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Descartes Systems Group, Inc (NASDAQ:DSGX)
Q1 2021 Earnings Call
May 27, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to The Descartes Quarterly Results Call. My name is Adrianne and I'll be your operator for today's call. [Operator Instructions] Please note this conference is being recorded.

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

J. Scott Pagan -- President and Chief Operating Officer

Thanks, and good afternoon, everyone. Joining me remotely 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 our assessment of the current and future impact of the COVID-19 pandemic on our business and financial condition, Descartes' operating performance, financial results, and condition, Descartes' gross margins and any growth in those gross margins, cash flow and use of cash, business outlook, baseline revenues, baseline operating expenses, and baseline calibration, anticipated and potential revenue losses and gains, anticipated recognition and expensing of specific revenues and expenses, potential acquisitions and acquisition strategy, cost reduction; and integration initiatives, and other matters that may constitute forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties, assumptions, and other factors that may cause the actual results, performance, or achievements of Descartes to differ materially from the anticipated results, performance, or achievements implied by such forward-looking statements. These factors are outlined in the press release and in the section entitled Certain Factors That May Affect Future Results in documents filed and furnished with the SEC, the OSC, and other securities commissions across Canada, including our management's discussion and analysis filed today.

We provide forward-looking statements solely for the purpose of providing information about management's current expectations and plans relating to the future. You're cautioned that such information may not be appropriate for other purposes. We don't undertake or accept any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements to reflect any change in our expectations or any change in events, conditions, assumptions, or circumstances on which any such statement is based, except as is required by law.

And with that, let me turn the call over to Ed.

Edward J. Ryan -- Chief Executive Officer

Thanks, Scott, and welcome everyone to the call. Thanks for joining us today. This has certainly been a quarter with a unique work environment. This call is also unique for us because each of Allan, Scott, and I are in different locations. So, please bear with us as we remotely coordinate to provide answers for any of your questions later in the call.

Similar to past calls, here's a roadmap for the rest of the call. First, I'll start with some opening comments, primarily focused on what happened over the last quarter and some steps we're taking to keep our business strong. I'll then hand it over to Allan, who will go over Q1 financial results in detail. I'll then come back and provide some perspective on how we're looking in the current quarter and beyond. And then we'll open it up to the operator to coordinate the Q&A portion of the call.

So, with that, let's get to it. We've delivered great financial results in what is likely one of the most challenging business environments we've ever had to deal with. Our commitment over the past 10-plus years has been to grow adjusted EBITDA 10% to 15% per year. In Q1, we grew adjusted EBITDA 15% over the quarter a year ago. We were able to do that because we were in a business with a high degree of recurring and visible revenues. With that visibility, comes the ability to set our expenses at manageable levels to continue to hit our profit targets. We think that business discipline is going to serve as well, as we weather this period, while the world's economies recover. There's some businesses out there, many of them customers of ours, who've done very well over the past two to three months. Businesses involved in the manufacture and delivery of personal protective equipment and medical supplies have done well. Businesses involved in food and grocery replenishment, and distribution have been very busy. E-commerce businesses have seen record holiday-style volumes as people moved to online purchases in quarantine rather than going in store.

Other businesses, some of them also customers of ours, have struggled in the quarantine environment. Passenger airlines, who move air cargo in the belly of their planes, have seen passenger demand plummet. This impacts the ability to price and price of moving air cargo and mail. Retail stores and shopping malls have been temporarily shuttered, impacting not only the stores, but also the entire ecosystem that supplies and delivers to them. Customs, brokers, and other intermediaries have been impacted as cross-border shipments and demand becomes more complex.

For Descartes, we serve all of those types of customers. Fortunately, by design, we're extremely diversified. We cover all modes of transportation, air, truck, ocean, and rail, so we're not fatally exposed when one mode is hit. We have a broad geographic footprint, so we continue to serve customers as economies retract, expand, and recover at different times. We cover many logistics functions and the different solution pillars that we have. So, we're not unduly reliant on any one particular service. And we cover many industries allowing us to be flexible to assign our resources where they're needed as different customers see ebbs and flows of demand. We're diversified by design, and that makes us resilient. That diversification has also allowed us to be a big part of the efforts to help people get through this quarantine period. We've been right there helping people deliver food, medical supplies, and personal protective equipment. As our customers went to remote work, they relied on our solutions to allow them to remotely manage logistics functions and shipments securely and efficiently. That's what those -- these solutions were designed to do.

We each owe a ton of gratitude to the thousands of medical professionals and other frontline workers that have been helping us over the past month. But we equally owe a huge debt to the logistics and delivery workers, the drivers, the warehouse workers, the support staff that have helped in getting essential goods, where they need to be. We're very proud that our Company can play a small part in helping them.

COVID-19 has had a big impact on how everyone does business and we're certainly no exception. Since I last spoke to you in March when we released our year-end financial results, we've transitioned to our entire Company working from home. We cancelled our use -- our Global User Conference in Florida and we have suspended all global travel, and we've transitioned all of our marketing activities to online participation. But COVID-19 has not changed the other important things that we do. We continue to provide top quality service and support to all of our customers. We continue to engage with customers on helping them rollout projects that will bring them increased automation and remote management capabilities. We continue to investigate combining with other businesses that will make our diversified Company even stronger. And by continuing to do well the things that we always have, we were able to deliver another solid financial quarter consistent with our commitment to sustained profitable growth.

This past quarter, we had record services revenues of $74.1 million. We had record income from operations of $15.7 million. Our cash flow from operations was 83% of our adjusted EBITDA. Our adjusted EBITDA grew 15% over Q1 last year and our adjusted EBITDA margin was above 39%. We finished the quarter with more than $50 million in cash and almost all of our $350 million debt facility available to us. We produced excellent financial results and ended in a very strong financial position. As I said before, this wasn't easy. Particularly in April, we saw transaction volumes over our network hit and we were managing many requests from customers who were struggling in this environment.

I'm typically pretty frank in telling you when I know something, and when I don't know something. I know that many of our customers have struggled. I know that many economies around the world are starting to reopen from a period of lockdown. I don't know how quickly we'll see recovery in each of the different industries and when we'll be at, what many of us would consider, full recovery for the entire world. Our job is to manage our business with the best information that we have. So, we've assumed that the recurring revenue run rate that we saw in April will be the revenue run rate that we see each -- in each month of Q2. Overall, that run rate is down 5% from what we would have expected to see in a typical month at this time of year. Then, as we described in the press release, we've recalibrated our expenses to come down by reducing our workforce by 5% and closing a few offices. Allan will go into more detail about that restructuring later.

Anytime you have to make decisions that impact members of your team, it's tough. However, they're also the right decisions for our business right now and the decisions that we believe our shareholders expect that we would make in this environment. It's possible that economies, our customers, and our business recover quickly and then April ends up being the month where our revenues were most impacted. If that's the case, then we're at a cost base from where we can ramp up investments for the future. But it's also possible that we end up in further lockdowns in the future and that April is appropriately reflective of what will happen to our business. If that's the case, then we think we've got the raise the cost base to weather that going forward. We view this temporary period until the world sees a full economic recovery and a vaccine as a period that's going to distinguish the most resilient of companies. We're striving to be one that will continue to perform for our stakeholders during this challenging period.

Over the longer term, we believe that there are going to be some very positive trends that will benefit a technology company like ours. Our business easily accommodates the remote workforce. Our business focuses on delivering solutions that help customers manage their supply chain operations remotely, while removing manual processes, including paper-based processes that require physical contact. Our business thrives on helping customers with changes in their logistics, operations and supply chain and we think that in the coming years, there will be big changes in how and where companies source and ship goods. And most importantly, we've proven to be a resilient and reliable service provider that will be there for our customers during any tough times for the future.

For now, our business remains head down, hardworking, and helping our customers. Our job is to do what is expected from us, expected from our customers, our partners, and our stakeholders. As we've shown in the past and we're showing now, that's what Descartes does. Thanks to all the Descartes employees for everything they've done and I know that they will do to help our customers and Company during these difficult times. I feel we're even more aware now of the importance of what we do for our customers.

And with that, I'll now turn the call over to Allan to go through our Q1 financial results. Allan?

Allan Brett -- Chief Financial Officer

Thanks Ed. As indicated, I'm going to walk you through our financial highlights for the first quarter of fiscal 2021 ended April 30. We are pleased to report quarterly revenues of $83.7 million this quarter, up 7% from revenues of $78.0 million in the first quarter of last year. With the continued strengthening of the US dollar against almost all other currencies, we are once again hit with a negative impact from foreign exchange. Without the impact of foreign exchange on revenue, we would have come in almost $1 million higher this quarter when compared to the first quarter of last year.

Our revenue mix continues to be very strong, with services -- record services revenue of $74.1 million, or 89% of total revenue in the first quarter, an increase of 11% from services revenue of $67.0 million, or 86% of revenue in the same quarter last year. In addition, license revenue came in at $1.8 million, or 2% of sales in the quarter, while professional service and other revenues came in at $7.8 million, or 9% of total revenues for the first quarter of this year.

Gross margin was solid at 74% of revenue for the quarter, which is consistent with the gross margin achieved in the first quarter of last year.

From an operating cost perspective, while we did not qualify for any significant benefits from the government support programs that were introduced across our operating regions related to the pandemic. Consistent with our standard operating approach, we were able to quickly make some changes to our operating cost structure in an effort to address the estimated impact of the pandemic on our business. From early March, these cost saving activities included a general freeze on the hiring of new staff members, a ban on all travel, and a pause on most external marketing events, including the cancellation of our own User Group event, which had been scheduled to occur this past quarter. As a result of these adjustments to our cost structure, as well as some continued growth in revenue for the quarter, we were able to achieve a record adjusted EBITDA of $33.0 million, or 39.4% of revenue, up 15% from adjusted EBITDA of $28.7 million, or 36.8% of revenue in the first quarter of last year.

With the onset of the pandemic, we were also able to quickly react with an increased effort on the collection of receivables from our existing customers. We also have the benefit of providing services that are generally very essential to the operations of our customers. So, as a result, our days sales and receivables increased only slightly to 38 -- from 38 days of revenue at the end of the fourth quarter last year, increasing to just 39 days at the end of Q1. As a result, cash flow generated from operations came in at $27.5 million, or approximately 83% of adjusted EBITDA in the first quarter of this year, which is within our target range and pretty comparable to operating cash flow of $23.4 million, or 82% of adjusted EBITDA in Q1 last year. Going forward, subject to unusual events and quarterly fluctuations, including the challenges that the pandemic creates on the general economy and our customers, we expect to continue to see operating cash flow conversion to be in the range -- the expected range of 80% to 90% of our annual adjusted EBITDA over the balance of fiscal 2021.

From a GAAP earnings perspective, net income came in at $11.0 million, or $0.13 per diluted common share in the first quarter, an increase from net income of $7.3 million, or $0.09 per diluted common share in the same quarter last year. As Ed said, overall, we're pleased that we're able to continue to generate solid operating results in the first quarter, despite the significant headwinds that arose as a result of the pandemic.

If we look at the balance sheet, our cash balances totaled $56.0 million at the end of the first quarter, while borrowings, under our revolving credit facility, were $9.7 million for a net cash position of just over $46 million at the end of April. In addition, we continue to have just over $340 million available to be drawn on our existing credit facility, with the ability to expand that line of credit by an additional $150 million, if needed. And we also have approximately $500 million in additional capital that can be raised under our existing base shelf prospectus. So, 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 to the second quarter of this year, we should note the follow: after incurring approximately $1.0 million in capital additions in Q1, we expect to incur approximately $4 million to $5 million additional capital expenditures for the balance of the year, with this balance expected to include further enhancements to our network security and infrastructure; we expect amortization expense will be approximately $39.3 million for the balance of fiscal 2021, with this figure being subject to adjustment for FX changes and future acquisitions; our income tax rate came in at approximately 28% of pre-tax revenue in the first quarter, which is slightly higher than our statutory tax rate. This is due to the impact of certain permanent tax differences, which are mainly related to stock-related compensation that is non-deductible in Canada and the United States. Going forward, we would expect that our consolidated tax rate will continue to trend in the range of 27% to 30% of pre-tax income over the balance of the year. Although, as always, we should add that our tax rate may fluctuate from quarter-to-quarter from one-time tax items that may arise as we operate internationally across multiple countries. We also expect stock-based compensation that will come in approximately $4.6 million to $4.8 million for the balance of fiscal 2021 subject any forfeitures of stock options or share units.

And finally, as Ed mentioned earlier, in order to further address the potential impact of the pandemic on our business, subsequent to the end of the quarter, on May 19, we implemented a 2021 restructuring plan, that will reduce our global workforce by approximately 5%, while also providing for the closure of several office facilities across the business, where we determine that employees can permanently work remotely or alternately work from other Descartes offices. We expect the total cost of this plan to be approximately $2 million. And while these restructuring activities are substantially advanced, we expect that they will be completed over the next six months. Once complete, we expect that these activities will result in savings of between $6 million and $7 million on an annual basis.

And with that, I'll turn it back to Ed to wrap up with our baseline calibration.

Edward J. Ryan -- Chief Executive Officer

Great. Thanks, Allan. Similar to past calls, I'd like to now address our calibration for Q2. As it has been many years and it is still the case right now even through these challenging times, our target for our business is to grow our adjusted EBITDA by 10% to 15% per year. We do this through a combination of organic operations and combining with complementary businesses. We use this 10% to 15% target as a guide for helping us set our expense level.

As I mentioned earlier in the call, to set the expense level for our business during this pandemic, we've assumed that the run rate of April recurring revenues that are down about 5% from a typical month, will be the run rate of recurring revenues for each of May, June, and July. We then undertook a restructuring around May 19 to also lower expenses about 5%. So, while we typically give you a calibration as of the first day of the quarter, calibration here is instead as of May 19, the day we started the restructuring. And I know that some of you have in the past, used our calibration to give you a view to where our actual results will be. I just want to caution you on doing that this quarter. Our calibrated revenues are intended to reflect the visibility that we have to our revenues as we enter the quarter. And as I just told you, there is more uncertainty than prior periods in our revenue visibility this quarter. So, the comparison between our Q2 calibration and the Q2 actual results may be much different than it has been in the past quarter, especially on the revenue front.

So, with that, let's talk calibration. We've provided a comprehensive description of baseline revenues, baseline calibration, and their limitations in our quarterly report that we filed today. But to summarize how we see things as of May 19, 2020, using foreign exchange rates of $0.72 to the Canadian dollar, $1.10 to the euro, and $1.22 to the UK pound, and considering our run rate of recurring revenues in April 2020 and incorporating our fiscal 2021 restructuring plan, we estimate that our baseline revenues for the second quarter of 2021 are approximately $77 million and our baseline operating expenses are approximately $50.5 million. We consider this to be our baseline calibration of exactly -- excuse me, of approximately $26.5 million for the second quarter of 2021, or approximately 35% of our baseline revenues as of May 19, 2020.

As we've indicated previously, that the adjusted EBITDA operating margin range for our business is 35% to 40%. Those of you that have made a habit of comparing our baseline calibration to our actual results may note that it's challenging to grow adjusted EBITDA 10% to 15% and stay in that operating range. The math is probably going to work out that way. So, we expect it will probably exceed our operating range for at least the next quarter as our business buckles down to help our customers during the next month.

Even with the operating margins temporarily above our normal operating range, we intend to still look for opportunities for investment, either in our existing businesses or by bringing other businesses into the Descartes portfolio. Earlier in the year, you saw us announce our acquisition of Peoplevox, a company that complements our pixi business by focusing on e-commerce, warehouse management technologies. As I mentioned earlier, we've seen strong performance from e-commerce-related businesses over the past few months.

So, we'll continue to see how we can best help customers there. We've also seen challenges in our customer base and booking freight and visibility as they struggled with finding air cargo capacity. So, we'll see what we can do to help them in other modes of transportation. We've also continued to see strong demand for our tariff and duty content and Denied Party Screening solutions, which we think will be even more important to people as they rethink their supply chains moving forward. Things are certainly changing the world and wherever there's change, there's opportunity for Descartes.

With that, thanks to everyone for joining us on the call today. For those shareholders on the call, we'll be hosting a Virtual Annual General Meeting tomorrow at 9 a.m. Separately, as always, we're available to talk to you about our business by phone or virtual meeting and we hope sometimes sooner rather than later in person.

And with that, operator, I'd like to turn it over for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And the first question comes from Paul Treiber from RBC Capital. Your line is open.

Paul Treiber -- RBC Capital Markets -- Analyst

Thanks very much and good afternoon. Just wanted to better understand some of the trends that you saw in April. You mentioned, I believe, those transactions or maybe volumes were down 5%. Could you speak to what type of transactions where you saw the greatest slowdown? And particularly, in regards to maybe the annual minimums or the minimums that you have in place with customers, how that may have impacted revenues as opposed to volumes?

Edward J. Ryan -- Chief Executive Officer

So, I think as you might have expected, the people that were hit the hardest were the airlines and closely followed by retailers that were in the business of operating retail stores. And those were the two areas that we kind of noticed significant hits. Without commenting too much on individual airlines, minimums, some hit their minimums, some did not. It depended on the circumstances. If you've been reading the news, some of the airlines have put back passenger planes in cargo service. That certainly helped. But still didn't suck up all of the demand for cargo. I think that's going to continue. I hear more and more plans from airlines of converting larger planes to cargo for the foreseeable future. I think we'll see more and more of that.

And as far as retailers and malls, we just have to see when these malls open. We're starting to see signs of it right now. But, for example, malls near me still are not open. I know they are in some places in the United States and around the world, but we'll be watching these guys closely.

Paul Treiber -- RBC Capital Markets -- Analyst

And have you -- in your discussions of customers, have any requested changes to the minimums at any place in the contracts? And how would you manage those negotiations? I think in the past you talked about there's a possibility of trying to upsell additional services during those negotiations. Can you just give us some insight into how that's progressing?

Edward J. Ryan -- Chief Executive Officer

We haven't gotten a ton of that. We'll see what happens in the coming months, recession could have a -- the impending recession or maybe the recession that just started now could change that for different industries that we don't anticipate right now. There's a lot of unknowns even for us with a lot of access to data. But you're right, certainly, if someone's coming to us asking to change something that they don't really have a right contractually to do, that's the first thing we're asking them is, what else might you want to buy from us that might change our mind about changing something in the contract? And at the same time, there haven't been a ton of these conversations. Yeah. We've had some of our airline customers that certainly were in trouble. But most of the other businesses we do business with were still operating in some form or fashion and still needed the service to do that.

Paul Treiber -- RBC Capital Markets -- Analyst

And lastly from me, could you speak to your ability to conduct M&A in this environment? Like I imagine you can do a lot of the process virtually. But then how would you anticipate or do you anticipate closing deals in the near-term, just given travel restrictions and other challenges around social distancing?

Edward J. Ryan -- Chief Executive Officer

Well, I don't think anything that's going on right now would preclude us from doing this. Remember, we're in the technology business and our whole business is predicated on getting people to move processes online. A lot of the people that we might buy, we certainly know them pretty well from past experience, and oftentimes, they're people we've known for years. So, seeing them face-to-face isn't necessarily the most important thing to us. I don't want to say there's no impact of that, but certainly we're able to still operate in that environment.

Paul Treiber -- RBC Capital Markets -- Analyst

Great. Thank you. I'll pass along.

Edward J. Ryan -- Chief Executive Officer

Thanks, Paul.

Operator

And your next question comes from Paul Steep from Scotia. Your line is open.

Paul Steep -- Scotiabank Global Banking and Markets -- Analyst

Great. Thanks. Hey, can -- could you talk a little bit about what you saw from clients in terms of demand for e-commerce and routing? Whether we've seen an uptick in demand and how those cycles sort of might progress? And then I've got two quick follow-ups.

Edward J. Ryan -- Chief Executive Officer

Well, our e-commerce business has been doing quite well during this period of time. I mentioned I think in the prepared comments -- we were on a call a couple weeks ago, and someone's going, hey, it's -- last Thursday was like Black Friday in terms of volume on our network, just to give you a kind of example. It's been going very well for us.

The routing business hasn't been -- there hasn't been much impact on that. Most of the trucks are still driving around, making deliveries. Some customers of ours needed to buy more licenses to make big deliveries or more deliveries because their business was going nuts. We had a bunch of people in the medical device and the DIY space that needed more. But most of the businesses out there making deliveries and even if they weren't the way they pay for their services probably and maybe they use less trucks for a month or two, but their contract is such that they buy a certain number of trucks from us for an extended period of time in a contractual commitments. So, not a whole lot of impact in our routing and scheduling business. E-commerce, on the other hand has been the shining star of this for us.

Paul Steep -- Scotiabank Global Banking and Markets -- Analyst

And then I noticed you've made an addition to the executive team. You added a gentleman to take care of sales leadership role that I don't think Descartes had for a while. Obviously, you've managed sales well. Maybe talk about just -- is this just more of the evolution of the business as you grow? What, if anything, do we read into it? And then I've got one final one.

Edward J. Ryan -- Chief Executive Officer

We think that our sales will continue to remain strong. We did pretty well through this period. We believe -- I don't know any better than anyone else, but we believe we may be through the worst of it. And we thought we sold pretty well through that period of time for businesses and a lot of our sales are not something that shows up next month. It's something that shows up over the next several years. And those sales continued. We had certainly some areas of the business where there were a lot more sales than normal, tariff and duty content, anything in e-commerce was really selling very well, people were buying more and more stuff from us. We had some things that were down a bit. Certainly, if you're trying to sell something to an airline in the past three months, it was difficult to get their attention. But net-net, we thought we did pretty well.

Paul Steep -- Scotiabank Global Banking and Markets -- Analyst

Great. Last one, just on the office footprint. How are you thinking about sort of recalibrating that going forward at several offices? But how would you think about maybe moving even more of the staff virtual? Thanks.

Edward J. Ryan -- Chief Executive Officer

Well -- yeah. Thanks, Paul. We'll have to see. I mean, we did close a couple offices in this restructuring. They weren't gigantic offices or anything. They were things that maybe made sense in the long run anyway. We'll just have to see how this goes. Probably, we're not very dissimilar for other companies. And we probably don't know right now, what's going to be the impact on offices. I do -- I did notice, how quickly we were able to move from, I'd say, in a normal time, maybe about 30% of our workforce works online or at home, I should say. And all of a sudden, 100% of our workforce was asked to move home. I was surprised and really proud of our people, how fast that happened and how smooth that transition was. We'll just have to see when they go back how many people feel like going back to an office.

It's -- for a company like ours, it's never been something we've been particularly concerned about. And at the same time, you have lots of employees and I know it was difficult for them -- and I'm talking to them personally about it. Where they go, hey, I got two little kids at home and they're screaming and they're not in school right now, and it's difficult to work from home for those people, so they need an office. So, I don't think you're going to see offices go away for us. But I think we may come out of this with a little higher percentage of our employees saying, hey, I can work from home or I can work from home three days a week. We'll just have to see what happens there.

Paul Steep -- Scotiabank Global Banking and Markets -- Analyst

Thanks, Ed.

Operator

And our next question comes from Matt Pfau from William Blair. Your line is open.

David Robinson -- William Blair & Company -- Analyst

Hey, guys. This is Dave Robinson on for Matt. I just had a question on the restructuring plan. I was wondering if you can maybe shed some more light on where those workforce reductions would be coming from. Would that be more on the sales side or research and development? Just hoping for some more clarity there.

Edward J. Ryan -- Chief Executive Officer

It was more things, more operational things. The biggest area, it makes sense, if you think about it, we were getting a lot less calls in customer support through this period of time. And as a result, you need less customer support people and -- to handle the volume, we get a lot of calls every day. That we have to have people available to handle and all of a sudden, the calls went down. That was probably a good example of areas that we did that. Otherwise, it was minor -- small -- pretty small percentage of our workforce, minor areas across the entire business. But a couple areas where -- like support, where we had less work to do was more obvious place to make some cuts.

David Robinson -- William Blair & Company -- Analyst

Okay. Thanks.

Edward J. Ryan -- Chief Executive Officer

Thanks, Dave.

Operator

And the next question comes from Justin Long from Stephens. Your line is open.

Justin Long -- Stephens Inc. -- Analyst

Thanks and good afternoon. So, maybe to follow-up on the restructuring commentary and that question. So I was curious, if you could provide a little bit more color on how you came to the conclusion that 5% was the right number in terms of the headcount reduction. I know Ed, you gave the commentary on how you're thinking about the second quarter. But maybe you could talk bigger picture, what kind of recovery scenario is -- or a downturn and then recovery scenario is being factored in as you thought about the magnitude of that reduction? And could you flex down more, if this ends up being longer or more pronounced in terms of the magnitude than you expect right now?

Edward J. Ryan -- Chief Executive Officer

Sure. I mean, the answer to that is pretty simple and straightforward. We looked at what happened in April, and we went, hey, most of the world was shut down in April, beginning to end. And so, that should be a pretty good indication of where our transactions and transaction and subscription revenue would be at its worst case. We're not positive of that. I told you when we did calibration, we assumed that May, June and July would be just like April from a revenue perspective, that's how we came up with the 5%. Our revenues were down 5%. We took our costs down 5% to match that. We're hopeful that it could be better than that. And we have a little expression around here that we've said for years, as we recovered, 15, 20 years ago from the way the business was performing back then. And, we'd always say, plan for the worst and hope for the best. And I think we're doing a little that right now, right? We kind of went, hey, I think April is going to be the worst of it because certainly now in May, you see businesses opening back up. So hopefully, April is the worst of it, and our revenue was down 5% in April, and we went, hey, let's take our cost down 5% too so that we can line up with that. Hopeful that May or June, July actually end up better than that, but we're planning for it to be just like April.

And I -- otherwise, I don't know what's going to happen going forward, any better than anybody else does, right? Will the recession actually be worse than it was in April, later on in the year? Will we end up having to go back into quarantine at some point? I don't know. But we figured it was a fairly conservative approach to it to kind of plan for April being the worst of it.

Justin Long -- Stephens Inc. -- Analyst

Okay. Great. And then just a couple follow-ups, one on e-commerce. Obviously, you're seeing strength there. But I was wondering if you could help us out by sharing the percent of your business that you feel like is tied to e-commerce today. And then just a follow-up on acquisitions, curious if you could comment on valuations that you're seeing in the pipeline today if those have moderated at all with the macro pressure we've seen.

Edward J. Ryan -- Chief Executive Officer

E-commerce roughly is around 10% of our business. And we have seen some indications that there's a change in how acquisitions might -- evaluations might be considered going forward in that, a bunch of processes that had bankers and private equity firms involved that had pulled the process. I think they were looking for top dollar, and this kind of acknowledged, I'm not going to get top dollar right now. We'll have to see what happens long-term.

My experience in the past has been that this takes six to 12 months to kind of balance itself out, right? No one believes that their business has been impacted significantly today, and they think -- if it has, they think it's coming back quickly. They have to probably see what happens over time and realize, hey, this business that's up for sale is never going to be the same or it's not going to be the same for some period of time before they're willing to change the purchase price. So, we've seen some indications of it certainly not, everything that we might expect to see in the long run.

Justin Long -- Stephens Inc. -- Analyst

Okay. That's helpful. I appreciate the time.

Edward J. Ryan -- Chief Executive Officer

Hey, thanks, Justin.

Operator

And the next question comes from Peter Kaushal [Phonetic] from Stifel. Your line is open.

Deepak Kaushal -- Stifel Financial Corp. -- Analyst

Oh, hey. I think that was Deepak, not Peter, but I am from Stifel. So, maybe I'll just -- and hope you guys are doing well?

Edward J. Ryan -- Chief Executive Officer

Hey, Deepak, how are you doing? Yea, we are doing well. How are you doing?

Deepak Kaushal -- Stifel Financial Corp. -- Analyst

So just a quick follow-up on one of the previous questions. You mentioned e-commerce is strong and certain sectors were strong healthcare and what have you that are part of the pickups in post-COVID. How much of that pickup is permanent? Or does some of this pickup go away when economies go back to kind of the old ways? Thanks.

Edward J. Ryan -- Chief Executive Officer

Good question. I don't know. I have a theory that it's somewhat permanent, right? Grandma got used to ordering stuff online and went, oh, wow, this is kind of easy. She keeps doing this. I suspect that e-commerce has took a jump because of this and that it's never going back. But I don't know any better than anybody else. I've certainly read some things to that effect. But I don't know that -- the guys that wrote that know any better than I do, either. It would just feel that way to me. Once you start to go, hey, I can order this stuff online. I could order food online, once the stores get used to doing that, why go back. And we'll have to see what happens, but that's kind of what I expect.

Deepak Kaushal -- Stifel Financial Corp. -- Analyst

Got it. Okay. And then a couple more questions. Curious, I think you mentioned earlier that you saw some extra pickup in demand and Denied Party Screening. I'm kind of curious about that business and the trade content business and in particular visual compliance, now that you've had the business for over a year...

Edward J. Ryan -- Chief Executive Officer

Yeah. Those businesses are doing very well.

Deepak Kaushal -- Stifel Financial Corp. -- Analyst

Yeah. So, what's driving that in this environment?

Edward J. Ryan -- Chief Executive Officer

I think the biggest driver was government saying there's no tariff on like half the tariff book, because of COVID. And they dropped big portions of their tariffs. And if you make any glove right now or any mask, you are trying to classify it in a way that has you not pay tariffs and duties anymore, because everyone dropped their gloves and masks, tariffs and duties. And, you're probably seeing a lot of work gloves being classified as gloves that could be used to protect your hands and as a result, I have to pay any tariffs and duties on it.

To figure that out, you need access to our database. And so, I think we're seeing more and more people who hadn't thought to buy it, because they were in a sleepy business that maybe didn't make a bunch of products, all of a sudden thought, there's a lot of value in that database. I should get hold of it right now. And so, we've seen those sales certainly accelerate.

Deepak Kaushal -- Stifel Financial Corp. -- Analyst

Got it. But in terms of Denied Party Screening in particular, or just general trade data content sales as opposed to customs and tariffs, what's been the impact on that side?

Edward J. Ryan -- Chief Executive Officer

That business has hung in there. I wouldn't say, it's accelerated, like the tariff and duty content, but it's certainly done pretty well. Most of those customers are just fixed annual subscriptions to the service, so it's not necessarily impacted on a day-to-day basis.

Deepak Kaushal -- Stifel Financial Corp. -- Analyst

Got it. And my last question, last quarters you kind of cited the observations from China as a bit of a preview of what you might expect in the rest of the world as a shut down and then restarted. And China recovered quite quickly and fully. What's happened now in the kind of [Indecipherable] of that recovery? As things stabilize at those high -- previous levels or they settled down to a lower level? And what might we read too from that?

Edward J. Ryan -- Chief Executive Officer

China seems to be going -- from our perspective, I'm not talking about what I'm reading in the news, because one of my concerns about China is that, maybe some of the news we were getting wasn't 100% accurate. But on our network, the stats I was getting were 100% accurate. And we definitely saw a big hit in China for a couple weeks and then a recovery and that recovery continues. I don't know that it's exactly back to normal, but it's close. I also don't know that the rest of the world is going to follow that exact pattern.

Deepak Kaushal -- Stifel Financial Corp. -- Analyst

Okay. Okay. Well, thank you for taking my questions. I guess, we just have to wait and see how the world plays out.

Edward J. Ryan -- Chief Executive Officer

Yes, we will.

Deepak Kaushal -- Stifel Financial Corp. -- Analyst

Yes. Keep well, guys.

Edward J. Ryan -- Chief Executive Officer

All right. Thanks, Deepak. You too.

Operator

And the next question comes from Scott Group from Wolfe Research. Your line is open.

Robert Salmon -- Wolfe Research, LLC -- Analyst

Hey. Good afternoon, guys. It's Rob on for Scott. Ed, in terms of the revenue run rate update you gave us for April, can you give us a sense of directionally how that's trended kind of month-to-date? And what typical seasonality -- and I realized there's absolutely nothing typical about what we're going through. What that would be kind of May, June...

Edward J. Ryan -- Chief Executive Officer

Yes. I'm throwing seasonality out the window for the moment, because we don't -- because it's all different right now. Normally, April, May are good months, by the way. But I kind of said it in the prepared comments that we are assuming that May, June and July are going to be the same as April and that I'm hopeful that we do better than that. But in terms of our calibration, that's what we planned for, so that we can be sure that we're running our business conservatively.

We have seen slight impacts as economies opened up in May, but certainly not enough for us to change that answer. Time will tell in the next couple of months, how that improves over time, but I would expect that it would, but I don't know exactly how these economies are all going to open up and I didn't want to guess too much. We didn't see enough in the beginning of May to change that commentary, I would say.

Robert Salmon -- Wolfe Research, LLC -- Analyst

All right. Really helpful. Allan in terms of the restructuring, that you called out, how much of the benefit should we be expecting in kind of the fiscal second quarter? And in just so that we're calibrating our models properly in terms of the benefit in the fiscal third quarter before you get the full run rate benefit in the fiscal fourth.

Allan Brett -- Chief Financial Officer

Yeah. I think you've got it. There's a partial impact in the second quarter, we obviously started this restructuring, implemented on the 19th of this month. So, majority of the quarter, but then the full effect will come into the third quarter. So, there's a slight -- you take the run rate, the annual run rate, as we work it out, they'll be a slight decrease to that on a quarterly -- it's lower impact in the second quarter, and then the full impact on the third.

Robert Salmon -- Wolfe Research, LLC -- Analyst

All right. That's helpful. And then, I guess, the final one on our end. Can you remind us kind of today where your contractual versus transactional split of the business is? And how -- and if there we should be thinking about any changes in the back half just given kind of the updated run rate that you provided us?

Edward J. Ryan -- Chief Executive Officer

I think it's 41% transactional, 47% subscription, if that's the question you're asking. I don't anticipate that that would change substantially.

Robert Salmon -- Wolfe Research, LLC -- Analyst

Appreciate the time, guys.

Edward J. Ryan -- Chief Executive Officer

Thanks, Rob.

Operator

Our next question comes from Steven Li. Your line is open.

Steven Li -- Raymond James -- Analyst

Hey, Ed.

Edward J. Ryan -- Chief Executive Officer

Hey, Steven. How are you?

Steven Li -- Raymond James -- Analyst

Good. You are among the lucky ones that get to report both March and April. So you said April was down 5%. What was the linearity in March -- February and March?

Edward J. Ryan -- Chief Executive Officer

Sorry, what was the -- what March?

Steven Li -- Raymond James -- Analyst

What is the linearity in February and March? You said April was down 5%, was March down more than 5%?

Edward J. Ryan -- Chief Executive Officer

No, no, April's the worst of it. I don't have off the top my head what March was down, but March was not down much at all. And then, April -- because remember most things -- at least here in North America, most things started shutting down around the 19, 20. And I think people were just getting their heads around that. As our March numbers were pretty strong, or at least not significantly down. And then April was a big hit because that's when every -- no one was working during April pretty much unless you were an essential service provider.

Steven Li -- Raymond James -- Analyst

Got it. And then you said -- so, so far in May very similar to April. What do you think so down 5%?

Edward J. Ryan -- Chief Executive Officer

We're seeing a slight uptick, but it's not enough for us to change that conservative approach to providing the calibration numbers.

Steven Li -- Raymond James -- Analyst

Got it. Okay. And the restructuring, Ed, this cost savings were up $6 million to $7 million once competed. Is it 50-50 people and real estate?

Edward J. Ryan -- Chief Executive Officer

No. I think it's much more people. I don't Allan, if you want to comment specific around that?

Allan Brett -- Chief Financial Officer

Yeah. Steven, it's -- a heavy portion of it is people-related, the facilities portion was a much smaller percentage of that annual savings.

Steven Li -- Raymond James -- Analyst

Okay. Right. And then my last question, the pandemic restrictions impacting your due diligence, so we should see a pause until things open up, maybe Q4 on the M&A side?

Edward J. Ryan -- Chief Executive Officer

Well, without getting too specific, no, our M&A activities continue. There's -- someone else asked a question a minute ago that, are the challenges in it? Yeah, it's easier if you can go meet them in person. Some of the processes have been pulled, but certainly the -- some of the ones that we've been working on for a long time and similar way that we do tuck-ins all the time, right? Businesses we've known for a long time, owners that we know personally, there's nothing stopping us from getting this deals done. No, I wouldn't think you'd see us stop our activity. Certainly, all the things that we do to get them to happen are continuing.

Steven Li -- Raymond James -- Analyst

Great. Thanks, guys.

Edward J. Ryan -- Chief Executive Officer

Thank you.

Operator

The next question comes from Robert Young. Your line is open.

Robert Young -- Canaccord Genuity -- Analyst

Hi. Maybe just an additional M&A question. Seems like some of the more attractive targets that you've been following for the long term shakeout in difficult times. And so, I was wondering, if you could talk about maybe any thoughts you have on things you've been following for a while, maybe that comes more likely in the near term or medium term.

Edward J. Ryan -- Chief Executive Officer

We haven't seen that yet. And I probably couldn't tell you if we did. So you'll hear when the deal gets announced. But I do have a belief that that kind of thing might happen. But we -- it's -- no one's walking in right now and saying, oh, I'll sell it to you for half of what I would sell it to you for two months ago. It just takes people longer to get their head around that and then the short period of time that we've had. We will see what happens in the future. It depends what happens to the economy over the next bunch of months. But if it continued down and people didn't -- companies didn't recover much, I can see it, certainly making its way into the M&A market, but doesn't usually happen that fast.

Robert Young -- Canaccord Genuity -- Analyst

Okay. And then it seems as though, the -- there's a larger demand for tracking and the stuff that has been moving, people are a little more concerned about it, even toilet paper I think probably people are tracking. Are you seeing an uptick in value-added services on top of messaging that -- and could not stick around? Is there any cultural change in the way people are thinking about the tracking?

Edward J. Ryan -- Chief Executive Officer

I think that tracking will continue to be playing more and more important role as we go forward. And this has probably helped, I think maybe more over. And maybe even more importantly, the e-commerce thing that we just mentioned earlier, I think that's here to stay. I think that, if you look at what we do it a very high level, we help people manage logistics processes remotely, and everyone in the world just got told that they need to be remote for some period of time. I think that's going to play very well for us in the long run.

We very much look at this as -- would rather it didn't happen, but this could be some short term pain for long term gain for us in that -- the things that we do to help people handle the complexity of their supply chain, the things that we do to help people remotely figure out what's going on in their supply chain. Just got more important because of this and in the long run, that will be a tailwind for us.

Robert Young -- Canaccord Genuity -- Analyst

Okay. And last one is just pro services are a little bit weaker than I was expecting. Is that general slowdown or is it customer's maybe delaying some work? Or is it just harder to get some work done with the social distancing? Is there anything to read into that? And then I'll pass the line.

Edward J. Ryan -- Chief Executive Officer

I didn't see it as very far down. But no, I think our projects continue. And no, I don't think we have any fundamental problem there. I didn't even think of them as down very much, honestly.

Robert Young -- Canaccord Genuity -- Analyst

Yeah, great. Thanks.

Edward J. Ryan -- Chief Executive Officer

Thanks, Robert.

Operator

And our next question comes to Daniel Chan from TD Securities. Your line is open.

Daniel Chan -- TD Securities -- Analyst

Hi, guys. Thanks for taking my question. Look, I know you're restructuring, given the uncertainty from the pandemic. But are there any areas where you're adding resources, since there may be opportunities to grow them coming out of the pandemic?

Edward J. Ryan -- Chief Executive Officer

Well, we just laid up a bunch of people. So no, we -- the first thing we did when this all happened was, for the most part, stop all new hires. And you probably won't see us change that in the next couple months, just because we just laid off a bunch of people. But I think in the long run, sure, we expect our business to keep growing long term. And we'll get back to it in full swing, as soon as the economies of the world recover a little bit. And when we do, we'll be hiring people. Between now and then it's going to be specific instances where we go, hey, we got something that's doing really well here, we'll get some more people to help sell that or modify the product to meet more customer demand, things like that. But it's not the first thing on our mind right now.

Daniel Chan -- TD Securities -- Analyst

Okay. And then do you have an estimate on your exposure to end markets that may have the highest exposure to the pandemic you outlined or you highlighted airlines, as well as retail, what's your exposure to some these higher risk verticals?

Edward J. Ryan -- Chief Executive Officer

Well, we are pretty big in the air business. I don't know what the percentages are. Retail, we have some exposure too, but half of that exposure is e-commerce, right? So, while we have some customers that are really struggling in retail space, we have a fairly decent size, maybe disproportionate size, customer base that's doing quite well, because e-commerce sales are doing well, because we've made a bunch of investments in e-commerce over the last five years, given us maybe more exposure to that than we might otherwise have. So, I'll leave it at that.

Daniel Chan -- TD Securities -- Analyst

Great. Thank you.

Edward J. Ryan -- Chief Executive Officer

Thanks, Dan.

Operator

And that concludes our question-and-answer session. I'll turn the call back over to the speakers for final remarks.

Edward J. Ryan -- Chief Executive Officer

Hey, great. Thanks, everyone. We look forward to reporting back to you in Q2 -- on Q2 in September and otherwise, have a great week. If you're looking for meetings with us, please feel free to call in and schedule. We look forward to talking to you.

Operator

[Operator Closing Remarks]

Duration: 54 minutes

Call participants:

J. Scott Pagan -- President and Chief Operating Officer

Edward J. Ryan -- Chief Executive Officer

Allan Brett -- Chief Financial Officer

Paul Treiber -- RBC Capital Markets -- Analyst

Paul Steep -- Scotiabank Global Banking and Markets -- Analyst

David Robinson -- William Blair & Company -- Analyst

Justin Long -- Stephens Inc. -- Analyst

Deepak Kaushal -- Stifel Financial Corp. -- Analyst

Robert Salmon -- Wolfe Research, LLC -- Analyst

Steven Li -- Raymond James -- Analyst

Robert Young -- Canaccord Genuity -- Analyst

Daniel Chan -- TD Securities -- Analyst

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