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The Descartes Systems Group Inc (NASDAQ:DSGX)
Q2 2020 Earnings Call
September 4, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the quarterly results call. My name is Erin and I will be the operator for this call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If you would like to ask a question during today's presentation, please press * then 1 on your touch tone telephone. Please note that this conference is being recorded.

I will now turn the call over to Scott Pagan. Scott, you may begin.

Scott Pagan -- President and Chief Operating Officer

Thanks and good afternoon, everyone. Joining me on the call today are Ed Ryan, CEO and Allan Brett, CFO. I trust that everyone has received a copy of our financial results press release that was issued earlier today. Portions of today's call other than historical performance include statements of forward-looking information within the meaning of applicable securities laws. These statements are made under the safe harbor provisions of those laws.

These forward-looking statements include statements related to Descartes' operating performance, financial results and conditions, Descartes' gross margin and any growth in those gross margins, cash flow and use of cash, business outlook, baseline revenues, baseline operating expenses, and baseline calibrations, 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 session entitled certain factors that may affect future results in documents filed and furnished with the SEC, the OFC, 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 related 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.

With that, let me turn the call over to Ed.

Edward Ryan -- Chief Executive Officer

Great. Thanks, Scott. Good afternoon, everyone. Welcome to the call. Thanks for joining us today. We carried out our momentum from Q1 through to Q2 as we delivered yet another set of record results. Our focus on delivering value for our customers continued to pay off as they trust us more and more with their business. We believe the market right now is more dynamic than ever.

Global trade regulations can change daily, as we're in a heightened climate of trade sanction regimes and trade disputes. Economic and operating conditions can turn on a dime, leaving companies vulnerable if they can't quickly adapt and consumers continue to increase their expectations about service delivery. Often, they want to buy something now and get it within 24 hours and at a time that's convenient for them. This can create serious supply chain and logistics challenges for even the most advanced operators.

Dealing with surges in demand while also remaining efficient outside of peak times is a tricky balancing act. We think this creates opportunities for companies that can remain agile with the appropriate technology systems fed by timely, reliable information. But that's not all. Companies also need to be connected to a wide community of supply chain participants to be able to operate efficiently and react quickly.

This, of course, is why we continue to invest in the global logistics network so that all the participants in the supply chain, whether you're a shipper, a carrier, or a logistics intermediary have one place to connect, collaborate, and execute shipments in real time. I'll speak further on today's call about the challenges and opportunities we're seeing in today's market and how customers are leveraging our network to turn challenges into opportunities.

As part of that, I'll also provide some updates on our recent acquisitions. After our market update, Allan will then provide a detailed overview of our financial results and then I'll finish up the call talking about our calibration for Q3 and our operating plans moving forward.

But first, let's start by going over some of the key financial highlights for the second quarter of fiscal 2020. We had another outstanding quarter of operating results and were very happy with our key metrics, fueled by our continued organic growth and our ability to successfully integrate acquisitions. Revenue for the quarter was up 20% from Q2 last year, coming in at $80.5 million.

Our adjusted EBITDA continued to grow nicely for the quarter. We generated $30.2 million of adjusted EBTIDA, an increase of 32% over Q2 of last year. Digital compliance continues to contribute nicely to this growth that is ahead of our plan of mid to high-20s adjusted EBITDA growth for this fiscal year compared to the previous fiscal year.

We continue to convert our EBITDA into cash, converting 89% of EBTIDA into cash and generating a record $26.9 million of cash in the quarter. Consistent with our long-term operating plans, we've been investing cash back into our business through focused research and development investments and by combining with complementary businesses.

We combined with two businesses in Q3, CORE and STEPcom and we combined with BestTransport in August. I'll go into those acquisitions in more detail later. We also had a public share offering in the quarter and raised $245 million, increasing our capacity to do more investments as the right opportunities come up.

All in all, another great quarter here at Descartes to round off the first half of the year. We have a stable, cash-generating business and we have a solid balance sheet with financial capacity to continue to acquire businesses and we're well-positioned to continue our growth.

So, with that, let's talk a little bit more about today's market conditions and some of the tools we have available to help customers manage today's complex market dynamics. I'd like to start with some comments around what many of us are hearing about and seeing in the North American freight market. If you think back to the summer of 2018, you would have heard a lot about capacity crunch, meaning there weren't enough trucks to fill demand and rates were consistently rising.

This summer, you're hearing about a number of carriers going out of business, emblematic of businesses that weren't agile enough to adjust to rapid shifts in demand. Being able to operate efficiently in the peaks and troughs of the market are key to survival. Freight has always been cyclical, so, this isn't a new concern. What's new is the pace of change and how quickly market conditions can turn.

What's also new is there's now technology that can help in the up and down markets by supporting more efficient use of resources. In the up times, you need to be able to improve capacity with the resources available. To do this, you need good information on what is moving right now and what is going to be moving in the future as well as what resources are available to help.

In the down times, you need to leverage that same information to make the most of what's out there to get an edge to keep yourself operating profitably. Our MacroPoint capacity matching solution is particularly well suited to help carriers and freight workers with this challenge. Our solution is designed for freight workers and carriers to partner on an opt in basis to share lane history and capacity to support better network alignment and utilization.

As I've highlighted before, it isn't about this intermediating logistics service providers from their customers. It's the opposite of that. It's a tool to help logistics service providers and make them more successful. It's about helping logistics service providers respond to dynamic markets and self-assemble to identify opportunities to collaborate, remove friction, and respond to market forces that are threatening their business.

As we continue to enhance the capacity matching solution and add more users to the community, we see more and more opportunities to really make a difference for our customers here and help them thrive in today's market. We're also seeing how the solution could be used for sub-communities, which is one of the drivers behind our most recent acquisition of BestTransport.

BestTransport is a cloud-based transportation management system provider focused on flatbed-intensive manufacturers and distributors. Moving goods in the flatbed market requires domain expertise and special equipment and the associated transportation management processes have some unique characteristics.

The flatbed market is therefore served by a specialist community, a micro community of the wider freight market with its own history, capacity, and rates links. BestTransport built a great business serving this specialist flatbed community with the tools for the shippers, carriers, and logistics intermediaries. Asset allocation in the dynamic market is never easy, but it can be even harder in a smaller community with a specialty asset.

I see this as a great opportunity to introduce Descartes' MacroPoint visibility and capacity matching to this market. We've already generated some interest with some of the best transport customers and we're excited to see where this takes us. In the meantime, I'd like to welcome the best transport employees and wider community to Descartes. It's great to have you here.

While I'm at it, let's switch gears and talk a bit about another acquisition that took place since we last spoke, a company called STEPcom. You might have noticed that I continually make a point that we have solutions on our network for all of the participants in the supply chain -- shippers, carriers, and logistics intermediaries.

Logistics is a multi-party, multi-process challenge and if you want all the participants in the supply chain to join your network, you're going to be more successful if you can add value with useful tools for each participant. The more you can help that community of shippers, carriers, and logistics intermediaries to execute additional processes in the lifecycle of a shipment, the more likely you are to have them do more business with you and bring others into the community with the network effects.

Connectivity is critical for this to work and having the ability to onboard trading partners rapidly is key, particularly in an environment where the supplier or customer landscape can change quickly. When you look at what STEPcom has done, they have spent 15 years helping supply chain participants connect and collaborate to exchange business documents and automate supply chain processes.

They're very good at it. Every shipment starts with a purchase order and STEPcom helps its customers automate the process for what will ultimately turn into a shipment. By combining with the global logistics network, we can now help that community execute those shipments with tools for booking and tracking in real time. So, a warm welcome to all the STEPcom employees and customers.

By combining with businesses such as STEPcom, we continue to execute on our three-part vision for supply chain information processing. First, you've got source data collection, which used to be manual but more and more is becoming automated through internet-enabled devices in an IoT world such as telematics devices, sensors, GPS devices, and other mechanisms.

 Second, you need a trusted network to communicate, store, and sort that source data in a way that is useful to the entire supply chain. Third, you need applications that can leverage that data and help you make better decisions for your business. So, source data and content, trusted networks and decision support applications.

Our Q2 acquisition of CORE is a good example demonstrating all those principles. CORE is an electronic transportation network that provides global air carriers and ground handlers with shipment scanning and tracking solutions. Customers use CORE's network to accurately track international mail, parcel, and cargo shipments as well as US domestic mail and parcel shipments.

CORE's experience in air cargo tracking led them to identify internet of things or IoT opportunities to better track containers that are used by air carriers. These containers are called ULDs. The ULD is a unit load device, essentially, it's the box or palette that cargo is loaded into before it goes on to a plane. ULD management is a tricky thing and by incorporating Bluetooth-enabled IoT technology, CORE is helping the air carriers better manage their pool of assets.

However, that's not where the value ends. By combining CORE's IoT solutions with the global logistics network, we can then link shipment tracking to ULD tracking because we have the shipment data. In effect, this will create more real time data events for consumption by the wider Descartes community, not just the air carriers, but also the forwarders and their customers, the shippers.

Even broader, CORE has applications which allow you to visualize what's going on with the ULDs and mail so that you can have accurate visibility over your air cargo. Source data collection from the ULDs using the GLN to processing information and applications to analyze what was generated.

We're pretty excited about the opportunity to enhance what we do for the wider air cargo community as we continue with the integration of CORE into our business. So, also welcome to the CORE employees and customers. Welcome to Descartes.

Speaking of integration, I'm sure people are keen to hear about how things are going with Visual Compliance. So, I'll spend a couple of minutes there. At the top of the call, I mentioned the constantly changing regulatory environment our customers are facing every day. Trade is getting more complex and the velocity of changes is increasing. In order to stay on top of changes to duties, tariffs, taxes, and sanction lists, customers need access to timely, reliable information and need systems that can digest that information.

As a result, we've been building our content offerings over the last few customers get the right data at the right time. Visual Compliance provides software solutions, content, and services to automate customs, trade, and fiscal compliance processes with a focus on denied and restricted party screening processes and export licensing.

The acquisition followed our other recent investments in trade content including Datamyne, CustomsInfo, and MK Data, a business that was also on denied party screening. Adding Visual Compliance not only gave us more scale in the denied party screening space, but it's also complementary to MK Data as it adds new functionality for us to bring to the market. We're now six months into the integration and things are going very well.

We're starting to see the benefits of the wider content teams working together. We've seen a lot of interaction between our content teams to standardize with best practices and the teams that gel very well. We continue to make good progress on our plans to bring these teams together so we can further align our processes and streamline the content collection and normalization process.

We're also starting to see more product synergies ahead. As we think about how we can leverage the Visual Compliance offerings combined with our CustomsInfo solution as an example. From a go-to-market perspective, we've already seen synergies over in our European operations. Our team there has landed a number of visual compliance deals following our successful cross-training efforts over the first few months.

And from a financial perspective, we're really pleased with the continued growth of the recurring revenues of the business and the financial profile remains very healthy. The business continues to perform ahead of our plans, which has contributed to our aggregate growth being ahead of our planned range.

Before handing the call over to Allan to talk more about the financials, I'd like to thank some people that continue to contribute to the strength of our business. Thank you to our employees for all the hard work they put in to make sure our customers get results. Our customers continue to get results and 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, thank you for connecting and helping our community grow and thanks for your continued engagement. I would also like to thank our partners for helping us continue to expand our ecosystem and thanks to our shareholders both new and long-standing for continuing to have confidence in Descartes and supporting us with your capital.

With that, I'll turn the call over to Allan to go through the financial highlights for Q2.

Allan Brett -- Chief Financial Officer

Thanks, Ed. As indicated, I'm going to walk you through our financial results for our second quarter ended July 31st. We are pleased to report record quarterly revenues of $80.5 million this quarter, up 20% from revenues of $67.1 million in the second quarter of last year. This revenue growth was achieved from solid organic growth as well as from our recent acquisitions. As well, we've achieved despite a negative impact from foreign exchange of approximately $900,000 over Q2 of last year.

Our revenue mix continues to be very strong, with services revenue increasing 20% to $71.4 million or 89% of total revenue in the second quarter compared to $59.7 million in the same quarter last year and also consistent at 89% of revenue. License revenue came in at $1.1 million or just over 1% of sales in the quarter, down slightly from license revenue of $1.3 million or 2% of revenue in Q2 last year while professional service and other revenue came in at $8.0 million or 10% of revenue, nicely up from $6.1 million or 9% of revenue in the second quarter of last year.

Gross margin was solid at 74% of revenue for the quarter, which is up slightly from gross margin from 73% in the second quarter last year. This increase is mainly due to the addition of the Visual Compliance business acquired in mid-February as well as from continuing growth in revenue from new and existing customers.

With solid revenue and continued strong cost control, we continue to see strong adjusted EBITDA growth of approximately 32% to $30.2 million or 37.5% of revenue compared to $22.8 million or 34% of revenue in the same period of last year. Consistent with past quarters, the FX impact on adjusted EBITDA was insignificant as we remained fairly naturally hedged to FX movements across our business.

As a result of the solid operating results, cash flow generated from operations came in at $26.9 million or approximately 89% of adjusted EBITDA in the second quarter this year, up 48% compared to operating cash flow of $18.2 million or 80% of adjusted EBITDA in Q2 last year. Going forward, subject to unusual events and quarterly fluctuations, we expect to see continued strong offering cash flow conversion of between 80% and 90% of our adjusted EBITDA for the balance of fiscal 2020.

From a GAAP earnings perspective, net income came in at $8.6 million or $0.10 per diluted common share in the second quarter, up slightly from net income of $8.5 million or $0.11 per diluted common share in the same period last year. Overall, we are pleased with these operating results in the second quarter as strong revenue growth allowed us to make increased investments in our business while achieving 32% growth in adjusted EBITDA and generating strong cash flow.

If we look at the balance sheet, our cash balances totaled $27.4 million at the end of the second quarter, while borrowings under our credit facility were $22.8 million for a net cash position of just under $5 million at the end of the second quarter.

As Ed mentioned earlier, we completed an equity offering during the second quarter, issuing 6.9 million common shares at a price of $35.50, resulting in gross proceeds of $245 million and after all issuance costs, net proceeds of approximately $237 million. We used those proceeds from the equity issue in the second quarter to repay a large portion of the balance that was outstanding under our credit facility.

We also used our cash flow of operations to replay approximately $30 million on the credit facility during the second quarter while we also drew approximately $43.8 million on the credit facility to complete the CORE Transport and STEPcom acquisitions during the quarter.

Subsequent to the end of the second quarter, we also borrowed approximately $11 million on the credit facility to complete the BestTransport acquisition. As a result, we currently have approximately $320 million available to us to draw under the credit facility.

In addition, we were able to offer just over $500 million of capital under the current shelf perspectives. So, clearly, we continue to be very well-capitalized to allow us to consider all acquisition opportunities in our market consistent with our business plan.

As we look ahead to the second half of this year, after incurring approximately $2.4 million in capital additions in the first half of the year, we expect to incur approximately $2.5 million to $3.5 million in additional capital expenditures for the balance of the year, with this balance expected to include further investments in our network security and infrastructure.

We expect amortization expense will be approximately $27 million for the balance of FY 20 with this figure being subject to adjustment for FX changes and future acquisitions. Our income tax rate came in at 26.3% of pre-tax revenue in the first half of the year, which is very close to our statutory rate in Canada and the US.

Going forward, we expect that our tax rate will continue to trend in the range of 25% to 28% of pre-tax income over the balance of the year. Though, as always, we should add that our tax rate may fluctuate from quarter to quarter from one-time tax adjustments that may arrive as we operate internationally across multiple countries. Finally, we expect stock-based compensation will be approximately $2.6 million to $2.8 million for the balance of fiscal 2020 subject to any forfeitures of stock options or share units.

With that, I'll turn it back over to Ed to wrap up.

Edward Ryan -- Chief Executive Officer

Thanks, Allan. Before talking about calibration, I just wanted to highlight that we set up the conference registration site for Evolution 2020, our annual user and partner conference. Evolution 2020 will be held at the Diplomat beach resort in Fort Lauderdale, Florida from Tuesday, March 17th to Thursday, March 19th, 2020. It's a great opportunity to meet the people that build and deploy our solutions as well as the customers that use them. If you want to learn about Descartes, it's really a good investment of your time and I would encourage you to book early.

With that, let's move on to our calibration for Q3 FY 2020. Similar to previous quarters, we don't provide guidance but we use our baseline calibration as a key metric related to the ongoing health and strength of our business. Our calibration for Q3 includes the addition of BestTransport with the business for a partial quarter and assumes the following exchange rates -- a $0.75 Canadian dollar, $1.11 euro to US dollar, and $1.21 GBP to US dollar.

Our calibration for Q2 is $78.2 million in visible recurring contracted revenues, otherwise known as our baseline revenues. Our baseline operating expenses are $53.4 million, a baseline calibration of $24.8 million for adjusted EBITDA from Q3.

Some other key points related to how we're positioned for fiscal 2020 -- we have a solid financial footing. We have a healthy business that's well-calibrated and we have a healthy balance sheet. We are profitable and cash-generating. We have low capital needs within our organic business. And as you've seen from our recent historical financial results, we have solid growth in our organic business. Our primary uses of capital are for continued use and acquisitions, we've completed 45 acquisitions since 2006.

And we have access to additional capital quickly, should we need it. Before the acquisition of BestTransport at July 31st, we had $23 million drawn on our $350 million line of credit and we have the ability to expand that line of credit to $500 million if needed. We also have a preliminary shelf perspective for up to $750 million, of which just over $500 million remains unused, to raise capital by other mechanisms. In short, we have good capacity for our planned acquisition activity.

We also have a strong acquisition pipeline. There continues to be a lot of industry activity 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 or content or community 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 larger and smaller opportunities and while we review everything as it comes our way, we're not just buyers for buyers' sake. The fact that we have an acquisition line of credit and a shelf filing in place 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. Furthermore, we don't see the recent larger acquisition of Visual Compliance impacting our ability to continue executing on our plan.

As I just said, we're competent in our ability to deploy capital, as you've just seen with our recent acquisitions of CORE, STEPcom, and BestTransport. And we have a robust integration methodology in place to help us quickly and efficiently integrate incoming businesses.

As a reminder for our plans for the remainder of fiscal 2020 -- as we've said in the past, our belief for sustainable growth in the long-term is a 10% to 15% growth in adjusted EBITDA. However, given the scale of visual compliance, fiscal 2020 we indicated would grow in the mid to high 20s. Given our performance in the first half of the year, we're now confident that we'll at or just beyond the top end of that range.

As in the past, we intend to invest any overperformance back into the business. Our growth is planned to come through a combination of organic and inorganic activities and as always, acquisitions are not incremental to this plan. We intend to continue to focus on recurring and deemphasize one-time license sales. Given the current performance of the business and mindful of the FX environment, our planned operating margin range remains at 35% to 40%. So, please keep in mind this could vary if we buy other businesses that need fixing up or if the FX environment changes, both of which would impact that metric in the short run.

Finally, as always, we'll continue to make ourselves available to shareholders to answer any questions. We believe we've got a great business. We want to be available to help people learn about our business. We'll continue to spend time and resources to get the word out and we hope you'll do the same. So, with that, Operator, I'd like to open the call up to questions.

Questions and Answers:

Operator

Thank you. If you have a question, please press * then 1 on your touch tone telephone or if you wish to be removed from the queue, please press the # sign. There is going to be a delay for the first question is announced. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press * then 1 on your touch tone telephone.

Your first question comes from Raimo Lenschow with Barclays. Your line is open.

Mike -- Barclays -- Analyst

Hey. This is Mike on for Raimo. Congrats on the quarter, guys. I wanted to touch base on the strong acquisition pipeline you talked about. When you think about the puts and takes behind that right now for your business and expanding those EBITDA margins for 35% to 40% for the rest of the year, could you talk a little bit about the balance you're seeing between reinvestments back into the business, which obviously you guys have been doing on the R&D side and acquisitions -- has anything changed with visual compliance there and kind of that being stepped up, at least for the kind of short-term?

Edward Ryan -- Chief Executive Officer

I think you're going to see us operate the same way we have for the last number of years. We continue to see a strong market for potential acquisitions. We look at every one of them. Sometimes they're over-priced. A lot of stuff in this market is over-priced because everyone thinks that it's a great time to sell their business.

That's true for some and not for others. We're trying to manage our business as well as we can and deploy our capital efficiently. I don't think in our minds there's any material change in that belief. Sometimes more acquisitions come along that look like great fits to us and we're able to get a deal done with someone and sometimes they don't. We don't push it if it's not there.

Mike -- Barclays -- Analyst

Just a little bit more detail on the cash conversion, which was especially impressive this quarter at 89% -- can you talk about the puts and takes there and what drove that up. That's a lot higher than what we've seen over the last couple of quarters or significantly higher. Is there anything specific that you wanted to call out on that end?

Edward Ryan -- Chief Executive Officer

Not really. We typically see conversions in the 80% to 90% range of adjusted EBITDA. For this one, we're right at the top of that range. Interest expense went down in the quarter compared to last quarter, typically the second quarter can be a better collection a quarter. So, it's just one of those things. We do see fluctuations. Last second quarter, we were at 80%. It was a weaker quarter as a couple receivables didn't come in, just more of the same. You could expect us to fluctuate typically in that 80% to 90% range -- nothing terribly unusual.

Mike -- Barclays -- Analyst

Thanks, guys. Congrats on the quarter.

Operator

Your next question is from Matt Pfau with William Blair. Matt, your line is open.

Matt Pfau -- William Blair -- Analyst

Hey, guys. Thanks for taking my questions. I wanted to ask a few on MacroPoint. First of all, are you gaining any more traction with shippers? My understanding is that your primary exposure with MacroPoint is traditionally with brokers, but have you seen anything on the shipper side? Then also, at your user event earlier this year, I think it was discussed about entering the European market with macro point sometime during 2019. So, I just was wondering what the update on that is.

Edward Ryan -- Chief Executive Officer

Thanks, Matt. We do business with a lot of shippers on the MacroPoint side. Our primary customer base is freight workers and 3PLs. Typically, we're trying to deal with shippers trying to supplement the information they're getting from their broker. That's their primary driver in that market. We also have had a number of large shippers come to us over the last several years to sign up for the service and we're happy to do that. They're usually supplementing something they're already doing with a freight broker and looking for one place where they can go and get all the tracking information.

As far as the European markets are concerned, we're making a very cautious move in there. you have a lot of personal privacy issues in Europe to get over and certainly some language barriers as well. We're starting with some of the English-speaking countries and being very careful about how we're collecting information from drivers to not run afoul of any rules over there.

Matt Pfau -- William Blair -- Analyst

I also wanted to ask on the capacity-matching solution -- related to some of the dynamics going on in the trucking industry currently, how are those impacting the demand for capacity matching from the broker side and then from the supply side with the actual carriers, how does the current environment impact capacity matching?

Edward Ryan -- Chief Executive Officer

It's not for me to tell, really. We're in the early innings of this. It's not enough for us to see massive trends in it other than the customers that have gone through this process and now, we're opening that up to other mid-size brokers and 3PLs. They continue to expand their usage of the service as they get into it.

It's not clear to me what the impact on the market is yet. We don't have a big enough representative sample. I can tell that the customers are getting a lot of benefit out of it. Everyone that started in those initial pilots is rolling the solution out and using it more and more effectively every day. We're really excited about that.

Matt Pfau -- William Blair -- Analyst

Thanks, guys. That's all I had about that.

Operator

Your next question comes from David Hynes with Canaccord. David, your line is open.

David Hynes -- Canaccord Genuity -- Analyst

Hey, guys. Nice set of numbers. Ed, I wanted to ask you generically around trade volumes, it's hard to parse out given diversity of the business. Are you seeing any slow down at all given the ongoing trade disputes? I guess as part of that, maybe you can remind us the exposure to China you have there.

Edward Ryan -- Chief Executive Officer

We haven't, really. We read the same newspapers you do. So, we're kind of watching to see what will happen. We haven't seen much impact on our network. Some of that may make sense, right? One of the big reactions you see with companies who are dealing with trade restrictions in certain countries is to start moving manufacturing to other locations. From the perspective of our network, we don't really care where the shipment comes from. We care that it gets made.

So, whether that shipment comes out of China or Vietnam, it's still a shipment that's going out over our network. Now, if you live in China or Vietnam, it might be an issue, but from the perspective we take on it, we're just trying to process the world's shipments. That still ended up being a shipment on our network. Which country it came from is not particularly material to us.

The part that it has helped quite a bit and may continue is our trade data content business, a big part of it is focused on database and tariffs and duties. Over the last couple of years, with all that has gone on around the world, not just in the US but other countries around the world too, I've put a real high focus on that trade data information and it's one of the faster-growing parts of our business as a result. So, we're pretty excited about that.

David Hynes -- Canaccord Genuity -- Analyst

One housekeeping for Allan and then I'm going to come back to you, Ed, for one -- share comp expected -- diluted shares for Q3, like just over $85 million, $85.2 million -- is that the right spot we should be?

Allan Brett -- Chief Financial Officer

For Q2, that might be a little high. We did the share issuance right at the middle of the quarter. So, a dilution of 3.5 million shares, essentially, for Q2. It will be in the full effect in Q3. I think it's $84.5 million. You're testing my change, but $84 million and change of shares outstanding. So, around that. Just look at the balance sheet. A lot of the balance sheet, you'll have the actual numbers. But about half a dilution effect for this quarter and the second part of it comes through Q3.

David Hynes -- Canaccord Genuity -- Analyst

Ed, Matt was asking earlier about capacity matching and the opportunity there. It seems like there are two strategies in the market. There are the folks who are competitors trying to disintermediate the 3PLs and the freight brokers and you guys have taken a different tact, which is deliver tech to enable those folks. Can you talk about your view of the challenges that the competitors who are trying to disintermediate will face and what gives you confidence that you're pursuing the right strategy, if that makes sense?

Edward Ryan -- Chief Executive Officer

Sure. Thanks for asking. I feel like I've seen this movie before. The same thing happened in the late 90s, early 2000s timeframe, where a bunch of dotcoms came in and said, "We're going to disintermediate this entire market." If you look back on that time, every one of those companies did not succeed, in our market in particular. That's not how they did it. They did not cut the freight borders and the 3PL down.

In fact, those markets have grown substantially since then. We don't think it's that easy to manage people's freight and I don't think you're going to quickly do it on a website and problem solved. Because of what we have in MacroPoint, where we have visibility into hundreds of thousands of trucks every day and where they're going to be a few days from now, we think that's very valuable information to help companies decide who the next carrier should be or who the next driver should be to take that next load.

To the extent that we can identify three or four trucks or ten trucks within a couple miles of that location who are available for pick up three days from now, that information could save a freight broker $150 to $250 on a move because they don't have to pay for backhaul or deadheading to drive empty to the pickup location.

There are two things you can do with that. The first is you can say, "I'm going to be a freight broker and I'll save that $200." The second is the approach that we're taking, which is, "Hey, I do business with 5,000 or 6,000 freight brokers around North America. Why don't I just provide that information to them, my customer and have them make the money and hope they'll give me a cut of it for providing that information?"

We have no intention a freight broker. I look at the guys that are doing it and I say, "Hey, the last time someone tried to do this, they didn't do that well." I have seen a lot of the market go that way. They come out and they get investors and get valuations in the hundreds of millions of dollars for a company that's doing $2 million or $3 million in revenue and they have a lot of expectations to meet and I don't think they're going to.

I look at our approach to it and I say I think it's a much more reasonable approach. I think it's something that's helping our customers and helping the market be more efficient. I think the guys that are trying to say, "Hey, I'll help the market be more efficient too and I'm going to put all the money in my pocket." I think those guys are being greedy and will eventually get burned.

David Hynes -- Canaccord Genuity -- Analyst

That's helpful. Thanks, guys.

Operator

Your next question comes from Justin Long with Stephens. Justin, your line is open.

Justin Long -- Stephens -- Analyst

Thanks and congrats on the quarter. Maybe to start with the adjusted EBITDA growth guidance for this year, I wanted to be clear on what drove that upward revision. Was that a function of visual compliance outpacing expectations or has your assumption on organic growth improved as well? Maybe if we think about that EBITDA growth in the high-20s or something around that this year, could you speak to the rough split of that between organic and acquisition-driven growth?

Edward Ryan -- Chief Executive Officer

I'll make a couple of comments about it and then pass it to Allan. At a high level, we were bumping against the top of the range we have given previous, which I think was 32% to 37%. We were getting closer to that. You're absolutely right. Visual Compliance was a very profitable company and was behind us and then moving the range up to 35% to 40%. Prior to that, our business was performing very well and continued to move up and up each quarter and then we bought Visual Compliance and we said we're definitely going to be in that range now for the foreseeable future. Allan?

Allan Brett -- Chief Financial Officer

Sure. Ed was referring to the EBITDA as a percentage of revenue. That's exactly true on that front. If you're looking at it from an EBITDA growth perspective, where we came in at 32% for the quarter and as Ed mentioned, we had said in the previous quarter that we would be in the mid to high-20s as a growth rate for this year, we're feeling more comfortable with the business overall.

We've run visual compliance now for five and a half months. We've added some small additional items or companies to our mix here. The business is performing well organically. That led us to a bit more comfort to say we'll fit the higher end of that range into the 30-ish range as far as growth in EBITDA. So, you've kind of got now answers on both -- EBITDA growth and EBITDA as a percentage of revenue. And both have impacts of our core business improving and visual compliance improving.

And then separately, your last piece of the question was split between organic and acquisitions -- our typical model growing 10% to 15% a year, where I think our 10-year average is 17%, you should roughly think of that as being roughly split half and half, half organic growth in EBITDA, half acquisitions. In a year like this where we're going to be upwards around 30% or so, much more of that is coming from acquisitions. Our core business is performing as we would expect and that's great. That's giving a good, solid, EBITDA growth. The rest is coming from acquisitions.

Operator

Your next question comes from Paul Treiber with RBC Capital Markets. Paul, your line is open.

Paul Treiber -- RBC Capital Markets -- Analyst

Thanks very much and good afternoon. I'm hoping that you can elaborate more on BestTransport and the TMS strategy in general. You have a number of partnerships with TMS companies. How do you decide between partnering with these companies and then owning a TMS vendor themselves. At what point would you consider moving into the broader TMS market?

Edward Ryan -- Chief Executive Officer

BestTransport is a niche player in hat business and fairly unique player in that business and they handle something that's a little more complicated than your normal truck move in that it's flatbed. People get a flatbed because the cargo is odd-shaped and more difficult to move and you can't put it inside a trailer. We wanted to have that functionality in our TMS. We thought our customers would benefit from getting access to that functionality. We certainly didn't buy it to go after any of our partners that are in the broader TMS market.

I think if you asked them, they would say the flatbed is a relatively small part of most of their customers. Our partnerships in that space are largely based around connectivity. That's why we're working with SAP and Oracle and a bunch of other TMS providers to be the network of choice for their customers so they can get connected to those carriers.

If you think about it, what BestTransport brings us there, maybe one of the more valuable things is connections to those flatbed carriers that may otherwise have been somewhat elusive because they're relatively small players in the market. Now, they're on our network and if you look at the BestTransport acquisition from that perspective, you probably have a pretty good sense of where they're coming from and buying it.

We didn't think of it as a predatory move to our partners. We thought of something that would help them. They want to provide connectivity to flatbed providers in their TMS. Now, I'm available to do that and like to do it all electronically. So, that's the driving force behind it.

Paul Treiber -- RBC Capital Markets -- Analyst

Is there an opportunity for synergies between BestTransport and MacroPoint in capacity matching?

Edward Ryan -- Chief Executive Officer

For sure. They bring a whole new set of carriers to the table, a whole new set of shipper customers to the table as well. To the extent that there are people using those solutions that also want to use capacity matching or brokers on our network that want to use capacity matching and now match up for flatbed moves -- I have a much better ability to do that today than I did before the BestTransport acquisition.

Operator

Your next question comes from Scott Group with Wolfe Research. Scott, your line is open.

Rob -- Wolfe Research -- Analyst

Good evening, guys. It's Rob on for Scott. I'm just following up in terms of the organic growth -- clearly, in North America, we've seen some very light rail carload volumes as well as soft truck demand more broadly. I was hoping you could speak to your view of the sustainability of the organic growth as we look forward in what could be a softer freight in market.

Edward Ryan -- Chief Executive Officer

The short answer is I don't know. I also don't know what's going to happen to the freight market any better than anyone else in our industry, other than to say that if transportation volumes go down, we get paid by the shipment to process transactions and if there are less transactions, there's less revenue for us and therefore, either our organic revenue is going to slow or we're going to have to sell more to keep it growing at the rate that it is. I don't have a crystal ball.

We don't put stats out there about what's going to happen in the future. We know over the past couple of years, it's gotten better. I think it's due to us having a better network every day with more participants on it. That's partially due to some of the acquisitions we've bought in the past few years, where they're growing at a faster clip than some of the things we've bought in the past.

Then our company is doing a good job of integrating those acquisitions in and getting them to perform better than they were before we bought them. I hope that continues. If we have to do that with some headwinds in the transportation market pushing against us, it will make it harder. If the transportation market continues to boom as it has over the last couple of years, that's going to make it easier for us and give us the potential to do even better. It's growing nicely and has been growing nicely the past couple of years and we hope it continues and if not, we're going to do our best to manage through it.

Rob -- Wolfe Research -- Analyst

You guys clarified in terms of some of the concerns we've been hearing in the market about trade and shifting of volume of China to other Asian countries and the impact for Descartes -- I was hoping you could speak a little bit about in the news, we've seen some order consolidation with the recent closure by DSV. How does that impact if we're seeing growth of some of the bigger participants -- how does that impact Descartes as we look forward?

Edward Ryan -- Chief Executive Officer

That one in particular has been pretty good for us. DSV is one of our best customers. They bought Panalpina that was also a very good customer of ours. We're looking for them to do even -- if we can get DSV to do all the stuff with Panalpina that DSV is doing with their own business, I look for that to be pretty good news for us. That's the way we're talking at the moment. We like the DSV guys. They've been good customers of ours. They've gone from a midsize player to one of the largest forwarders in the world. We're excited for them and excited to help them.

Rob -- Wolfe Research -- Analyst

We should be thinking about the potential of if you've got a relationship with the acquirer as being accretive or not, per se, relative to the target?

Edward Ryan -- Chief Executive Officer

I think you'll find in the freight forwarding space, we're going to have relationships with most of the acquirers. It's how strong that relationship is. In the case of DSV, it's very strong. Over the last ten years or so, as there has been a lot of consolidation in this market, the bigger guys tend to be our best customers. They're the ones that have taken advantage of what we have more effectively than the smaller and midsize guys.

So, in most cases, it's worked out pretty well for us. They buy a small freight forwarder who uses some of our stuff but not all of our stuff and now, all of a sudden, they're bought by a bigger player who uses a lot of our stuff and as that small freight forwarder gets rolled into the bigger operation, we tend to benefit.

Operator

Your next question comes from Deepak Kaushal with GMP Securities. Your line is open.

Deepak Kaushal -- GMP Securities -- Analyst

Hey, guys. A couple of follow-up questions from me on the recent acquisitions -- on BestTransport, was the opportunity to sell capacity matching into a niche network the motivation behind acquiring BestTransport?

Edward Ryan -- Chief Executive Officer

It was certainly one of them. We saw that opportunity as a pretty good one. To add, something that's not otherwise there in the capacity matching space at the moment because it's kind of a unique space, flatbed is. That was a big help. More broadly, we wanted to add these flatbed carriers to our network and the ability to manage a flatbed move to our network. There are not a lot of networks out there that can do that. Most of that stuff is done manually today. Now, we have a chance to automate it, not only for ourselves but as someone mentioned earlier on the call, for our partners as well.

Deepak Kaushal -- GMP Securities -- Analyst

Do you see similar or parallel niche networks that could be well-suited for capacity matching and is that a reasonable strategy to go forward onto M&A?

Edward Ryan -- Chief Executive Officer

I think there a couple of opportunities to do that, but I wouldn't say that's going to be a core driver to our M&A strategy. BestTransport came along and it's been an opportunistic thing for us. We saw it for sale and thought that actually might be a good idea and then we went and talked to them and thought we could prove that and did so.

I don't know that you'll see it continue to look for those opportunities. If they're around, we'll look at it and see if we think it's a good fit. In BestTransport's case, we thought it was. So, we did it. I think you're more likely to see us go after stuff in the trade space and some of the areas that we've been investing in over the last couple of years.

Deepak Kaushal -- GMP Securities -- Analyst

In terms of driving capacity matching adoption, it's not necessarily to find these closed networks?

Edward Ryan -- Chief Executive Officer

No. I think the biggest thing that's going to drive capacity matching is going to be us going out and getting more and more of our brokers' heads around using a third-party to provide them with this information and using that as a competitive advantage for their competitors and maybe for some of these dotcoms that think they're going to do it without a broker.

Deepak Kaushal -- GMP Securities -- Analyst

On STEPcom, you gave some good color on the supply chain integration network they have. I wanted to know if you can go a bit further in terms of how different it is from integrating a transportation network, supply chain versus transportation. In terms of supply chain, how penetrated are you? How much of your GLM is related to supply chain specifically and what could the opportunity become?

Edward Ryan -- Chief Executive Officer

So, obviously, we're much more focused on the logistics side of it in that we have just about every transportation provider of size in the world on our network. So, we're a very large player in the logistics network space. We're a relatively small player in the supply chain network space. We eventually believe these things need to come together. They are different. They all need to be done.

In our mind, they should be done by somebody that could put them all together so the end customer, the retailer/manufacturer can get complete visibility into, "I ordered this thing with my purchase order. I created an ASN that said what I'm going to be shipping. I created a bill of waiting and then started getting status messages back so that I can see where my stuff is on a line item basis," versus getting information back from a carrier that, "Hey, your container is here."

That's not that helpful unless you know what's in that container. Someone can do all that for you. They can put all that information together. They should give you SKU-level information as to where your inventory is around the world and when you think it's going to get to the places it needs to get to so you can better manage your supply chain. At a very high level, that's what's behind us buying STEPcom. I think you'll see us do more of that moving forward.

Deepak Kaushal -- GMP Securities -- Analyst

Are there certain industries that are more receptive to bring both of these things under one network?

Edward Ryan -- Chief Executive Officer

I don't know if industries are more or less. Certainly, the bigger industries out there, retail, for example, is one of the groups of people that seem to have the most to gain by doing this. I think you'll see us go after that group more than most. They have an awful lot of inventory. Their volumes are extremely high and if they can sync up some of these things, they can save a lot of money. That's been something that's driven a lot of not only our acquisitions but visibility and things like that into the supply chain space.

Operator

There are no more questions at this time.

Edward Ryan -- Chief Executive Officer

Thank you, guys. Appreciate your time and we look forward to reporting back to you next quarter on our Q3 results.

Operator

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

Duration: 61 minutes

Call participants:

Scott Pagan -- President and Chief Operating Officer

Edward Ryan -- Chief Executive Officer

Allan Brett -- Chief Financial Officer

Mike -- Barclays -- Analyst

Matt Pfau -- William Blair -- Analyst

David Hynes -- Canaccord Genuity -- Analyst

Justin Long -- Stephens -- Analyst

Paul Treiber -- RBC Capital Markets -- Analyst

Rob -- Wolfe Research -- Analyst

Deepak Kaushal -- GMP Securities -- Analyst

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