Descartes Systems Group Inc

TSX:DSG

Earnings Call Transcript 2020-Q4

[Operator]

Welcome to the quarterly results call. My name is Darrel, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Scott Pagan. Scott, you may begin.

[John Scott Pagan, President & COO]

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 condition, Descartes' gross margins and any growth in those gross margins, cash flow and use of cash, business outlook, baseline revenues, baseline operating expenses and baseline calibration, anticipated and potential revenue losses and gains, anticipated recognition and expensing of specific revenues and expenses, potential acquisitions, 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 and documents filed and furnished with the SEC, the OSC and other securities commissions across Canada, including our management's discussion and analysis filed today. We provide forward-looking statements solely for the purpose of providing information about management's current expectations and plans relating to the future. You are cautioned that such information may not be appropriate for other purposes. We don't undertake or accept any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements to reflect any change in our expectations or any change in events, conditions, assumptions or circumstances on which any such statement is based, except as is required by law.And with that, let me turn the call over to Ed.

[Edward J. Ryan, CEO & Director]

Great. Thanks, Scott. Good afternoon, everyone, and welcome to the call. Thanks for joining us today. As you'll see from our results, we had another great quarter to finish off another great year here at Descartes. We're really happy with how the business performed. And we're very happy that in less certain times like these, we've built a business that has a good degree of visibility and stability. Our business is diversified by geography, motor transportation and parts of the logistics and supply chain that we serve. Our business has grown over each of the past 15 years by setting and achieving a consistent growth target. We've targeted growth in adjusted EBITDA at 10% to 15% a year. Last year, we grew more than that, about 30% because we added the larger Visual Compliance business. But our longer-term plan remains to grow the adjusted EBITDA in our business 10% to 15% per year through a combination of organic growth and complementary acquisitions. That certainly becomes a bigger challenge in any particular year when logistics and supply chains are faced with unique market circumstances. The current market uncertainty relating to coronavirus presents a bigger challenge to our customers and our partners than we've seen in several years. At this time, it's impossible for any of us to know the full impact the coronavirus will have on the market and for how long. But we know that we've built a solid business that we believe is better able to handle this uncertainty than other technology providers in our market. That's why we believe a long-term adjusted EBITDA growth target of 10% to 15% per year makes sense regardless of what happens in any particular year. I'm sure people will be looking for updates on what impact we're seeing in our own network, and I'll come back to that in a minute. But in the meantime, I'd like to take a minute to reemphasize some of the things we've been talking about for the last few years. At Descartes, we help isolate customers from complexity. The regulatory environment and changing customer buying expectations have been driving complexity over the last few years. And now the coronavirus has the potential to magnify that complexity. We're already seeing examples of it. For instance, with factories going down in China for a few weeks, businesses had to adapt quickly and think about whether to change suppliers, which can be tricky in the short run and whether there are alternative ways to move their goods so as to minimize the disruption to their supply chain.In order to be agile and flexible, you need to have access to timely information to understand changes in real-time and to calculate the cost of alternative courses of action. Furthermore, you need to be pre-connected to a network of alternate suppliers and transportation providers to quickly execute any potential changes. This is what we've been building over the last 20 years at Descartes, a hub for shippers, carriers, logistics service providers and government authorities to connect and collaborate for the seamless movement of goods worldwide. And when things are changing, that's when our customers need us most. So I can't tell you exactly what will happen next with the coronavirus, but I believe our business will be able to handle it better than most. Our customers will need us more than ever, and we'll be there to help them through it. I'll come back to talking about what we're seeing in the market in a minute. And after that, Allan will then provide a detailed overview of our financial results, and then I'll finish up the call talking about our calibration for Q1 and our operating plans for fiscal 2021.But first, let's start by going over some of the key financial highlights in the fourth 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 19% from Q4 of last year, coming in at $84.2 million. Our adjusted EBITDA continues to grow nicely. For the quarter, we generated $32.2 million of adjusted EBITDA, an increase of 29% over Q4 of last year. Visual Compliance continues to contribute nicely to this growth, growth, growth that ended up ahead of our plan of mid- to high 20s adjusted EBITDA growth for the fiscal year compared to the previous fiscal year. We continue to convert our EBITDA into cash, generating $26.4 million of cash in the quarter, and consistent with our long-term operating plans, we've been investing cash back into the business through focused R&D investments and combining with complementary businesses.We combined with 4 businesses in FY '20. We just completed another acquisition in February that I'll talk to in a minute. All in all, a great quarter to cap off another great year here at Descartes. We have a predictable cash-generating business, and we have a solid balance sheet with financial capacity to continue to acquire complementary businesses.While we're on the topic of complementary businesses, I'd like to spend a minute talking about our most recent acquisition, Peoplevox. Peoplevox serves direct-to-consumer e-commerce customers around the world. The web-based eWMS and e-commerce fulfillment solutions help customers seamlessly connect to a web shop front ends, translate order information into a mobile-driven pick-and-pack process within the warehouse and then feed parcel delivery systems for shipment execution.Like our investments in Oz, pixi* and ShipRush, Peoplevox adds density and domain expertise to what is an increasingly important area of our business, e-commerce. Whether you're a large retailer, a small e-tailer or something in between, in order to satisfy your customers' expectations, you need to know how much inventory you have and where it is at all times. You need to be able to effectively fulfill your orders, and you need to be able to understand your delivery cost and execute those deliveries as seamlessly as possible.Successful e-commerce supply chains need to be flexible to scale up and down during peak periods while maintaining connections with complex ecosystems of sales and delivery channels. It's hard enough on a good day. When you think of this through tomorrow's lens of potential uncertainty, what worked today may not work tomorrow. And if you're going to be agile, you need to have timely access to reliable data to help you make better decisions about sourcing and transportation costs and need to be pre-connected to a network of both sales and delivery channels.By combining Peoplevox with our existing suite of e-commerce solutions, we're in a better position to help our customers manage the direct-to-consumer market, a market that has been growing consistently. We may even see some short-term boost in growth if consumers put a heavier emphasis on home delivery versus going to the mall or grocery store. With this latest investment, we have a good density of e-commerce solutions in our portfolio. Going forward, you can expect that these e-commerce solutions will form a bigger part of how we go to market, including in our marketing materials. e-commerce is truly becoming another business pillar here at Descartes. I'd like to welcome the Peoplevox employees, customers and partners to the Descartes community.And with that, let's talk a little bit about what we're seeing on the network over the last few weeks. Historically, we haven't commented on network volumes for the current quarter on our results call. But given the uniqueness of the current market situation, we thought we'd provide some very preliminary additional color as to what we're seeing on our global logistics network. We typically see volumes dip a bit in February due to the certain number of business days in a month as well as the impact of Chinese Lunar New Year. This year, Chinese New Year fell in January, but as a result of the coronavirus impact on Chinese manufacturing, we saw that slowdown continue for a bit longer than usual. In particular, we saw an extended impact on air volumes in China after Chinese New Year, but we've since seen the volumes recover in the region. Specifically, we're hearing reports that China's supply chain activities have largely resumed, and we are seeing that in our network.It's too early for us to see what, if any, impact there will be in EMEA and North America as those regions start to deal with the virus. We only have the dip and subsequent slow recovery of China -- in China to guide us at this point. More generally, as we look across the globe to our customs filing volumes, which give a pretty broad overview of the multimodal freight movements, we saw a typical seasonal dip in February, but nothing that alarms us so far. When analyzing the U.S. domestic market, we see truck volumes, and e-commerce activity is still looking quite healthy.Before handing over to Allan to talk a little bit more about the financials, I'd like to thank some people that continue to contribute to the strength of our business. So thanks to our employees for all the hard work they put in to make sure our customers get results. Our customers continue to get results, and that's why we have a successful business. Thank you to our customers who continue to place confidence in Descartes as their network of choice. Whether you're a shipper, logistics intermediary, carrier or even a government agency, thanks for connecting and helping our community grow, and thanks for your continued engagement. Thank you to our partners for helping us continue to expand the ecosystem, and thank you to our shareholders, both new and long-standing, for continuing to have confidence in Descartes and supporting us with your capital.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 walk you through our financial highlights for the fourth quarter and year ended January 31, 2020. We are pleased to report record quarterly revenues of $84.2 million this quarter, up 19% from revenues of $71.0 million in Q4 of last year. Our revenue mix in the quarter continued to be very strong, with services revenue increasing 17% to $73.7 million or 88% of total revenue in the fourth quarter, compared to $62.9 million or 89% of revenue in the same quarter last year. With a couple of larger deals in the quarter, license revenues came in at $2.5 million or just under 3% of revenue in the quarter, up from $1.1 million or 1% of revenue in Q4 last year. While professional services and other revenue came in at $8.0 million or 9% of revenue, up from $7.0 million or 10% of revenue in Q4 last year.For the year, revenue was $325.8 million, up 18% from revenue of $275.2 million in the previous year. Our revenue mix for the year remained fairly consistent at roughly 88% services revenue, 2% license revenue and approximately 10% of revenue from professional services and the other category. Gross margin for the fourth quarter was steady at 73% of revenue for the quarter, consistent with the gross margin percentage in the fourth quarter of last year. For the year, gross margin increased slightly to 74% compared to 73% for the whole year in FY '19.Operating expenses in the fourth quarter and for the year ended January 31 increased primarily related to the impact of recent acquisitions. While those increases were partially offset by cost efficiencies as we successfully integrated these past acquisition and identified cost overlap opportunities. As a percentage of revenue, the increase in each category of our operating expenses was lower than the increase in revenue this year, a further sign of our operating leverage. So as a result, with revenue growth and continued strong cost control, we continue to see strong EBITDA growth of 29% to $32.2 million or 38.2% of revenue in the fourth quarter compared to $25.0 million or 35.2% of revenue in the fourth quarter last year.Adjusted EBITDA for the year came in at $122.6 million or 37.6% of revenue, up 31% from adjusted EBITDA of $93.9 million or 34.1% of revenue last year. As a result of these solid operating results, cash flow generated from operations came in at $26.4 million or approximately 82% of adjusted EBITDA in the fourth quarter this year, up 21% from operating cash flow of $21.8 million or 87% of adjusted EBITDA in the fourth quarter of last year. For the year, cash flow from operations was $104.3 million or 85% of adjusted EBITDA, up from $78.1 million or 83% of adjusted EBITDA last year. Going forward, subject to unusual events and quarterly fluctuations, we expect to continue to see strong operating cash flow conversion of approximately 80% to 90% of our adjusted EBITDA in the periods ahead. From a GAAP earnings perspective, net income came in at $11.4 million in the quarter, up 44% from net income of $7.9 million in the fourth quarter last year. For the year, net income was $37.0 million or $0.45 per diluted common share, up 18% from $31.3 million or $0.40 per diluted common share last year.Overall, we are pleased with these solid operating results in the fourth quarter and for the year in FY '20 as strong revenue growth allowed us to make continued investments in the business while achieving greater than 30% growth in adjusted EBITDA and producing strong cash flow from operations.If we turn to the balance sheet. Our cash balances totaled $44.4 million at the end of January 2020, and we did not have any borrowings under our credit facility at the end of our fiscal year. Subject to our year-end, we used some of our existing cash balances and, in addition, drew just over USD 10 million on our credit facility to complete the Peoplevox acquisition late in February. As a result, we currently have approximately USD 340 million available to us to draw on under the credit facility for future acquisitions. So we clearly continue to be well capitalized to allow us to consider all acquisition opportunities in our market consistent with our business plan.As we look to the current year, our fiscal 2021, we should note the following. After incurring approximately $4.9 million in capital additions last year, we expect to incur between $5.0 million and $7.0 million in additional capital expenditures this coming year, heavily focused on improvements in our network security. We expect amortization expense will be approximately $53 million for fiscal 2021, with this figure being subject to adjustment for FX changes and future acquisitions. As a result of a few unusual income tax recoveries, our income tax rate in Q4 came in at 14.0% of pretax income, resulting in a tax rate for the year of 23.0% in FY '20. Going forward, we would expect that our tax rate will continue to trend into the range of 24% to 27% of pretax income for our fiscal 2021, though, as always, we should add the tax -- our tax rate may fluctuate from quarter to quarter from onetime tax items that may arise as we operate internationally across multiple countries. And finally, we should expect stock-based compensation to be approximately $4.0 million to $4.2 million for fiscal 2021, subject to any forfeitures of stock options or share units.And with that, I'll turn it back over to Ed to wrap up.

[Edward J. Ryan, CEO & Director]

Great. Thanks, Allan. So let's get right into our calibration for FY -- for Q1 FY 2021. We're doing this as of February 21, the day that we bought Peoplevox. 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 Q1 assumes the following exchange rates: a CAD 0.76; EUR 1.09 to USD 1; and GBP 1.29 to USD 1.Our calibration for Q1 is $81.3 million in visible recurring contracted revenues, our baseline revenues. We typically see a negative seasonality impact as we transition from Q4 into Q1. On the flip side, the addition of Peoplevox from February 21 positively impacts this calibration. On top of all that, much like everyone else in this call, we don't know the exact impact of coronavirus, so we haven't adjusted our calibration to reflect any adverse impact from that other than what we typically see seasonally. Our baseline operating expenses are $55.3 million. This gives us a baseline calibration of $26 million for adjusted EBITDA for Q1. Some other key points related to how we're positioned for fiscal '21. We have a solid financial footing. We have a healthy business that's well calibrated with a high degree of visible recurring revenues, 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 recent historical financial results, we continue to grow our organic business. Our primary uses of capital are for continued use in acquisitions. We've completed 46 acquisitions since 2006, and we have access to additional capital quickly should we need it. Following the Peoplevox acquisition, we had a small draw 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 unused to raise capital by other mechanisms in case they're needed. In short, we have good capacity for our planned acquisition activity.We also have a broad acquisition pipeline. There 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 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 valuation, but we're confident in our ability to deploy capital effectively. We're also watching with interest to see how recent market events will impact valuations and a willingness of some sellers to sell their business in this market. Looking ahead to fiscal 2021. We've completed our planning process as we do every year around this time. As we said in the past, our belief for sustainable growth in the long term is a 10% to 15% growth in adjusted EBITDA, and that remains our plan. We've been very transparent in how we plan to run our business, and we will continue to do so. We don't have a crystal ball to predict exactly how coronavirus will unfold, but we feel we're well positioned to weather any potential storm.As in the past, we intend to invest any overperformance back in the business. Our growth is planned to come from a combination of organic and inorganic activities, and acquisitions are not incremental to our plan. We intend to continue to focus on recurring revenue and deemphasize onetime license sales. And given the current performance of the business and mindful of the FX environment, our planned operating margin range remains in the 35% to 40% range. But please keep in mind, this could vary if we buy other businesses that need fixing up or if the FX environment changes significantly, 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 that business. We'll continue to spend time and resources to get the word out, and we hope you'll do the same.And so with that, let's open up the call to your questions. Operator, if you could start the Q&A.

[Operator]

[Operator Instructions]And our first question comes from Matt Pfau from William Blair.

[Matthew Charles Pfau, Analyst]

Ed, maybe it'd be helpful if you could just go over or remind everybody how your business is impacted by transaction volumes? And when volumes have been under pressure in the past, how that's impacted the growth of your overall business?

[Edward J. Ryan, CEO & Director]

Yes. Sure. We're a little under 90% recurring revenue. Little under half of that is transactional, the other half is seats or users or non-transactional recurring revenue, let's say. In the past, we've done pretty well in these environments, if you go a little back to '08 or '09. We continue to grow our network through a downturn. I don't expect this is quite in that category. But there's an unknown here that we haven't seen this spread around the world yet. What we did see in China, I alluded to a few minutes ago, was somewhat encouraging. If you were reading the news reports in the United States, I think you might think China completely shut down for a couple of weeks. During that period of time, we still saw shipments moving over our network. And we were pleasantly surprised by how fast it came back once China put people back to work in the last several weeks. So we don't know what's going to happen next, but we think we're pretty well positioned to deal with whatever it is.

[Matthew Charles Pfau, Analyst]

Got it. And then on the Peoplevox acquisition, it seems like you, obviously, hinted that e-commerce is going to be a big focus for you guys moving forward. Maybe help us understand how Peoplevox fits into the overall WMS market, who are the target customers here, and maybe a peek into what the broader e-commerce vision is?

[Edward J. Ryan, CEO & Director]

Yes. Sure. Well, you've seen with the acquisition of ShipRush and Oz and pixi* and now Peoplevox, we have started to realize that this e-commerce market's a great business to be in. Peoplevox focuses on WMS solutions for midsize and smaller retailers and e-tailers. That's a very rapidly growing market. These guys are getting their businesses off the ground quickly and may need help in the transportation management and warehouse management spaces. We bought pixi* a few years ago. We like that quite a bit. And we had the chance to look at one of their competitors, Peoplevox, who has done a very good job of spreading that solution around the world. And we thought it would be a great addition to our network.

[Operator]

And our next question comes from Justin Long from Stephens.

[Justin Trennon Long, Managing Director]

So I wanted to ask first about fiscal 2021. Ed, I know earlier you said that EBITDA growth target of 10% to 15% is unchanged, but is your expectation that you'll be within that range this year? And maybe you could also talk about the level of organic growth you're expecting this year versus what you saw in fiscal '20?

[Edward J. Ryan, CEO & Director]

Tough for us to call on the organic growth side. We think we have a good business. We think it's going to continue to grow organically. There's a lot of uncertainty out there, so I don't know exactly what the number is going to be nor would I try to guess right now. But we think that the business will continue to grow organically and that we're going to find decent acquisitions to add to that over the years just like we have in the past. I don't know what's going to happen with coronavirus. I'm encouraged by what I saw in China and how quickly it came back, but I really don't know how it's going to impact the rest of the world? Or is it going to spread around the rest of the world? Are they going to be just minor companies -- countries impacted or major? None of that is clear to us right now. I don't think it's clear to anybody else on this call. So I don't want to speak to it too much or make guesses because I really don't know. But the 10% to 15% organic growth -- or sorry, growth in EBITDA is a number we've been saying for the last 10 or 12 years. And I think you're going to see us continue with that this year.

[Justin Trennon Long, Managing Director]

Okay. That's helpful. And secondly, to follow up on some of the commentary you had on acquisitions in the pipeline. It sounds like there's still a lot of activity. But just given some of the macro uncertainties and different moving pieces with the election, coronavirus, et cetera, have you seen the number of sellers increase? I'm just curious if the pipeline has kind of picked up in the last few months. And also would love to get your thoughts on valuations and if we've seen any kind of tapering evaluation multiples in the market, too.

[Edward J. Ryan, CEO & Director]

Well, it's tough to say. I mean we certainly have seen it picking up in the last several months. There's a lot of stuff for sale right now. And really, in the last several years, there's been a lot of stuff for sale. A lot of times, we think that a lot of those deals go down at a very high price, maybe higher than normal price. That's always concerning to us and gives us pause when we're looking at these businesses to see if we should buy into them or not. As a result, we're forced to look a little harder in trying to find good deals for our company and for our shareholders. We haven't seen any impact in the last couple of weeks, nothing related to coronavirus. I would say that if coronavirus had any impact on the economy, that would, obviously, impact prices that people pay. Bluntly said, people have been paying too much for several years now for businesses as private equities come in with access to cheap capital. We're waiting for that bubble to burst. I don't know one is going to, but if this was the start of it, we'll be happy about it.

[Operator]

And our next question comes from Paul Treiber from RBC.

[Paul Michael Treiber, Director of Canadian Technology & Analyst]

Just wanted to clarify your comments on baseline. You did mention that it's as of February 21, but then you also mentioned that there's -- you made no adjustment for coronavirus. So should we take that as you're assuming no -- you're making no adjustment beyond February 21, but you've taken into account what you've seen to date up to February 21?

[Edward J. Ryan, CEO & Director]

For sure. Just -- with Chinese New Year going down at the same time coronavirus, if you think about what really happened, the Chinese government told everyone to stay home during Chinese New Year. And that might have gone up to a week or so past Chinese New Year, but in January, we're always expecting, and you can see that in the numbers for the quarter, is there really weren't any significant impacts to the quarter. In other words, if I were looking at Q4, I wouldn't know there was a coronavirus problem unless someone told me if I were looking at our numbers. It wasn't a big deal. We were surprised at how fast China got back to work and how quickly we saw the shipping volumes recover. We knew all that as of February 21. So I guess, yes, that's in there. What happens beyond this? It depends on what happens in these individual countries and how they react to it. We don't know what that is, so we didn't put it into calibration because I don't know what's going to happen. It could be no big deal at all. It could be some impact that we notice.

[Paul Michael Treiber, Director of Canadian Technology & Analyst]

And at a high level, in terms of the way you arrive at the calibration, the methodology or the conservatism that you use, it's consistent with prior quarters?

[Edward J. Ryan, CEO & Director]

Yes.

[Paul Michael Treiber, Director of Canadian Technology & Analyst]

Okay. That's great. And then the -- on e-commerce, like are you seeing a stronger pickup in e-commerce, generally, as you get more entrenched in that space? And maybe in the last couple of weeks related to coronavirus, are you seeing some pickup there?

[Edward J. Ryan, CEO & Director]

No. I mean you might speculate that could happen. We've talked about that. I haven't noticed in the numbers. But e-commerce has been a big thing for us in the last couple of years. It's really driven a lot of growth in our business. And I think as a lot of these e-tailers get bigger and they start to realize they need systems, we want to be there to provide them with those systems. And I think we've done a nice job of rounding out a bunch of solutions in the logistics and supply chain space that would work for them and, as a result, realize this is a business we want to continue to try and focus on and grow. What happens from here? I don't know, but we're pretty happy we got our hands on Peoplevox, and we think it's going to be very complementary to our network and the Oz and pixi* businesses and ShipRush businesses that we're already in. And so we look forward to growing that portion of our business consistent with how we have done in the past.

[Operator]

And our next question comes from Raimo Lenschow from Barclays.

[Unknown Analyst]

This is [ Mike ] on for Raimo. I just wanted to dig into kind of the Peoplevox and some of those direct-to-consumer e-commerce stuff you're looking at. Now that you've kind of added that into the fold, are you seeing anything that maybe like continued gaps in the product offering that you guys have, where you're looking to address moving forward after you kind of like rolled that in as that becomes a bigger portion of your business? Are there some areas that you may be focusing on?

[Edward J. Ryan, CEO & Director]

No. We're focusing on putting all those things together making them work better for our customers as one cohesive solution and selling a whole lot more of it similar to what we've done over the past 2 years. We've seen really nice growth in those businesses. We're really happy we got into the space. We have a lot of customers in that space that are doing very well. And they're real happy about our solutions and rolling them out as their businesses expand. And I think you'll see us more of the same there. With regard to are there any holes, none that I see.

[Unknown Analyst]

Okay. That's helpful. I appreciate it. And then just a follow-up on kind of the transactional revenue flow that you see. Who is like the typical customers that are using that transactional versus having more of the subscription setting? Is it usually like the larger customers that have a subscription but then are adding on additional transactional revenue? Or is it more kind of lower end of the market that's working on that more transactional level?

[Edward J. Ryan, CEO & Director]

No, it's the other way around. Almost every customer in our business is a network customer. Oftentimes, our customers start with us. They start with the network and buy subscription services. The core customers of the network are the big airlines, ocean carriers, trucking companies and, to a lesser extent, railroads and all of the people that want to communicate with them. Primarily the biggest group of there is logistics services providers, such as Kuehne + Nagel, DHL, FedEx, UPS, DSV, Jenker, Panalpina-type companies and then the customers that hire them, the big retailers and manufacturers. It's very typical for someone to join our network and then buy a whole bunch of subscription-based value-added services over time as they want to help make better decisions about what's moving over that network.

[Operator]

And our next question comes from Scott Group from Wolfe Research.

[Robert Hudson Salmon, Research Analyst]

It's Rob Salmon on for Scott. Just kind of tying a bow on the coronavirus discussion. Could you give us a sense of how much of your business is tied to China? And when we're thinking about air, kind of, a second part to that question, are you guys agnostic if it moves in, kind of, if the volume moves in passenger belly space or cargo?

[Allan J. Brett, Chief Financial Officer]

Yes, Rob, it's Allan here. Just to quickly touch on. So from a reporting perspective, if you're going to look in our financials, you'll see that 4% of our revenue comes from Asia, and a subset of that is from China. That's not the entire picture. We get paid as transactions move, as trucks leave factories in China through to the port in Hong Kong through to North America or Europe. We are getting paid. It is a part of our transactional volumes. As Ed said, try to give you some metrics, that's a portion of our recurring revenue or services revenue business. And exactly how much of China? We don't know, but we know we are impacted and get paid from some of those transactions. Ed, anything further?

[Edward J. Ryan, CEO & Director]

No. But you had the second part of the question. Could you repeat it?

[Robert Hudson Salmon, Research Analyst]

Yes. I mean if we're seeing kind of more volume move within kind of freighter capacity as opposed to passenger belly space, is there -- do you guys have a difference in terms of exposure there or from an economic perspective?

[Edward J. Ryan, CEO & Director]

No, we do business with just about every major passenger airline that puts cargo in the bellies of their planes and just about every cargo airline in the world that has a full -- plane full of cargo. I understand from talking to some customers that there were some switches there. When they shut down the passenger traffic in China, the cargo traffic didn't necessarily shut down either for ocean or air, which maybe is behind some of the results that I kind of said there, okay, China shut down for a period of time, but it came back, and it didn't look that bad to us on our network. I think that's -- I think that's part of it, right? The logistics and supply chain operations kept moving even though a lot of other things in the country stopped for a period of time.

[Robert Hudson Salmon, Research Analyst]

No. Understood. And then when we're thinking about kind of the airfreight component, if we're seeing higher pricing, is that something you guys get leverage to? Or do you just benefit from when we're seeing kind of more of the volume run through the network within the air segment?

[Edward J. Ryan, CEO & Director]

Yes, it's mostly volume-related for us in air. We don't charge more when our customers charge more. However, it is usually pretty good for us when our customers do better. So if they have ways to make more money and end up doing better as a result, that usually ends up benefiting us as well. But no, we're typically charging by the transaction, and it doesn't matter to us what they charge for the shipment.

[Robert Hudson Salmon, Research Analyst]

Got it. And Ed, just to kind of close off the discussion in terms of the corona and us trying to figure out the impact, when we look at -- is that totally encompassed in the baseline revenue? Or should we think about whatever hit we have that we've seen to date, it would be kind of in baseline or it would be kind of the premium that you guys typically generate from a revenue relative to that premium?

[Edward J. Ryan, CEO & Director]

I'm not exactly sure how to answer the question, but I would say that as of February 21, we told you everything that we could see as of that date on our network. We've assumed from there going forward that it's largely business as usual. I understand that could change, but I don't know what those changes are, so I didn't want to start guessing in our calibration as to what might happen in the coming months.I will -- just to reiterate one more time, I did notice that in China, it was not nearly as big an impact as one might have thought when going into it, right? It was down for a couple of weeks and operations did not stop during that period of time. They did slow down as people were told not to go to work, but we were pleasantly surprised at how fast they got back and how quickly the supply chain has got back to nearly full movement again.

[Operator]

And our next question comes from Deepak Kaushal from Stifel.

[Deepak Kaushal, Director and Technology & Communications Analyst]

This is Deepak asking for Deepak. Got a couple of follow-up questions, sorry, ask about coronavirus again, but I will. So Ed, when you mentioned 50% of your 90% recurring is transaction related, are you able to parse out what of that transaction portion is related to global trade volumes versus domestic kind of e-commerce fulfillment and the relative sensitivities of those to kind of some -- like a disruption in global trade like coronavirus?

[Edward J. Ryan, CEO & Director]

I don't think we break that out. We don't, and I'd be guessing to give you a number, so I probably shouldn't. I'd say...

[Deepak Kaushal, Director and Technology & Communications Analyst]

So you can't say whether it's more than 50-50 or less than...

[Edward J. Ryan, CEO & Director]

We have significant operations in both, let me say it that way. Domestic North America market is a big deal to us, obviously, but we do business with every big airline and ocean carrier and all our customers. So that's also a pretty big part of our network.

[Deepak Kaushal, Director and Technology & Communications Analyst]

Got it. So if we just say that they're 50-50, would it be safe to say that the portion that's related to North American e-commerce kind of domestic parcel is more resilient to global disruption in shipping volumes? Or are they really that integrated that they're both impacted at the same level?

[Edward J. Ryan, CEO & Director]

It depends on what happens, right? I don't know what's going to happen. Like it was in China, and I think a lot of people are still going the work, they were just being cautious when they did. I think there's certain jobs where they just were not doing that job for a couple of weeks. And I don't know what's going to happen in these other countries, right? I mean you're still talking about very small numbers of people infected with the virus. So I don't want to speculate that we're going to have another China on our hands. I don't know that that's the case.I can tell you what I saw in China, it didn't look that bad from a volume perspective on our network. But I'm not sure what's going to happen going forward. I'd be speculating, and I don't want to do that because I really don't know any better than anyone else what's going to happen with the coronavirus rollout and spread around the world and when does it stop? Or does it stop in the summer? Or does it continue in the fall? I don't know any of those answers any better than anybody else on this call, so I don't want to speculate too much.

[Deepak Kaushal, Director and Technology & Communications Analyst]

Got it. And then -- so if I think back to 2008, when you did have kind of an economic downturn that was big, what kind of tactical adjustments did you do and what we might think of that you can do to actually -- to take advantage or to mitigate the situation?

[Edward J. Ryan, CEO & Director]

I don't know the things -- I don't know if these 2 things are in the same category. The global recession we faced in 2008 was pretty big. Coronavirus is nowhere near that right now from an economic perspective. But in '08, you saw we did a bunch of things. We went and took the breadth and scope of our network and brought that to bear with our customers in negotiations. When they wanted better pricing because they were facing tough times during that time, we were saying stuff like, "Hey, buy more products from us. Here there's other product I want to sell you. If you want a discount, buy this from me and throw that other vendor out and use our service and I'll cut your cost on both services." And we found that to be a very effective way to not only grow our business in a challenging time but develop much closer, tighter relationships with our customers.The biggest thing that we saw in that downturn was prices of acquisitions dropped precipitously. Some of the best deals we got in terms of dollars per EBITDA made over the coming years were during '08, '09, '10, '11. And I don't know how far this is going to go. I'll be surprised if it goes that kind of far. But to the effect that there is a downturn in the economy over this, I think some of the people to go are the people that are overcharging for their companies when they're selling them, right? A bunch of private equity firms that felt like for the last 5 years, they couldn't lose. Well, that can't be true, and there'll be a day when they do. And we won't be around on that day to buy up good assets at a relatively fair price.

[Deepak Kaushal, Director and Technology & Communications Analyst]

Got it. And then on Peoplevox, just a quick one. So you got pixi*, you got Oz, you got ShipRush and now you've got Peoplevox. Like, how much do you integrate these products into a single Descartes-branded product? Are these largely stand-alone in various geographies and they just all kind of do the same thing? I mean what level do you guys integrate these...

[Edward J. Ryan, CEO & Director]

No, no, no. They're all different businesses. Sorry, they're all different businesses. They do need to work together. We do make them work together. We continue to add things to help them work together. They are not all the same business. pixi* and Peoplevox are similar businesses. And I think you'll see us take advantage of that and help them solve problems for customers more globally because we have both of them now. But as with most acquisitions, we look at them and say, what needs to be integrated here to our existing network? And the fact that we operate a network makes it pretty darn easy to integrate the solutions together and have them start working together for the customers straight out of the box because that's what our network does. It helps 2 disparate software systems talk to each other. And so our job may be a little easier there than it is for most companies.

[Operator]

And our next question comes from Robert Young from Canaccord Genuity.

[Robert Young, Director]

I'll just maybe continue on one of the last questions there. After what you saw in 2008, was there an incentive for organizations that weren't on the network to get on to the network? I know you said that a little bit, but maybe if you could just add some color to that.And maybe the second piece of that, I mean, a lot of changes in the regulatory framework around shipping logistics after some previous issues in the past. This is -- my perception of this is coronavirus would be more of an impact on movement of people, but do you see any impact on logistics that maybe we wouldn't recognize?

[Edward J. Ryan, CEO & Director]

Well -- okay. So in the -- let me take that one first. So in the long run, yes, I mean, I think there's going to be some rules put around that will affect the supply chain for sure, right, to help prevent the spread of virus and things of that nature. I think as we learn with each of these things, what caused this and you start to figure it out, I don't know they completely know the answer yet, but as they do, I think they're going to start to shut down some of those practices. And the customs authorities are going to ask questions about these types of things when they find out what caused it. As you have seen with a lot of global issues, terrorism is the one that really comes to mind, right, where they go, "Oh, that's how the terrorists did this? Okay, well, let's shut that down." And one of the ways you shut it down is to look to logistics and supply chain companies to say, "What can you do about it?" And put rules in place to help them do that. And one of the more successful parts of our business has been watching as these new rules come down and helping our customers address them. And so I don't know what's going to happen with this one, but I suspect something like that may happen over time with new filings that need to be made and stuff like that as you move goods around the world. To your first part of the question, yes, people are obviously more affected than cargo. When the government tells everyone not to go to work for a period of time out of an abundance of caution, that can affect every business and the economy as a result and, obviously, logistics and supply chain in part with that. But I alluded to it on the call earlier, I think it's safer to go use an e-commerce site to order stuff than it might be to go to a grocery store if there's actually a virus in your area that's somewhat widespread. That's not really the case in many places outside of the Wuhan province in China, but we're all watching the news daily and going, it could happen. These things could spread to other countries and not just a couple of people, but larger amounts of people. And if that were the case, might we see more shift to e-commerce? For sure, we may. And if so, that's helpful for our e-commerce business.

[Robert Young, Director]

And in the past, have you seen a surge in new prospects or new joins onto the network after like this type of disruption or any kind of disruption?

[Edward J. Ryan, CEO & Director]

Not new joins for people using our network to switch providers. One provider goes out, they need to get the produce something elsewhere. We see our network as a convenient way to facilitate that. Remember, most people in the supply chain are on our network already. So it's just a matter of how they use it. They're using it to connect to certain trading partners right now, and something like this virus or maybe some other larger issues might impact the use. And our network is convenient in that it gives them the ability to make those changes quickly and get on with their business. So yes, I've seen that in the past, and I suspect that, that could play a role here as well.

[Robert Young, Director]

Okay. And then just a little bit on Peoplevox for me. My perception is that the customers of Peoplevox might be smaller customers. Is there any opportunity for you to upsell the functionality into your larger customers that are on the network?

[Edward J. Ryan, CEO & Director]

Yes. I mean maybe a little bit we always try and buy a solution itself in the medium and small customers. We try to move it upstream over time. We believe most technology markets erode from the bottom. So when we're selling to the small guys, can we make that bigger over time? But that's not why we bought it. We bought it because there's a lot of small or mid-sized e-tailers and retailers out there that have an increasingly large problem and need software to help deal with it, and we thought we'd be in a better position if we were able to sell that software over our network and get more and more of these customers around the globe, which is our driver in mind.

[Operator]

And we have no more questions at this time.

[Edward J. Ryan, CEO & Director]

Okay. Great. Thanks, everyone. Appreciate your time this afternoon. We look forward to reporting back to you next quarter with our Q1 results. Have a great day.

[Operator]

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