issued earlier today. Portions of today's call, other than historical performance, include statements of forward-looking information within the meaning of applicable securities laws. These statements are made under the Safe Harbor provisions of those laws. These forward-looking statements include statements related to Descartes' operating performance, financial results and conditions; Descartes' gross margins and any growth in those gross margins; cash flow and use of cash; business outlook; baseline revenues, baseline operating expenses and baseline calibration; anticipated and potential revenue losses and gains; anticipated recognition and expensing of specific revenues and expenses; potential acquisitions and acquisition strategy; cost reduction and integration initiatives; and other matters that may constitute forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties, assumptions and other factors that may cause the actual results, performance or achievements of Descartes to differ materially from the anticipated results, performance or achievements implied by such forward-looking statements. These factors are outlined in the press release and in the section entitled Certain Factors That May Affect Future Results in documents filed and furnished with the SEC, the OSC and other securities commissions across Canada, including our 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 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.

Great. Thanks Scott. Good afternoon everyone and welcome to the call. Thank you for joining us today. As you'll see from our results, we had another great quarter to finish off another great year here at Descartes. Our organic business continues to grow fueled by the volumes on our Global Logistics Network and we continue to supplement that organic growth with strategic acquisitions that add more content, trading partners, and solutions to the Global Logistics Network. Every day, we have new customers joining the community, while existing customers continue to increase their use of our expanding solution sets. Changes in the regulatory trade landscape and increasing customer buying expectations continued to create complexity for logistics operations and supply chains around the world. But where there's complexity, we also believe there is opportunity. We believe that in order to take advantage of these opportunities and grow through this complexity, our customers need to be connected to their trading partners and they need to collaborate and have access to timely information from a wide variety of sources. Logistics remains a multi-party, multi-process challenge, and one that we believe is best solved with a multimodal network that connects all constituents of the supply chain to make it compelling for parties to connect to a network and share information. We continue to believe that it's critical to have all applications, data content for all the parties involved in a shipment. And we believe that our focus on having one place for all parties in the supply chain: shippers, carriers, logistics intermediaries, and government agencies to collaborate and manage the complete lifecycle of shipments has been a key enabler to our growth. This is something we've been working on for a long time, so we already have a well-rounded set of solutions for these constituents, but there's more we can do. That's reflected in our continued investment strategy. In FY'19, we added three new businesses to the Global Logistics Network, each serving a different constituent in the logistics landscape. And we also announced the fourth acquisition, Visual Compliance that was completed in February, enhancing our global trade data content footprint. On today's call, I'll do a quick recap of these investments, and then Allan will provide a detailed overview of our quarterly and annual financial results. I'll then finish up the call by talking about our calibration for Q1 and our operating plans for fiscal 2020. But first, let's start by going over some of the key financial highlights for the fourth quarter of fiscal 2019. We had another great quarter of operating results, and we're very happy with our key metrics fueled by our strong organic results and our ability to successfully integrate acquisitions. Our adjusted EBITDA continued to grow nicely. For the quarter, we generated $25 million in adjusted EBITDA, an increase of 17% over Q4 of last year. Revenue for the quarter was up 12% from Q4 of last year coming in at $71 million. We continued to convert our EBITDA into cash generating a record $21.8 million of cash in the quarter and consistent with our long-term operating plans. We've been investing cash back into our business through focused R&D investments and by combining with complementary businesses. All-in-all, another great quarter here at Descartes to cap off another great year. We have a stable cash generating business, and we're well-positioned to continue our growth. So, with that, let's talk about some of the investments we made in fiscal '19 and how we believe those investments will help us build our network for shippers, carriers, and logistics intermediaries to connect to and collaborate with each other so they can move goods efficiently and securely. Throughout the year, we continued to invest in our business organically with more than 17% of our revenues reinvested into research and development. Many of those investments will be showcased at our upcoming User Group here in a few weeks and we hope to see some of you there. But as with previous years, we've supplemented those organic investments by combining with some new businesses, three in total with the fourth announced at the end of the year. Our first acquisition in FY'19 was Aljex. Aljex provides back-office transportation management solutions for logistics intermediaries with a focus on the freight forwarder community in North America. Essentially, they help customers manage shipments for order creation through execution including real-time tracking on our MacroPoint network. Since the acquisition, we continue to add new freight broker customers to the business, and we're also helping some shippers that are setting up their own internal freight brokerage operations to maximize the use of their trucks. We've also strengthened the integration between Aljex and our MacroPoint Solutions resulting in many more Aljex customers tracking their shipments on the network. Furthermore, the Aljex community has been very receptive to our MacroPoint capacity matching solution, and we now have a number of Aljex customers live in our capacity co-op. We've seen a lot of synergy between those two businesses which is driving strong growth and we expect that growth to continue. More generally, while we're on the topic of MacroPoint capacity matching, I'm happy to report that Q4 is another strong quarter of growth from a wider MacroPoint business. Some of this growth is coming from the synergies we just talked about with Aljex and the freight broker community, but we're also seeing an increasing number of opportunities on the shipper side for MacroPoint. Looking ahead, we feel that the shipper opportunity and the capacity matching opportunity will continue to drive growth for the overall MacroPoint business. So, let's take a look at the second acquisition of fiscal '19, a company called Velocity Mail. While Aljex was focused on the logistics intermediary segment of the market, Velocity Mail is focused on carriers. Using Velocity Mail's network, global air carriers leverage mobile devices to accurately track postal shipments and deliveries in real time. All carriers need to have access to timely and reliable information about the movement of mail and partial shipments to operate efficiently and meet postal authority service Level agreements. Velocity Mail automates the entire shipment process from route generation to accounting reconciliation, simplifying operational processes for the air carriers, ground handlers and postal authorities. With more than 60% of cross-border e-commerce transactions shipped using postal providers, the growth of e-commerce has fueled an increase in the market for velocity Mail solutions, and the business continues to grow nicely. Velocity Mail's network operates with similar fundamentals to our network. It helps parties connect and share information, while value-added business application that are part of the network leverage that information to increase efficiencies and improve decision-making. When you think of this acquisition in the context of our overall strategy, it is another example of us building out our solutions for the wider community. In this case, connecting air carriers, many of which are existing customers to postal authorities and helping them leverage and share information to move another type of good compliantly and efficiently, but also investing consistent with trends in the market that our customers are increasingly dealing with. In this case, e-commerce moves by postal authorities around the world. And by combining with Velocity Mail solutions with the Descartes global air messaging gateway, air carriers now have one platform to manage the lifecycle of all shipments both e-commerce focused mail and partial shipments including larger freight shipments. We're really excited about the opportunities we're seeing as we bring these things together for our air carrier customers and their partners, and we believe it will lead to larger growth opportunities as a combined business. Our third acquisition of FY'19 was PinPoint, the leading provider of fleet tracking and mobile workforce solutions based in Canada. This acquisition was focused primarily on our community of customers that operate their own fleet of vehicles and/or manage a dedicated fleet of vehicles. Typically these would fall into the category of shippers such as retailers, manufacturers and distributors. But it can also include business service providers and trucking companies. PinPoint helps their customers collect real-time location information on trucks and mobile workers with the help of Geotab telematics solutions and SkyBitz asset tracking solutions. This information can then be used by technology solutions like [Technical Difficulty] to drive fleet and mobile resource productivity, manage driver performance and comply with government regulations. The market for these solutions continues to grow with market demand stemming from two main sources. First end customers increasingly want to access real-time information on the location of vehicles, and two, new government regulations around driver hours, services are coming into effect. For instance, the electronic logging device or ELD mandate in the U.S. has driven increased adoption of telematics solutions in both the U.S. and Canada over the last few years and we expect further tailwinds for this market particularly in Canada. As the Canadian government file suit. Since the acquisition, we see the number of opportunities created to solve further Descartes solutions into the PinPoint customer base and we're benefiting from having more scale and domain expertise in this area of our business. As you can see each of the acquisitions in FY'19 was focused on a different customer segment helping us build our solutions on the Global Logistics Network, for logistics intermediaries, carriers and shippers. Toward the end of the fiscal year, we also announced another acquisition that was closed on February 12, a company called Visual Compliance. Visual Compliance is now a part of our global trade content offering. The business provides software solutions content and services to automate customs, trade and fiscal compliance processes with a focus on denied and restricted party screening processes and export licensing. Visual Compliance is based in Canada and serves over 2000 customers with over 67,500 subscribers operating in over 100 countries. The acquisition follows our other recent investments and trade content including Data Mine, Customs Info and MK Data, a business that was also focused on Denied Party Screening. As we're all seeing the news every day, global trade has become even more complex with new trade agreements, trade disagreements and ongoing geopolitical activity resulting in increased levels of sanctions and enforcement. Denied and sanctioned party screening has become a critical must have companies for every business dealing they have whether it'd be for shipment of products abroad or relationships with new and existing customers, partners, suppliers and employees. We anticipate the future may include regulatory mandates on certain businesses to conduct these types of screening activities. In the meantime, those that don't have some sort of screening solution in place put themselves at risk. We're seeing demand for more screening services from our direct customer base with businesses stepping up their compliance activities in the face of increased enforcement. Demand from our partners in this space remains strong too as we support our own partners in the global trade management space like SAP and Oracle. We continue to see demand for more and more detailed screening data that captures the myriad of relationships and commodity shipments, multinational companies can find themselves in. Like Descartes, Visual Compliance is an existing partner of both SAP and Oracle and we think the combination will give us more firepower to support our partner community. It's only been a few weeks since we closed the deal, but since then I'm happy to report that we've had a great start to the integration with domain experts from both Descartes and Visual Compliance already mapping out how we can leverage each other's respective strengths to better serve our combined community. I'd like to take a minute to welcome to Visual Compliance customers, partners and employees to Descartes and our Global Logistics Network. Before handing the call over to Allan to talk a bit more about the financials, I'd like to thank some people that continue to contribute to the strength of our business. So thanks to our employees for all the hard work they put in to make sure our customers get results. Our customers continue to get results and that's why we have a successful business. Thank you to our customers, who continue to place confidence in Descartes at their network of choice whether you're a shipper, logistics, intermediary, carrier or even a government agency thanks for connecting and helping our community grow. Thank you to our partners for helping us continue to expand our ecosystem. And thank you to our shareholders for continuing to have confidence in Descartes. And with that, I'll hand the call over to Allan.

Okay. Thanks Ed. As I indicated, I'm going to take you through our financial highlights for the fourth quarter and our year ended January 31, 2019. As Ed mentioned, we are pleased to report record quarterly revenue of $71.0 million this quarter up 12% from revenue of $63.6 million in the fourth quarter of last year. Service revenue can remain strong coming in at $62.9 million or 89% of revenue up 14% from $55.0 million or 86% of revenue in the fourth quarter last year. Gross margin also continued to be very strong coming in at 73% of revenue for the fourth quarter consistent with the fourth quarter of last year. We produced adjusted EBITDA growth of 17% to $25.0 million or 35.2% of revenue in the fourth quarter compared to $21.4 million or 33.6% of revenue in the same quarter last year. As a result, as a percentage of revenue adjusted EBITDA has improved nicely from the same period last year as a result of the strong revenue growth as well as our continued cost control and operating efficiency. As a result of these solid operating results cash flow from operations came in at $21.8 million or 87% of adjusted EBITDA in the fourth quarter up 11% from $19.6 million in the fourth quarter of last year. Other charges of $1.5 million were recorded in the income statement during the fourth quarter primarily as we incurred additional expense on increasing the initial estimate of the earn out payment expected on a past acquisition. As a result of the previously mentioned items, GAAP net income came in at $7.9 million or $0.10 per diluted common share in the fourth quarter, which was an increase from $6.7 million or $0.09 per diluted common share in the fourth quarter last year. If we look at the results of operations for the year. Revenue came in at $275.2 million for the fiscal 2019 up 16% from revenues of $237.4 million in fiscal 2018. Gross margin was 73% for the year, consistent with last year. Adjusted EBITDA for the year was $93.9 million or 34.1% of revenue compared to $80.8 million or 34.0% of revenue for fiscal 2018, an increase of 16%. Cash flow from operations was solid at $78.1 million or 83% of adjusted EBITDA this year compared to $72.1 million or 89% of adjusted EBITDA last year. We should note that we continue to expect cash flow from operations to come in a range between 80% and 90% of adjusted EBITDA subject to quarterly fluctuations. Our tax rate for the year came in at 20.8% down slightly from 22.7% last year. As a result, GAAP net income for fiscal 2019 came in at $33.3 million or $0.40 per diluted common share up from $26.9 million or $0.35 per diluted common share in fiscal 2018. This represents a 16% increase. As Ex has already mentioned, we are really pleased with these continued strong operating results as we closed out our 2019 year. If we turn our attention to the balance sheet, we ended the year with cash balance of $27.3 million while we had drawn $25.5 million on our credit facility at the end of the year. As a result, we ended the year with a very small positive net cash position of $1.8 million. During the fourth quarter, we are able to repay approximately $25 million on our offering facility. Also, as previously mentioned late in the fourth quarter, we amended our credit facility to increase it to U.S.$350 million and then just subsequent to year-end, we drew an additional CAD$318 million or approximately U.S.$240 million to complete the Visual Compliance acquisition, we did that on February 12. So as a result, as on February 12, we had approximately $265 million drawn on our credit facility leaving us approximately $85 million of additional borrowing capacity. We continue to believe that with this undrawn balance on our credit facility along with our current cash balances, our ability to expand the credit facility by an additional $150 million as well as the expectation of continued cash flow from operations. We remain very well capitalized and ready to execute on our business plan, which could include additional acquisitions as we continue to explore them. As we look forward to fiscal 2020, we round out our financial picture, we should note the following; at this point, we see a small negative impact on revenue from foreign exchange in the first quarter and as always, we continue to be fairly naturally hedged. So, we don't expect any impact -- any material impact on foreign exchange to our adjusted EBITDA or our operating cash flows at this time. Beginning this year, we will adopt the new lease standard ASC 842 under U.S. GAAP. We currently expect that there will be an increase in lease liabilities and a right to use lease asset of approximately $11 million on our balance sheet in the first quarter. However, we do not expect any material impact on the income statement or cash flow statements from the adoption of this new accounting standard. As I mentioned earlier, our tax rate was 20.8% for the year in fiscal 2019 and going forward, we would expect that it will be in the range of 23% to 26% of pre-tax income closer to our statutory tax rate of 26%. As always, our tax rate may be impacted quarter-to-quarter by any unusual or onetime adjustments in any of our international operations. After spending $5.2 million on capital assets in fiscal 2019, we expect to incur approximately $6 million to $8 million in additional capital expenditures this year. And these expenses are expected to continue to be primarily focused on investments in our network including in the area of cybersecurity. We currently expect the amortization expense will come at approximately $39 million for fiscal 2020, with this figure being inclusive of the estimated impact of the Visual Compliance acquisition, but also subject to adjustment for FX changes as well as the completion of any other additional acquisitions. And finally, we expect stock-based compensation will be in the range of $2.8 million to $3 million in the coming year. So with that, I'll turn it back over to Ed, who will provide our calibration for Q1 and to wrap up.

Great. Thanks, Allan. So, calibration for Q1. Similar to previous quarters we don't provide guidance, but we use our baseline calibration of the key metric relating to the ongoing health and strength of our business. Our calibration for Q1 assumes the following exchange rates of CAD$0.75, €1.13 to U.S. dollar and £1.34 to U.S. dollar. Our calibration for Q1 is $74 million in visible recurring contracted revenues otherwise known as our baseline revenues. We typically see a negative seasonality impact as we transition from Q4 to Q1. On the flip side, the addition of Visual Compliance from February 12 positively impacts the calibration. Our base line operating expenses are $51.8 million. This gives us a baseline calibration of $22.2 million for adjusted EBITDA for Q1. Some other key points related to how we're positioned for fiscal 2020. We have a solid financial footing. We have a healthy business that's well calibrated and as Allan mentioned following the increase in our debt facility and the borrowings for Visual Compliance acquisition, we still have a very healthy balance sheet. We are profitable and cash generating, we have low capital needs within our organic business. And as you've seen from our recent historical financial results, we have solid growth in our organic business. Our primary uses of capital are for continued use in acquisitions, we've completed 42 acquisitions since 2006 and we have access to additional capital capacity should we need it. Allan mentioned that we have about $265 million drawn on our line of credit out of $350 million following the Visual Compliance acquisition leaving $85 million in capital capacity available immediately. And we have the ability to expand that line of credit to around $500 million if needed. We also have filed a preliminary shelf prospective for up to $750 million, if capital was needed to be raised using other mechanisms. We have a strong acquisition pipeline that continues to be a lot of industry activity right now with the consolidation continuing in our market with our 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'll review everything as it comes our way, we're not buyers for buyer sake. But our recent acquisition of Visual Compliance does not change our willingness to do them. In fact, if we have an acquisition line of credit and a shelf filing in place doesn't change how we view acquisitions. We intend to continue to be prudent on valuation, but we're confident in our ability to deploy capital effectively. Looking ahead to fiscal 2020, we've completed our planning process as we do every year around this time. As we said in the past, our belief for sustainable growth in the long-term is 10% to 15% growth in adjusted EBITDA. However, given the scale of the Visual Compliance acquisition for fiscal 2020, we are planning for a growth rate of adjusted EBITDA in the mid to high 20s. 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 are not incremental to this plan. We intend to continue to focus on recurring revenue and deemphasize onetime license sales, our planned operating margin remains 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. The time is almost upon us for Descartes Evolution 2019, our user conference is less than three weeks away. If you haven't booked your tickets yet, I encourage you to do so as soon as possible. The event provides a great opportunity to see our business work from products to customers to partners to Descartes team members. You can even meet some of the new team members from the acquisitions I spoke to earlier. And to several one on this call, I've been to the event in the past and I hope that you found it worthwhile. Registration is open on our Web site and we're planning to make this the biggest one yet. So, get yourself registered and come down and learn more about what we do. The conference this year will be held at the Naples Grande Beach Resort in Florida, Tuesday, March 26 to Thursday, March 28. And finally, as always, we'll continue to make ourselves available to shareholders to answer any questions. We believe 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 operator let's open the call up to questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Phillip Huang from Barclays. Your line is open.

Hi. Good afternoon guys. Maybe I'll just start with MacroPoint. I was wondering if you might be able to give us an update on the size of MacroPoint. I think you guys alluded in the past not too long ago that you always have doubled the revenue since you acquired it and certainly we've seen some very strong organic growth. Just wondering, if you could provide an update on MacroPoint.

Well, it continues to perform very well. It's a great business. We think there's a real opportunity ahead of us in a capacity matching business as well. That's early days there, but we're very excited about the ramp that we're seeing in that business, and I hope to continue the growth rates that we've seen over the past year and a half since we've owned the business. It's one of the best we've ever bought.

Yes. That sounds encouraging. On the backhaul opportunity, I was wondering if you might be able to elaborate a little bit on the adoption so far, especially the number of customers you have on the pilot, how has that been progressing?

I think we're up at around 30 right now, and maybe -- these are all small numbers, but the revenue in it may be doubled since we talked about it last monthly run rate. So, we're excited about it. Still early days, not a lot of money, you are not going to notice in our financial results anytime soon, but we're very encouraged with the reports we're hearing back from customers about how it's working for them. We're encouraged that they are all signing up when they go through these pilots that we've opened up, and they get out of pilot and they immediately sign up to the customer. And that in that process, they're all agreeing to share all of the driveway information across our entire network which is as I mentioned a couple of quarters ago was one of the initial hurdles that we were concerned about. They all seem to be able to get over that. I think, furthermore, a lot of the people that think they're going to address this space are coming at it from a different perspective than we are. We're very focused on helping our freight broker customers, take advantage of the ability to match capacity. I think most of the other players in the market have taken a much different approach to that and they are going out trying to disintermediate this entire market. I don't believe in that strategy. I don't think our company believes in that strategy. You can see in our relations with the global freight forwarders and some of the people that we've dealt with internationally we've never taken that approach. We're always working in concert with the intermediaries to help them solve a broader problem here, and we believe that's the right way to do it. And I think the playing field over the years that I've been in this business is littered with a bunch of technology companies that oversimplify the problem and come in and say they're going to disintermediate everyone in this business and they all fail, and I think I'm watching that again in this freight brokerage community.

That's very helpful. And maybe a last for me just on the M&A side, it appears that some of the larger deals -- recent larger deals like MacroPoint and Visual Compliance, revenue synergies seem to be becoming a bigger driver of the strategic rationale relative to just sort of cost synergies, and that's certainly reflected in your stronger organic growth and also the multiples paid. So, when you look at your pipeline, are you finding more attractive opportunities that offer greater revenue synergies versus just opportunities are mainly driven by cost -- on the cost side? Thanks.

We see both. Yes. Thanks Phil. We see both as we have for a long time. You probably heard us talk in the past about the last five or six years with private equity coming in what we perceive to be over aggressively coming into this space and spending money because they have a lot of money to spend, and they have to put it to use if they don't get their management fees. So, they're in spending what we were perceived to be wildly, and when we look out there and see stuff for sale, we haven't been in this market for most of our lives. We kind of look and say hey let's -- if we're going to have to pay up for an asset, let's make sure we get a good one. All right. I'm happy to pay you a reasonable amount of money for something that I think is a great business and we're happy to do that. What I'm not happy to do is pay a lot of money for something that's an average business, and what we're competing against these firms when we see something that's great, we see something we think it's going to be a good fit on our network. We do the math and say, hey, we think we can make this work out and we're willing to pay for those businesses. Same focus though how are we going to get our money back? Same focus we've always had on stuff. Maybe a different way to get there, right. When you buy something that needs to be cleaned up quite a bit, you pay a lower amount for it. You pay a lower multiple for it, but then you have a lot of work to do to fix it up and that could be a distraction from other things in your business. We're well aware of having done that a bunch of times. When we see something that's great and we see something that's growing and we think it's a great fit on our network, we think we should be the buyer for this business and can best take advantage of it. As you've seen with the MacroPoint example, and the Visual Compliance, example, we go after it and we think given our experience in the market we have a better chance of being right in a private equity firm that might have been in this market for two or three months versus 20 or 30 years.

That's helpful. Thanks Ed.

Thanks Phil.

And our next question comes from Paul Steep [Scotia Capital]. Your line is open.

Great. Thanks. Ed, could you talk a little bit, we've seen huge change or what's the industry noise around the Amazon coming in the space with ADS. I'd like to get your take on -- on that and more importantly how you're going to help clients and maybe prep us a little bit what will come at the conference to deal with some of those changes in the market. Thanks.

Well, they are big customer of ours too. So, we help them as well. I don't know how far they're going to go in this, I read the same reports that you do. I think there's some challenges for them ahead in it. A lot of people they might compete with would never use them as a transportation provider. And I think, if they really want to be a common carrier of sorts right that services everyone, there's going to be a large chunk of the market that's going to refuse to do business with them. Now I think for their shipments or shipments that from sellers on their platform, I think they're a very logical choice to do that. But, at the same time seeing in the parcel market, you've seen a lot of people go up to try and compete with FedEx and UPS over the years. Most of them have failed. And if you think about what Amazon is doing, it's really aimed at small package and maybe a little bit of air. And I think that probably going to be a long ways away from being able to deliver to every home in the market. But, I'm watching the same way as you are to see, how far do they go in this. I don't know where they stop. We do help our customers and always have help our customers compete with whoever they're competing with whether it's Amazon or any other transportation provider out there. So, I'm watching along, they're also a good customer of ours, so I'm happy for their success and we'll see what happens.

That's great. Maybe the other area that relates to it Ed is just talking a little bit about the omni-channel and home delivery some of the work you've done there you bought a number of assets over the last few years. Talk about how that's sort of come together and maybe even the size of that overall piece of the pie within Descartes. Thanks guys.

Thanks Paul. Yes. It continues to be a great business for us. The Best Buys and Home Depots of the world were the tip of the iceberg for us. We continue to have a name brand wins out there and in our home delivery space. We think we have the best solution on the market. For that we kind of invented the process of having a customer be able to select a delivery time on the Web site and use that to more efficiently wrap trucks in the coming days. And we continue to enhance that product to meet the demands of our customers as they think of new ways that they want to make these deliveries and interact with their customers on the Web site or in a store. And all the while knowing that if they're using our solution that they're going to ride their trucks more efficiently than if they weren't. So, I think that's going to continue for a long time. I think more and more companies are seeing how they might take advantage of this non-stop optimization or dynamic optimization tool set that we have and integrating that into customer interaction that sits on their Web site is the space we invented and we continue to enhance that with more and more capabilities that drive for customer to hopefully say, hey, I really like this Web site, it's really convenient booking with these you guys and we look forward to doing more of that for our customers.

Thank you.

Thanks Paul.

Next question comes from Deepak Kaushal from GMP Securities. Your line is open.

Thank you. Hey good evening guys. Thanks for taking my questions. Ed maybe more of a longer term, a bigger picture question. Your strategic model for the last 10 to 15 years, if I can paraphrase reinvest all the cash flow back into the business or into acquisitions driven by customer needs to drive more value for them. So, how could this or should this change over the next 10 to 15 years going forward as you guys get larger. Do you see -- how do you see Descartes evolving here?

Well, I think we hope to do more the same. I mean we think the model that we have is the right one. We tell everyone 10% to 15% growth. We do our best to be 15 every year. We've done that for 10 to 12 years in a row now. And we do that through a combination of organic and inorganic activities. We keep getting better at finding and buying and integrating companies. And you see us with the capability over the last couple of years to do bigger and bigger deals. I think you'll see more of the same from that. I like the strategy, it's one that's worked for a long time. It's a fairly generic one right [indiscernible] lots of flexibility within that strategy to buy different types of companies. You've seen us maybe change the mix of that to buying maybe higher quality assets in the last couple of years from time to time. So I think -- at a high level, I think you're going see us do a lot of the same going forward. We believe in that strategy. What kind of companies we buy in there and what they're focused on that may change over time as we see things in the market. For example, e-commerce over the last five years has been a big focus of ours. We see that market is expanding rapidly, you see a lot of the acquisitions we've done, our aim to take advantage of that. That may not be the case forever. There'll be another e-commerce that comes along in the future, I don't have a crystal ball to know what they all are. But when they do I want to take all the expertise that we have in understanding the supply chain and logistics technology markets and put it to use to make sure we make the best decisions. But the combination of inorganic and organic growth trying to grow 10% to 15% a year, which I kind of perceive as growing at a healthy pace. I think that's going to continue for a long time.

Okay. So, it doesn't sound like in the next 5, 10 years, you'll be limited by size, but does the size necessitate managing the business differently and how do you think about that and how that might change?

It's obviously at a detailed level going to -- you already have without probably making it obvious on this call would change the way we run this business 3x or 4x over the last 10 years as we've grown. But I think those are all things lessons learned. We look at our business and go hey it's getting bigger whether we should manage it a little differently now. As we continue to get bigger, I think you could see us continue to make those adjustments over time. But we have a management team here that's very open to doing that and we're not stuck in an hour and are needing too much in terms of how we operate the business. But I do think there's a lot of value, we perceive a lot of value in integrating these businesses together to make them one business. And I know this company is out there to disagree with that and they operate in a whole different way, but we've seen that we can operate businesses very profitably and go out to our customer base with the very complete integrated solution and we think that's the best way to do that. And I think you'll see us do that for a long time to come.

Okay. Thank you. I appreciate the answer. I do have a follow up for Allan. I know you mentioned amortization of intangibles. I think you said $38.8 million in 2020 that includes Visual Compliance. I would've thought Visual Compliance would have increased that versus fiscal '19. What's the other offset here, is that goodwill or assets or tangible assets?

No. There's other intangibles from past acquisitions that drop over time. And keep in mind at this point, the Visual Compliance number we're giving is very much an estimate simply that we don't have -- all the accounting work is done, but that is our estimate for the coming year inclusive of that number or that acquisition.

Okay. Great. Okay. Thank you. That's it for me. I'll pass along. Have a good evening.

Hey, thanks, Deepak.

The next question is from Paul Treiber from RBC Capital Markets. Your line is open.

Thanks very much. I guess in regard go -- can speak about international for a moment. You mentioned several of the recent acquisitions like PinPoint, Velocity Mail [Technical Difficulty] last year. What's the international opportunity or the opportunity to take those businesses which are predominantly North America into other markets?

Well, Velocity Mail is an international business. That already is international we hope to continue to expand that internationally because we do business at just about every cargo carrying air carrier in the world. And Velocity Mail only had some of them. So, as we go around and talk to our customers about some of the new solutions we've added to the network that's certainly high on the list when we're talking to air carriers. PinPoint to some extent it's U.S.-Canada primarily focused. There's different telematics issues over in Europe. So, I don't know if you'll see us moving that to Europe as quickly or to Asia as quickly. But more over other parts of our business, a decent chunk of our business is focused internationally. The other one that comes to mind is MacroPoint where we're cautiously starting to move over to Europe focusing initially on English speaking countries and looking for opportunities to bring that MacroPoint solution over there because it's largely non-existent in the European area at the moment.

Just in regards to MacroPoint in Europe, I think you mentioned it in the past. What are the constraints to the ramping up over in Europe?

Data privacy issues over there that are a big issue. We're tracking a driver based on the position of a cell phone. That's a potentially personal privacy issue. So you have to figure out ways to get around that and each of the countries to comply with the rules. You have languages issues and you have some issues with the way drivers work in different countries. They're not all set up the same way North America's, it's a high percentage of freight workers over here. That's not necessarily the case across Europe. There is larger trucking companies. There's less independent owner-operator. So, this may maybe a different way of doing things over there that we have to take into account as we start to bring the service over there. And I don't want to rush it over there and not do a good job of it. We've a pretty good reputation globally with a lot of the big air carriers, ocean carriers, trucking companies and rail carriers and I don't want to put any of that in jeopardy by rushing something out over there. So, we're going country by country and trying to -- customer by customer and trying to find ways to bring it to Europe and do a good job of it.

And then, just on the long-term margin outlook of 32% to 37%. I think that that Visual Compliance is above that, will be accretive to your margins. With Visual Compliance, do you see the greater ability to reinvest back in your business, or do you see margins beginning to trend up over time with that in your model now?

Yes. I think for -- as that indicated we've maintained that operating ratios 32% to 37% for now. We've only had the Visual Compliance business for three weeks. So, we want to take time and look at that business and see how it fully integrates. We always invest in our business that is part of our business plan, and then drives the 10% to 15% long-term growth that we're looking for. But we'll continue to watch where the margins go to. You can see it in our calibration we've put Visual Compliance into our calibration. You can see an improvement in the calibrated adjusted EBITDA margins. But, we'll continue to update you guys as we operate this business and we get more comfortable quarter-by-quarter.

And then, Allan, just one last one, just on Q1 based on -- could you, is that inclusive of the new lease accounting?

It is. But as I mentioned, the lease accounting, the new pronouncement or new accounting rules for leases, they're not expected to have a material impact at all on our income statement or our cash flow. It's really a balance sheet issue. So, it is inclusive, but there's not a big impact from it.

Okay. Thanks for taking my questions.

Okay. Thanks Paul.

And the next question comes from Stephanie Price of CIBC. Your line is open.

Good afternoon.

Hi, Stephanie. How are you?

Hey, I'm good. Can you talk a bit about the Salesforce integration with Visual Compliance and whether you're going to be keeping both sales team and the cross training of Visual Compliance sales on other GLN products?

Yes. I think for the moment we're staying, keeping that data content team focused on data content. I think it's a great addition to have our MK Data Service focus sales people, Customs Info focus sales people now have the addition of a whole bunch of other Visual Compliance sales people that also know the space very well. We're cross training them across all of those data content products Data Mine and Customs Info, MK Data and Visual Compliance we're doing that across that whole sales force. We also have our mainline sales force itself to all the big retailers, manufacturers and logistics intermediaries trained on those products, and then, bringing those sales reps in that focus on Visual Compliance or Customs Info or MK Data on a case by case basis as they uncover opportunities in their broader market. And that's what we're focused on right now. The questions beyond that are probably not something we spend a lot of time on in the last three weeks.

Fair enough. And when you think about Visual Compliance and how meaningful do you think that's kind of that incremental additional revenue from cross-sell could be going forward?

That's interesting. They are in the same business as MK Data, but they have two different offerings. That's one of the reasons we went after them so aggressively is because we looked and said MK Data was very good at putting data content in an SAP or Oracle format. They won most of those deals and you have SAP or Oracle, they are a very logical choice. That's why we had such a good partnership with SAP and Oracle because we could go to their customers and give them the data content in a format, they can look directly into their SAP or Oracle system. Visual Compliance on other hand was very good at doing a transactional based kind of compliance check. So, you're constantly sending them names to check all day long. And they have built a lot of tools that made that very convenient for the customer. And so, we looked at it and said hey we have two great databases here that have very similar databases maybe there is some cost synergies there. But we now have two ways to provide this service where we really only had one before and that opens up -- us up to a whole bunch of new customer opportunities that -- where maybe we weren't the first choice and now we are.

Perfect. Thanks.

Thank you, Stephanie.

And our next question comes from Matt Pfau from William Blair. Your line is open.

Hey, guys. Thanks for taking my question. I wanted to circle back to MacroPoint and there's a few competitors out there that have recently received funding. So just kind of wondering what you're seeing competitively if there's been any change there recently? Thanks.

Most of what we hear about is the funding and how they're spending their money. Like it's somebody else's money. In terms of seeing them in the market there's one that we see as a competitor of ours maybe more frequently not so much in our core market with freight brokers, but when we go out and sell to big retailers and manufacturers, we see one of them been a good portion of the deals 40%, 50% of the deals. So, we're aware of them. Maybe running the business a lot differently than MacroPoint ran it, MacroPoint always kind of ran the business to make money. These guys are talking about the same -- that you are there. They raised a lot of money at very high valuations. One of them was a $0.5 billion valuation, which for a company that has you know pretty low revenues seems like extremely high valuation to raise money at. And we're competing with them because we think we have a better mousetrap. So we're out there every day slugging it out with them. We've got a lot more sales reps than they have. So, we're able to go out and touch a lot more customers more quickly than they are. And with a better product, I hope that all comes out and wash the end of the day.

Got it. And then, just wondering on size of acquisition. Obviously, you're still doing a mix of both large and small deals, but the large side is continued to move up over time, and then, with Visual Compliance took another material step up. And one of the -- I think keys that you've done over time for your acquisitions is not getting in bidding wars and being able to purchase businesses at a reasonable valuation. Now Visual Compliance was perhaps a unique situation, but I guess where do you think you are at in terms of the ceiling in terms of the size of acquisition that you could do and still sort of execute that strategy that you've done historically to be able to pay reasonable multiples and not get into these overpaying situations where there's multiple perhaps private equity or other strategic acquirers out there trying to bid on an asset.

Well, you don't get to see it, but we've walked away from a whole lot more deals than we've done in the last five years. When we look at something and say, I don't know how we're going to get our money back for doing this and we go well and let somebody else make that mistake. It's not going to be us. Remember, oftentimes when these companies are selling to private equity it's not over yet right. They're just buying it for a couple of years. They're going to try and dress it up and put lipstick on it and sell it to the next guy for four more than it's worth or more than they paid for it. We're happy to not participate in that game, when we don't think we can get our money back for our shareholders. And at the same time, you see us keep doing bigger deals. I think we're probably very focused on being a consistent performer and as a result of that we don't take a ton of chances and any chance we take is a very calculated decision. We place a lot of value on consistency and as a result, we're fairly conservative. And I think you'll see that continue albeit at perhaps bigger sizes right as we get bigger. Our wherewithal to do bigger deals and integrate bigger deals and get the money to do bigger deals continues to expand and I think you see that over the last five years and the size of deals that we're doing. I would expect that will continue.

Great. That's it for me guys. Thanks a lot.

Thanks Matt.

And the next question comes from David Hynes of Canaccord. Your line is open.

Hey, thanks guys. Ed, you obviously have a ton of modules now and obviously not all products fit all customers, but can you give us an update kind of where the average customer is in terms of number of products used maybe versus kind of where you're at your best customers are. I mean anything to help us kind of put in perspective what that same-store sales opportunity may look like with the current product set.

Let me answer it with a little more complicated answer than you're asking. So, if I gave you an average across all the customers it probably wouldn't be very helpful. So, let me break it down. Carriers are one component. We were probably selling 5 to 10 products maybe 15 to two carriers, but they have very high volumes in those 5 to 10 products. Logistics intermediaries, which tend to be our biggest customer base. We have more products for them than just about any other type of customer. You see the biggest guys there getting into the 30 to 40 different product lines of ours. And oftentimes with the biggest three PLs out there very large volumes. Most of our top customers are three PLs logistics intermediaries let's call them. And then, you have big retailers and manufacturers and there again like carriers 5 to 15 product sets from 15 probably being our biggest retail customer. But they also have a wide range of volumes, right, depending on how big their company is, their volumes can vary dramatically. And with now almost a little over 20,000 customers, a lot of them being retailers and manufacturers, they can go from guys that are spending 50 bucks a month, the guys that are spending, $150,000 a month depending on what they're doing with us. So, we continually infiltrate all those customers especially in the retail manufacturers face we're getting new names all the time. And as soon as we get them for one product, the sales guys next job is to go in and tell them about the next four or five products that they think that'd be a great fit for them and help them save money and we're trying to go and show them. Hey, let me -- if you use this product along with the one you have, you can save this much more money. And go ahead and making that argument and trying to get them to turn into like a CVS or Home Depot or Best Buy [indiscernible] whole bunch of our products.

Got it. And then, maybe a follow-up, you obviously talk to customers often so you know where their interests lie in terms of product use. I'm just curious how many are there like trade data content categories are out there that would make sense for Descartes to own. I mean, obviously, these have been massively accretive acquisitions when you've done them. So, kind of how big is the opportunity to expand that footprint.

We see a lot more opportunity to do by the content companies. Visual Compliance was obviously one of them. It kind of fall under two camps. You have new types of data content that we might get our hands on in an acquisition. You also have like Visual Compliance, you have a data set that we're already in the business of selling. And we've seen other company that does that and say, hey, that be a great fit with our business that provides in this case Denied Party screening, restricted party screening and we're open to doing both, right. We look at the math behind them and say oftentimes buying another company does same kind of thing we do in the data content space is a very lucrative proposition because two companies collecting the data twice now I have put them together and I go out, I need to collect this data once. And I can take the solutions they both offer and say hey there they're not exactly the same solution. There was reasons customers chose one company over the other if I have them both. Now I have a more complete solution set. So, I think you'll see us continue to look at the space and look for additional opportunities than I think plenty exists.

Yes. Well, certainly the benefits are reflected in that EBITDA guide for 2020. So, good work.

All right. Thanks a lot David.

And another question comes from Steven Li from Raymond James. Your line is open.

Thank you. Hey guys just a quick question on the margins. So, the target range of 32% to 37%. Given the [Visual] [ph] synergies with MK that probably pushes margins a little higher. Just wondering why the target range is so wide?

Oh, that's been our target range Steven for a number of years now. Typically, I think maybe three years ago, we adjust that range to 32% to 37%. So, no real change there. As I said earlier in the call, we thought we've had the business for three weeks, we'll continue to operate it. We invest in long-term and we will update further as we operate this business and we integrate into our entire Descartes business.

Okay. So that's 32% is very unlikely scenario then?

Well, we just finished a quarter at 35.3%. We finished the year at 34%. We've had foreign exchange can take us there. We can do acquisitions that will -- that may be as Ed will say fixer uppers that we have to adjust. So, we still feel comfortable in that region. As I said, we'll update you guys further as we operate Visual Compliance and we see the -- how our business unfolds.

Okay. That's helpful. Thank you.

Thanks Steve.

And next with [closing introduction] [ph], I will now turn the call back over to speakers for closing remarks.

Great. Thanks everyone. We appreciate you taking the time to listen to our call today. And we look forward to reporting back to you next quarter. If anyone has requests for additional marketing at the shareholders, let us know and otherwise we'll look forward to talking to you again next quarter. Thanks.

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