Q1 2021 Earnings Call
Welcome to the Descartes quarterly results call. My name is Adrian and I'll be operator for today's call. At this time all participants I know that's not only mode. Later, we'll conduct a question answer session.
And the question answer session. If you have a question. Please press Star then one on your Touchtone phone.
Please note. This conference is Dan Korte, it and that's kind of color to Scott Pagan Scott Pagan you may begin.
Okay.
Thanks, and good afternoon, everyone.
Joining me are mostly on the call to their and Rhines CEO and Allan Brett.
Trust that everyone is received a copy of our financial results press release issued earlier today.
Portions of today's call historical performance includes statements are forward looking information and meeting a couple securities laws.
These statements are made under the safe Harbor provisions are those laws.
These forward looking statements include statements related to our assessment of the current and future impact to the cobot 19 pandemic on her business financial condition. They carts operating performance financial results and condition. The carts gross margins than any growth in those gross margins cash flow and use of cash business outlook baseline revenues baseline operating expense.
As a baseline calibration.
Anticipated potential revenue losses in game anticipates, a recognition as expensing of specific revenues and expenses potential acquisitions and acquisition strategy cost reduction and integration initiatives and other matters in that may constitute forward looking statements.
These forward looking statements involve known and unknown.
Certainties assumptions another factors that may cause actual results performance or achievements of day cartus differ materially from the anticipated results performance for achievements implied by such forward looking statements.
These factors are outlined in the press release, and then the section entitled certain factors that may affect future, though.
In documents filed or furnished with the FCC, yeah, let's see another 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 managements 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 Germany's publicly any updates or revisions to any forward looking statements to reflect any change in our expectations or a change in events conditions assumptions or circumstances on which any such statements based except as required by law.
And with that let me turn the call over there.
Thanks, Scott and welcome everyone to the call thanks for joining us today.
It's certainly been a quarter with the unique work environment.
It's called also unique for us because each of our Scott and I are in different locations. So please bear with us as we remotely coordinate to provide answers for any of your questions later in the call.
Similar to past calls here's a road map for the rest of the calls.
First I'll start with some opening comments, primarily focused on what happened over the last quarter and some steps, we're taking to keep our business strong.
I'll bet handed over to Allen, who will go over Q1 financial results in detail.
Let me come back and provide some perspective on how we're looking in the current quarter and beyond.
And then we'll open it up the operator.
To coordinate the Q and a portion of the cost.
So with that let's get to it.
We delivered great financial results in what is likely one of the most challenging business environment, we've ever had to deal with our commitment over the past 10 plus years, it's been to grow adjusted EBITDA, 10% to 15% per year in Q1, we grew adjusted EBITDA, 15% over the quarter a year ago.
We were able to do that because we run a business with a high degree of recurring and visible revenues.
With that visibility comes the ability to set our expenses at manageable levels to continue to hit our profit targets.
We think that business discipline is going to serve us well as whether this period, while the world economies recover.
There's some businesses out there many of them customers of ours, we've done very well over the past two to three months.
Business is involved in the manufacture and delivery of personal protective equipment and medical supplies have done well.
Business involved in food and grocer replenishment distribution I've been very busy.
Ecommerce business since I've seen record holiday style volumes as people move to online purchases quarantine rather than going in store.
Other businesses some of them also customers of ours have struggled in the quarantine environment.
Passenger airlines, who move air cargo in the belly of their planes have seen passenger demand plumbing.
This impact the ability to price and price of a movie air cargo and mail.
Retail stores in shopping malls have been temporarily shut or impact not only the stores, but also the entire ecosystem that supplies and delivers to them.
Customs brokers another intermediaries have been impacted this cross border shipments in demand becomes more complex.
Pretty cart, we serve all of those types of customers.
Finally by design, we're extremely diversified.
We cover all modes of transportation Air truck motion in rail so we're not fatally exposed when one modus hit.
We have a broad geographic footprint. So we continue to serve customers as economies retract expand and recover at different times.
We cover many logistics functions and the different solution pillars that we have so we're not unduly relying on any one particular service and we cover many industries, allowing us to be flexible to sign our resources, where they're needed as different customer she ebbs and flows in demand.
We're diversified by design and that makes us resilient.
That diversification has also allowed us to be a big part of the efforts to help people get through this quarantine period, we've been right there, helping people deliver food medical supplies and personal protective equipment.
As our customers went to remote work they relied on our solutions to allow them to remotely manage logistics functions and shipments securely and efficiently. That's what dose a these solutions were designed to do.
We each show a ton of gratitude to the thousands of medical professionals and other frontline workers that have been helping us over the past months.
Oh equally owe a huge debt to the logistics and delivery workers. The drivers the warehouse workers. The support staff that have helped in getting essential goods, where they need to be.
We're very proud that our company could play a small part in helping them.
Cobot 19 has had a big impact on how everyone does business and we're certainly no exception.
Since I last spoke to you in March when we released our year end financial results, we've transitioned to our entire company working from home, we cancel used our global user conference in Florida, and we've suspended all global travel and we've transitioned all of our marketing activities to online participation.
The cobot 19 has not changed the other important things that we do we continue to provide top quality service and support to all of our customers. We continue to engage with customers on helping them rollout projects that will bring them increased automation and remote management capabilities. We continue to investigate combining with other businesses that will make our diversified company even stronger.
And by continuing to do well the things that we always have we were able to deliver another solid financial quarter consistent with our commitment to sustained profitable growth.
This past quarter, we had record services revenues of $74.1 billion.
We had record income from operations, a $15.7 million, our cash flow from operations was 83% of our adjusted EBITDA.
Our adjusted EBITDA grew 15% over Q1 last year and our adjusted EBITDA margin was above 39%.
We finished the quarter with more than $50 million in cash and almost all of our $350 million debt facility available to us.
We produced excellent financial results and ended in a very strong financial position.
As I said before this wasn't easy, particularly in April we saw transaction volumes over our network hit and we were managing many requests from customers who were struggling in this environment.
I'm typically pretty Frank and telling you what I know something you want I don't know something I know that many of our customers of struggle I noted many economies around the world are starting to reopen for a period of walk down I don't know how quickly will see recovery in each of the different industries and when we'll be at what many of US would consider full recovery for the entire world.
Our job is to manage our business with the best information that we have so we've assumed that the recurring revenue run rate that we saw April will be their revenue run rate that we see each each month of Q2 over.
Overall that run rate is down 5% from what we would have expected to see the typical month at this time of year.
Then as we described in the press release, we Recalibrated, our expenses to come down by reducing our workforce by 5% we close in a few offices Alan will go into more detail about that restructuring later.
Anytime you have to make decisions that impact members of your team. It's tough. However, there are also the right decisions for our business right now and the decisions that we believe our shareholders expect it would make in this environment.
It's possible that economies, our customers and our business recover quickly in that April ends up being the month, where our revenues were most impacted if that's the case when we're at a cost base for where we can ramp up investments for the future.
But it's also possible that we end up and further locked down and in the future and that April is appropriate way reflective of what will happen to our business. If that's the case then we think we've got the west cost base to whether that going forward.
We view this temporary period until the world's through the full economic recovery in a vaccine has a period, it's going to distinguish the most resilient of companies. We're striving to be one that will continue to perform for our stakeholders. During this challenging period.
Over the longer term, we believe that they're going to be some very positive trends that will benefit of technology company like ours.
Our business easily accommodates a remote workforce our business focuses on delivering solutions that help customers manage their supply chain operations remotely, while removing manual processes, including paper based processes that require physical contact our business thrived on helping customers with changes in their logistics operations and supply chains and.
I think that in the coming years, there will be big changes in how and where companies source and shipping goods.
And most importantly, we've proven to be a resilient and reliable service provider that will be there for our customers joint any tough times for the future.
For now our business remains head down.
Hardworking and helping our customers our job is to do what is expected from us expected from our customers our partners and our stakeholders as we've shown in the past and we're showing now that's what Dick Clark does.
Thanks to all the Descartes employees for everything they've done and I know that they will do to help our customers and company. During these difficult times I feel we're even more aware now of the importance of what we do for our customers and with that I'll now turn the call over to Alan to go through our Q1 financial results now.
Thanks, Ed as indicated I'm going to walk you through our financial highlights for the first quarter fiscal 2021 ended April 30.
We're pleased to report quarterly revenues of 83.7 million this quarter up 7% from revenues of 78.0 million the first quarter of last year.
With the continued strengthening of the U.S. dollar against almost all other currencies. We are once again hit with a negative impact from foreign exchange.
Without the impact of foreign exchange on revenue, if we would have come in almost 1 million higher this quarter when compared to the first quarter last year.
Hi revenue mix continues to be very strong with services record services revenue 74.1 million or 89% of total revenue in the first quarter, an increase of 11% from services revenue of 67.0 million or 86% of revenue in a same quarter last year.
In addition license revenues came in at 1.8 million or 2% of sales in the quarter.
While professional service and other revenues came in at 7.8 million or 9% of total revenues for the first quarter of this year.
Gross margin was solid at 74% of revenue for the quarter, which is consistent with the gross margin achieved in the first quarter last year.
From an operating cost perspective, while we did not qualify for any significant benefits from the government support programs that were introduced across our operating regions related to the pandemic.
Consistent with our standard operating approach, we were able to quickly make some changes to our operating cost structure in an effort to address the estimated impact of the pandemic on our business.
From early March these cost saving activities included the general freeze on the hiring of new staff members.
Dan and all travel and a pause on most external marketing events, including the cancellation of our own user group events, which had been scheduled to occur.
This past quarter.
As a result of these adjustments to our cost structure as well some continued growth in revenue for the quarter.
We were able to achieve a record adjusted EBITDA of 33.0 million or 39.4% of revenue up 15% from adjusted EBITDA of 28.7 million or 36.8% of revenue in the first quarter last year.
With the onset of a pandemic. We're also able to quickly react with an increased effort on the collection of receivables from our existing customers.
We also had the benefit of providing services that are generally very essential to the operations of our customers.
So as a result, our days receipts that day sales in receivables increased only slightly to 38 from 38 days of revenue at the end of the fourth quarter last year, increasing to just 39 days at the end of Q1.
As a result cash flow generated from operations came in at 27.5 million or approximately 83% of adjusted EBITDA in the first quarter. This year.
Which is that within our target range and pretty comparable to operating cash flow of 23.4 million or 82% of adjusted EBITDA in Q1 last year.
Going forward subject to unusual events in quarterly fluctuations, including the challenges with a pandemic creates on the general economy and our customers.
We expect to continue to see operating cash flow conversion to be in the range. They expected range of 80% to 90% of our annual adjusted EBITDA.
Over the balance of fiscal 2021.
From a GAAP earnings perspective, net income came in at 11.0 million or 13 cents per diluted common share in the first quarter, an increase from net income of 7.3 million or nine cents per diluted common share in the same quarter last year.
Has that said overall, we're pleased that we're able to continue to generate solid operating results in the first quarter. Despite the significant headwinds that arose as a result for the pandemic.
If we look at the balance sheet, our cash balances totaled.
56.0 million at the end of the first quarter, while borrowings under our revolving credit facility with 9.7 million for a net cash position of just over $46 million at the end of April.
In addition, we continue to have just over 340 million available could be drawn on our existing credit facility with the ability to expand that line of credit by an additional 150 million if needed and.
And we also have approximately 500 million additional capital that can be raised under our existing base shelf prospectus.
So we continue to be very well capitalized to allow us to consider all acquisition opportunities in our market consistent with our business plan.
As we looked at the second quarter of this year.
We should note to follow.
After incurring approximately 1.0 million in capital additions in Q1, we expect to incur approximately four to 5 million additional capital expenditures for the balance of the year.
With this balance expected to include further enhancements to our network security and infrastructure.
We expect amortization expense will be approximately 39.3 million for the balance of fiscal 2001 with this figure being subject to adjustment for FX changes and future acquisitions.
Our income tax rate came in at approximately 28% of pre tax revenue in the first quarter, which is slightly higher than our statutory tax rate.
This is due to the impact of certain permanent tax differences, which are mainly related to stock related compensation that is nondeductible in Canada and the United States.
Going forward, we've expected our consolidated tax rate will continue to trend in the range of 27, 30% to pre tax income over the balance of the year, although as always we should add that our tax rate may fluctuate from quarter to quarter from onetime tax items that may arise as we operate internationally across multiple countries.
We also expect stock based compensation.
That will come in approximately 4.6 to 4.8 million for the balance of fiscal 21 subject any forfeitures of stock options or share units.
And finally as Ed mentioned earlier in order to further address the potential impact of the pandemic on our business subsequent to the ended the quarter on May 19, we implemented a 2021 restructuring plan that will reduce our global workforce by approximately 5%. While also also providing for the closure of several office facilities.
Across the business, where we determined that employees can permanently work remotely alternately alternatively work from other Descartes offices.
We expect the total cost of this plan to be approximately $2 million.
And while these restructuring activities are substantially advanced we expect that they will be completed over the next six months.
Once complete we expect that these activities will result in savings of between six and $7 million on annual basis.
And with that I'll turn it back to add to wrap up with our baseline calibration.
Great. Thanks, Alan similar to past calls I'd like to now address or calibration for Q2.
As it has been many years and it is still the case right now even through these challenging times our target for our business is to grow our adjusted EBITDA by 10% to 15% per year.
We do this through a combination of organic operations and combining with complimentary businesses. We use this 10% to 15% targeted to guide for helping us at our expense level.
As I mentioned earlier in the call to set the expense level for our business. During this pandemic, we've assumed that the run rate of April recurring revenues that are down about 5% from typical month will be the run rate of recurring revenues for each of May June and July.
We then undertook a restructuring around may 19th to also lower expenses about 5%.
So while we typically give you a calibration as of the first day of the quarter calibration here is instead as of May 19th the day, we started the restructuring.
And I know that some of you have in the past user calibration to give you a view to where our actual results will be I just want to caution you on doing that in this quarter. Our calibrated revenues are intended to reflect the visibility that we have to our revenues as we entered the core and as I just told you.
There was more uncertainty than prior periods in our revenue visibility this quarter. So the comparison between our Q2 calibration and the Q2 actual results may be much different than it has been in the past quarters, especially on the revenue from.
So with that let's talk calibration, we've provided a comprehensive description of baseline revenues baseline calibration and there are limitations in our quarterly report that we filed today.
To summarize how we see things as of May 19, 2020.
Using foreign exchange rates of 72 cents to the Canadian dollar.
A $1.10 to the euro and $1.22 to the UK pound and considering our run rate of recurring revenues in April 2020, and incorporating our fiscal 2021 restructuring plan, we estimate that our baseline revenues for the second quarter of 2021 are approximately 77 million.
In dollars and our baseline operating expenses are approximately $50.5 million. We consider this to be our baseline calibration of exactly to be up approximately 26.5 million for the second quarter of 2021 were approximately 35% of our baseline revenues as of May.
19th 2020.
As we've indicated previously.
That the adjusted EBITDA operating margin range for our business is 35% to 40%.
Those of you that have made a habit of comparing our baseline calibration to our actual results may note that it's challenging to grow adjusted EBITDA, 10% to 15% and staying in that operating range. The mass is probably going to work out that way. So we expect it will probably exceed our operating range for at least the next quarter as our business buckles down.
To help our customers during the next month.
Even with the operating margins temporarily above our normal operating range, we intend to still look for opportunities for investment either in our existing businesses or by bringing other businesses into the Descartes portfolio.
Earlier in the year, you saw us announce our acquisition of people box accompany the complements our pixie business by focusing on ecommerce warehouse management technologies as I mentioned earlier, we've seen strong performance from ecommerce related businesses over the past few months. So we'll continue to see how we can best top customers there.
We've also seen challenges in our customer base in booking freight and visibility as that struggled with finding air cargo capacity. So we'll see what we can do to help them and other modes of transportation.
We've also continued to see strong demand for our tariff and duty content and denied party screening solutions, which we think will be even more important to people.
The rethink their supply chains moving forward.
Things are certainly changed in the world and wherever there's change there's opportunity for Descartes.
With that thanks to everyone for joining us on the call today for those shareholders on the call we'll be hosting a virtual annual general meeting tomorrow at nine am separately as always were available to talk to you about our business by phone or virtual meeting and we hope sometime sooner rather than later in person.
With that operator, I'd like to turn it over for questions.
Thank you well now begin the question and answer session.
The question. Please press Star then one and on your Touchtone phone.
If you wish to emerge from the Q. Please press the pound sign on ASCII.
There will be delayed for the first question is announced.
If he is the speaker phone you may need to pick up the handset fair to for pressing the numbers.
So again, if you have a question. Please press Star then one on your Touchtone phone and the first question Paul Treiber from RBC capital. Your line is open.
Thanks, very much good afternoon, just wanted to better understand from the trends that you saw on April you mentioned I believe is transactions or maybe volumes were down 5% could you speak to what type of transactions.
Where do you saw that the greatest slow down in particularly in regards to.
Maybe that the annual minimums and a net amongst you haven't plates customers how that.
Net impacted.
Revenues as opposed to volumes.
So.
I think as you might have expected that the people that were hit the hardest where the airlines and closely followed by retailers that were in the business of operating retail stores.
And those those are the two areas that we kind of no significant hits.
Without comedy too much on individual airlines.
Minimums.
Some hits our minimum some did not have dependent on the circumstances, if you've been reading the new some of the airlines have put back passenger planes in cargo service.
That certainly helps but but still bitten suck up all of the demand for cargo I think thats going to continue I hear more and more plans from airlines converting larger planes too.
Cargo for the foreseeable future I think we'll see more and more of that and as far as retailers in malls. We just have to see when these malls open we're starting to see signs of it right now but.
For example, malls near me still are not open I know they are in some places in the United States and around the world but.
We'll be watching this closely.
And have you probably in your discussions of customers have any request changes to the minimum any place in the contracts.
How would you manage those negotiations during the past you talked about there's a possibility of trying to up sell additional services.
During those negotiations UK, but some insight into how that's progressing.
We haven't gotten a ton of that.
We'll see what happens in the coming months recession could have a you know the pending recession or maybe the recession started now could could change that for different industries that we don't anticipate right now a lot of unknowns, even for us with both with a lot of access to data.
But you're right certainly if someone's coming to us asking to change something that they don't really have a REIT contractually to do thats. The first thing we're asking Ms.
What else might you want to buy from us that might change our mind about changing something in the contract.
And at the same time, there havent been a ton of these conversations we've had some of our airline customers that.
Certainly we're in trouble, but most of the other business, we do business with we're still operating in some form or fashion and still needed the service to do that.
And lastly from me can you speak to your ability to conduct M&A in this environment match, you a lot of the process virtually.
But then how would you anticipate our or do you anticipate closing deals in the near term just given travel restrictions now there are challenges around social distancing.
Well I don't think anything that's going on right now would preclude us from doing this number we're in a technology business and our whole our whole business is predicated on getting people to move processes online a lot of people that we might buy we certainly know them pretty well from from past experience and oftentimes there people we've known for years.
So seeing them face to face isn't necessarily the most important thing to us.
I don't want to say, there's no impact to that but but certainly we're able to still operate in that environment.
Great. Thank you up Hassan.
Thanks, Paul.
Next question comes from Pasties Skus, Sir your line is open.
Great. Thanks, Hey, can you talk little bit about what you saw from clients in terms of demands for E Commerce, and writing whether we've seen an uptick in demand and how those cycles sort of late progress and then I've got two quick follow ups well, our ecommerce business has been doing quite well during this period of time I mentioned.
I think in the prepared comments.
Yes.
Well, we run a call couple of weeks ago someone's going Hey, it's.
Last Thursday was like Black Friday.
Terms of volume on our network just to give you kind of.
Example.
It's been going very well for us the routing business hasn't been.
And it hasn't been much impact on that most of the trucks are still driving around making deliveries.
Some customers of ours needed to buy more licenses to make big deliveries are more deliveries because their business was going nuts, we had a bunch of people in the medical device and the DIY space that.
That needed more but most of the businesses out there.
Making deliveries and.
Even if they weren't the way they pay for their service probably.
Maybe they use less trucks for a month or two but there.
The contract is such that they buy a certain number of trucks from us for an extended period of time.
Contractual commitments so.
Not a whole lot impact in our routing and scheduling business ecommerce and the other hand as it's been the shining star of this for us.
Great and then I notice you needed in addition to the executive team you added.
Gentlemen to take care of sales leadership role that idle.
Carts head for a while obviously managed sales well maybe talk about just is it's just more of the evolution of the businesses as you grow what if anything do we read into it and then they got one final.
We think that our sales will continue to remain strong we did pretty well through this period.
We believe.
Don't know any better than anyone else, but we believe we maybe through the worst of it and we thought we still pretty well through that period of time for business did a lot of our sales are not something that shows up next month, it's something that shows up over the next several years and those sales continued we had certainly some areas of the business, where there were a lot more sales than normal tariff and duty content.
Anything in ecommerce was was really selling very well people buy more and more stuff from us with some things that were down a bit certainly.
If you're trying to sell something when airline in the past three months it was difficult to get their attention.
But net net we thought we did pretty well.
Great last one just on the office footprint, how are you thinking about sort of recalibrating that going forward as several offices, but.
How would you think about maybe moving even more of the staff virtual thanks, well yeah. Thanks Paul.
We'll have to see I mean, we did close a couple offices in this restructuring.
They weren't gigantic offices or anything there things that may be made sense in the long run anyway.
We're just have to see how this goes I probably were were no not very dissimilar from other countries companies and we probably don't know right now what's going to be the impact on offices I do I did notice how quickly we were able to move.
Front I'd say the normal timing, maybe about 30% of our workforce works online or how am I should say.
And all of a sudden 100% of our workforce was asked to move home I was.
Surprise been really proud of our people how fast that happened in how smooth that transition was.
What does have to see when they go back how many people feel like going back to an officer. It's for a company like ours, it's never been something we've been particularly concerned about and at the same time, you have lots of employees and I know it was difficult for them. Good talking personally about it where they go Hey, I got two little kids at home in their Scream at you know and they're not in school right now and it's difficult to work from home.
For those people so they need an office so I think you're going to see offices go way for us, but I think.
We may come out of this was.
A little higher percentage of our employee, saying, Hey, I can work from home or where I can work from home.
Three days a week now and we'll just have to see what happened there.
Thanks.
We.
Your next question comes to NAV files from William Blair. Your line is open.
Hey, guys did Robinson on for Matt I, just had a question on the restructuring plan I was wondering if.
You can maybe shed more light on where those workforce reductions will be coming from about the more the sales that side or research and development just hoping for some more clarity there.
I was more things more operational things.
The biggest area and it makes sense. If you think about it we were getting a lot less calls and customer support through this period of time and.
As a result, you need less customer support people and fix to handle the buying we did we get a lot of called everyday.
That that we have kept people available to handle on all of sudden Nichols went down I was probably a good examples of areas that we did that.
Otherwise.
You know was minor small pretty small percentage of our workforce.
Minor areas across the entire business, but.
Couple areas, where like support where where we had less work to do was more obvious place to do to to make some cuts.
Okay.
Thanks.
And your next question.
Justin line from Stephens Your line is open.
Thanks, and good afternoon.
So maybe a follow up on.
Restructuring commentary and that question. So I was curious if you could provide a little bit more color on how you came to conclusion that 5% with the right number in terms of that the head count reduction I know add you gave the commentary on how you're thinking about that the second quarter, but maybe you could talk.
Bigger picture, what kind of recovery scenario. It is our downturn and then recovery scenario is being factored and as you thought about the magnitude of that reduction and could you flex down more it ends up being longer or more pronounced in return for the magnitude than you expect right now.
Sure.
Through the answers to that's pretty simple straightforward, we looked at what happened in April and he went hey, most of the world was shutdown in April.
Beginning Dan and so that should be a pretty good indication of where our transactions and transaction subscription revenue.
And would be at its worst case.
We're not positive back.
I told you when we did calibration we.
Assumes that May June and July would be just like April.
From a revenue perspective, that's how we came up with the 5% our revenues were down 5%.
We took our cost up 5% to match that.
We're hopeful that that could be better than that and we have a little especially around here that we've said for years as as we recovered.
15, 20 years ago from.
From the way the business was performing back down and.
I always say.
Planned for the worst and hope for the best and I think we're doing a little that right now right we kind of.
Hey, I think April is going to be the worst of it because certainly now in May you see businesses opening backup so hopefully april's the worst of and our revenue was down 5% in April and we went when you look let's take our cost down 5% too so that we line up with that.
We are hopeful that may or June July actually in a better than that but but we're planning for it to be just like April.
And I, otherwise I don't know, what's going to happen going forward.
Other than anybody else does right will will the recession actually be worse than it was an April you know later on in the year, where we end up having to go back into quarantine at some point I don't know.
But.
We figured it was a fairly conservative approach to it just to kind of plan for April being nor Sir.
Okay.
Great and then just a couple add follow up one on E. Commerce, obviously, youre seeing strength there, but I was wondering if you could help us out by sharing the percent of your business that you feel like it's tied to E. Commerce today, and then just a follow up on on acquisitions curious if you could comment on valuation.
And that Youre seeing in that in the pipeline today, if those that moderated at all with the macro pressure weve season.
Ecommerce roughly is around 10% of our business.
And.
We.
Have seen some indications that that there's a change in how you know acquisitions might be the valuations might be considered going forward in that.
The bunch a bunch of processes that had bankers in private equity firms involved the had pulled the process. They were looking for top dollar in this kind of acknowledged im not going to get top dollar right now.
Well have to see what happens long term experienced in the past and spend that this takes six to 12 months to kind of balance itself out right now no. One believes that their business has been impacted significantly.
Today and they speak if it has they think it's coming back quickly you know they have to probably.
I see what happens overtime and real I'd say this business you know that that's up for sale is never going to be the same we're not going to be seen for some period of time for their will change the purchase price. So.
Bob.
We've seen some indications of its certainly not.
Everything that we might expect to stand alone.
Okay. That's helpful. I appreciate the time.
Hey, thanks.
And next question comes from Peter car surface Stifel. Your line is helping.
Oh, Hey, I think that with Deepak.
Peter but I have for people so.
Maybe ill.
Hey, guys paid allow.
There were doing.
[music].
Quick follow up.
On now I want to previous question.
You mentioned ecommerce is strong in certain sectors were strong.
Health care and.
Okay.
And we'll have you.
That are part of them.
Pickups in post cobot, how much of that pickup in permanent or does some of this pickup go away when it comes back to kind of in the old ways. Okay.
Good good question I don't know I have a theory that that it's somewhat permanent right now.
Grandma got used to ordering stuff online who went Oh Wow. This is kind of easy yes, you keep doing this.
I suspect that that E commerce.
Took a jump.
Because of this than that but it's never going back.
But I don't know any better than anybody else.
I certainly read some things to that effect, but I don't know the back at the guys that wrote that know any better than I do you.
It would just feel that way to be.
Once you start to go Hey, I can order this stuff online I could order food on line once the stores get used to doing that.
You know.
Why go back.
And walk through happens, but that's kind of what I expect.
Got it Okay, and then I have couple of questions.
Curious I think you mentioned earlier that cost.
Extra pickup pickup in demand denied party screening I'm kind of curious about that business and the trade content business.
In particular visual compliance now that you've had the business for over a year.
Yeah. That's been what are you in the doing very well sites.
Yeah, that's almost.
Environment.
I think the biggest driver was governments, saying Theres no tire fund like half the terror book because it cobot.
And they dropped big portions of their tariffs and.
Yes.
You know if you make any glove right now or any mask.
You are trying to classified in a way that has you not pay tariffs and duties anymore, because everyone dropped or gloves, and masks tariffs and duties and.
You're probably seeing a lot of worked loves being classified as.
Gloves that could be used to protect.
Your hands and.
And as a result, I have to paying tariffs and duties on it.
Figure that out you need access to our database and so I think we're seeing more and more people.
Who hadn't thought to buy it because they were in a sleepy business that maybe didnt make a bunch of products all of a sudden thought there's a lot of value in that in that database I should get hold of it right now.
And so we've seen those sales certainly accelerate.
Got it but but in terms of denied party screening in particular or just general trade.
Content sales.
As opposed to customers entire.
What's the impact on that side.
That businesses hung in there I wouldn't say, it's accelerated to elect the tariff and duty content, but it's certainly done pretty well most of those customers are fixed fixed annual subscriptions to the service. So it's not.
Necessarily impacted on a day to day basis.
Got it and the my last question last quarter, you kind of cited that the.
Observations from China is a bit of a preview of what you might expect in the rest of world as a.
Down and then restarted in China, China recovers quite quickly and fully.
What's happened now in kind of Damian mall.
Recovery.
As things stabilize at those highlight previous levels or they settle down to a lower level and what money return.
Shyness seems to be going from our perspective, I know I'm not talking about what I'm, referring to the news because one of my concerns, but China is the maybe some of the news we were getting was 100% accurate.
But on our networks. The stats I was getting were 100% accurate and we definitely saw a big hit in China for a couple of weeks and then a recovery.
And that that recovery continues.
I don't know that it's exactly back to normal, but it's close.
I also don't know that the rest of world going to fall that exact pattern.
Okay, Okay, well well. Thank you for taking my questions I guess.
Is that the wait and see how the workplace.
Yeah, I keep what I will.
All right. Thanks TBD.
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Your next question Scott Group.
Research Your line is open.
Hey, good afternoon, guys, it's Rob on for Scott.
Ed in terms of the the revenue run rate update you gave us for for April can you give us a sense of Directionally, how that's trended kind of month to date and what typical seasonality and I realized there is absolutely nothing typical about.
What's that way.
I know May June I'm, throwing seasonality out the window for the moment, because we don't because it's all different right now.
Normally April may are good months by the way.
But.
I kind of said it in the prepared comments that we are assuming that May June and July are going to be the same as April and that I'm hopeful that we'd be better than napa, but in terms of our calibration thats. What we planned for so that we can be sure that we're running our business conservatively.
We have seen.
Slight impacts as economies opened up in may, but certainly not enough for us to change that answer.
Time will tell in the next couple of months how that.
How that improves over time, but I would expect it would but I don't know exactly how these economies are all going to open up and I didn't want to just too much.
We didnt see enough in the beginning of may to change that commentary.
All right really helpful. Alan in terms of beat the restructuring on that you called out how much of the benefits should we be expecting in kind at the fiscal second quarter and.
Just so that were calibrating our models properly in terms and the benefit in the fiscal third quarter before you get the full run rate benefit in not in the fiscal fourth.
Yes, I think you've got it there's a partial impact in the second quarter.
Lastly started this restructuring implemented on the 19th of this month so.
So in a majority of the quarter, but then the full effect will come into the third quarter. So there's a slight you take the run rate the annual run rate as we pick it has to be a slate.
Decreased it out on a quarterly.
The impact in the second quarter and the full impact in the third.
All right. That's helpful. And then I guess that the final one on our end can you remind us kind of today, where your contractual versus transactional.
Split of the business is and how and if there are we should be thinking about any changes in the back half just given.
Kind of the updated run rate that you provided us.
I think it's 41% transactional 47%.
Subscription to the question you're asking.
I don't anticipate that would change substantially.
Appreciate the time guys.
Thanks, Rob.
Our next question comes from Stephens. Your line is open.
Hey, Ed.
Hey.
Good evening around the latter once I get to report both March and April.
Okay.
You said that there was down 5% one would be.
In March and have been much.
So what was the what Mark what does that we get in February and March. She said April was down 5% was marched down more than 5%.
No no april's the worst of it.
I don't have I'll start my head what March was down but March was not down much at all.
And then.
You know April because remember at most things at least here in North America, most things started shutting down around the 19th Twentyth.
And I think people were just getting our heads around data units our March numbers were pretty strong.
Or at least.
Not significantly down.
And then April was big hit because such whenever no. One was working during April pretty much unless you were a.
And essential service provider.
Got it and let me sets. So so far we made very similar to April what you're seeing so down type event.
We're seeing that we're seeing a a slight uptick but if not enough for us to change that conservative approach to.
To provide any calibration numbers.
Got it okay and the restructuring add this this cost savings that $67 million. Once completed is it 50 50 people that we other state.
No I think it's much more people I don't know Alan if you want to want to a comment specifically on that.
Yes, Stephen it's heavy portion of it as people related to the.
Facilities portion was a much smaller percentage of that annual savings.
Okay right and then my last question the.
And then make restrictions that impacting your due diligence. So we should see a pause until things open up.
Maybe to fall on the M&A site.
Well without getting too specific no our M&A activities continue.
There's someone else ask your question a minute ago that are the challenge than it yes.
It's easier for you to go meet them in person.
Some of the processes have been pulled but certainly the some of the ones that we've been working on for a long time and.
Similar way that we do tuck ins all the time right businesses, we've known for a long time owners that we know personally.
You know, there's nothing stopping us forget this deals on and I wouldn't.
I wouldn't think you'd see us stopper activity certainly certainly all the things that we do to get to happen our continued.
Great. Thanks, guys.
Thank you.
Next question comes from Robert Young your line is nothing.
Hi.
Maybe just an additional M&A question.
Seems like some of the more attractive targets that you've been falling for the long term shake out in difficult times and so I was wondering if you could talk about.
Maybe any thoughts you have on things you've been following for wild maybe that comes more likely in the near term our medium term.
I'll leave it seem that yet.
And I couldn't tell you if we did.
You'll hear when the deal gets and now.
But.
I do have a belief that that kind of thing might happen.
But we it's.
No one's walking in right now, saying I'll sell it to you for half of what I would sell to your for.
Two months ago.
It just takes people longer to get their head around that and then.
And then the short period of time that we've had.
We will see what happens in the future.
It depends what happened in the economy over the next step bunch of months, but.
No, but continued down and people didnt companies didn't recover much I could see it certainly making its way into the M&A market, but doesn't usually happen fast.
Okay.
And then it seems as though.
The.
There's a larger demand for tracking.
Stuff that has been moving people are little more concerned about it even when the paper I think probably people are tracking.
Are you seeing.
An uptick in value added services on top of messaging, that's and could that stick around is there any cultural change and we keep our thinking about.
The tracking.
I think that track new will continue to be play more and more important role as we go forward or this is probably helped I think maybe more over.
And maybe even more importantly E commerce, and maybe just mentioned earlier I assume thats here to stay.
I think that.
If you look at what we do have very high level, we help people manage logistics processes remotely and everyone. In the world just got told that they need to be remote for some period of time I stick thats going to play very well for us known in the long run.
We very much look at this is a.
I would rather it didn't happen, but this could be some short term pain for long term game for us.
In that.
Things do we do to help people handle the complexity of their supply chain. The things that we do to help people remotely figure out what's going on in their supply chain.
Just got more important because of this and that in the long run that will be a tailwind for us.
Okay last one is just.
Pro services, but weaker than I was expecting that general slowdown or is that customers, maybe delaying some work or is that just harder to get some work done that social distancing, so anything to read into that than past line.
And I didn't see it is very far down but.
No I think our progress continue.
And no I don't think remedy fundamental problem.
Even pick of them is down pretty much on us.
Great. Thanks.
Thanks, Rob.
And our next question comes to Daniel Chan from TD Securities. Your line is nothing.
Hi, guys. Thanks for taking my question look I know your restructuring given the uncertainty from the pandemic, but are there any areas, where you're adding resources and there maybe opportunities to grow them coming out of the pandemic.
Well, we're we just laid up a bunch of people. So no. We the first thing we did one when this all happened was which was for the most part stop all new hires.
And.
We probably won't see us change that in the next couple of months just because we just laid off a bunch of people but.
I think in a long run a sure how should we expect our business to keep growing a long term and.
We will get back to it in full swing.
He is the economies in the world recover a little bit.
And when we do will will be hiring people.
Yeah between now and then it's going to be.
Yeah.
Specific instances, where we go after we got something with doing really well here, we'll get some more people to help sell that are or.
Modify the product to meet more customer demand things like that.
But.
It's not the first thing on are migrating.
Okay, and then you had an estimate on your exposure to end markets that may have the highest exposure to the pandemic you outlined or you highlighted airlines as well as retail mature exposure to some of these higher risk verticals.
But we're pretty big in the air business I don't know its percentages are retail we have some exposure to but.
Half of that exposure is ecommerce right. So.
While we have some customers that are really struggled and retail space we have.
Fairly decent size, maybe disproportionate size customer base, that's a that's doing quite well because E. Commerce sales are doing well because we've made a bunch of investments in ecommerce over the last five years, given us maybe more exposure to that them them, then we might otherwise have.
So probably with them.
Great. Thank you.
Thanks, Dan.
And that creates a question answer session I'll turn the call back Afek speakers.
Okay.
Okay, great. Thanks, everyone. We look forward to reporting back to you in Q2.
On Q2 in September and otherwise savvy, a great week, if you're looking for a meetings with US please feel free to a call in and schedule. We look forward to talk to you.
Thank you ladies and gentlemen, this this conference call. Thank you for participating you may now disconnect.
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