The Descartes Systems' (DSGX) CEO Ed Ryan on Q3 2017 Results - Earnings Call Transcript

| About: Descartes Systems (DSGX)

The Descartes Systems Group, Inc. (NASDAQ:DSGX)

Q3 2017 Results Earnings Conference Call

November 30, 2016 05:00 PM ET


Scott Pagan - President and Chief Operating Officer

Ed Ryan - Chief Executive Officer

Allan Brett - Chief Financial Officer


Matt Pfau - William Blair

Brian Essex - Morgan Stanley

Steven Li - Raymond James

Paul Treiber - RBC

Paul Steep - Scotia Capital

David Hynes - Canaccord

Michael Urlocker - GMP Securities


Welcome to the quarterly results call. My name is Adrian and I will 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 will now turn the call over to Scott Pagan. Scott Pagan, you may begin.

Scott Pagan

Thanks and good morning, 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 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 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 required by law.

And with that, let me turn the call over to Ed.

Ed Ryan

Great, thanks Scott. Good afternoon, everyone and welcome to the call. Thank you for joining. It's been a pretty busy year with lots of changes in the global, political and economic landscape but as you’ve seen from our financial results, not much has changed in our performance. We once again delivered solid financial results that’s because we build a stable business designed to help our customers deal with change.

Our business continues to grow organically as our customers leverage more solutions on the Global Logistics Network and we continue to add complementary businesses to our network through our disciplined acquisition strategy, such as our most recent two tuck-in acquisitions in October and November.

We recognize that our customers are facing change every day. When you are dealing with constant changes, it’s good to have a stable partner you can rely on and for our customers that’s Descartes. We are always looking ahead to the challenges our customers will face as the market changes and we are building solutions to help them meet the challenges of today, tomorrow and all in an efficient and compliant manner.

If you look at our progression of the business, we have come a long way over the last decade, but there is still a lot more to do for our customers right now and a lot more to help them prepare for the world of tomorrow in a complex and ever changing environment. The good news there is that means there is a lot of opportunity for our business to grow. And while the geopolitical climate looking ahead is little uncertain, we are certain that we’ve got opportunities to grow our business because our customers need us most when there is change.

Speak more about that in a few minutes but as usual, I’ll start by walking through a few financial highlights followed by some commentary on our wire business. Allan will then take us through the financial results in a little more detail and I’ll finish up with some comments about our calibration for Q4 and the business landscape we see in front of us.

So with that let’s start by going over some of the key financial highlights for the quarter and for the first three quarters of the year. We had another record quarter across our key metrics. Our adjusted EBITDA continues to grow in line with our plans. For the quarter, we generated $17.8 million of adjusted EBITDA, an increase of 13% over Q3 of last year and year-to-date we are up 16%, generating $51.6 million of adjusted EBITDA. On a per share basis, we grew adjusted EBITDA 14% compared to the same quarter last year and 15% year-to-date. Revenue for the quarter was up 9% from this quarter last year, coming in at $51.5 million, and year-to-date revenue was up 10% to $151 million.

We continue to focus on deemphasizing license sales and that continues to show in our revenue mix with the services revenue accounting for 96% of our revenues from the quarter and year-to-date. You’ll hear me say this time and time again, we are not just here to grow revenue at any cost, like some people and some companies may do, we’re here to grow the business profitably and focusing on profitable recurring revenue growth is a key part of our strategy.

You will see the profitable growth and the leverage in our business model when you look at our expanding margins. Adjusted EBITDA as a percentage of revenue was 35% this quarter, up from 33% at this time last year. And year-to-date our adjusted EBITDA margin is 34%, also up from 33% last year. And at the end of the day, this is a healthy adjusted EBITDA number, reflective of the strong cash generated in our business.

In the quarter, we generated $20.5 million in cash from operations and $53 million for the year-to-date; that’s a cash conversion ratio for both, north of 100% of adjusted EBITDA. Of course, we don’t expect to do that always but in any given period, that can be influenced by the changes in working capital. This is a great number and when you look at the historical cash conversion over the last 10 years, it's just under 90% and what we expect this kind of performance to continue.

Generating cash is a key part of our long-term operating plans, because as we said before, we see lots of opportunities to reinvest that cash in our business to increase our geographic and functional footprint for our customers.

So with that, I would like to change gears and talk about our business a little bit. On the last call, I talked about some key changes we’re seeing in the market and how these changes impact the logistics and supply chain landscape for our customers. Today, I would like to talk about why our customers look to help -- for us to help them manage that change. Our customers need help to navigate the change that they face every day. If you think about some of the changes they face on an ongoing basis, it could include changes of suppliers and their locations, changes in the flow of goods for political reasons, changes in tariffs and duties, changes in free trade agreements and that greatly impacts their cost to deliver, changes in the mode of transportations they use as prices and capacity change and whether that’s based on the cost of fuel, labor cost, or other reasons, changes in the list of people, countries and businesses that you can or can’t do business with, changes to the internal or an external systems used in their businesses, changes to consumer and/or customer buying preferences on price, delivery and choice. In general, this has led to many of our customers wrestling with omni-channel delivery challenges. And the list just goes on and on.

It’s one thing to handle change it’s another to do it efficiently and consistently with the level of service that customers have come to expect from you. This is exactly why our customers look to us to provide a stable platform that can adapt and grow, so that when the world changes for them and the customer buying patterns force everyone to think differently, we can isolate them from that complexity and help them stay ahead of the curve. This is why we invest to grow our business for the long-term, whether it’d be the substantial amounts of money that we invest in research and development or the almost $0.5 billion we’ve invested in acquisitions over the past 11 years.

To be a successful, stable partner in the landscape of change, you need to, one, be plugged into the regulatory environment; two, have logistics domain experts who are attuned to the changing patterns of buying and delivering goods; and three, have a large network of customers who have a common interest in the network meeting these changes -- helping them to meet these changes.

So, let’s start by diving in a bit deeper on the first of these three, the regulatory environment. We don’t have a crystal ball to tell us exactly what will happen with Brexit or new U.S. Trump government. They both very well may have significant impacts on trade agreements and inter-country relations. But one thing we can count on is that there will be changes to the regulatory environment for any one moving goods. Every shipment deals with regulations including can they buy from this person or ship to that person, the list can change pretty quickly on a normal day and in a new environment, you won’t want to be caught out of loop.

Other issues might include what will the duties and taxes be based on how they ship or our customer ship their goods, and what kind of documents do they need to ship them. Has it changed, will it change soon, have the government systems changed requiring new formats, will border controls influence speed of delivery, should they consider different routes, et cetera. It’s impossible for our customers to stay on top of everything as the rules and regulations change, and so we do that for them. Our Global Logistics Network combined with our extensive trade data content helps isolate them from that complexity, and they rely on us to help them do this each and every day.

Regulations aren’t the only changes impacting logistics and supply chain, it's consumer buying patterns are compelling for our customers to change, to be more flexible to offer delivery choices to their consumers. With Cyber Monday this week showing the biggest online shopping day in U.S. history with more transactions trending online and customers expecting goods when and where they want them, it’s clear that consumers are forcing everyone to think differently about delivery. Ecommerce and omni-channel aren’t just buzz words anymore, they’re part of the global commerce system. Satisfying consumer expectations through competitively priced deliveries, the tight time windows on an expected basis is quickly moving from a differentiator to table stakes. And whatever the consumer wants today, they’ll probably change that tomorrow. All this makes it more difficult for our customers to deal with it. Companies cannot adapt and struggle -- will survive to survive and we’re here to help them do that.

I’ve talked before about how we have the premier delivery routing and scheduling solution in the market. Retailers look to compete with the Amazons of the world, can use our state-of-the-art home delivery solutions to enhance their customer experience right from the online delivery appointment booking through to mobile monitoring delivery at the customers’ door. The reason we’re ahead of the game on home deliveries is because we’ve made a conscious decision more than 10 years ago to rethink how our optimization engine should work. I won’t bore you with the technical details, but we saw the need for tighter time windows and increased service levels coming, and we made a change to how our optimization engine works to tackle those problems. We're ahead of the curve and our competitors, and we had to wait until the market demand caught up with us, but we've been doing great now for the last number of years and we expect that there is many more to come.

We continue to invest in our routing and scheduling solutions to help our customers with fleets stay ahead of the market changes, but we've also made a number of investments to help our small to medium sized customer and are moving goods that generally fit in a parcel. These are very different problems driven by the same consumer buying pattern changes. And as I said off the top, we're committed to helping all of our customers, large and small alike, stay ahead of the changes the market may throw at them for many years to come.

In any one of these areas, we know we will face competition, sometimes from establish players and sometimes from startups trying to tackle a single piece of the puzzle, but we believe we're approaching the problem different to anyone else. And we believe that approaching the problem from a position of stability with a large connected network and a broad technology platform puts us in a great position to be the winner in this space in the long run. And make no mistake, we plan to be here and be the winner.

And that brings me to the final -- the third point and final point about helping our customers deal with change, having a large, stable and supportive connected network with a common interest in having a network address change for everyone's benefit. You want to move goods efficiently, you need to be connected to a broad ecosystem of parties to execute shipments. Our Global Logistics Network does just that, not only helps our customers navigate the regulatory environment for international trade, but it also electronically connects them to all the parties and the supply chain to help them exchange data and execute shipments more efficiently. And when you're moving goods internationally in large complex supply chains, it's important to be able to connect quickly and seamlessly to not only your trading partners, but also logistics service provider community including your carriers, brokers and third-party logistics providers. Size does matter in this case; it’s not real easy to do this. It takes a long time to build a community of participants. And more the people and services you have on the network, the greater the value is to the existing community and to potential participants, thus driving expansion and more adoption.

We spent decades connecting parties on our network. This has been and will continue to be a large area of investment for us. These connected parties are key for us. It means that when a new organization joins, it's likely that a lot of their trading partners and transportation providers are already on the network, so we can get them up and running quickly. You no doubt have seen that in the past two months we've made some more and important investments in order to scale our network. In October, we combined with Appterra, the U.S. based B2B network that automates supply chain processes; and more recently in November, we combined with 4Solutions, a market leader for B2B supply chain integration and trading partner enablement solutions for the healthcare sector in Australia.

Both were relatively small acquisitions but that shouldn't take away from what they bring to the table. Each company has spent many years connecting parties and building up a network. Coincidently, they both operated within blocks of each other in the Philippines. And by our combining them with the Global Logistics Network, we increased the scale and reach of our business.

With that, I would like to take a minute to welcome both the Appterra and 4Solutions employees to the Descartes family. We're very excited to have all of you with us and looking forward to having your input and helping us solve our combined customers' logistics and supply chain problems for many years to come.

Before I hand the call over to Allan to talk a bit more about the financials, I’d like to thank some of the people that made this another great quarter for Descartes. So, thanks to our employees for all the hard work they put in to make sure our customers get great results. Thanks to our customers who continued to place confidence in Descartes as their network of choice. Thanks to our partners for helping us continue to expand our ecosystem. And finally, I'd like to thank our shareholders for continuing to have confidence in our Company.

And with that I’ll pass it over to Allan.

Allan Brett

Thanks Ed, I appreciate it. As indicated, I am going to walk you through our financial highlights for the third quarter ended October 31, 2016.

So, as Ed mentioned, we are pleased to report record quarterly revenue of $51.5 million this quarter, up 9% from revenue of $47.4 million in the third quarter last year and also up 2% sequentially from the second quarter of this year. We should note that these revenue figures were achieved despite continued negative headwinds from foreign exchange of over $600,000 when compared to the Q3 last year and almost $400,000 when compared to the second quarter this year.

Consistent with our business plan and current trends, service revenue remained strong coming in at $49.4 million in the quarter or 96% of our total revenue, up 9% from $45.5 million in Q3 of last year. Gross margin continued to be very strong coming in at 73% of revenue for the third quarter, consistent with the second quarter of this year and up slightly from gross margin of 72% in the third quarter last year, as we continue to experience operating leverage from our network growth.

As a result of the continued revenue growth, gross margin improvement and of course strong cost control, we experienced adjusted EBITDA growth of 13% to $17.8 million or 35% of revenue in the third quarter compared to $15.8 million or 33% of revenue in the same period last year. Adjusted EBITDA was also up 3% sequentially from adjusted EBITDA of $17.2 million or 34% of revenue in the second quarter this year, again showing the continued strength in our business. As a result of these solid operating results and extremely strong collection of accounts receivable, cash flow from operations came in at record $20.5 million. At 115% of adjusted EBITDA, this quarter's conversion of adjusted EBITDA into operating cash flow was certainly higher than previous quarters and also at the top end of our expectations.

GAAP net income came in at $5.9 million or $0.08 per diluted common share in the quarter, an increase of 13% from net income of $5.2 million or $0.07 per diluted common share in the third quarter of last year. As Ed has already mentioned, overall, we are really pleased with these continued strong operating results in the third quarter.

So, if we turn our attention to the balance sheet, we ended the quarter, the third quarter with the cash balance of $77.9 million. During the quarter, we used $4.6 million to repay a portion of our Europe based advance that we took out on a revolving credit facility earlier in this year when we closed the pixi acquisition. In addition, we used $5.7 million to fund the acquisition of Appterra, previously announced earlier in the third quarter. With this cash balance and with $147 million currently remaining undrawn on our revolving credit facility as well as the expectation of continued cash flow from operations, we certainly remain very well-capitalized in order to allow us to achieve our business plan.

As we look to the final quarter of this year, to round out our financial picture, we should note the following. We continue to see strength in U.S. dollar compared to several other currencies in which we generate our sales and incur expenses. As a result, we currently expect an additional decline of approximately $800,000 in revenue directly from FX in the fourth quarter when compared sequentially to the third quarter revenues. And this has been factored into the collaboration figures that Ed will speak shortly. However, we continue to be fairly naturally hedged. As a result, the FX impact on Q4 adjusted EBITDA is currently estimated to be less than $100,000 from these currency movements.

After strong operating cash flows in third quarter, we would expect the cash flow from operations will trend more towards our long-term average of approximately 90% in the fourth quarter, and this is subject to a number of factors. And this should leave us close to 100% cash flow conversion of adjusted EBITDA for the year.

Our income tax rate came in at 23.1% in the third quarter and we would expect that it will continue to be in the range of 22% to 25% of pretax income over the balance of the year. In addition, as expected, we started to see an increase in the cash portion of income taxes increase as a percentage of the total tax expense. And going forward, subject to a number of factors, we would expect to see cash tax expenses trend up towards our stated tax rate, as we continue to use up most of the loss carry forwards and other tax deductions available to us in our North American businesses.

As we previously indicated, we also expect to incur approximately $1 million to $2 million of capital expenditures for the balance of this year and these expenditures are expected to continue to be focused on investments in our network infrastructure. We currently expect amortization expense will come in around $6.8 million for the fourth quarter of this year. We also expect that like in recent quarters, acquisition cost related to some retention bonuses from past acquisitions will come in at approximately $400,000 in the fourth quarter of this year. And finally, we expect stock-based compensation will come in at approximately $400,000 to $600,000 for the fourth quarter of this year.

So, now, I'll turn it back over to Ed to wrap up.

Ed Ryan

Great. Thanks, Allan. So, let’s start with calibration for Q4. Similar to our previous quarters, we don’t provide guidance, but we use our baseline calibration as a key metric relating to the ongoing health and strength of our business. With movements in the FX rates, we have used the most recent FX rates as of yesterday. So, our calibration for Q4 assumes the following exchange rates: C$0.77; €1.12 to US$1; and GBP1.32 to US$1.

So to turn to Q4, as of November 30, 2016, for Q4, we had $49 million in visible recurring contracted revenues or our baseline revenues. As Allan mentioned, we expect the changes in FX rates from Q3 to Q4 to impact our revenues by about $800,000 this quarter and that is already included in that number. On the flip side, we have the impact of the recent tuck-in acquisitions. We had $34.7 million in baseline operating expenses and this gives us a baseline calibration of $14.3 million for adjusted EBITDA for Q4.

Some other key points related to how we are positioned for Q4 and beyond. As always, we are very well capitalized. We have a healthy business that’s well calibrated. And as Allan mentioned, we also have a healthy balance sheet. We are profitable and generating cash. We have little capital needs within our organic business. Our primary uses for capital are for continued use in acquisitions. We have completed 34 acquisitions since 2006. And we have access to additional capital should we need it. Allan mentioned the undrawn portion of our credit line of more than $147 million. We’ve also filed a shelf prospectus for up to $500 million of capital, was needed to be raised by other mechanisms.

We have a strong acquisition pipeline. You will have seen there is a lot of industry activity right now with consolidation happening in our market. With this capital capacity and our execution capabilities, there are still a number of acquisition opportunities that can expand our geographic reach, functional capabilities, trade data and content or community or 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 are seeing both larger and smaller opportunities. And while we review everything as it comes our way, we are not buyers for buyers sake. The fact that we’ve increased our line of credit recently and filed for the new shelf doesn’t change how we view acquisitions. We intend to continue to be prudent, but we’re confident in our goal to deploy capital effectively.

As a reminder for our plans, as we wrap up FY17, we continue to target 10% to 15% annual adjusted EBITDA and adjusted EBITDA per share growth. As in the past, we intend to invest any over performance back into 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 one-time license sales.

If you recall, in FY16, we increased our planned operating margin range to 30% to 35%. Given the current performance of the business and mindful of the FX environment, we expect to continue to operate in that range, but please keep in mind, this could vary if we buy businesses that need fixing up, which would impact that metric in the short run.

Just as a quick update on our annual user conference. As I mentioned in the last call, we set the date for our 2017 Descartes Evolution User Conference in West Palm Beach, Florida. The event’s three days from March 28th through the 30th of 2017. The event provides a great opportunity to see our business at work from products to customers to partners, and Descartes team members. I know several people on this call have been to the event in the past and I hope they found it worthwhile. Registration is open on our website and we’re planning to make this the biggest one yet. So, get yourself registered and come and learn more about what we do. There are worst [ph] places to be than West Palm Beach at the end of March. Hope to see you all there.

And finally, and as always, we’ll continue to make ourselves available to shareholders to answer any questions. We think we’ve got a great business because we want to be available to help people understand and learn our business. We’ll continue to spend time and resources to get the word out and we hope you’ll do the same.

So with that, let’s open up to questions. Operator, if you could take the line?

Question-and-Answer Session


Thank you. We’ll now begin the question-and-answer session [Operator Instructions]. And our first question comes from Matt Pfau from William Blair. Please go ahead.

Matt Pfau

First, I wanted to start out, Ed, I know you had talked a bit earlier about the potential impact from Trump’s presidency on the business. But maybe we can just dig into that a little bit more. So, for example, if U.S. trade becomes more restrictive, potentially trade volume could fall off, but maybe the trade would become more complicated. So, maybe if we could just touch on the puts and takes there to your business from those types of situations?

Ed Ryan

Sure. No one really knows what’s going to happen, both with Brexit and with at least Trump campaign conversations. It's not a little protectionism, which for us could potentially be a benefit. With Brexit, people putting up a border around the UK, it's another border that has to be crossed, it’s another set of customs and security filings that have to be made. And if that all comes to pass, might be a couple of years from now, but if that all comes to pass, it’d probably be incremental benefit to our business as people have to cross that border and make filings to do it.

Some of the things that Trump said, I don’t know that he went that far, he certainly is not necessarily creating any other borders and things that he said, but he has certainly talked about the transpacific partnership and cancelling that. And those types of things cause change, as I mentioned earlier in the call, in the tariffs and duties rates around the world. And every day that those things are changing makes our database of all the rates that are kind of up-to-date every day, more valuable. Customers need to see it, the more the rates change, the more they need to look at it; and the more they look at it, usually the better Descartes does.

As for your other comment about potential for this to result in less trade, I am not so convinced that's going to happen, but if it did, it would probably impact us like it impacts everyone else. People are moving less goods around the world, that's probably bad news for most companies. It's not clear to me that’s what's going to happen though.

Matt Pfau

And then, the other thing I wanted to touch on was, just on the acquisition front, you made two tuck-ins, but it's been a fairly quiet year for your guys. Maybe just some commentary around that; is there anything behind it being a relatively quiet year that's driving that or how should we think about the acquisitions going forward?

Ed Ryan

I hope you think about it the same way we do, which is we’re just really out there looking at businesses and saying which one’s that we think is to combine and who can we reach an agreement with. And we talk to a lot more than we end up getting deals done. That’s because we’re picky, and spend a lot of time getting ourselves into a position where we can be and in hopes that that will lead us to make better decisions. And I think that’s what you're seeing right now. Lots of things were for sale and lots of things continue to be for sale but we don't like some of the prices. And so, we buy the ones that we think we can get a fair deal on. And if people are looking for more than we think stuff is worth, we pass. Whether that means they sell to somebody else or they just don’t sell it, doesn't matter to us much. We kind of go -- we want to make sure we're doing good deals for our shareholders. And if we see something that we want, but it's not a god deal, we're happy to pass on it. And that's the way we've operated historically and that's the way we're going to continue to operate.


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

Brian Essex

I was wondering if we could dig in a little bit on 4Solutions. I mean and healthcare document exchange seems a little out of the box for your guys. I was just wondering maybe if you could offer a little bit of rationale and exactly how that fits into the puzzle. And then I got a follow-up.

Ed Ryan

It's a network business and it's -- their supply chain transaction is in the healthcare space, we think of that as part of our core mission. We weren’t as focused on the healthcare capabilities of it, both with Appterra and with 4Solutions. We looked at those businesses as networks and networks that specifically focused on data quality which we think is really important. Appterra in particular had some tools that we thought were going to be helpful to our customers in the long run to help us monitor and improve data quality. They're relatively small but they also provide us with a core base of employees over in the Philippines which enables us to provide some of the service provided at better margins, both for our benefit and for our customers’ benefits and we do it more cost effectively for them. So, they were good deals and certainly in the supply chain space and thought they’d be great additions to our network.

Brian Essex

Got it. And then, just one on expenses; it looks like G&A is pretty flat year-on-year, maybe you have a couple $100,000. Is that pretty much due to the rationalization of back office cost of acquisitions that you have made year-to-date? And how do we think about that given we saw a little bit of a pop last year and arguably due to some acquisition, but maybe if you can just help understand some of the movement there? And where you plan to get leverage in the model going forward?

Allan Brett

Sure. It's Allan, Brian, I’ll handle it. Yes, we certainly do integrate the businesses; we do look for cost efficiencies where possible. I think you’ve seen that through these numbers in G&A. FX is also -- while it affects our revenue, it pulls down our expenses as well as the U.S. dollar is strong. And as we buy businesses, our G&A will increase over time and over time then we will fight to find efficiencies and that’s what you will see in our business quarter-by-quarter.


And the next question comes from Steven Li from Raymond James. Please go ahead.

Steven Li

Ed, when you look at the different segments, where is the most of the growth coming from? Any one segment stood out? And also maybe you can talk about your outlook in those faster growing segments over the next 12 months? Thanks.

Ed Ryan

Yes, true, you’ve heard us talk about a lot over the last year, one of the content space that we’ve gotten into in the last couple of years that continues to grow very nicely for us. We bought some companies there few years ago that were growing well, then our sales force got a hold of them as well, and probably it's helped move even faster than they were prior to our owning them. And then, the one that I mentioned on this call and probably mentioned in the last five or six calls in a row that the mobile resource management business, our optimization engine is proven to kind of be the market leader in the omni-channel space which has been hot now for five or six years and suspect will be for a long time to come. And those two businesses are fastest growing businesses and driving a lot of the growth that you see in our network.

Steven Li

Thanks. And Ed on the slower M&A this year, does that move your EBITDA growth expectations about 10 to 15 range? Does it move it closer to the lower end or you expect organic growth to make up for this slower M&A? Thank you.

Ed Ryan

Yes, I mean, I don’t know that we think of it's slower M&A but we are doing the M&A deals that we see in front of us that we think are good deals. No, we are not planning on changing our guidance on how we are going to operate the business. We still see us operating 10% to 15%. We always trying to beat 15% and we do that fairly consistently. So, I don’t think you are going to hear a different story from us on that hopefully for a long time to come.


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

Paul Treiber

I just wanted to focus on the gap between baseline and actuals, it seems like it's widened out over last couple of quarters. I think little while ago, you mentioned that it will be narrowing. How should we think about baseline versus actuals going forward?

Allan Brett

Yes. It's actually been fairly stable from what I see. It's affected by a number of things, acquisition we make; foreign exchange rates will impact it; and obviously the amount of license deal that we complete. When we say it was narrowing, it was simply that license deals were coming off that when a couple businesses we bought that have added some license revenues back to our business, licenses keep coming in around 2 million; it's been fairly stable. I think it was a 6% or 7% -- revenues were up 6% or 7% from baseline and EBITDA was up 27%, 28% and that’s been fairly consistent the last couple of quarters that we have seen. I don’t think there is any significant trend there, Paul; it’s simply continuing to operate the business where foreign exchange rates go, where acquisitions take place that will affect calibration actuals.

Paul Treiber

Okay. In regards to acquisitions, what your thoughts on the size of acquisitions, particularly just in regards to like larger versus smaller ones but specifically like the valuations that you are seeing between those sizes but then also sourcing and then integrating, just the differences between the large and the small?

Ed Ryan

We look all types, so we certainly looked at a number of big ones and have it pull the trigger on anything very large yet. But, our bread and butter have been these smaller tuck-in acquisitions; we have done very well at them over time. And we continue to be confident that we can execute on them as well as we have in the past. The larger deals have a lot of competition. They have bankers involved, they’ve private equity firms involved that are flushed with cash the moment that tends to be bidding some of them up, beyond what we think a reasonable expectation. In other words, we think the people that invest in those are going to struggle to get their money back. On the smaller end, I’d say, the deals tend to be more-fair. It’s people we have usually known for a long time, we have usually worked with them either as a partner or just the potential acquisition candidate for a number of years. And eventually they decide they want to sell their business and if they are going to sell, they are going to sell to Descartes. And they aren’t really affected by things like the amount of capital coming to the private equity market, things of that nature that have maybe had us shy away from some of the larger deals.

Paul Treiber

And what your thoughts on increasing the frequency of smaller deals per year; is there a natural inhibitor or constraint in terms of the number of deals that you could do in a given year?

Ed Ryan

I am sure there is. We haven’t come here hitting it yet; it’s not the thing we spend a lot of time talk about. We certainly think we have the wherewithal especially as we’ve gotten bigger over the last five or six years. To do lots of them, what we end up doing is the ones we think that are good deals. If there were more of them that would be fine with us; in fact, we would probably pretty happy about that. We certainly think we have the ability to execute on more of them, if we find good ones. But we are not worried about doing more, if they were to make themselves available to us.


And the next question comes from Paul Steep from Scotia Capital. Your line is open.

Paul Steep

Can you talk a little bit about Oz, and just what your view is a year on after acquiring the company?

Ed Ryan

Yes, sure. We are very excited about the Oz acquisition. As you said, it's been almost a year now that we’ve had it. I think business has done quite well. The people fit in I think quite well. A lot of the people that came from the Oz acquisition are now off in other areas of our business helping expand our ability to deal with the small and medium-size customer base that they were so good at dealing with prior to acquiring the business. Numbers have looked good, as we expected, which is great. We like when businesses perform as we expected prior to acquisition. And so, I think overall, we are pretty happy about it. We have had a number of customer successes and we have had a number of cross-sell opportunities that we’ve won. So I think overall we are pretty happy with it.

Paul Steep

And then, the quick follow-up, how should we think about you building up any vertical market solutions or sort of attacking the market the more vertical way? Thanks guys.

Ed Ryan

As we get bigger, we’re starting to do that. I mean what you see us doing right now is we break out logistics and transportation and we sell to those guys specifically, the airlines, oceans carriers, trucking companies and 3PLs and we target them specifically and down to a smaller customer size and have done that historically, in what we call the MRDM market or selling to major manufacturers, retailers, distributors and mobile service providers. We keep doing more and more in that market. We used to only focus on the big guys in that market, big manufacturers big retailers. And you see -- and in part helped by some of the acquisitions we’ve done in the last few years, we’re now going into focus on the medium and smaller size customers in that segment as well. You definitely get good at a certain vertical segments in there. If you look at our routing software, we dominate beverage; we dominate oil and gas delivery and 20 to 30 others.

And so, our sales force and our delivery teams start to develop an expertise in that. And so, when you get one big retailer or electronics retailer, you’re probably a pretty good choice for the others as well. And over time that usually ends up helping us. As we get bigger, we’ve kind of spilled out our logistics and transportations segment and are now looking to make sure we spill out our mobile, retail, manufacturing and solutions that we sell to our customers.


And the next question comes from David Hynes from Canaccord. Please go ahead.

David Hynes

So, I want to get at Matt’s question around trade policies and the new administration. So, I think we understand the impact that complexity it has on your ability to grow. How should we think about the potential impact on your cost structure? In other words, if trade agreements renegotiate or tariffs changed; how much of that requires incremental investment on your end to ready the network and data or is that pretty much all automated? Just trying to think about the impact on margins?

Ed Ryan

Well, that’s the beauty of -- it’s been a while since I’ve discussed this on a call. But if you think about the beauty of the MK Data and the Custom Import Solutions that we bought over the last couple of years, the big differentiator for them over their competitors was the automated fashion in which they collected data. And you see that show up in their profit margins. You also see that show up in the timeliness and accuracy of their data. It’s how they became the market leaders was the box that they built that go out and queer government websites, six, seven, eight times, a day and look for changes.

And so, when a government changes, their rates between one country and another country, we have box that are built to go out and find that information and get into our data base very quickly, within hours; they found it, extracted it and put it into our data base. The only thing that causes us any kind of work in that process is if a government changes the way their websites works. But that doesn’t go hand in hand with some of the stuff you are talking about. The trade negotiations have nothing to do really with Belgium deciding, hey, I am going to change the way my website works. When they do change the way their website works, we have couple of days to work at a minimum to go in and figure out how to retune the box to make them automatically extract all of the data. But that usually has very little of anything to do with the renegotiation of trade rates. So, I don’t think you’re going to see our costs change at all really just because more rates change in a day doesn’t mean that our costs are impacted in any way.

David Hynes

And then, I want to ask about drop ship. So, as online retailers leverage drop ship for assortment expansion and other things, is that a good or a bad thing for your business? I know a lot of your retail delivery relationships are with kind of the largest retailers. But I guess suppliers kind of increasingly get into the active shipping directly to the consumer, how does that impact you guys?

Ed Ryan

Well, the packages that are let’s say bigger than 125 pounds, it directly impacts us in a very positive way. You've seen that in the last five years that that’s the omni-channel opportunity that we’re talking about. As big retailers go, hey, I need to get good at delivery in these washing machines and TVs to consumers’ houses and then schedule it and installation guy right behind him. That's our bread and butter. And if you went into a big retailer 10, 15 years and talked about, they’d say, we don’t really have to do too much of that, or if we do, it's done manually. Now, all of a sudden, you bring that process online and it has to be done electronically, it has to be done in an automated fashion. And if you want to operate your business efficiently, you better know the best delivery time while that consumer is online, you let them pick anytime you want, you're going to instead of using 2,000 trucks and make those delivery tomorrow, you might need 2,700 trucks, and that's a lot of extra money. And that's played right into our hands. On packages more than 125 pounds, that's parcel and LTL delivery. Our TMS channel -- it creates a need for our TMS and by the way, have a lot competitors in that space. So, it creates a need for them as well. But more demand in the market for everybody usually trickles down and helps us just like it helps everybody else. So, I think both ways, we do fairly well. If it's the larger ticket items, larger side packages, we have a very direct benefit that you already see some of that playing out and I think it's going to go on for quite some time as every retailer starts to realize, I need to do this. On the smaller package, it doesn’t create some demand for us, but it helps our competitors as well.


And our next question comes from Michael Urlocker from GMP Securities. Please go ahead.

Michael Urlocker

If we look at cash from operations, it's really strong, strong performance, and it's been accelerating in terms of growth. But, I don't really understand why that is. So, if we look at just to pick a number, revenue growth so far this year I think is 10% and cash from ops growth is 36%. Or another way to look at is your conversion of EBITDA to cash from ops is again also higher than the norm. So, what do you think is causing that? Is it a structural change in the industry; is it that the de-emphasis of license or is there something else going on?

Allan Brett

Mike, there is a few things there; it's Allan. First off, we do think there is a conversion of EBITDA that's the most relevant. And what we’ve seen so far year-to-date, we're just over 100% conversion operating cash flow to the EBITDA, strong collections are part of it. It's also -- another factor is that business we've been buying recently have -- we've seen a trend towards more annul billing and more billing upfront. So that can certainly help. We're buying businesses that arguably have negative working capital, as you grow them. And we currently strive to achieve. So that' a little structural change. We're hesitant to say that there is a -- our 10-year average is close to 90%. Our three-year average is probably 92% to 93%. And we think those are still relevant ranges, but there is a bias to a little bit higher in the last 24 to 36 months. So that's the best we can give you as far as the guidance. It should come in somewhere in 90% to 95% go forward.

Ed Ryan

I'll just comment for two seconds. We've talked about here for 20 years, especially as we've worked our way out of problems for 15 years ago. Happy customers pay and they pay best. And as our network does a better job, our customers pay best and it's -- I don’t know that’s the entire answer to the question yet, but it's -- at a high level that’s a big driver behind it.

Michael Urlocker

Well, thank you because often the simplest answer is the best one. Right? So, it makes sense. Hell, I couldn’t understand that accounting stuff, happy customers -- no, I understood it all. Thank you. I appreciate it. Keep up the good work. It's great to see. Thank you.


And we have no further questions. I’ll turn the call back over for the final remarks.

Ed Ryan

Great, guys. Thanks for all your support this past quarter. And if we don’t see you have a great holiday season, if we do see, we will be on the street for next couple of weeks working with you. So, have a great holiday. Thanks.


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

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