The Descartes Systems Group Inc.
Q4 2016 Earnings Call Transcript

Published: 9 Mar 2017

[Operator:]

Welcome to the Descartes quarterly results call. My name is Karen, 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.

[Scott Pagan:]

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, the business outlook, baseline revenues, baseline operating expenses and baseline calibration, anticipated and potential revenue losses and gains, anticipated recognition and expensing of specific revenues and expenses, potential acquisitions and acquisition strategy, cost reduction and integration initiatives and other matters that may constitute forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties, assumptions and other factors that may cause the actual results, performance or achievements of Descartes to differ materially from the anticipated results, performance or achievements implied by such forward-looking statements. These factors are outlined in the press release and in the section entitled certain factors that may affect future results in documents filed and furnished with the SEC, the OSC and other securities commissions across Canada, including our Management’s Discussion and Analysis filed today. We provide forward-looking statements solely for the purpose of providing information about management’s current expectations and plans relating to the future. You are cautioned that such information may not be appropriate for other purposes. We don’t undertake or accept any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements to reflect any change in our expectations or any change in events, conditions, assumptions or circumstances on which any such statement is based, except as required by law. And with that, let me turn the call over to Ed.

[Ed Ryan:]

Thanks, Scott. Good afternoon, everyone, and welcome to the call. Thanks for joining. We had another great quarter to finish off another great year, executing to our long-term operating strategy as outlined at the beginning of the year. We are a financially stable business that is trusted by our customers to help them manage the complexities of their ever-changing logistics and supply chain landscape. Our Global Logistics Network provides the foundation for what we do, helping parties connect and collaborate to research the plan and execute shipments. We keep expanding what our customers can do on our network by building more functionality and combining with complementary businesses. This year, we combined with four new businesses, taking us deeper into the trade content world, adding tools and resources to enhance our on-boarding capabilities and adding new warehouse management functionalities for ecommerce. From the financial perspective, we continue to focus on recurring revenue and deemphasize license sales. As a result, you can see our EBITDA margins continue to expand, showing the operating leverage we have in the business. We're really happy with the business we've built and we continue to see opportunities to grow the business further as the global trading environment becomes more complex. I'll speak to some of those opportunities shortly, but first a quick summary of what we're going to talk about on the call. I'll start by providing a few highlights for the quarter and the year followed by some comments on what we've been up to in the business. Allan will then take us through the financial results in a little more detail and then I'll finish up with some comments about our calibration for Q1 and the business landscape we see in front of us. So, let's start by going over some of the key financial highlights for the quarter and for fiscal 2017. We had another record quarter and the year across our key metrics. Our adjusted EBITDA continues to grow in line with our plans. For the quarter, we generated 18.5 million in adjusted EBITDA, an increase of 13% of Q4 of last year; and for fiscal 2017, we were up 15% generating 70.1 million of adjusted EBITDA. On a per share basis we grew adjusted EBITDA 14% compared to the same quarter last year and 15% for the year. Revenue for the quarter was up 10% from this quarter last year, coming in at $52.8 million and for the year revenue was up 10% to $203.8 million. The revenue mix was excellent as well. We continue to focus on profitable growth with an emphasis on growing our return revenue base. Services revenues accounted for 97% of our revenues for the quarter and for the year. You may see that shift up in the future, if we buy businesses that have higher license component, but generally we'll continue to plan for less and less license revenues in our business. We think that our focus on profitable growth is paying off. The leverage in our business model is clear when you look at what's been happening with our margins. Adjusted EBITDA as a percentage of revenue was 35% this quarter, up from 34% this time last year; and for fiscal 2017, our adjusted EBITDA margin was 34% also up from 33% in fiscal 2016. Another key metric we track is our conversion. We think strong cash conversion is reflective of a healthy business and we're very happy to see our cash conversion metrics remain incredibly strong. In the quarter, we generated $19.5 million of cash from operations and 72.6 million for the year. That's a cash conversion ratio for both that is north of 100% of adjusted EBITDA which is great. Looking forward, we don't expect to remain north of 100%, but we'll be targeting levels around 90% consistent with what we've seen in our business over the last decade or so. As we continue to generate cash, we've got lots of potential usage for it. In FY '17, we spent our operating cash flow on some great acquisitions and in a minute we'll talk about that in more detail. But first, I'd like to start by going through a quick reminder of what it is we're building here with our Global Logistics Network and why? This should help provide some context for our various investments. For every shipment in the world is moving from point A to point B, there're multiple parties involved, likely with many different people within each of those parties across different departments and geographies. So, a lot of documents that need to be created and exchanged, and there's a lot of data in those documents and external to those documents that is required to ensure shipments are moving efficiently. Some of that data is common across multiple documents and some data elements need to be shared across some or all of those multiple parties, while some data should only be seen by one party. Various decision points and processes need to be completed along the way, and opportunities for errors and inefficiencies present themselves at many points for our customers. This is true even for domestic shipments that aren't crossing borders, particularly when you add scale to the picture. Moving one shipment efficiently is one thing, but more shipments you move and more complicated the whole process can become. On the flip side, there's often more opportunities for efficiency when you're moving larger volumes of shipments. And when you're moving goods internationally, the amount of data, documents parties and processes can increase exponentially. This can get very complex very quickly. Even before shipment is made, there's a lot of research required to get set up. Who should I buy from? Can I buy from or sell to that party? Am I allowed to do that, in other words? Which countries should I be doing business in? What are the tariff duties and tax considerations moving these types of goods into or out of the country or set of countries? Are there any other regulatory considerations required for moving these types of goods? What carriers should I consider using? What channel should I consider using? Et cetera. And that could just be for one shipment or one type of shipment. Most companies have supply chains moving lots of different kinds of shipments to and from lots of different places. The work doesn't stop once you've made your decision or decisions. And things can and do change once the goods are in motion, and that change occurs regularly. In order to operate efficiently and satisfy your customers, you need to be able to react to new information that becomes available during the course of the shipment. To do this, you need the ability to track and monitor your shipments in real time. And for this to happen effectively, you need to be connected to your external parties and systems in some way to receive updates as quickly as possible. And many need to have the ability to react to all of this new information. Like I said earlier, this can get very complex very quickly. And that's what we do here at Descartes is help our customers solve these problems. In a time when global trade is poised to change faster than ever with uncertainty line ahead for many country trading relationships, we are here to isolate our customers from that complexity. How do we that? We do it with our Global Logistics Network by bringing together a wide range of capabilities, content, connections all into one place, so that our customers can research and plan, who to do business with and how, to connect their global trading community to collaborate and share information, to execute and monitor shipments and react in real time to changes, and finally to analyze the data with business intelligence tools to improve for next time. So with that content, let's take a look at some of our investments in 2017. In FY '17, we continued to invest in our business organically with more than 17% of our revenues reinvested into research and development. But as with previous years, we supplemented those organic investments by combining with some new businesses, actually four new businesses. So let's talk about our most recent acquisition, Datamyne. For those of you that have been on some of our previous calls, you probably weren't surprised by another investment into the data content space. Following the success of our recent Customs Info MK Data acquisition, we've been looking for more trade content businesses that can allow customers to do more on our Global Logistics Network. Datamyne is a great fit for us. It expands both the functional footprint and geographic reach of the Global Logistics Network. They have offices in the U.S., Uruguay, Argentina and Brazil. So what do they do? They collect claims and commercialized logistics trade data from over 50 countries across five continents. Essentially, they gather shipment data from official filings with customs authorities and trade ministries around the world. They then process that data and make it available to customers via web-based tools. Subscribers use their solutions and business intelligence tools to augment, speed-up and simplify trade data research and to shape global marketing prospecting and sourcing strategies. When you put that into context, it's about what we've just been talking about with the Global Logistics Network as one place to manage the lifecycle of shipments. This functionality is critical when you're researching, planning your supply chain and to monitor how you're doing against your competitors, amongst other things. Above and beyond, the immediate impact of Datamyne, the Datamyne bring to our business by helping our customers better research and planned shipments. We're also very excited to now have a new team of logistics trade data domain experts and data scientists here at Descartes. We have a lot of data flowing through our networks at this point on a day-to-day basis. In fact, almost every quarter on this call, we hear questions about the volumes we're seeing on the Global Logistics Network, as a proxy for wider shipping trends. Over the next while, we'll be working with Datamyne team to start thinking about how to unlock more of the value from the data inherent in our network as well as continually looking for more sources of data that we think will be helpful for our customers. So for the Datamyne team, welcome to Descartes, we're really happy to have you as part of our family and look forward to working together for many years to come. Moving on prior to the Datamyne deal in October and November, we made two investments to add scale to our network and augment our on-boarding capabilities. In order to execute shipments efficiently and to be able to collect and react to real time information, you need to be connected to a broad ecosystem of parties. We spent a very long time connecting people to our network, companies to our network, and consider this a key factor in the ongoing success of our business. When we sign up a new customer, the chances are we are already be connected to a number of their trading and logistics partners, which saves them time and money. However, we can always have more parties on the network, and we continue to invest in our on boarding capabilities to get more parties connected, and we're always looking for opportunities to combine with businesses that can help us expand faster and reach further. 4Solutions, an Australian-based company, and Appterra, U.S. based company, were two such investments we made last year. Each company spent many years connecting parties and building up a network, and we're very happy to have them choose Descartes as their trusted partner to combine with. Coincidentally, each of them had office in the Philippines only a block apart, and we have recently combined those offices into one Descartes office. We're looking forward to building up our operations there as we continue to grow the combined businesses. And finally, I'd like to talk a little bit about other combination earlier in 2017, pixi, which not only added direct presence for us in Europe's largest economy, Germany, but also added functionality and domain expertise for e-commerce order fulfillment and warehouse management. A few minutes ago, I talked about the Global Logistics Network, as one of the place to research, plan and execute shipments. Just to be clear, we want to help people with all types of shipments, large or small, domestic or international. And as a consumer, consumer buying patterns change, in particular the continued growth of omni-channel e-commerce, we continue to invest to stay ahead of the game and put ourselves in a position to help customers of all sizes with all types of shipments. The pixi combination helped us get deeper into the e-commerce processes, specifically helping us expand our offering for small and our small-and medium-sized business customers, SMBs. Pixi's platform collects order information from an e-commerce web front, translates that into a scanner-driven pick and pack process within the warehouse, initiates the shipment to the customer, and synchronizes all of this information with the customer's financial systems for invoicing and shipment tracking. This is a big deal for their customers. The efficiency savings are incredible, and it helps a typical SMB customer with one of their biggest problems, which is scaling their business efficiently. The typical pixi customer can process three times as many shipments with the same resources after putting a Descartes system in. Taking that a step further, if you think about the pixi platform combined with our other e-commerce solutions, it's very complementary. Specifically as we combine with Global Logistics Network and our e-commerce and ERP capabilities from our combination with Oz Development last year, it allows us to present highly differentiated offering for this segment of the market. Before I hand the call over to Allan, we talked a little bit about -- who's going to talk a little bit about the financials. I'd like to thank some of the people that made another great quarter possible here at Descartes. So, thanks to all of our employees for all the hard work they've put into make sure customers can results. Thanks to our customers who continue to place confidence in Descartes as their network of choice. I'd like to thank our partners for helping us to continue to expand our ecosystem. And finally, I'd like to thank our shareholders for continuing to have confidence in Descartes. And with that, I'll turn it over to Allan.

[Allan Brett:]

Okay, thanks, Ed. I appreciate it. As indicated, I'm going to walk through our financial highlights for the fourth quarter and the year ended January 31, 2017. For the fourth quarter, we are pleased to report record quarterly revenues of $52.8 million, up 10% from $48 million in Q4 of fiscal 2016. This revenue growth was achieved despite continued negative foreign exchange movements as a result of the stronger U.S. dollar compared mainly to the euro and the British pound. Our revenues declined by approximately 500,000 in the fourth quarter when compared to the fourth quarter last year. Excluding FX, revenue growth would have been just over 11% in the quarter when compared to last year. As Ed indicated, following there consistent trend, license revenue declined, coming in at only 1.4 million or 3% of revenue this quarter. Gross margins continued to be very strong at 72% of revenue for the quarter, which is consistent with the same period last year, as we continued to experience strong operating results from our network business. With continued revenue growth driven by leverage from our network revenues and recent acquisitions, we also continued to see solid adjusted EBITDA growth of approximately 13% to 18.5 million or 35% of revenue, compared to 16.3 million or 34% of revenue for the same period last year. Similar to other quarters last year, FX had a minimal impact on our adjusted EBITDA, as we are fairly naturally hedged to changes in the U.S. dollar against the Canadian dollar, against the euro and the British pound. As a result of these strong operating results and solid collections of receivables, cash generated from operations came in at 19.5 million in the quarter or approximately 105% of adjusted EBITDA. As a result of all of the above, GAAP net income came in at 6.1 million or $0.08 per diluted common share in the fourth quarter, an increase of 13% from net income of 5.4 million or $0.07 per diluted common share in the fourth quarter last year. This increase in net income is after the effect of higher amortization of intangible assets as well as the inclusion of approximately 900,000 of acquisition-related expenses. If we look at our results of operations for the year, revenue came in at 203.8 million in fiscal 2017, up 10% from 185.0 million for fiscal 2016, again, despite some continued FX pressures from a stronger U.S. dollar of approximately 1.8 million. Adjusted EBITDA for the year was 70.1 million compared to 60.9 million last year, an increase of 15%. For the year, cash flow from operations were extremely strong, coming in at 72.6 million or 104% of adjusted EBITDA, compared to 54.2 million or just under 90% of adjusted EBITDA in fiscal 2016. GAAP net income for the year came in at 23.8 million or $0.31 per diluted common share, compared to 20.6 million or $0.27 per diluted common share in fiscal 2016, which is an increase of 15%. If we turn our attention to the balance sheet, we ended the year with a cash balance of 38.1 million after completing the acquisition of 4Solutions and Datamyne during the fourth quarter, and we completed those out of available cash on hand. In addition, we repaid the remaining balance we had outstanding on our credit facility during the fourth quarter. And as a result, we currently have the entire 150 million balance in our credit facility available to us. Accounts receivable came in at 43 days of sales, while accrued liabilities and deferred revenues increased mainly as a result of additional acquisitions we completed during the year. As we have mentioned in the past, we expect to continue to use our available credit facility along with our year-end cash balance as well as future cash flow from operations to fund the continued expansion of our business. You will also recall that we have a 500 million shelf prospectus that was filed last year, under which we could raise additional capital if required. In short, we continue to be very well capitalized to allow us to execute on our business plans. A couple of points as we look towards fiscal 2018, we should note the following for you, we expect to incur between 5 million and 7 million of capital expenditures next year, and these will be mainly focused on investments in our network security and IT infrastructure. We expect the amortization expense will come in over approximately 27.5 million in fiscal 2018, with this figure being subject to adjustments through FX changes. After experiencing a tax rate of 24.3% this past year; we expect our tax rate to stay within the range of 23% to 26% of pretax income in fiscal 2018. And finally, we should expect stock based compensation to come in at approximately 1.5 million to 1.7 million for fiscal 2018, subject obviously to any forfeitures of stock options or share units. And so with that, I'll turn it back to Ed to calibrate and wrap up.

[Ed Ryan:]

Great, Allan. So let's start with calibration. So 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; CAD0.75; $1.05 euro to the U.S. dollar; and a $1.20 -- $1.22 GBP to U.S. dollar. So to turn to Q1, as of January 31, 2017 for Q1, we had 51 million in visible recurring contracted revenues, or otherwise, our baseline revenues. We had 36 million in baseline operating expenses. This gives us a baseline calibration of 15 million for adjusted EBITDA for Q1. Some other key points related to how we're positioned for fiscal 2018. First, we are very well capitalized. We have a healthy business that's well calibrated. And as Allan just mentioned, we have a very healthy balance sheet. We're profitable and cash generating. We have low capital needs within our organic business. Our primary uses of capital are for continued use in acquisitions. As you may be aware, we've completed 35 acquisitions since 2006. And finally, we have access to additional capital should we need it. Allan mentioned our undrawn line of credit of 150 million. We've also filed a shelf prospectus for up to $500 million if capital was needed to be raised by other mechanisms. We have a strong acquisition pipeline. You will see there was a lot of industry activity right now with the consolidation continuing in our market. With this 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 and 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 our valuation, but we're confident in our ability to deploy capital effectively. Looking ahead to fiscal '18, we've completed our planning process, as we do every year around this time. It should be no surprise to anyone how our plans are framed. We continue to target 10% to 15% annual adjusted EBITDA and annual adjusted EBITDA per share growth. As in the past, we intend to invest any over performance back into the business. Our growth is planned to come through a combination of organic and inorganic activities, and acquisitions are not incremental to this plan. We intend to continue to focus on recurring revenue and deemphasize onetime license sales. If you recall in FY '16, we increased our planned operating margin range to 30% to 35%. Given the current performance of the business and being mindful of the FX environment, we're increasing that range to 32% to 37% moving forward. But please keep in mind this could vary if we buy businesses that need fixing up, which would impact that metric in the short-run. A quick update on our annual user conference, the time is almost upon us for Descartes Evolution in 2017. Our user conference is less than three weeks away. If you haven't booked your tickets yet, I encourage you to do so as soon as possible. The event provides a great opportunity to see our business at work from products to customers to partners to Descartes team members. You can even meet some our new team members from the acquisitions that I spoke about earlier. I know several on this call have been in the event in the past, and I hope they found it worthwhile. The registration is open on our website, and we're planning to make this our biggest event ever. So get yourself registered and come and learn more about Descartes down in West Palm Beach in a couple of weeks. Just as a reminder, it's March 28th to 30th in West Palm Beach, Florida, and we all hope to see you there. And finally as always, we continue to make ourselves available to shareholders to answer any questions. We 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 you'll do the same. So with that, let's open it up to questions. Operator, if you could start the Q&A process.

[Operator:]

Thank you. [Operator Instructions] And we do have our first question from Steven Li from Raymond James.

[Steven Li:]

Ed, so last year, the U.S. census was a headwind on your organic growth. As you lap those comps, should we expect a little better organic growth this year?

[Ed Ryan:]

I think our business is a pretty consistent performer. We try to operate in the 4% to 6% range of organic growth, and I'd expect you'd see the same going forward. Yes, I don't really know what's going to happen next year with our network. But certainly the economy is doing well, and we have a pretty good feeling at the moment. So we'll see what happens, but we certainly plan our business to be in the 4% to 6% range.

[Steven Li:]

And there is a metric you give out for your network, the churn. So what is the churn you're expecting for this year for fiscal 2018?

[Allan Brett:]

We disclosed, Steven, in our disclosures that we will talk about a 4% to 6% expected churn rate. It varies within that. And then we expect nothing that would move it significantly off that next year, if anything, maybe at the lower end of that.

[Steven Li:]

So Allan, so 46% for fiscal 2018?

[Allan Brett:]

That's what it was -- yes, that's what we stated in our public disclosures, exactly.

[Operator:]

Thank you. And we have our next question from Brian Essex from Morgan Stanley.

[Brian Essex:]

I was wondering, Ed, if you could maybe give us a little bit of an update what you're seeing with omni-channel and perhaps big-box retailers, given some of the pressures, some of those retailers have seen recently. And then maybe incremental impact from Amazon, as they kind of vertically integrate logistics channels?

[Ed Ryan:]

It's been pretty consistent for maybe the last 3 years. We continue to have big retailers someone else we're kind of the market leader in that space. Certainly one when people want to do omni-channel retail and same day, next day schedule deliveries and they want to do that efficiently, we tend to be the system of choice. We've had a pretty steady stream of retailers coming to us, a lot of big names. You've seen some of the press releases and maybe seen some of them in our user conference. I think they've gotten some great results for some of them. A couple of them in the last couple of months, I'm seen at various conferences, come up and thank me for some of the things that we've done in the cost savings, we driven into their business in the process of them building the new omni-channel environment with Descartes as a part of that. It's been fairly consistent and steady stream for the past couple of years, and I seem same in these last couple of quarters.

[Brian Essex:]

Got it. And then maybe any commentary you can offer on your M&A pipeline, prices you're paying for deals? How robust is that pipeline? I know across technology, we're starting to see some software vendors and IT services vendors back off M&A little bit as prices are getting a little lofty. What are your thoughts on I guess your M&A prospects for the rest of the year?

[Ed Ryan:]

Yes, so we certainly see some of that. I don't know that it's, we may be in a fortunate positions in market when there are so many opportunities available that it hasn't hit across the entire market, as there certainly selected deals and tends to be hit to get bigger deals. There's a lot of competition. They're selling for stuff for prices that we think is too much. We've historically backed away from those deals, and I think you'll continue to see us behave that way. We try to be prudent investors. And if we think it's too much money, we'll walk away. And so maybe it's a little easier for us because there's a lot of stuff to buy. So I think, well Jesus, if that guy wants too much money for his business, let's go do something else. And fortunately for us, there are other things to do, a lot of it that smaller tuck-in acquisitions maybe aren't subject to some to some of those things. And because of the size and may be they're owned by a single person that is interested in more than just money when they're selling business, they're looking for a good home for the business and the people and the customers that they've cultivated over the years. And we spend a lot of at a Descartes trying to position ourselves as the best choice for that type of guy. Hey, if you care about what happens to your business after it's bought, we're the guy to come to. And maybe we haven't seen some of the price issues hit that side of the market. I think it will be tough to because some of the people are, in my minds, overpaying for stuff, don't have the desire to focus on the $10 million or $15 million deal. They're looking for stuff well north of 100.

[Operator:]

And we have our next question from Matt Pfau from William Blair.

[Matt Pfau:]

So Ed, just wanted to hit on the trade content business a little bit, nice that you continue to add products there. What do you think the additional opportunity is there to -- or is there additional opportunities to continue to add products at the trade content solution? And then it also sounds like as you bring on the new team, there may be an evaluation of the potential to do something else with the data that's already flowing over your network. Is that true?

[Ed Ryan:]

Yes, for sure. One, there's opportunity to get in other areas. Maybe more importantly there's opportunities to take those same content business and I talked about fixed cost structure of those businesses in the past. That means if we buy another content business in the same exact space, we have an opportunity to operate those businesses even more efficiently going forward, and we think that's a great opportunity not only for our business and those customers but for our shareholders as well. And that's exciting to us, the content businesses that we just bought like the Datamyne. One of the other things that we're doing is kind of looking at -- and I alluded to this in the call earlier but we're looking at the data that's flowing over our network and saying how can we supplement the trade content that we get through Datamyne with some of the content that we get passing over our network? Of course, with our customers permission, but all in an effort to make something that's even more valuable to them. And so not that these people have been here in, the Datamyne guys have only been here for a month or so, month and a half, but we are spending a lot of time talking about that right now. What other data elements can we supplement into this database and make it even more valuable to the customers.

[Matt Pfau:]

And then just one last one from me. I believe you also brought in the Datamyne CEO as the new SVP of trade content. Any changes that you foresee making in the business now, bringing a new head of that business?

[Ed Ryan:]

Well, Brendan is a guy I've known for years. He was a customer of mine years ago. And he's been at Datamyne for a whole bunch of years. We got to know him there over the years as our two companies became friendly for the last eight or nine years. We have a lot of respect for him. He's an industry veteran, came out of the ocean carriers space and we're hopeful that he can come in and help us quite a bit. So we get this a lot, right, with acquisitions. We get a bunch of people come in. I came from an acquisition, for example. New people come in, and we go, hey, maybe we can leverage them to do more stuff, they're now in a much bigger company. And there's a lot more opportunity not only for them, but opportunity for us to take advantage of the things that they might bring to us and we hope to do the same with Brendan.

[Operator:]

And we've our next question from Paul Steep from Scotia Capital.

[Paul Steep:]

Ed, can you just go back to where we sort were at a minute ago? On the data content side of the network, where do you think the opportunity really lies this year in '18? Is it the cross-sell of the data set you already have, as continue to perform there? Or is it taking it and building it in new products you alluded to a little bit earlier? And then I've got one quick follow-up.

[Ed Ryan:]

Actually, I think the biggest opportunity is taking the content that they have and exposing it to our entire sales force that can go after the customers. We do business with almost 17,000 companies now, I think. If we can go out to all of them with our sales force and show them what's possible with the denied party screening database, with the trade content database, tariff and duty database. I think that's probably the biggest opportunity for growth for us. So let's call that the cross-selling piece of it. The integrating in and combining two of those, as soon as we bought Datamyne, we started telling some of the other things that we do with some of our sales people and some of the other things they do. They started getting very excited about the ability to put some of this content together and make it more valuable for their customers. When I went into the for the first meeting in Miami to give the Welcome to Descartes discussion, and half of the meeting got taken over with stories from them about how the trade content databases they have and the tariff and duty database that we have are two things that are perfect together and more valuable together to the customers. So we're excited about that. It might take a little more time for that opportunity to completely unfold, but it's pretty exciting to me. I left that meeting pretty energized.

[Paul Steep:]

Great. And last quick one for me just on MK Data, the outperformance is nice to see obviously. They overshot the targets with the extra little bit of earn out we saw hit in Q4. Can you and I know it's hard to say? Was that outperformance, Ed or Allan, was that driven by them just getting that continued growth we saw a year ago with the user conference and denied party screening for new clients? Or was it driven really by you guys starting to push that back through the channel? Thanks

[Allan Brett:]

Paul, it's Allan. Yes, I'm not sure we have that right. So I think for MK, so there should be two parts to it. MK is performing very well. We're very pleased with the way it's performed. I think what's in our P&L for the fourth quarter would be some accruals around retention bonuses we have for that team in the acquisition expense. I don't think there's any earn out that was accrued or put through there. There was no earned out on that deal, okay, so maybe just a clarification to your point.

[Operator:]

We have a next question from David Hynes from Canaccord.

[David Hynes:]

Allan, maybe I can start with you, just a quick one on the numbers that the sequential jump in deferred revenue was pretty impressive year-over-year growth, anything there that we should be aware of?

[Allan Brett:]

Yes, a couple of things on the sequential, so taking third quarter to fourth. One, the Datamyne acquisition came with a sizable balance of deferred revenue, given the size of that business. In addition, there is a bit of a seasonality what happen every fourth quarter. We do have a lot of annual renewals. So it's not completely all annual renewals, but there is more tends to be a more annual renewals around the calendar year. And as a result, the deferred revenue balance does take-up a little bit for January vis-à-vis October. So it's combination of those two factors, and it will trend there'll would be a bit of a seasonality trend, but it will continue from here as far as staying at these levels.

[David Hynes:]

Yes, got it. And then Ed, maybe curious if you can give us kind of your updated view on the regulatory backdrop, as it pertains to customers filing business? I know we've talked in the past about how that business kind of see step function growth based on changing regulations. Curious, I guess, with the kind of uncertainty in the political landscape, does it feel like some of the initiatives that we've talked about have shifted out? Or how are you thinking about how that plays out over the next 12 to 18 months?

[Ed Ryan:]

Well, the big once that we've seen and know about are Canadian eManifest and AMS, switch to AMS to eManifest in the United States. They've been going on, and will continue to go on over the next year, if provided some healthy growth in our customs and security filing business. We've been happy about that. With some of the nationalistic moves that you're seeing in the U.K. and the U.S., the country is talking about how to better secure their borders. We see that and it's not a very pin pointed direction right now, but we see that generally as good news for us when country sit and say, I need to better secure my borders. One of the main things they do is say I need to collect more data from all the trade participant so I can scan the data and try and use it identify the bad guys. And we play a big role in that. I think it's the best way to do it. The data tells you a lot of things about the people that are trying to move cargo and what they may be up to and because the normal operators are doing running their business day in and day out and having a somewhat consistent pattern of shipments, the guys that are new to this and the uninitiated tend to stand out and that's a very helpful to customs authorities when they are trying to better protect their borders. You might only be able to inspect 100 containers an hour coming through Long Beach, yet there might be 1,000 containers an hour coming. And your job at CBP is to say, "What 100 containers should I inspect, because I can't inspect them all? And the data is the best way to figure that out, and we play obviously a large role and helping people collect that data. Nothing with a new Trump administration's really been announced specific to our business yet, but I do believe ultimately it's a good thing if they're going to try to predict the borders better. I think it's a good thing for the United States. I think it's a good thing for our country, our company, I should say.

[David Hynes:]

Helpful and one last one, if I may. Curious, I mean is how high is up for EBITDA margins over time? I mean you guys do a great job managing business with these intermediate term targets. And obviously, it just raised those again tonight. I'm curious if you take kind of a long-term view of the model, at some point, do you hit a ceiling at which, above which you think it's hard to show leverage as growth comes from kind of rolling up these subscale assets? Or how should we think about kind of what this business could look like at X million, X hundred million or revenue 500 million in revenue, say?

[Ed Ryan:]

As you mentioned, you saw us moving from 30 to 35, to 32 to 37. We're pretty conservative guys. So we may have an opportunity to say more than that, but we are conservatively saying, "Hey, that's the range we think we're going to operate in for the next year." Barring any acquisitions that are operating at a lower margin, that we are, that would obviously change things. I don't know where it stops it yet. I think we can continue to, like we've seen over the last couple of years, make our network more and more profitable. I think we've spent a lot of time telling people about how our network has efficiencies in it that are kind of built in, that allow that to happen over time. I don't know where it stops I guess for the moment. I'd say we give you range of 32 to 37, so that's what we can see at the moment.

[Operator:]

And we have our next question from Deepak Kaushal from GMP Securities.

[Deepak Kaushal:]

I've got a couple of follow-ups, and I guess they largely have to do with M&A integration. Back on the data content side of Datamyne, what kind of heavy lifting is required to integrate the 2 sets of data from your organic business and your acquired business? The tools in APIs, do they reside separately? Can you integrate them together? Is that part of the plan?

[Ed Ryan:]

Yes, they're absolutely separate databases at the moment. We are looking at ways to combine them and to supplement each of those databases to make something more valuable. From a technical perspective, you can leave them in two separate databases perspective. You can leave them in two separate databases and have a tool, search against both, to bring it to the customer. So it's not something where we feel like we have to literally combine the database. The bigger issue is trying to find a customer value in combining them. And build front end tools that give the customers what they want. And so what we are spending time with right now is talking to the product managers with each of those businesses and getting some of their ideas and then going after customers with them and saying stuff like what if we do this, would that be helpful to you? Can I pilot that with, can you tell me if it really helps your business and if it does, I'm going to go try and sell it to everybody else. That's where we are at the moment. I don't think it's nearly as big as a technical challenge as it is a commercial one.

[Deepak Kaushal:]

And then forgive my ignorance, but on the tools and APIs, do you open that up to third parties or to your customers to allow them to develop their own? Or is that something that you do for them on their behalf at this stage?

[Ed Ryan:]

There's some capabilities like that in the tool set, but usually, we're trying to identify the value, because it tends to be the same for all the customers. They're all involved in logistics moves, and they're either carriers, third party logistics providers or big retailers or manufacturers. So they have similar types of problems. And we try to build the capability in our tool to cut the data up in ways that they would find valuable. We get that, those ideas from them, and then we make them available to the entire customer base.

[Deepak Kaushal:]

And then the second part of this, I guess on the integration side of the acquisitions, you talked a little bit about how you're trying to push your customers towards subscription licenses and move away from the annual licenses. When you're making acquisitions in their annual license heavy or upfront license heavy, how is that process generally, how does that go and how long does it takes to generally evolve it?

[Ed Ryan:]

Let me be clear. It's not annual licenses have a problem, its perpetual licenses. I'll sell you the thing onetime, you pay license fee and we don't talk anymore. We don't like that. We don't think it's good for the customer, we don't think that's good for us. The move that you've seen us make here and remember, 12 years ago, we were like 30% or 40% license. Now we are 3%. And I think some of it'll never go away because we have some products and some customers specifically that want to capitalize their purchases, and to do that they need a perpetual license. We allow that. We don't encourage it. We don't think it's actually a good idea for them. I know why they want to do it. There's a financial gain in their plan to do it, but I don't think it's a really long term benefit to their business. I think you'd like to hear me say thanks for signing up with me, I'll see you tomorrow, not thanks for signing up with me, I'll see you later. And what we've done is, we go and say, hey, I might offer this particular product both ways, but I really think you should do it in a month -- a monthly subscription service versus perpetual license. So, that we're partners in this forever, if I'm saving you $30 million a year from something that we're doing, what do you care whether you pay me one time for this stuff or you pay me every month? It's saving you so much more money than I'm charging you. Don't you want me there every day with you, trying to help you solve that problem? It's a $30 million problem. And I think more-and-more what you're seeing is our customers are agreeing with that.

[Operator:]

And we have our next question from Paul Treiber from RBC Capital.

[Paul Treiber:]

I just wanted to get your thoughts on blockchain and if you're making any investments there. And in particular, I'm sure you saw earlier this week that IBM and Maersk announced a blockchain solution for supply chain data on the ocean shipping side. And I was just wondering what's your thoughts on that solution that they announced?

[Ed Ryan:]

Yes, so it's interesting. And then I think it's the concept's a little pie in the sky right now, but I think it will come to be helpful. If you look at some of the ways that our network already behave, so lot of the elements of what people will describe in blockchain are already exist on our network. We continue to look at it. We don't use those words when we're out talking to our customers, but the concepts of chain of custody and things like that that are kind of essential to blockchain are already core elements of our network. And we do think that a network is the best place to do it, that it should not be literally documents to go back and forth between companies with no someone without someone in the middle of helping them. And I guess that's my thought on it. We continue to want to help our customers solve problems with that. And blockchain will play a role in it, but I don't know if it's the most important element to it.

[Paul Treiber:]

Okay, thanks. The second question just in regards to baseline, just looking at baseline for Q4 versus Q1, the revenues are it looks like it would be up. The baseline is up by 2 million quarter-over-quarter, and that's despite Datamyne. When I look at Datamyne, I estimate maybe 3 million to 4 million in revenue per quarter. So are you taking a little bit of a conservative stance on the contribution from Datamyne? Or is there some other factor that play from Q4 to Q1?

[Allan Brett:]

Yes, Paul. It's Allan here. So, I think the way we look at it we haven't owned Datamyne for very long, and those numbers are calibration as of February 1st. So part of the Datamyne numbers are in there. Whereas elements of the Datamyne business that we need to understand and get more comfort with before we feel more comfortable putting in our calibration. You'll see us evolve that overtime, okay?

[Operator:]

And we have our next question from Blair Abernethy from Industrial Alliance.

[Blair Abernethy:]

You haven't touched on partnerships in the call. I'm just wondering if you can give us a bit of a snapshot of what's happening on your go-to-market partnerships and particularly around SAP?

[Ed Ryan:]

Yes, SAP and Oracle our two biggest partners and we continue to expand our relationship with both of them very nicely. I mentioned on previous calls that they're both doing very good with the data content but behind to their global trade management, both of their global trade management systems. About six months ago, SAP also decided to start using our network behind their transportation management systems. That's going very well for us. As we've been brought into a number of large accounts. We started to sign accounts up. And these are very large relationships for SAP. And they end up, fortunately for us, being fairly large relationships with us on our network. We hope to do the same with Oracle. We do follow Oracle around and so our global logistics network. But at the moment, it's not with their blessing, like it is with SAP. We continue to whittle away at them and try to convince them that the best strategy for them and their customers is to sell our network embedded into their transportation management system. And we continue to make headway there, but we're probably not all the way over the wall yet.

[Blair Abernethy:]

Okay, great. And then just back on the retail vertical for a moment, I'm wondering if you can provide any more color sort of in terms of what areas, I mean, you've done a lot of deals in the grocery side of things, consumer electronics. So are there any parts of the retail vertical that you are resonating better with you guys that you think are growing faster?

[Ed Ryan:]

Well, retail side specifically. I mean, if you look at our, we call it omni-channel retail is one of the big growth drivers in this. But if you think about what's behind that, our nonstop optimization or incremental optimization engine has applicability to far beyond omni-channel retail. And I think our customers in other areas, manufacturing and parcel delivery and things like that, are starting to realize that what we built originally for big retailers is very applicable to them in getting a couple of extra points in cost savings because we can optimize around the clock. And with each new piece of information they can tell us, either about a customer order on its way in, or about where trucks are and what they're doing in their delivery process during the day, you can feed that information back into our nonstop optimization engine. You get better results. Our competitors don't have that capability at the moment, and it's been a big opportunity for us in the market. We tend to focus that on our omni-channel retail because that's the first and fastest-growing biggest area that we get, we see an impact. But it has applicability far beyond that with our customers that are watching their trucks drive around all day. And we say to them, If I can feed that information back into our optimization engine real time, I can help you make better decisions about what the trucks are going to do the rest of the day. And that could end up in a several percent additional cost savings for you. And if you've got 2,000 trucks and I can save you a couple of percent over the course of the year that might be tens of millions of dollars in extra savings. And so that's what we are working on right now and some of the reasons you see that kind of tailwind in that business.

[Operator:]

And it looks like we have no further questions at this time.

[Ed Ryan:]

Great. Thank you very much. Thanks, everyone, look forward to reporting back to you next quarter. And if you have prospective clients that want to see us, feel free to reach out. Thanks.

[Operator:]

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect. Speakers, please stand by for your post conference.