Q2 2020 Earnings Call
Welcome to the quarterly results call.
And then Karen and I'll be your operator for today's call at this time, all participants I mean listen only mode. Later, we will conduct a question and answer session. If you would like to ask a question. During today's presentation. Please press Star then one on your Touchtone phone. Please note that this conference is being recorded.
I will now turn the call over to Scott Pagan Scott you may begin.
Thanks, and good afternoon, everyone. Joining me on the call today are Ed Ryan CEO and Allan Brett CFO I Trust that everyone has received a copy of our financial results press release that was issued earlier today.
Portions of today's call other than historical performance include statements of forward looking information within the meaning of applicable securities laws.
These statements are made under the safe Harbor provisions of those laws.
These forward looking statements include statements related day to day carts operating performance financial results and condition Descartes gross margin in 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 FCC. The O I 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 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 add a great. Thanks, Scott Good afternoon, everyone and welcome to the call. Thanks for joining us today.
We carried out a card or strong momentum for Q1 through Q2, as we delivered yet another set of record results.
Our focus on delivering value for our customers continues to pay off as they trust us with more and more of their business. We believe that the market right now is more dynamic than ever global trade regulations can change daily as we're in a heightened climate of trade sanction regimes and trade disputes economic and operating conditions can turn on a dime, leaving companies vulnerable. If they can quickly adapt and consumers continue to increase their expectations about service delivery often they want to buy something now and get it within 24 hours at a time as convenient to them.
This could create serious supply chain and logistics challenges for even the most advanced operators dealing with surges in demand. While also remaining efficient outside of peak times is a tricky balancing act. We think this creates opportunities for companies that can remain agile with the appropriate technology systems fed by timely reliable information.
That's not all companies also need to be connected to a watt community of supply chain participants to be able to operate efficiently and react quickly.
This of course is why we continue to invest in the global logistics network. So that all the participants in the supply chain, whether you're a shipper a carrier or logistics intermediary have one place to connect collaborate and execute shipments in real time I will speak further on today's call about the challenges and opportunities. We are seeing in today's market and how customers are leveraging our network current challenges into opportunities as part of that also provide some updates on our recent acquisitions.
After our market update Alan will then provide a detailed overview or.
Of our financial results and then I'll finish up the call talking about our calibration for Q3, and our operating plans moving forward.
But first let's start by going over some of the key financial highlights for the second quarter of fiscal 2020.
We had another outstanding quarter of operating results and we're very happy with our key metrics fueled by our continued organic growth and our ability to successfully integrate acquisitions.
Revenue for the quarter was up 20% from Q2 last year coming in at 80.5 million. Our adjusted EBITDA continues to grow nicely for the quarter, we generated $30.2 million of adjusted EBITDA, an increase of 32% over Q2 of last year digital compliance continues to contribute to contribute nicely to this growth growth that is ahead of our plan of mid to high Twentys.
Adjusted EBITDA growth for this fiscal year compared to the previous fiscal year.
We can continue we continue to convert our EBITDA into cash converting 89% of EBITDA into cash and generating a record $26.9 million of cash in the quarter.
And consistent with our long term operating plans weve been investing cash back into our business through focused research and development investments and by combining with complementary businesses.
We combined with two businesses in Q2 core and step comp.
And we combined with best transporting August I'll go into those acquisitions in more detail later.
We also had a public share offering in the quarter and raised $245 million, increasing our capacity to do more investments at the right opportunities come up.
All in all another great quarter here at the car to round off the first half of the year, we have a stable cash generating business and we have a solid balance sheet with financial capacity to continue to acquire businesses and we're well positioned to continue our growth.
So with that let's talk a little bit more about today's market conditions in some of the tools, we have available to help customers manage todays complex market dynamics.
I'd like to start with some comments around what many of us are hearing.
About and seen in the North American freight market. If you think back to the summer of 2018, you would have heard a lot about capacity crunch, meaning that there weren't enough trucks to fill demand and rates were consistently rising this summer you're hearing about a number of carriers going out of business emblematic of businesses that werent agile enough to adjust to rapid shift in demand being able to operate efficiently and the peaks and troughs of the market are key to survive freight has always been cyclical. So this isn't a new concern what's new with the pace of change in how quickly market conditions can turn.
And whats also new is that Theres now technology that can help in the up and down markets by supporting more efficient use of resources and the uptimes need to be able to improve capacity of the resources available and to do this you need good information on what is moving right now and what is going to be moving in the future as well as what resources are available to help.
And the Downtimes you need to leverage the same information to make the most of what's out there and get an edge to keep yourself operating profitably.
Our macro point capacity matching solution is particularly well suited to help carriers of freight brokers with this challenge. Our solution is designed for freight brokers and carriers to partner on an opt in basis to share lane history and capacity to support better network alignment and utilization.
As I've highlighted before it isn't about Disintermediating logistic service providers from the customers. It's the opposite of that that's a tool to help logistic service providers and make them more successful it's about helping logistic service providers responded dynamic markets and self assembled to identify opportunities to collaborate remove friction and respond to market forces that are threatening their business.
As we continue to enhance the capacity matching solution and add more users to the community, we see more and more opportunities to really make a difference for our customers here and help them through.
Thrive in today's market.
We're also seeing how the solution can be used for sub communities, which was one of the drivers behind our most recent acquisition of best transport.
Best Transport the cloud based transportation management system provider focused on flatbed intensive manufacturers and distributors moving goods in the flatbed market requires domain expertise in special equipment and the associated transportation management processes have some unique characteristics. The flatbed market is therefore serve by specialist community a micro community of the wider freight market with its own history and cycles capacity and rate swings best transport build a great business, serving the specials flatbed community with the tools for the shippers carriers and logistics intermediaries.
Asset allocation in a dynamic market is never easy, but it can be even harder in a smaller community with a specialty asset we see this as a great opportunity to introduce Descartes macro point visibility and capacity matching to this market. We've already generated some interest with some of the best transport customers and we're excited to see where this takes us in the meantime, I'd like to welcome the best transport employees and wider community to date card. It's great to have you here.
While I'm at it let's switch gears and talk a bit about another acquisition that took place since we last spoke company called <unk> Dot Com you might have noticed that continually make a point of highlighting that we have solutions on our network for all of the participants in the supply chain shippers carriers and logistics intermediaries logistics is a multi party multi process challenge and if you want to all the participants in the supply chain to join your network you're going to be more successful. If you can add value with useful pool for each participant.
The board can help that community of shippers carriers and logistics intermediaries to execute additional processes in the lifecycle of a shipment the more likely you are to have them do more business with you and bring others into the community with the network effect.
Connectivity is critical for this to work and having the ability to onboard trading partners rapidly as key, particularly in an environment, where the supplier or customer landscape can change quickly. When you look at what's step commas done. They spent 15 years, helping supply chain participants connect and collaborate to exchange business documents and automates supply chain processes. They are very good at it.
Every shipments start with the purchase order at step calm helps us customers automate the process for what will ultimately turn into a shipment by combining with the global logistics network. We can now help that community execute those shipments with tools for booking and tracking in real time. So a warm welcome to all of us step calm employees and customers by combining with businesses such as step calm we continue to execute on our three part vision for supply chain information processing first you've got source data collection, which used to be manual, but more and more is becoming automated through internet enabled devices and an aiotv world such as telematics devices sensors, GPS devices and other mechanisms second EMEA trusted network communicate store assort that source data in a way that is useful to the entire supply chain and third into the applications that can leverage that data and helping make better decisions for your business to source data and content trusted networks and decision support applications.
Our Q2 acquisition of core is a good example, demonstrating all those principles.
Cores and electronic transportation network that provides global air carriers and ground handlers with shipment scanning and tracking solutions customers use cores network to accurately track International mail parcel and cargo shipments as well as us domestic mail and parcel shipment course experience in air cargo tracking led them to identify internet of things or Iot opportunities to better track. The containers that are used by air carriers. These containers are call you LTL yield the unit LOE device essentially it's the boxer palette. The cargo was loaded into before it goes onto a plane.
You will be management is a tricky thing and by incorporating Bluetooth enabled biotechnology core is helping the air carriers better manage their pool of assets. However, that's not where the value adds by combining course aiotv solutions with the global Logistics network. We can then linked shipment tracking well the tracking because we have the shipment data in effect. This will create more real time data events for consumption by the wider Descartes community not just the air carriers, but also the borders and their customers the shippers.
And even broader core as applications, which allow you to visualize what's going on with the utilities and mail. So that you can have accurate visibility over your air cargo source data collection from the utilities using the GL into processing information and applications to Annaly analyze what was generated.
We're pretty excited about the opportunity to enhance what we do for the wider error Karger community as we continue with the integration of core into our business to also welcome to the core employees and customers will come to the car.
Speaking of integration I'm sure people are keen to hear how things are going with visual compliant. So it's been a couple of minutes there.
At the top of the call I mentioned, the constantly changing regulatory environment. Our customers are facing everyday trade is getting more complex and the velocity of changes is increasing.
In order to stay on top of changes to duties tariffs taxes, and sanction list customers need to access to timely reliable information and new systems that can digest that information as a result, we've been building our content offerings over the last few years to help our customers get the right data at the right time.
Digital compliance provide software solutions content and services to automate customs trade in fiscal compliance processes with the process with a focus on denied and restricted party screening processes and export licensing.
The acquisition followed our other recent investments and trade content, including data mine customs info and MK data a business that was also focused on denied party screening.
Adding visual compliance not only gave us more scale denied party screening space, but it's also complementary to MK data as it add new functionality to us for us to bring to the market.
We're now six months into the integration and things are going very well, we're starting to see the benefits of the wider content teams working together, we've seen a lot of interaction between our content teams to standardize with best practices and the teams have gel very well we continue to make good progress on our plans to bring these teams together. So we can further align our processes and streamline the content collection and normalization process.
We're also starting to see more product synergies ahead, as we think about how we can leverage the visual compliance offerings combined with our customs info solution as an example.
From a go to market perspective, we've already seen synergies over in our European operations. Our team. There has landed a number of visual compliance deals. Following our successful cross training efforts over the first few months and from a financial perspective, we're really pleased with the continued growth the recurring revenues of the business and the financial profile remains very healthy. The business continues to perform ahead of our plans, which has contributed to our aggregate growth being ahead of our planned range.
Before handing the call over to Alan to talk a little bit more about the financials I'd like to people that continue to contribute to the strength of our business. So thank you to our employees for all the hard work they put in to make sure our customers get results our customers continue to get results and Thats why we have a successful business. Thanks to our customers continue to place confidence in the car as their network of choice, whether you're a shipper logistics intermediary carrier or even a government agency. Thank you for connecting and helping our community grow and thanks for your continued engagement.
I'd like to thank our partners for helping us continue to expand our ecosystem and thanks to our shareholders, both new and long standing for continuing to have confidence in that car and supporting us with your capital and with that I'll turn the call over to Alan to go through the financial highlights for Q2.
Okay. Thanks, Ed.
As indicated I'm going to walk you through our financial results for our second quarter ended July 31.
We are pleased to report record quarterly revenues of 80.5 million this quarter.
20% from revenues.
$67.1 million in the second quarter of last year. This revenue growth was achieved from solid organic growth as well as from our recent acquisitions.
And as well was achieved despite a negative impact from foreign exchange approximately 900000 over Q2 of last year.
Our revenue mix continues to be strong very strong with services revenue, increasing 20% to $71.4 million or 89% of total revenue in the second quarter.
Compared to $59.7 million in the same quarter last year.
And consistent also consistent at 89% of revenue.
License revenue came in at 1.1 million for just over 1% of sales in the quarter up slightly down slightly from license revenue of $1.3 million or 2% of revenue in Q2 last year.
While professional service and other revenue came in at $8.0 million or 10% of revenue.
Nicely up from $6.1 million or 9% of revenue in the second quarter last year.
Gross margin was solid at.
74% of revenue for the quarter, which is up slightly from gross margin of 73% in the second quarter last year.
This increase is mainly due to the addition of the visual compliance business acquired in mid February as well as with from continued growth in revenue from new and existing customers.
With solid revenue growth and continued strong cost control, we continue to see strong adjusted EBITDA growth of approximately 32% to $30.2 million or 37.5% of revenue compared to $22.8 million or 34% of revenue in the same period last year.
Consistent with past quarters, the FX impact on adjusted EBITDA was insignificant as we can as we remained fairly naturally hedged to FX movements across our business.
As a result of the solid operating results cash flow generated from operations came in at $26.9 million or approximately 89% of adjusted EBITDA in the second quarter. This year.
Up 40 for 48% compared to operating cash flow of $18.2 million or 80% of adjusted EBITDA in Q2 last year going forward subject to unusual events in quarterly fluctuations. We continue to expect to see continued strong operating cash flow conversion of between 90 to 80 and 90% of our adjusted EBITDA for the balance of fiscal 2020.
From a GAAP earnings perspective, net income came in at $8.6 million or 10 cents per diluted common share in the second quarter up slightly from net income of $8.5 million or 11 cents per diluted common share in the same period last year.
Overall, we are pleased with these operating results in the second quarter as strong revenue growth allowed us to make increased in businesses increased investments in our business, while achieving 32% growth in adjusted EBITDA and generating strong cash flow.
If we look at the balance sheet, our cash balances totaled $27.4 million at the end of the second quarter, while borrowings under our credit facility were $22.8 million for a net cash position of just under $5 million at the end of the second quarter.
As Ed mentioned earlier, we completed an equity offering during the second quarter issuing 6.9 million common shares at a price of $35.50 in us dollars, resulting in gross proceeds of $245 million and after all issuance costs net proceeds of approximately $237 million.
We used those proceeds from the the equity issue in the second quarter to repay a large portion of the balance.
That was outstanding and.
Under our credit facility.
We also used our cash flow of operations to repay approximately $30 million on the credit facility. During the second quarter. While we also drew approximately $43.8 million on the credit facility to complete the core transport and step calm acquisitions during the quarter.
Subsequent to the end of the second quarter. We also borrowed approximately $11 million on the credit facility to complete the best Transport acquisition and as a result, we currently have approximately.
$320 million available us to available to us to draw under the credit facility.
In addition, we are able to offer just over 500 million of capital under the current base shelf prospectus. So clearly 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 look ahead to the second half of this year.
After incurring.
Approximately 2.4 million and capital additions in the first half of the year, we expect to incur approximately $2.5 million to $3.5 million in additional capital expenditures for the balance of the year.
With this balance expected to include further investments in our network security and infrastructure.
We expect amortization expense will be approximately $27 million for the balance of that fly 20, with this figure being subject to adjustment for FX changes and future acquisitions.
Our income tax rate came in at 26.3% pre tax revenue in the first half of the year, which is very close to our statutory rate in Canada and the U.S.
Going forward, we'd expect that our our tax rate will continue to trend in the range of 25% to 28% of pre tax income.
Over the balance of the year.
So as always we should add that our tax rate may fluctuate from quarter to quarter from onetime tax adjustments that may arise as we operate internationally across multiple countries and finally, we expect stock based compensation will be approximately $2.6 million to $2.8 million for the balance of fiscal 2020 subject to any forfeitures of stock options or share units.
And with that I'll turn it back over to Ed to wrap up.
Hey, great. Thanks Alan.
Before talking about calibration I just wanted to highlight to everyone that we now set up the conference website in registration site for evolution 2020, our annual user and partner Conference evolution 2020, we will held at the diplomat Beach resort in Fort Lauderdale, Florida from Tuesday March 17th to Thursday March 19 2020.
It's a great opportunity to meet the people that build and deploy our solutions as well as the customers that use them. If you want to learn about the car. It's really a good investment of your time and I would encourage you to book early.
With that let's move onto our calibration for Q3 FY 2020.
Similar to previous quarters, we don't provide guidance, but we use our baseline calibration as a key metric relating to the ongoing health and strength of our business. Our calibration for Q3 includes the addition of best transport to the business for a partial quarter and assumes the following exchange rates 75 cents Canadian dollar 1.11 Euro to US dollar and 1.21 GBP to US dollar our calibration for Q2 is $78.2 million in visible recurring contracted revenues otherwise known as our baseline revenues. Our baseline operating expenses are $53.4 million. This gives us a baseline calibration of $24.8 million for adjusted EBITDA for Q3.
Some other key points related to how we are positioned for fiscal 2020.
We have a solid financial footing.
We have a healthy business thats, well calibrated and we have a healthy balance sheet, we are profitable and cash generating we have low capital needs within our organic business and as you've seen from our recent historical financial results. We have solid growth in our organic business. Our primary uses of capital are for continued use and acquisitions Weve completed 45 acquisitions since 2006.
And we have access to additional capital quickly should we needed before the acquisition to best Transport Best Transport at July 31, we had $23 million drawn on our $350 million line of credit and we have the ability to expand that line of credit to $500 million. If needed. We also have a preliminary shelf prospectus for up to $750 million.
Of which just over $500 million remains on used to raise capital by other mechanisms.
And in short we have good capacity for our planned acquisition activity.
We also have a strong acquisition pipeline that continues to be a lot of industry activity right now with consolidation.
Continuing in our market with our capital capacity and our execution capabilities. There are still a number of acquisition opportunities to expand the geographic reach functional capabilities trade data and content or community of participants on our network. We continue to see a lot of interesting opportunities out there to continue or even accelerate our pace of profitable growth.
We're seeing both larger and smaller opportunities and while we review everything as it comes our way, we're not just buyers for buyers sake.
The fact that we have an acquisition line of credit and a shelf filing in place Doesnt change, how we view acquisitions, we intend to continue to be prudent on valuation, but we're confident in our ability to deploy capital effectively.
Furthermore, we don't see the recent larger acquisition of visual compliance impacting our ability to continue executing on our plan as I. Just said we are confident in our ability to deploy capital as you've just seen with our recent acquisitions of core step common best transport and we have a robust integration methodology in place to help us quickly and efficiently integrate incoming businesses as a reminder, for our plans for the remainder of fiscal 2020, as we said in the past our belief for sustainable growth and long term.
As a 10% to 15% growth in adjusted EBITDA. However, given the scale of visual compliance for fiscal 2020, we indicated we would grow in the mid to high Twentys.
Given our performance in the first half of the year. We're now confident that we'll be at or just beyond the top end of that range.
As in the past, we intend to invest any over performance back in the business. Our growth is planned to come through a combination of organic and inorganic activities and as always acquisitions are not incremental to this plan.
We intend to continue to focus on recurring revenue and deemphasize onetime license sales given the current performance of the business and mindful of the FX environment. Our planned operating margin range remains at 35% to 40%, but please keep in mind. This could vary if we buy other businesses that need fixing up or if the FX environment changes both of which would impact that metric in the short run and finally as always we'll continue to make ourselves available to shareholders to answer any questions. We believe we've got a great business, we want to be available to help people learn about our business will continue to spend time and resources to get the word out and we hope you'll do the same so with that operator I'd like to open the call up for questions.
Thank you if you have a question. Please press Star then one on your Touchtone, some where if you wish screen moved from the queue. Please press the pound sign where the ASCII is going to be at least for the first question is announced and if you use the speakerphone you may need to pick up the first before pressing the NIM banks. Once again, if you have a question. Please press Star then one on your Touchtone phone and your first question comes from Raimo Lenschow with Barclays. Your line is open.
Hey, this is Mike on for Ryan I'll, Congrats on the quarter guys. Just wanted to touch base on kind of the strong acquisition pipeline that you talked about when you think about.
Just the puts and takes behind that right now for your business and in kind of expanding those EBITDA margins to more like 35% to 40% for the rest of the year can you talk a little bit about like kind of the balance you're seeing between maybe reinvestment back into the business, which obviously you guys have been doing on the R&D side and acquisitions has anything changed with visual compliance there and kind of that being stepped up at least for that kind of the short term.
No I think I think you're going to see us.
Operating the same way we have for that for the last number of years.
We continue to see a strong market for us for potential acquisitions, we look at every one of them, sometimes they're over price them and a lot of stuff in those markets.
Overpriced, because everyone thinks it's a great time to sell their business, that's true for some and not for others and we're just trying to do to to manage our business as well as we can and deploy our capital efficiently and I don't think you on our mind theres any material change in that in that belief, sometimes more acquisition come will come along with that looked like great fits to us and were able to get a deal done with someone and sometimes they don't and.
We don't push it if if it's not there.
Great and then just a little bit more detail hopefully on the cash conversion, which is especially impressive this quarter, an 89% can you talk about kind of the puts and takes there and and what drove that up because that's that's pretty a lot higher than what we've seen over the last couple of quarters are significantly higher as anything specific that you wanted to call out on that end.
Yes, not really we typically see conversions in that in the 80% to 90% range of adjusted EBITDA. So this one we're right at the top of that range interest expense went down in the quarter compared to last quarter.
Typically the second quarter's a can be a better collection quarter Silke. It's just one of those things. We we do see fluctuations last second quarter, we were at 80% it was a weaker quarter.
A couple of receivables didn't come in.
Ed just more and more of the same you can expect us to fluctuate typically in that 80% to 90% range and yet nothing terribly unusual.
Okay, and then just kind of going off of that would fit with the interest expense.
Kind of company coming down in the back half of the year.
Good John should we kind of expect maybe some similar trends, where it's a little bit more on the higher side on that part.
It's possible I think we did see in the notes that we still expect 80% to 90%.
There's there's a number of moving parts there.
We are a a victim of our success and in some ways, where cash taxes are slightly higher.
That may be in the in other years for us but overall.
Bob will update you as we go through the quarters, but I would at this point if I had the best guess would be right at 85% going forward and we'll we'll see how that plays out for the second half of the year.
Great. That's all I had thanks, guys congrats on the quarter.
Hey, Thanks, Mike appreciate it.
And your next question comes from Matt fill with William Blair Ma'am. Your line is open.
Hey, guys. Thanks for taking my questions.
I wanted to ask a few on macro points Sue.
First of all are.
Are you gaining any more traction with shippers might my understanding is that your primary exposure with with macro point is traditionally with with brokers, but have you seen anything on the shipper side.
And then also at year.
User events earlier this year I think it was discussed about.
During the European market with macro points sometime during 2019. So just was wondering what the update on that is.
Sure. Thanks, Matt.
Yes, we do business with a lot of shippers on that on the macro point side.
You are right our primary customer base is freight brokers and threepl and typically as our big customers of ours, we're trying to two.
What we are dealing with shippers trying to supplement the information that they're getting from their broker. That's the that's our primary driver in that market. We also have had a number of large shippers come to us over the last several years to sign up for the service and happy to do that.
In their place to usually supplementing something they're already doing with the freight broker and looking for for one place where that can go and get all the tracking information.
As far as the European markets are concerned, we're making a very cautious move in there you have.
A lot of personal privacy issues in Europe to get over and certainly some language barriers as well so restart at some of the English speaking countries and.
Being very careful about how we're collecting.
Information from drivers to not run afoul of any rules over there.
Got it and then.
I also wanted to ask on the capacity matching solution and.
Related to some of the dynamics that you mentioned going on and the trucking industry. Currently how are those impacting.
The demand for capacity matching from the broker side and then from the supply side with the actual carriers.
How does the current environment impact that for for capacity expansion.
Yes, it's tough for me to tell really were were just in the early innings of this so we're just getting started and not enough for us to see massive trends and other than.
The customers that we have gone through this pilot process and now we're kind of opening that up to two other.
Mid size brokers and Threepl.
Continue to expand their usage of the services they get into it.
It's not clear to me that.
What the what the impact of the market is yet on that how is that effecting next week, but not a big enough representative sample.
But I can tell you that the customers are using a getting a lot of benefit out of it and everyone that.
It started in those initial pilots is rolling the solution out and use it more and more effectively everyday so we're real excited about that.
Okay, Great. That's all I had thanks guys.
Hey, Hey, Thanks, Matt.
And your next question comes from Paul steep Scotia capital. Your line is open.
Great. Thanks, Hey, Ed can you talk a little bit about the e-commerce side of the business in terms of the uptake of a number of the solutions that youve pulled together that over the last few years there in terms of where you're at terms of feeding that into the base and growing that part of business.
Yes.
Sure thing that has been a big.
You probably noticed our organic revenue trending up over the last couple of years and ecommerce drive has been.
Big part of the reason behind some of that organic growth that you've seen in the business.
To ship Rush as a couple other ones that we did.
Have really been put together I think quite effectively by our team and.
Revenue in those businesses gone up substantially maybe even more than we thought when we bought the company.
I don't see it slowing down anytime soon it seems to be.
Right now it seems to be something that the customers are really after and that.
I think we're in a great position.
To take advantage of it so.
We've been real pleased with it.
Great and then the other area that we haven't talked or discussed a whole lot in the last few calls has been the customs area.
What's your take head on with the US doing a ace trial for low value goods I know, it's small trial and just going into test.
Is that does that all the potential for us to finally get the step function that we we talk about over a series of years in that customs business.
It'll help I mean, the big one that's been going on in the last six months its been helping US this is a cash.
Going into penalty phases, meaning if you don't comply you'd get Penalised and we helped a lot of customers get ready for that and that was a driver over the last six months.
There's still a number of other.
Over 100 countries that have said they are going to launch programs in this.
That have not done so yet so we're optimistic that they'll continue to do that.
And.
The little test that you see going on right now.
Low value goods.
I don't know where thats going to go yet.
That could be a big opportunity for us, but it's still a very small pilot right now and I don't think something you're going to see in the next.
Two quarters or three quarters, or so it's probably more like years before that takes hold.
I think our long term opportunity there is focused on export filings from a lot of the big countries that have already gone live within port filings and new countries Rolling out in four filings around the world. They're smaller countries. So Argentina go live last year's countries like that it's not a massive business for us, but it's every one of them helpful and our customers I think really appreciate us doing all those countries. So they don't have to do themselves.
Perfect. Thanks, guys.
Thank you Bill.
Okay and your next question comes from David Hynes with Canaccord, David Your line is open.
Hey, Thanks, guys nice set of numbers and I wanted to ask you just generically around trade volumes on that on the Geo and it's hard to parse out given the diversity of the business. So I you seeing any slowdown at all given the ongoing trade disputes and I guess as part of that maybe you can remind us kind of exposure to China that you have there.
We haven't really.
We read the same newspapers you do so we're kind of watching to see what will happen, we haven't seen much impact on our network, but some of that may make sense right I mean.
One of the one of the big reaction to see for companies, who are dealing with trade restrictions in certain countries is to start moving manufacturing to other locations.
From the perspective of our network, we don't really care, where the shipment comes from we care that gets made and so whether that shipment comes out of China or Vietnam. It's still shipment that's going on all over our network now if you live in China or Vietnam, it might be an issue.
But.
From the perspective, we take on it which is we're just trying to process the world shipments.
That's still ended up being a shipment on our network in which country. It came from is not particularly material to us.
The part that it has helped quite a bit and I think it may continue as if we are in it.
Our trade data content business, a big part of its focused on on database in tariffs and duties.
And over the last couple of years with all the rhetoric going on around the world not just in the U.S, but in other countries around the world too.
Has put a real high focused on that.
Trade data information and.
But one of the faster growing parts of our business.
As a result.
So we're pretty excited about that yes.
That makes sense.
One housekeeping for out and then I'm going to come back to you after a one.
Just the share count is expected.
Diluted shares for Q3 like just over 85 85, two is that kind of the right spot we should be.
For Q2 that might be a little high we get the share which issuance right at the middle of the quarter.
So a dilution of.
I have three at let's say three and a half million shares essentially for Q2, it will be the full effect in Q3.
I think its 84 and change here testing my memory about 84 million and change of the shares outstanding.
So.
In around that that's part of it just look at the balance sheet. The bottom the balance sheet, you will have the actual numbers, but about half the dilution effect for this quarter.
Our Q2 that just passed and the second part of it comes through Q3, yes, Okay got it.
And then Ed So Matt was asking earlier about capacity matching and the opportunity there and it seems like there's kind of two strategies in the market right. There is the folks who are competitors who are kind of.
Trying to Disintermediate, the threepl isn't that the freight brokers and you guys have obviously taken a different packages delivered tech to enable those folks can you just talk about kind of your view of the challenges that.
The competitors, who are trying to disintermediate will face and kind of what gives you confidence that you are pursuing the right strategy if that makes sense.
Well sure.
Thanks for asking actually.
I feel like I've seen this movie before right. It same thing happened in the late Ninetys early 2000 timeframe, where a bunch of dotcom came in and said we're going to Disintermediate intermediate this entire market. If you look back on that time every one of those companies did not succeed and our market in particular right.
That's just not how they did it they did not cut the freight forwarders and threepl that effect those markets grew substantially since then.
We don't think that easy to manage people freight and I don't think you're going to just quickly do it on a website and problem solve.
We because of what we have in macro point, where we have visibility into hundreds of thousands of trucks everyday and where they're going to be a few days from now we think thats very valuable information.
To help companies decide who the next carrier should be or who the negative drivers should be to take that next load and.
Excuse me to the extent that we can identify three or four trucks 10 trucks within a couple of miles of that location, who are available for pick up three days from now.
That information could save a freight broker 150 to $250 on a move by because they don't have to pay for for for backhaul or or dead heading to drive empty to the pickup location.
Theres two things you can do with that and you've kind of said it rather eloquently right. The first is you can say well I'm going to be afraid broker and I'll save that $200 and the second is the approach that we're taking which is hey, I do business with.
Five or 6000 freight brokers around North America, why don't I, just provide that information to them my customer and have them make the money and hope they'll give me.
Cut of it for providing that information, we have no intention of being afraid broker.
I look at the guys that are doing it at night and I say hey, the last time someone tried to do this they didnt do that well and.
But I have seen a lot of the market go that way right.
They come out they get investors and they get valuations in the hundreds of millions of dollars for a company that's doing two or $3 million in revenue and they have a lot of expectations to meet and I don't think they are gone and I look at our approach to it and I say I think it's a much more reasonable approach I think its something thats, helping our customers and help with the the market be more efficient.
And I think the guys that are that are trying to say, hey, I'll help the market be more efficient too and I'm going to put all the money in my pocket I think those guys or be ingredient I think they are eventually going to get Burke.
Okay. That's helpful. Thanks, guys.
Hey, Thanks VJ appreciate it.
And your next question comes from Justin Long with Stephens, Sir Your line is open.
Thanks, and congrats on the quarter.
So maybe to start with the adjusted EBITDA growth guidance for this year I just wanted to be clear on what drove that upward revision was was that just a function of visual compliance outpacing expectations or has your assumption on organic growth improved as well and maybe as we think about that EBITDA growth in the high twentys or something around that this year could you speak to the rough split of that between organic and acquisition driven growth.
Sure. So I'll make a couple of comments about it and pass it over down to see if he has anything else to add but at a high level.
We were bumping up before we bought bundled plans were bumping up against the top of the range that we had given previously which I think was 32% to 37%, we're getting closer and closer to that and you're absolutely right visual compliance is a very profitable company and.
It was.
Was behind Us improving and then moving the range up to 30 540, but I think.
Prior to that our business was performing very well and.
Continued to move up and up each quarter and then we bought visual compliance that we said what we are definitely going to be in that range now for the foreseeable future. So with that I am sure sure Ed was referring to the EBITDA as a percentage of revenue if you're if and that's exactly true on that front. If you are looking at it from an EBITDA growth perspective, where we came in at 32% for the quarter and as Ed mentioned in his remarks, where we had said in the previous quarter than we would be in the mid to high Twentys as a growth rate for this year, we're feeling more comfortable with the business overall, we've run visual compliance now for five and a half months we've added some small.
Additional items to our companies to our to our mix here the business is performing well.
Organically, so that led us to a bit more comfort to say will be the higher end of that range into the into the.
The thirtyish range percent as as far as growth in EBITDA. So we've kind of gotten now answers on both the EBITDA growth and EBITDA as a percentage of revenue.
And both have impacts of of our core business, improving and visual compliance improving.
And then separately you your last piece of the question was split between organic and acquisitions, while our typical model growing 10% to 15% a year, where I think our 10 year average of 17% you should roughly think of that as being roughly split half and half half organic growth in EBITDA half acquisitions in a year like this where we are going to be upward to around 30% or so.
Much more of that is coming from acquisitions, our core business is performing as we expect.
And that's that's great that's giving us a good solid EBITDA growth the rest is coming from acquisitions.
Great. That's really helpful and maybe following up on just organic growth I think if you adjust for FX in the quarter I get to organic revenue growth of around 6% any reason to expect that growth rate to accelerate or decelerate in the next couple of quarters.
You know, it's it's been in that range for the last few quarters.
Second half of last year on through this year.
I don't know.
For us remember, we're trying to grow a business here.
In a combined fashion, we're continuing to add pieces and solutions to that will be valuable to our customer base and so it's an organic growth story with acquisitions.
I guess I personally believe you'll see fluctuations in in in the organic growth from time to time, it's good economic times right now and we're seeing really strong good growth and and let's just see where the second half takes us.
We'll see how it how it plays out.
Okay Fair enough I appreciate the time.
Hey, Thanks, just local of call.
Your next question comes from Paul Treiber with RBC capital markets. Please your line is open.
Okay. Thanks, so much and good afternoon, just hoping that you could elaborate more on best transport and the Tms strategy in general.
You have a number of partnerships of Tms companies, how do you look at.
You decide between partnering.
With these companies and owning and Tms vendor themselves and then at what point would you consider moving into the broader Tms market.
Yes.
Best Transport.
A niche player in that business and that they have and a fairly unique player in that business and they handle something thats, a little more complicated than your normal truck move and that its flatbed and.
Any people get a flatbed because the cargoes.
Shaped and maybe more difficult to move we can't put it inside a trailer.
We wanted to have that functionality in our Tms, we've got our customers would benefit from getting access to that functionality certainly done by it too.
To go after any of our partners in that are in the broader Tms market.
I think if you ask them they would say that flatbeds, a relatively small part of most of their customers.
Our partnerships in that space are largely based around connectivity and.
That's why we're working with Sep and Oracle and a bunch of other.
Dms providers to be the network of choice for their customers. So that they can get connected to those carriers. If you think about it look best per transport brings us there and may be one of the more valuable things as connections to those flatbed carriers that.
May otherwise have been somewhat elusive because they are relatively small players in the market.
Now they are on our network and if you look at the best Transport acquisition from that perspective, you probably have.
Pretty good sense of where we're coming from and buying it we didn't think of it as a predatory move to our partners, we actually thought of something that would help them and.
They want to provide connectivity to flat bit providers in their Tms now I'm available to do that and I can do it all electronically.
So that's that's the driving force behind it.
And do you see is there an opportunity for synergies between best transport and macro point and possibly imagine.
For sure I mean, they bring a whole new set of carriers to the table a whole new set of.
Shipper customers of the tables, well and to the extent there's people using those solutions that also want to use capacity matching or brokers on our network that want to use capacity matching and now with the match up for flatbed move.
I have a much better ability to do that for them today than I did before the the best transport acquisition.
Okay, and then hoping to clarify something in the in the notes are just.
Hi, more details on it in regards to performance obligations quite strongly up 60% year over year and 10% quarter over quarter.
What are the drivers of that and how much is impacted by organic growth versus acquisitions.
Sorry, Paul can you repeat that for me please performance obligations as the 220 million this quarter.
Okay, so on a bit of a blank.
Performance.
As as it sorry, and then that was all I can take it offline with you.
Okay, Yes, please do sorry, you're catching me I apologize.
No problem I'll pass the line thanks, guys.
Hey, Thanks, Bob appreciate it.
Okay and your next question comes from Scott Group with Wolfe Research Scott Your line is open.
Hey, good evening guys, it's Rob on for Scott.
With.
Just following up.
Very well thanks, just following up in terms of the organic growth clearly in North America, we've seen some very light rail carload volumes as well as soft truck demand more broadly I was hoping if you could you could speak to kind of your view of the sustainability.
The organic growth as we look forward in.
It could be a softer freight market.
Well.
The short answer is I don't know, but I also don't know, what's going to happen to the freight market any better than than than anyone else.
In our industry.
Other than to say that if transportation volumes go down we get paid by the shipments it to process transactions and if theres less transactions. This theres.
Theres less revenue for us and therefore.
Either or our organic revenue is going to slow or we're going to have to sell more to to keep it growing at the rate that it is.
I don't have a crystal ball. So we don't put stats out there about what's going to happen in the future but.
We know over the past couple of years have gotten a lot better see.
That in the results and I think thats due to us having to a better and better network every day with more and more participants on it I think thats, partially due to the quality of some of the acquisitions that we bought in the past few years, where they're growing at a faster clip than some of the things that we bought in the past and.
And then our company doing a good job of integrating those acquisitions in and getting them to perform even better than they were before we bought them I hope that continues.
We have to do that with some headwinds in the transportation market.
Pushing against US it will make it a little harder if the transportation market continues to boom as it has over the last couple of years, that's going to make it easier for us and give us potential to do even better.
So.
I don't know that because that I'm prepared to predict what can happen for you, but I'm happy it's it's growing right now and it's been growing nicely over the past couple of years and we hope it continues and if if not we're going to do our best to manage through.
Yes, I understand and appreciate that color you guys really clarify it up in terms of some of the concerns that we've been hearing out there in the market about.
Trade and shifting potentially some shifting volume from China to other Asian countries and the impacts for credit card.
I was hoping you kind of speak a little bit about in the news release seats and border consolidation with the recent closure, but by DSV.
How does that impact if we're seeing kind of growth of some of the bigger participants how does that impact the descartes as we look for.
Well I want to be in particular has been pretty good for us right now.
DSP is one of our best customers and they bought panel painted it was also a very good customer of ours and.
We're looking for them to do even if if we can get DSP to do all this sorry, if we can get DSP to do all the stuff with panel PETA that DSP is doing with their own business and I think that their plan.
I look for that to be be pretty good news for us is certainly there where they're talking at the moment. So.
We're excited about it we like the DSD guides they've been great customers of ours. They have grown from a mid size player to one of the larger orders in the world and we're excited for them and excited to help them.
That's helpful. So should we should more be thinking about the potential as if you've got a relationship with the acquirer as being accretive or not.
Per se relative to the target.
Well I think you're going to find we're going to have in the freight forwarding space, we're going to have relationships with most of the acquirers.
It's how strong that relationship is in the case of DSV, it's very strong.
And Fortunately for us over the last 10 years or so as there has been a lot of consolidation in this market the bigger the bigger guys in that market tend to be our best customers.
They are the ones that have taken advantage of what we have more effectively than the smaller and mid sized guys. So in both cases, it's worked out.
Pretty well for us they buy a smaller freight forwarder, who use as some of our stuff, but not all of our stuff and now all of a sudden that bought by a bigger player who uses a lot of our stuff and as that small freight forwarder gets rolled into the bigger operation we tend to benefit.
All right really appreciate the color guys.
Great. Thanks appreciate are up.
And your next question comes from Deepak Kaushal with GMP Securities. Your line is open.
Hey, guys. Good evening, a couple of follow up questions for me.
On the recent acquisitions add just on best transport.
Was it.
The opportunity to sell capacity matching into a nice network the motivation behind acquiring best Transcore.
It was certainly one of.
We saw that opportunity as a pretty good one and at.
Something that that is not otherwise there the capacity matching space at the moment right because it's kind of a unique space flatbed is.
So that was certainly a big help I think more broadly.
We wanted to add these flatbed carriers to to our to our network.
And at the.
The ability to manage.
Flatbed move through our network and there's not a lot of networks out there that can do that most of that stuff done manually today and and now we have a chance to automate it not only for ourselves, but as someone mentioned earlier on the call for our partners as well.
Okay, and do you see like similar.
Or parallel nish networks that that could be well suited for capacity matching is that as reasonable strategy to go forward on some M&A.
Or is that my stretching further.
Well I think there are a couple of opportunities do that but I wouldn't say that thats going to be a core driver to our M&A strategy.
Best Transport came along its bit of an opportunistic.
Thing for US we solve for sale and went Oh that would that actually might be a good idea and then we went and talked to him and starting to like we'll be here and and thought we can prove that thesis out and did so.
I don't know that you're going to see us continue to look for those opportunities if they're around we'll we'll take a look at it and see if we think it's a good fit invest transports case, we we thought it was so we did it.
I think you're more likely to auto after stuff in the trade base and some of the.
Some of the areas that we have been investing in over the last couple of years.
Sorry got it but in terms of driving capacity matching adoption.
Not necessary to find these clothes networks you can do it.
I think the biggest thing it's going to drive capacity matching is going to be us going out and getting more and more of our brokers.
Heads around using a third party to provide them with this this information and using that as a.
Competitive advantage for their competitors and maybe for some of these dot com to think that they are going to do it without a broker.
Got it and then just on step column.
On you gave some good color on.
On the supply chain integration networks that they havent.
I wanted to know if you can go a bit further in terms of how different it is from integrating a transportation network.
Supply chain versus transportation and in terms of supply chain.
How penetrated are you or how much of your search yellen is is related to supply chain specifically.
And what kind of.
Become.
It could be 10%.
Business.
Yes so.
Obviously, we're much more focused on on the logistics side of it and that we have just about every.
Transportation provider of size in the world on our network.
And so we are we're a very large player in the logistics network space. We're a relatively small player in the supply chain network space. We eventually believe these things need to come together.
They are different it's different processing a purchase order.
At HSN versus a bill of living in a booking and transportation status messages, but they all need to be done and really in our mind. They should be done by someone who can put them altogether. So that the customer the retailer manufacturer can get complete visibility into.
Order to this thing with my purchase order.
I created an asthma and that said what I'm going to be shipping Ivan created a bill of lading booking goal of leaving and then started getting status messages back so that I can see where my stuff is on a line item basis versus.
Getting information back from a carrot, it's like how your containers here well that's not that helpful. Unless you know whats in that container somewhat can do all that figure that could put all that information together. They can start to give you SKU level information as to where your inventory.
Is around the world and when you think it's going to get to the places that needs to get to so that you can better manage your supply chain. That's at a very high level, that's what's behind us buying step common.
I think you'll see us do more of that moving forward.
Got it and are there certain industries that are more.
Receptive to bringing both of these things under one network in one of those.
No no I don't know that its initiatives are more or less certainly the bigger industries out there retail just take for example is one of them.
The groups of people that seem to have the most.
Game by doing this so I think you'll see us.
Great for that group more than more than most.
And that they have an awful lot of inventory their volumes are extremely high and if they can start to sync up some of these things that can really save a lot of money. So thats thats.
Certainly I think been been something that that's driven a lot of not only of our acquisitions, but but visibility and things like that into the supply chain space.
Okay got it. Thank you thats. It from me I was very helpful. Thanks.
Hey, great. Thanks deep.
Okay and there are no more questions at this time.
Okay, great. Thank you guys.
Appreciate your time, and we look forward to reporting back to you next quarter on our Q3 results.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.