Descartes Systems Group Inc

TSX:DSG

Earnings Call Transcript 2018-Q4

[Operator]

Hello, and welcome to the Descartes quarterly results call. My name is Brandon, and I'll be your operator for today. [Operator Instructions] Please note this conference is being recorded. And I will now turn it over to Scott Pagan. You may begin, sir.

[J. Scott Pagan, President and Chief Operating Officer]

Thanks, and good afternoon, everyone. Joining me on the call today are Ed Ryan, CEO; and Allan Brett, CFO. I trust that everyone has received a copy of our financial results press release that was issued earlier today.Portions of today's call, other than historical performance, include statements of forward-looking information within the meaning of applicable securities laws. These statements are made under the safe harbor provisions of those laws. These forward-looking statements include statements related to Descartes' operating performance, financial results and conditions, Descartes' gross margins and any growth on those gross margins, cash flow and use of cash, business outlook, baseline revenues, baseline operating expenses and baseline calibration, anticipated and potential revenue losses and gains, anticipated recognition and expensing of specific revenues and expenses, potential acquisitions and acquisition strategy, cost reduction and integration initiatives, and other matters that may constitute forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties, assumptions and other factors that may cause the actual results, performance or achievements of Descartes to differ materially from the anticipated results, performance or achievements implied by such forward-looking statements. These factors are outlined in the press release and in the section entitled Certain Factors That May Affect Future Results in documents filed and furnished with the SEC, the OSC and other securities commissions across Canada, including our management's discussion and analysis filed today. We provide forward-looking statements solely for the purpose of providing information about management's current expectations and plans relating to the future. You're cautioned that such information may not be appropriate for other purposes. We don't undertake or accept any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements to reflect any change in our expectations or any change in events, conditions, assumptions or circumstances on which any such statement is based, except as is required by law.And with that, let me turn the call over to Ed.

[Edward J. Ryan, Chief Executive Officer and Director]

Okay, great. Thanks, Scott. Good afternoon, everyone, and welcome to the call. Thanks for joining us today. As some of you may know, we're hosting our call this quarter from beautiful West Palm Beach, Florida. We're about to kick off our Evolution 2018 Descartes Global User and Partner Conference. It seems fitting that we're about to kick off our biggest conference ever with record attendance from customers and partners at the same time as we announced another record quarter and fiscal year. The theme of this year's conference is consistent with one of the larger factors impacting our business. The conference theme is titled, Logistics: The Engine of Ecommerce. Not many people would argue that the rise of e-commerce is putting traditional business models at risk. And while it may very well make our lives as consumers simpler in many ways, the business environment is getting more and more complex. Increasingly, demanding consumer buying expectations are now finding their way into the B2B market. This brings complexity in the business, and we're here to help isolate our customers from this complexity and to help them thrive in this challenging environment. Our focus on helping our customers manage the life cycle of shipments across transportation modes, geographies and commodities on one platform continues to resonate in the market, and we have grown as our customers and partners have supported our vision. In the fiscal year just ended that we're announcing today, we added even more customers and solutions to the Global Logistics Network, and we've already kicked off 2019 with a new addition to the family with Aljex, an acquisition that complements our ongoing investment in our MacroPoint business. We're working on some pretty exciting developments in this area, and I'll speak to that a bit later in the call. In fact, we've got lots of exciting developments across the business, and today, I'll walk you through some of those business highlights. And if you happen to be here in Palm Beach, you can see for yourself and talk to us about what's going on. But before I speak to that, I'll start the call by taking you through some of the highlights from our record financial results this quarter. Following my business update, Allan will then take us through the financial results in a little more detail, including a recap of the full fiscal year results, and then I'll finish up with some comments about our calibration for Q1 and our operating plans moving forward. So let's start by going over some of the key financial highlights for the fourth quarter of fiscal 2018. We had another record quarter of revenue, and we're very happy with our key metrics. Our adjusted EBITDA continues to grow in line with our plans of 10% to 15% per year. For the last quarter, we generated $21.4 million of adjusted EBITDA, an increase of 16% over Q4 of last year. Revenue for the quarter was up 20% from Q4 last year, coming in at $63.6 million. We converted 92% of our adjusted EBITDA into cash, generating $19.6 million of cash in the quarter. And consistent with our long-term operating plans, we've been investing cash back into our business through focused R&D investments and by combining with complementary businesses. So to summarize, great quarter to round off a great year. We're really happy about where the business is right now, and we're really excited to kick off our Global User conference, which promises to be a great event. With that, I'd like to talk a little bit about some of our innovations and investment, many of which we'll be showcasing this week at our Global User conference. Our customers are brought together by our Global Logistics Network and mission. We want to help people move shipments of all sizes to and from anywhere in the world, whether it's domestic partial shipment or international cargo or something in between. The GLN is a place where shippers, transportation carriers, logistics intermediaries and government agencies can share information and leverage that information to make better decisions. The network is key because logistics is a multiparty problem, and it's complicated. Regulations are changing every day. Customers are asking for more options every day, and companies like Amazon are disrupting the status quo. We're looking to isolate our customers from complexity and give them a competitive advantage in the market, and how we do it with the Global Logistics Network by bringing together a wide range of capabilities, content connections all in one place so the customers can, number one, research and plan who to do business with and how; two, connect to a global trading community to collaborate and share information; three, execute and monitor shipments and react in real time to changes; and four, analyze data with business intelligent tools -- intelligence tools to improve for next time. So you can think of each area of our business through that lens. Each of our solutions help one or more, multiple, unlikely multiple parties improve processes in the life cycle of a shipment. And while all of our customers are part of the Global Logistics Network, we have a -- several different solutions that our customers use in various combinations. I want to highlight some of our key investments and developments in the 5 different solution tracks that we're showcasing here at our user group. The first track I'll speak to is our private and dedicated fleet track. Descartes has a long history of helping fleet owners improve route optimization, specifically considering the impact of e-commerce suite of solutions to help retailers transform their delivery operation and customer experience into a truly omnichannel offering. This has been a great area of growth for us. We continue to be the go-to company for retailers who are looking to distinguish their business based on their logistics operations. Our customers can use our dynamic schedule and home delivery solutions to enhance their customer experience right from the online delivery appointment, booking through to the mobile monitoring and delivery at the customer's door. Some key innovations that will be showcased here at User Group relate to our mobile and telematics offerings that are integrated with our route planning solutions. And that leads me to our second major solution track, purchase transportation. Our transportation management solutions, or TMS as you'll hear them referred to, help companies of all sizes manage purchase transportation. This can range from managing small parcel shipments to less than truckload and full truckload shipments as well as air, ocean and rail shipments. Two exciting areas for development for us in this track relate to MacroPoint and our most recent acquisition, Aljex. With respect to MacroPoint, I'm sure many of you are looking for an update on how the business is progressing, and I'm happy to report that it's continuing to grow. We've been successfully integrating the product with our Descartes solutions, and we work hard to achieve some quick synergies on the customer side, where we continue to land some really interesting deals with both freight forwarders -- or freight brokers and shippers. Our partner community has been very interested as well. We're working hard to put integrations in place with the larger partners, like SAP, whose customers are increasingly asking for shipment visibility. At our conference, we'll be demonstrating the investments we've been making to leverage MacroPoint's content to provide transportation brokers and shippers with a predictive freight capacity to help identify early opportunities for additional freight moves. Unlocking transportation capacity represents one of the greatest opportunities for freight brokers, carriers and shippers to really improve service while reducing transportation costs. And it gets even more interesting when you think about how this fits together with Aljex, our most recent acquisition. Aljex provides back-office transportation management solutions for freight brokers and transportation providers, helping customers manage shipments from order creation through to execution, including real-time tracking on our MacroPoint network. Both MacroPoint and Aljex acquisitions illustrate our commitment to the freight broker community on our Global Logistics Network. Aljex helps freight brokers every day run their business and manage shipments, and MacroPoint is focused on giving these same brokers visibility to those shipments while they're in motion. We strive to continue to deliver solutions that help intermediaries serve the logistics market even more efficiently. It's a really exciting time for this part of our business. Welcome to all the Aljex employees, customers and partners as they join our ecosystem here at Descartes. Third solution track I'll speak to is our freight forwarder, broker and customs track. Every quarter, I hear of new start-ups that are looking to disintermediate the freight forwarders and 3PLs from the logistics process. We are not trying to do that. We believe the freight brokers, 3PLs, customs brokers, NVOCCs and any other intermediary will continue to play a key role in international trade well into the future. As a result, we continue to expand the solutions we offer to this important group of industry players. This is one of the reasons why we invested in MacroPoint and Aljex to provide tools to our customers to help them be even better service providers. We have targeted solutions for forwarders and brokers that can help them interact with carriers, other intermediaries and their customers. And they can also make use of the wider solution sets on the GLN, such as our content tools and our e-commerce footprint. We also continue to build out solutions for our customs filings and security compliance. As we've talked about on these call before, rules and regulations are constantly evolving, and we have a team of people dedicated to staying on top of this and providing solutions to help isolate our customers from complexity in this ever-changing landscape. And you don't need to look far for changes in trade flow. We've been talking for over a year now about Brexit, and I'm sure everyone read about the potential trade war as heightened steel and aluminum tariffs may come into play for imports into the United States. I can't tell you exactly how this plays out, but we do know that when duties and tariffs change, supply chains adapt and people need tools and data to help them make better decisions. And that's what we're here to do. And that leads nicely to the fourth solution track, which is our global trade content track. To make informed decisions, you need timely and relevant data. As it relates to duties and tariffs, our customers -- our Customs Info content team is continually gathering, cleansing and normalizing duties and tariff data from more than 160 countries around the world. This timely data is critical for companies managing large international supply chains. And if it turns out that you're going to modify your supply chain as a result of any changes in duties and tariffs, you may need to look for new suppliers or potential buyers, and you can do that using our Datamyne tools. While you're at it, you also want to leverage our MK Data content to perform denied party stream to determine if any of your potential new trading partners is on any denied party list around the world. And that's just one example of how our content tools are used every day. For those that attended the conference last year, you may have seen that our Datamyne sessions generated a lot of excitement. Since then, the business has been doing very well, and we've continued to look for ways that our team at logistics, trade data domain experts and data scientists can help us think about the data already flowing through the GLN in different ways. We'll be demonstrating our first result of that work here at User Group, whereby we'll be giving an advanced preview of an upcoming air content product. Last but not least, given this year's theme of logistics as the engine of e-commerce, let's talk quickly about our e-commerce focused solutions. We talked earlier in the call about consumer buying patterns changing and how that's making its way into the B2B market. We've also talked about how we're focused on helping customers with all types of shipments, large or small. We've recently made investments into this space and, in particular, investments to build comprehensive omnichannel solutions to help small and medium businesses deal with the complexities of e-commerce fulfillment and parcel shipment execution. Without a comprehensive omnichannel strategy that includes advanced parcel shipping capabilities, e-commerce, retailers and small and medium businesses alike can be left with escalating cost and poor delivery execution that can impact customer satisfaction. This is something we recognized a while back. Our e-commerce portfolio now combines our e-commerce fulfillment solutions from pixi* with our parcel execution capabilities from Oz and ShipRush. To give you an example, our customers can integrate with front-end e-commerce systems, collect order information, translate that into a mobile-driven, pick-and-pack process within the warehouse and initiate the shipment to the customer with seamless package labeling, rating, tracking and postage processing. This is a highly differentiated offering, and we're going to market with our e-commerce solutions very effectively with partners, which is driving some very nice growth in this part of our business. Before I hand the call over to Allan to talk a bit more about the financials, I'd like to thank some of the people that continue to contribute to the strength of our business. So thanks to our employees for all the hard work they've put in to make sure our customers get results. Our customers continue to get results, and that's why we have a successful business. So thank you. Thanks to our customers who continue to place confidence in Descartes as their network of choice, and thanks to those who made the trip down to Florida here for User Group. Thank you to our partners for helping us continue to expand our ecosystem, and a special thanks to those that are here at User Group as sponsors. Thank you to our shareholders for continuing to have confidence in Descartes. And finally, thanks to everyone involved in prepping for this User Group Conference. It's going to be a very special event. And with that, I'll turn the call over to Allan.

[Allan J. Brett, Chief Financial Officer]

Okay. Thanks, Ed. As indicated, I'm going to take you through our financial highlights for the fourth quarter and our year ended January 31, 2018. As Ed mentioned, we are pleased to report record quarterly revenue of $63.6 million this quarter, up 20% from revenue of $52.8 million in the fourth quarter last year and up 3% sequentially from the third quarter of this year. Service revenue remain strong, coming in at $61.6 million, also up 20% from the same period last year and consistent at 97% of total revenue. Gross margin was also strong, coming in at 73% of revenue for the fourth quarter, and this is consistent with the third quarter of this year and up slightly from 72% in the fourth quarter of last year. As a result of the -- of continued revenue growth and strong cost control, we experienced adjusted EBITDA growth of 16% to $21.4 million or 34% of revenue in the fourth quarter compared to $18.5 million or 35% of revenue in the same period last year. As a percentage of revenue, adjusted EBITDA was adversely impacted again this quarter by a weakening of the U.S. dollar against most other currencies, including euro, the pound and the Canadian dollar. As a result of these solid operating results, cash flow from operations came in at $19.6 million or 92% of adjusted EBITDA on the fourth quarter, up slightly from the fourth quarter of last year. Looking at our tax rate, we've reported a positive impact of approximately $700,000 in the fourth quarter related to the implementation of the new U.S. tax rules. However, we also had some smaller onetime items that partially offset this positive impact in the quarter. As a result, our income tax rate came in at 22% of pretax profits in the fourth quarter, slightly lower than the 22.2% rate recorded in Q3 and down nicely compared to the tax rate of 24.3% in the fourth quarter last year. As a result of all the previously mentioned items, GAAP net income came in at $6.7 million or $0.09 per diluted common share in the fourth quarter, an increase of 10% from net income of $6.1 million or $0.08 per diluted common share in the fourth quarter last year. If we look at our results of operations for the entire year, revenue came in at $237.4 million in fiscal 2018, up 16% from revenues of $203.8 million last year. Gross margin was 73% for the year, again up slightly from gross margins of 72% last year. Adjusted EBITDA for the year was $80.8 million compared to $70.1 million in fiscal 2017, an increase of 15% and consistent at 34% of revenue in each period. Cash flow from operations was solid at $72.1 million or 89% of adjusted EBITDA this year compared to $72.6 million or 104% of adjusted EBITDA last year. We should note that we continue to expect cash flow from operations to come in between 85% and 95% of adjusted EBITDA. But as we saw last year, sometimes, we will experience unusual items that will cause us to see results outside this range. Our tax rate for the year came in at 22.7%, down from 24.3% in fiscal 2017. GAAP net income for this year came in at $26.9 million or $0.35 per diluted common share compared to $22.8 million or $0.31 per diluted common share in fiscal 2017, which represented an increase of 13%. As Ed has already mentioned, overall, we are really pleased with these continued strong operating results as we closed out our fiscal 2018 year. If you look at the balance sheet, we ended the year with a cash balance of $35.1 million while we had $37.0 million drawn on our credit facility. As a result, we ended the year with a very small net debt position of $1.9 million. During the fourth quarter, we were able to repay $18 million on our credit facility. As you'll recall, we drew $80 million on our credit facility in August to complete the MacroPoint acquisition and now have repaid $43 million of this total in the last 5.5 months of the year. Finally, on our debt balance, we should also mention that we drew an additional $33 million on our credit facility just after year-end to complete the Aljex acquisition. As a result, as of February 1, we had about $70 million drawn against our $150 million credit facility. We continue to believe that with our current cash balances, the $80 million currently remaining undrawn on the credit facility, our ability to expand the credit facility by an additional $75 million as well as the expectation of continued cash flow from operations, we remain very well capitalized. If we look to fiscal 2019, to round out our financial picture, we should note the following: At this point, we see a minor positive impact from -- on revenue in the -- from FX in the first quarter. And as always, we continue to see -- to be fairly naturally hedged to FX impacts on our adjusted EBITDA and operating cash flows. Beginning this year, we will begin to adopt the new revenue recognition rules as outlined under ASC 606. We currently expect that there will be very little impact to our revenue recognition from the adoption of this new standard. However, we do expect to see an impact on our recording of sales commissions. Up until now, we have always expensed sales commissions as they were earned. And under the new accounting standard, going forward, we will be required to defer and amortize these sales commissions over the expected life of the customer relationship. In the first quarter, we expect to record a deferred commission asset of between $2 million and $3 million, net of any tax impact, and we will adjust opening returning earnings by the same amount as a result of this change in accounting policy. And although we will expense that deferred commission asset into our income statement over time, going forward, we would expect there to be a small yet positive impact on net income and adjusted EBITDA from this new revenue standard as future commissions are deferred and expensed over time under the new accounting rules. As I mentioned earlier, our tax rate was 22.7% for the year in FY '18, and going forward, we will expect it will be in the range of 20% to 23% of pretax income, and this is inclusive of the positive impact of the new U.S. tax rules. As always, our tax rate may be impacted quarter-to-quarter by any unusual or onetime adjustments in any of our international operations. After spending $5.1 million on capital assets in fiscal 2018, we expect to incur between $6 million and $8 million in additional capital expenditures this year, and these expenditures are expected to continue to be primarily focused on our investments in the network, including the area of cybersecurity. We currently expect amortization expense will be $35 million in fiscal 2019, with this figure being subject to adjustment for FX changes and the completion of any additional acquisitions. This number is inclusive of the Aljex acquisition, however. And finally, we expect stock-based compensation will be in the range of $2.2 million to $2.6 million in the coming year. I will now turn it back over to Ed to give calibration and wrap up.

[Edward J. Ryan, Chief Executive Officer and Director]

Great. Thanks, Allan. So let's talk about calibration for Q1. Similar to previous quarters, we don't provide guidance but we use our baseline calibration of the key metric relating to the ongoing health and strength of our business. Our calibration for Q1 assumes the following exchange rates: CAD 0.81, a EUR 1.24 to U.S. dollar and a GBP 1.42 to U.S. dollar. Our calibration for Q1 is $62.3 million of visible recurring contracted revenues or baseline revenues. This is impacted by the positive movement in FX rates and the addition of Aljex, while on the flip side, we're coming off our peak season, which benefits from holiday shipment volumes particularly on the small parcel side. We have $44.7 million of baseline operating expenses. This gives us a baseline calibration of $17.6 million for adjusted EBITDA for Q1. Some other key points related to how we're positioned for fiscal 2019. First, we're very well capitalized. We have a healthy business that's well calibrated. And as Allan mentioned, we also have a healthy balance sheet. We are profitable and generating cash. We have low capital needs within our organic business. Our primary use of capital is for continued use in acquisitions. We've completed 39 acquisitions since 2006 and 1 already here in fiscal 2019. And we have access to additional capital should we need it. Allan mentioned that after Aljex, we have about the $70 million drawn on our line of credit of $150 million. We have the ability to expand that line of credit to around $220 million -- $225 million, excuse me. And we have a shelf prospectus for up to $500 million if capital was needed to be raised by other mechanisms. We also have a strong acquisition pipeline. You'll have seen there continues to be a lot of industry activity right now with consolidation continuing in our market. With 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 -- that comes our way, we're not buyers for buyers' sake. The fact that we have an acquisition line of credit and a shelf filing in place doesn't change how we view acquisitions. We intend to continue to be prudent on valuations, but we're confident in our ability to deploy our capital effectively. Looking ahead to fiscal 2019, we've completed our planning process as we do every year around this time. It should be no surprise to anyone that our plans are very similar to the past. We continue to target 10% to 15% annual adjusted EBITDA and adjusted EBITDA per share growth. As in the past, we intend to invest any overperformance 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. Our planned operating margin range remains in the 32% to 37% range. Given the current performance of the business and mindful of the FX environment, that remains our target range even as we integrate MacroPoint into our business. But please keep in mind this could vary if we buy other businesses that need fixing up, which would impact that metric in the short run. And finally, as always, we'll continue to make ourselves available to shareholders to answer any questions. I think we've got a great business. We want to be available to help people learn about our business. We'll continue to spend time and resources to get the word out, and we hope to do the same. So with that, let's open the call up for questions. Operator?

[Operator]

[Operator Instructions] From Barclays Capital, we have Phillip Huang.

[Phillip Huang, Senior Equity Research Analyst]

On MacroPoint, I was wondering if you could provide a bit more color on the progress on that. Obviously, you broadened your network, reach and partnerships, and you previously indicated that there's strong interest in the product. I was wondering if you could give an update on the growth you're achieving there. I'm not sure if I missed at your remarks but you previously indicated 15%, 16% growth in the past. I was wondering if you could update us on that.

[Edward J. Ryan, Chief Executive Officer and Director]

Yes. We're really happy with that business. It not only continued the growth that we saw before the acquisition, but it's been a big help on our business. We have tremendous amount of interest from some of our partners, the likes the SAP and Oracle, who are looking to provide that type of service to their customers. We -- when we bought MacroPoint, they were looking to go after big retailers and manufacturers and it kind of scaled up to do that. But we're in early days. After the acquisition, we were able to turn that onto our sales force and get them out in front of the 17,000 customers on our network and start to help accelerate the growth in that portion of their business. All of that's come together to make a very exciting acquisition for us, and we're really happy with it.

[Phillip Huang, Senior Equity Research Analyst]

Are you able to provide us maybe a range of growth that you think is achievable in the near or to even midterm? Are we talking about a sort of 50%-plus type growth? Or is it something that's perhaps a little bit less meaningful as we think about -- as you ramp up the whole process?

[Allan J. Brett, Chief Financial Officer]

No. Phil, it's Allan Brett here. I think as Ed indicated, we're really happy with the business. We have expectations that business -- we would hope to see it double over a period of around 3 years, and I think that's still consistent with what we'd expect.

[Phillip Huang, Senior Equity Research Analyst]

Got it, got it, okay. And then on the cost side, is it fair to assume that the cost related to MacroPoint are now largely fixed? You've got sort of all the salespeople in place. How -- I mean, I'm asking this because I'm just wondering how we should think about margin contribution in the coming quarters.

[Edward J. Ryan, Chief Executive Officer and Director]

Well, I think we said when we bought it that we were going to try and eventually get this into line with our operating metrics. We made some moves right out of the gate to get a -- off to a good start there. We continue to invest in that business in that it operates below our average operating margins. Because we think it's a great business and it's growing very rapidly and specifically in the area of adding new customers or activating new customers on the network, we want to make an investment to make sure that we get all the freight brokers and transportation providers on the network as fast as we possibly can to continue to invest in that area. But as we said the day we bought it, we would plan to get it to -- through our operating margins within a year or so. And expect beyond that, it could potentially be more profitable like a lot of the other areas of our network.

[Phillip Huang, Senior Equity Research Analyst]

Got it. That's helpful. And one final question from me. Just looking at the pipeline, if you look at the pipeline of opportunities, do you see a greater abundance of opportunity that offer bigger revenue synergies that might also be a bit more expensive given it might be initially margin dilutive? And I say that just because both MacroPoint and Aljex seem to offer very strong earnings, synergies that requires a bit of upfront investment on the cost side.

[Edward J. Ryan, Chief Executive Officer and Director]

Thanks, Phil. We look at all different kinds of -- types of businesses. We bought all different types of businesses. We look at each of them individually and try to examine their thesis and figure out what it's worth to us. And that's what we pay people. If there's others out there that think they can do more with that business, they're probably going to win that deal. If we think we can do more than anybody else, we're probably going to win because we're going to be willing to pay more than others to get it. We think of ourselves as prudent investors. We don't like overpaying for stuff. We like to think that we got a good value for something when we bought it and a fair deal for both side of the party because we have to work with you guys after we acquire the company. When we're buying businesses that are in great shape, all recurring revenue, growing fast, highly profitable, yes, that's worth something, we're willing to pay to get that. On the flip side, we bought businesses that are in trouble and need some help to get fixed up. And in those situations, we're looking to pay pretty low multiples for something in hopes that we're going to be able to fix it up better than the current owners could and turn it into a big win for our shareholders. We also know that's a lot of work. So we try to factor that into our valuations. But I don't think anything's ever changed for us in this evaluation. We think of it the same way all the way through, right. We're looking at each individual acquisition and going, "Is that something we should own?" And if so, "What are we willing to pay for it?" And we're very prudent about sticking to our guns when that's the case.

[Operator]

From William Blair, we have Matt Pfau.

[Matthew Charles Pfau, Analyst]

First, Ed, I wanted to touch on Customs Info and MK Data, which have been in the mix for some time now. Where do you think you stand in terms of the opportunity to sell those within your existing customer base? And I guess, if that penetration is still relatively low, what do you need to do with those 2 products to sort of increase that penetration or conversion?

[Edward J. Ryan, Chief Executive Officer and Director]

Yes. We continue to sell into our customer base, and I think we're doing that quite effectively right now. There's still lots to go, lots more customers that don't use the service yet. We have to establish a need within our customer's mind for that service, right. One of the ways that's happened is you get in trouble, right. We have customers that get in trouble for not understanding the tariffs and duties or not understanding if they weren't allowed to ship stuff in to someone. And that's the obvious case for us to get a new customer. All of our international freight forwarders, we go out and spend time with them, explain how they can make this a service in their business, right. And they can take the service that we provide and mark it up and provide it as a service to their customers. So we continue to educate them to get that to be the case. It's probably still early days, I would say. We see the growth in those businesses continue for a long time to come.

[Matthew Charles Pfau, Analyst]

Got it. And then I wanted to hit on the routing business. And in terms of what you've seen the impact from Amazon getting into more types of deliveries and doing more deliveries themselves, how has that impacted the ability to sell solutions for private fleets? And then I guess, within your existing customers, have you seen them expand the number of vehicles they have in their fleets? Or have those contracted?

[Edward J. Ryan, Chief Executive Officer and Director]

Typically, they're expanding over time as their businesses are -- as they're getting into e-commerce and selling more and more. Amazon has been a big help to us because it's created a need within the broader retail community to be able to deliver to the home. Take the cases of Best Buy or Home Depot. They want to get good at doing this before Amazon gets good at doing it for them. And I think it -- you can read Best Buy's releases on your own, but they've done quite well on this e-commerce space in the last couple of years. We probably played a little bit of a role in that. We like to think we did at least in helping them manage this process more efficiently.

[Matthew Charles Pfau, Analyst]

Got it, okay. And then last one from me just on cash flow, Allan. It sounds like based on your commentary in terms of the range of cash flow as a percentage of EBITDA, you're expecting that growth to maybe more normalized and be more in line with EBITDA going forward? And then this year was a bit of an anomaly with the tough comp from the prior year. Is that correct?

[Allan J. Brett, Chief Financial Officer]

Yes. This year was compared over last year because we were over 100% of adjusted EBITDA and the operating cash flow in FY '17 made it a bit tougher. But going forward, we would expect to be in that 85% to 95% range. Most of our EBITDA should end up in cash at the end of each year. That's the consistent view.

[Operator]

From Morgan Stanley, we have Brian Essex.

[Thomas James Robb, Research Associate]

It's Thomas Robb on for Brian Essex. I wanted to -- I want to kind of dig into the possible trade sanctions that's kind of hitting the news right now, and I think it's kind of only been, like, a few days. But when this kind of stuff hits the news, do your customers kind of call you and see what you guys think? Or are you guys hearing anything from your clients on what this could mean for their business or how you can help manage it?

[Edward J. Ryan, Chief Executive Officer and Director]

We're typically not getting calls from them asking what the Trump administration or any other government is going to do about trade regulations other than we might get them months from now. As they start negotiating those trade regulations, then we'll have some information for them about it. But when it's in the news like you and I are reading right now, we tend to not know anything more than anyone else. And so the rubber starts to hit the road and government starts to take action, then we start to see some of the advanced actions and we'll advise our clients about that. More broadly, I think change is usually good for our business and that's -- people are talking about the changes in rates that may occur in the future that -- since we have a database that tells people what the rates are, that usually puts more focus and more value in our data content, which is generally a good thing for us.

[Thomas James Robb, Research Associate]

Got it. And then I guess when you think about your EBITDA growth framework for fiscal '19, are there any big moving pieces that could push that to the lower end or the higher end of that 10% to 15% range?

[Edward J. Ryan, Chief Executive Officer and Director]

Well, I mean, acquisitions always play a role in it, right. Our organic growth in EBITDA tends to be fairly consistent. But an acquisition can affect you positively or negatively, right. If we buy a company that's making 15% EBITDA margins and we're making 34% or so, that obviously provides a temporary drag on it. We don't tend to buy businesses where we don't think we could get it back to our levels at some point. But on the day we buy it, they're not always there. Conversely, we bought businesses like MK Data or Customs Info that we're making a lot more than we were as a percentage of revenue, and they impact us positively. Allan has mentioned earlier FX can impact it as well. Big increases or changes in FX over the course of a quarter or 2 can change our profit margins 1% or 2%, and we try to point that out when it happens.

[Operator]

From RBC Capital Markets, we have Paul Treiber.

[Paul Treiber, Associate]

The -- just on e-commerce, it does seem like the messaging around e-commerce is rising in prominence just given your comments today and then also at the user conference this week. The -- how does the go-to-market strategy differ for e-commerce versus your traditional business? And are there new partnerships you need to consider or other channels to go through to address -- to better address e-commerce?

[Edward J. Ryan, Chief Executive Officer and Director]

Yes, sure. And I mentioned this before over the last couple of years as we've gotten into the likes of Oz and pixi* and ShipRush, Customs Info and Datamyne for that matter. Those companies go after a smaller customer base. They're -- instead of going after customers that we traditionally went -- a typical customer of ours might be spending $5,000 or $10,000 or $15,000 or $50,000 or $100,000 a month with us, some of these businesses are going after customers that might pay $300 or $500 or $1,000 a month. And it causes a different go-to-market strategy, different marketing, different sales processes. If someone's going to pay you $100,000 a month, I mean, you can -- at the end of it, you can have a lot of sales calls with that customer trying to show them the value that you bring to the table. If someone is going to pay you $300 a month, you can't. And I think we've done a very good job in the last couple of years of getting acclimated to that environment and started to get good at it. We still have some ways to go, but I see significant changes in our organization. As we've gone from 6,000 or 7,000 customers to 17,000 or 18,000 customers over the past 5 years in the way we go to market to attack both the big guy that wants to do a lot of sophisticated stuff with us and can save a lot of money; and the small guy who's got a booming e-commerce business, but relative to the major retailers of the world, they're still quite small and needs help from some someone like us but it's not a major solution. And I think we continue to evolve and get better at that, but I'm quite happy with the progress we've made so far.

[Paul Treiber, Associate]

And then how do you think about e-commerce in terms of different geographies? So I mean, obviously, we think about North America quite a bit because we're here, but is the opportunity and the growth as rampant in Europe? And really, what are you seeing in Europe and outside of North America?

[Edward J. Ryan, Chief Executive Officer and Director]

Yes, I mean, I don't know if the growth is as rapid as it is in North America, but it's certainly moving now quite a bit. You saw a spike in pixi* over in Germany that had an e-commerce solution, provides warehouse management tools and transportation management tools, Oz has the business all over the world with partners. And we see e-commerce -- and listen -- think about it. In those foreign countries, the U.S. and maybe North America has had big box retailers for many years in place, where you could go to a store and get just about anything you want. Compare to some of the smaller countries around the world, that doesn't exist, and e-commerce is a big way for them to catch up over time. So I think you're going to see those areas continue to grow as consumers in those countries realize they can get their hands on just about anything through a good e-commerce site.

[Paul Treiber, Associate]

And then just a last one from me just on baseline. Baseline for the next quarter includes Aljex, where I think in the past, you didn't include acquisitions in baseline at least initially out of the gate. What's different with Aljex that you felt comfortable giving it in baseline?

[Allan J. Brett, Chief Financial Officer]

Yes, Paul. I think actually, what we've typically done is that when we've done the acquisition well in advance of the quarterly release, we have included it in our baseline as we would know about it and we've, many times, adjusted that date and said, "As of the date of the acquisition, we knew this much," just be as clear as we can be about revenue if we know it. So we've done that this time. As of February 1, we start our quarter and we'll have enough feel for the Aljex business. And so we'd rather give a much more consistent, inclusive picture.

[Operator]

From Scotia Capital, we have Paul Steep.

[Paul Steep, Analyst]

Ed, could you talk a little bit about, I guess, go-to-market now that you've got MacroPoint and soon with Aljex on the system in terms of broadening it out now that you've got a much stronger road product North America, how customers have responded and maybe what you've changed in terms of the go-to-market?

[Edward J. Ryan, Chief Executive Officer and Director]

Sure. Yes, we've spent a lot of time with the MacroPoint management team, and our sales force is trying to figure out exactly how we're going to go out. We know a ton of retailers in the space and manufacturers that procure full truckload shipments. And how we're going in front of them faster and show them what MacroPoint has to offer and get them signed up to the MacroPoint services, I think we're well on our way there. We've still got a lot of potential opportunity in the next couple of years but excited about the prospect that it brings. And we think it's a great offering, and we know it's a relatively short sale cycle compared to selling something like our transportation management or our routing scheduling tools. It's more something where we go in and tell them about it, and they go, "Wow, that's really great. How do I get some of that?" And we're just trying to educate ourselves to people and get them out in front of their customers as quickly as possible and then get them sign up the contracts and activate it and roll out so that we can start to see it become a new revenue stream for us.

[Paul Steep, Analyst]

And what should we think about in terms of expectations, Ed? In your mind, '18, I think -- is calendar '18 really a year of integrate, get everybody acclimatized, and '19 is when you'll start to sort of maybe increase investment behind it? Or no, do you think it will go a little faster maybe this year?

[Edward J. Ryan, Chief Executive Officer and Director]

I think we're going to continue as we did in '18. You're somewhat right. We spent the first couple of months trying to figure out how to educate everyone on our team about it so they can get out in front of the customers. I think you're going to see us getting out in front of the customers more and getting more customers signed up and then having to get them activated, et cetera, in '19 and beyond. But I don't expect any significant new investment in that business. In fact, we're trying to make that business make more and more money every day like the rest of our network businesses.

[Paul Steep, Analyst]

Great. And then just last one from me. You commented in your opening remarks about the M&A environment. Other than activity level, obviously, picking up, a couple of your competitors getting active and buying things, has anything else changed in the environment, Ed? Or is it just still more of the same?

[Edward J. Ryan, Chief Executive Officer and Director]

Thanks, Paul. Well, I mean, for several years now, we thought there's been a lot of acquisitions especially on the larger size acquisitions that, in our mind, were overpriced or fully priced. And we look at all of them. We were wary to -- we don't believe that those companies are worth what the seller thinks, and we usually back away from them. You have seen us buy, let's say, higher quality assets in the last couple of years and certainly paid for them when we did. But I think that's a philosophy we always had. We just saw more of them come available in the last couple of years and jumped on them when we did. MacroPoint was a great acquisition, but it was, by our normal standards, expensive. We'd hope to show people over the coming years that, that was actually a great price that we paid for that given what we got. But on the day we did it, we were well aware we have a lot to prove to people that that's what's going to happen and we were fully expecting that we would prove that to people.

[Operator]

From Canaccord, we have David Hynes.

[David E. Hynes, Analyst]

So Ed, I want to ask kind of a strategic question. Maybe it's relevant. Maybe it's not. But we hear folks like IBM talking about blockchain technology in the supply chain. Just curious, how does that flow into the logistics world, the stuff that you need to do to ready your products? Just help us think about kind of the puts and takes of that potential evolution.

[Edward J. Ryan, Chief Executive Officer and Director]

Sure. I mean, we're in the middle of it, right. We're in a bunch of blockchain pilots. And I think this is like the 10th standard that's come along over the past 20 years where people said, "This is going to be the new way that everyone does things." What I've seen in the past is it just becomes another way that people need to communicate with each other because not everyone does it. And I think blockchain is going to be the same, right. You can just think back to XML. If everyone just did XML and we all use the same transaction [indiscernible] communicate seamlessly with each other, well, that was the promise. That didn't turn out to be the way it worked out, right? Some people use XML. Some people use traditional EDI. Some people use flat file. One day, some people are going to use blockchain transactions. And they all have to communicate with each other yet they're all going to be using different ways to communicate. That's where we come in. We take that data. We put it in a standard format in our network and pass it to someone else in the format that they want to load directly into their back-office system. I don't think blockchain is going to be any different from that perspective. But with people that want to process blockchain transactions and when they do, we'll be there to help them. I can tell you this about blockchain: It's fairly expensive, right. I mean, look at the Bitcoin and you see [indiscernible] there's a little mobile app that shows you the power consumption used to encrypt blockchain ledgers. I think it's now reached the size of the Argentine power consumption just for the limited blockchain involved in bitcoin. That's pretty expensive. And you have to ask yourself, are you willing to pay the price to 128-bit encrypt a bill of lading because it's expensive? And I think the answer to that is going to be probably not. I can see some places where it might be a more natural fit, like government agencies, saying, "Hey, this is the way I'm going to accept these transactions." That might -- that type of customs filing transaction may have a need to be more secure. It's also mandated by a government. So if you want to ship into that country, you kind of need to follow their rules so they have a better chance of mandating it. And if that's the case, we're going to be there to help our customers do it. So yes, I mean, we see a role for it just like we saw a role for XML and EDI before that and I could go back and mention 10 different types of standards that came to play in our industry, and I think blockchain is going to be another one of them.

[David E. Hynes, Analyst]

Don't show your age on this call. And then, Allan, maybe just a tactical question for you. So the change in expensed sales commissions, how long are those commissions being amortized over or now? And how did you come with that decision?

[Allan J. Brett, Chief Financial Officer]

Sure, sure. So we've done a bunch of work in this area, obviously working with our auditors. It will be a 5-year period that we amortize the commissions over and that's just a function of life of technology, life of customer relationships, technologies, a lower life or a shorter life than our customer relationships, and that's where we ended up. So long answer, over 5 years.

[David E. Hynes, Analyst]

Yes. I think that's almost becoming a standard.

[Operator]

From Raymond James, we have Steven Li.

[Steven Li, Senior Vice President]

Allan, on this -- on the deferred commission assets, so $2 million to $3 million, so that's how much I should think your EBITDA is going to pick up given there's going to be little amortization in the first quarter?

[Allan J. Brett, Chief Financial Officer]

No, I think what we're thinking, there'll be a small positive impact to this. And mainly, as we amortize this asset or expense this asset into our P&L over the remaining life, we'll have to defer the future commissions we pay in Q1, Q2, et cetera. You should see this asset grow. That number that we quoted $2 million to $3 million is net of the tax impact. So as you see that number grow, you would see the impact of what would have been expensed going through the -- going on to the balance sheet. So we think it's going to be a fairly small number but it should -- that asset should grow over the next 2.5 years or so until we sort of reached a stable level of deferred commissions.

[Steven Li, Senior Vice President]

But in that first quarter, let's say in Q1, so you're deferring between $2 million to $3 million, but then you're not really amortizing much, right, because it's -- you're only starting now? Is that -- am I understanding that -- understanding this correctly?

[Allan J. Brett, Chief Financial Officer]

We are going to defer -- we will put an asset on the balance sheet. The offset will go to retained earnings, and we will start to amortize that asset in the first quarter.

[Steven Li, Senior Vice President]

Okay, all right, okay. And then, Ed, on the calibration ratio, your base on revenues to actual revenues has been in a tight range, 107%, 109%. Does the timing of some of your acquisition for [indiscernible] a little bit for Q1 or it should be about the same?

[Allan J. Brett, Chief Financial Officer]

Steven, I'll answer that. It's -- calibration typically does fall into a fairly tight range. Where you've seen it go off a little bit might be where we close an acquisition. In a quarter after our conference call, that can happen. That might drive a number that's 9% or 10%. But typically, it falls into a reasonable range. Subject to any future acquisitions this quarter, we would -- there's nothing that we would expect to see anything different as far as how we operate the business. And therefore, the ranges probably end up similar.

[Edward J. Ryan, Chief Executive Officer and Director]

That actually may fall into a tighter range and even -- imagine, right, because the timing of those acquisitions might have made it 9 versus 7 or -- without the acquisition, it might have been an even tighter range.

[Operator]

From GMP Securities, we have Ruben Sahakyan.

[Ruben Sahakyan, Associate]

On a more of a macro level, are you seeing any trends in the convergence of logistics and supply chains? And is this impacting you today? And how do you think about it? And how do you prepare for it?

[Edward J. Ryan, Chief Executive Officer and Director]

Well, I mean, our mission is -- we actually state our mission is to be the global leader in logistics and supply chain technology. We absolutely believe there's a convergence between those 2 things. You can see it in this e-commerce space completely, right. The e-commerce companies have really combined those 2 concepts. And we've thought about it that way for a long time as well, where we go, "Hey, these are 2 separate things but they certainly, over time, I think, are going to work hand in hand." And the companies that are -- that think of it that way, hopefully, are customers. We think we're going to take advantage of the companies that don't realize that that's the way it is. We've tried to build technology that helps them manage these processes and hopefully make them the best at it.

[Ruben Sahakyan, Associate]

Perfect. And then -- and last question, how do you go about growth in Asia? How do you go about it? Is there something that you're looking at? And what have you seen so far?

[Edward J. Ryan, Chief Executive Officer and Director]

Well, there's a bit of a misnomer in the way we report because we report where our customers are based and then the revenue that they generate. So it looks like a lot of our revenue comes from North America and Europe, where most of the world's large logistics and transportation companies are based and happen to be our biggest customers. If you look at the shipments that they're processing over our network, they are fairly well distributed between EMEA, Asia and North America because a lot of the shipments are coming in and out of Asia because that's a low-cost manufacturing center. So from our perspective, we already have a lot of business in Asia. We do. Our customers are moving shipments every day in and out of Asia. That's why they're using our network. You see this -- there were a couple of acquisitions over the past few years in Asia. I think as we get more footprint there on the ground, you'll see us do more. But fact of the matter is most of the world's logistics and transportation companies are not based in Asia. There's a much higher percentage based in North America and Europe. And that's why you see our revenue numbers reported that way because that's where the customers are based, their headquartered and that's where we report the revenue.

[Operator]

From CIBC, we have Stephanie Price.

[Stephanie Doris Price]

You had mentioned early customer synergies with MacroPoint in your prepared remarks. Could you elaborate a bit on that and talk a bit about what you're seeing in the sales cycle there?

[Edward J. Ryan, Chief Executive Officer and Director]

Sure. So when we bought MacroPoint, they had a real push on to go out and sell big retailers and manufacturers, like full truckload move. They had captured the market for freight brokers and 3PLs, who were the largest, let's say, customer base for transportation tracking transactions because they were going out and selling to a lot of retailers and manufacturers. And so if you want to get a lot of retailers at once, you go sell a freight broker who's got 500 different retailers already doing business with them. But MacroPoint saw an opportunity with the largest retailers and manufacturers. You may not use freight brokers as much. They do a lot of their own purchase transportation. And as Descartes was buying them or really convincing them to sell MacroPoint to us, we we're pulling out. Hey, we know these guys already, right. We already do business with a number of these retailers and manufacturers and, in fact, have significant relationships with them. So you're spending all this time to get in the door at a big retailer. We're already doing business with them and have a significant relationship with them, and we think we could get in there faster. And that's going very well for us right now. We've established a bunch of new relationships, and I think we'll see a lot more of that in the coming years.

[Stephanie Doris Price]

Great. And then could you also talk a bit about your optimal capital structure at this point?

[Allan J. Brett, Chief Financial Officer]

As far as capital structure, I mean, we are -- as we said, we ended the year, net debt, $1.9 million. We'll never feel that we will get accessible with debt, but we would feel comfortable up to 2 and, in certain conditions, up to 3x debt-to-EBITDA. So that wouldn't [ fuss us ]. We have a cash flow generating business. So as we buy -- and as you saw with the MacroPoint acquisition, we buy, we borrow $80 million in 5.5 months. We repaid $43 million of that. And that typical sort of use of the credit line is how we would look at it. But we said many times, I think, our first choice to deploy capital, only need for capital is really for acquisitions. Our first choice is out of existing cash flow. Our second choice is -- and third choice is also of existing cash flow but we will use some level of debt. And any transactions that were bigger than that, as Ed mentioned, we have a shelf prospectus. We wouldn't hesitate to go out and raise additional capital for deals that outstrip our existing cash flow and our debt capacity. Did that answer your question?

[Stephanie Doris Price]

It did. That's perfect.

[Operator]

From Echelon Wealth Partners, we have Ralph Garcea.

[Ralph Garcea]

Just two quick ones. On the CapEx side, the incremental $2 million or $3 million, is that just network build-out or IT systems upgrade on the targets? And on the cybersecurity side, again, is that for the GLN network or for some of your latest acquisitions?

[Allan J. Brett, Chief Financial Officer]

Yes. Our CapEx, we're not capital-intensive, Ralph. So $6 million to $8 million of CapEx is a reasonable range. It's slightly higher than last year. So it will be more of the same of what we've been doing. We run a network. We take the security of that network extremely seriously. We spent a lot of effort, and we spent dollars there. And that will be part of -- spent our dollars. So other than being slightly higher on the CapEx because we run on slightly bigger business and we integrate these acquisitions and want to make sure that security over their networks is up to the same level as ours, there's no change in how we're operating and looking at cybersecurity or CapEx.

[Ralph Garcea]

Okay. And then on the M&A side, would you look at strategic alternatives in the U.S. to sort of hedge against whatever happens on the NAFTA side? Or with regards to Europe, I mean, do you look at stuff in the U.K. or on the continent depending on what happens with Brexit and more trade flows go?

[Edward J. Ryan, Chief Executive Officer and Director]

I think we spent time thinking about it from that perspective from where we're going to acquire because some rules are changing. We think about those rules changing and its impact on our business but probably not particularly going after individual acquisitions based on it. I don't know if we think that will be prudent or not. We're going out to buy companies. We're trying to buy good companies that have recurring revenue, that make money, that are growing, that we think are going to be good fit on our network. And if those things are all true, we're interested in buying it. Now we'll look at these kind of macroeconomic trends that you're talking about and see if they have any positive or negative impact on them. But I think our thesis more revolves around whether we think this is a good business and whether we think it's a good fit for our network. And then lastly, do we think it's going to be a good business going forward given the macro economic trends that are going on? Because look, these things could all change a couple of years from now, right. We're talking about tariffs and trade tariffs right now and potential trade wars. Well, that could all change depending on who runs each country and as things tend to get decided every couple of years. So I don't think you'll see us executing acquisitions based on that.

[Operator]

Thank you. We will now turn to Scott Pagan for closing remarks.

[Edward J. Ryan, Chief Executive Officer and Director]

Guys, it's Ed Ryan. Thanks for joining the call today, and we look forward to reporting back to you in a couple of months on the next quarter. Have a great day.

[Operator]

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