Descartes Announces Fiscal 2023 Second Quarter Financial


Record Revenues and Income from Operations

WATERLOO, Ontario, Sept. 07, 2022 (GLOBE NEWSWIRE) — The Descartes Systems Group Inc. (TSX:DSG) (Nasdaq:DSGX) announced its financial results for its fiscal 2023 second quarter (Q2FY23). All financial results referenced are in United States (US) currency and, unless otherwise indicated, are determined in accordance with US Generally Accepted Accounting Principles (GAAP).

“Descartes had a very successful quarter helping customers navigate the complexities of global supply chains and logistics,” said Edward J. Ryan, Descartes’ CEO. “Geopolitical events, energy supplies and costs, and economic uncertainty have combined to present novel challenges for supply chain participants to manage. Our Global Logistics Network (GLN) is designed to help these shippers, carriers and logistics services providers connect and collaborate to plan and execute shipments in an efficient and sustainable manner. We’re pleased that we’ve been able to help so many existing and new customers improve their businesses and supply chains.”

Q2FY23 Financial Results

As described in more detail below, key financial highlights for Descartes’ Q2FY23 included:

  • Revenues of $123.0 million, up 18% from $104.6 million in the second quarter of fiscal 2022 (Q2FY22) and up 6% from $116.4 million in the previous quarter (Q1FY23);
  • Revenues were comprised of services revenues of $109.4 million (89% of total revenues), professional services and other revenues of $10.3 million (8% of total revenues) and license revenues of $3.3 million (3% of total revenues). Services revenues were up 17% from $93.5 million in Q2FY22 and up 6% from $102.8 million in Q1FY23;
  • Cash provided by operating activities of $46.4 million, consistent with $46.4 million in Q2FY22 and up 5% from $44.4 million in Q1FY23. In Q2FY23, Descartes paid $10.5 million in contingent consideration in respect of previously completed acquisitions of which $5.3 million was accounted for as cash used in operating activities in Q2FY23;
  • Income from operations of $31.5 million, up 21% from $26.1 million in Q2FY22 and up 3% from $30.6 million in Q1FY23;
  • Net income of $22.9 million, down from $23.2 million in Q2FY22 and down from $23.1 million in Q1FY23. Net income as a percentage of revenue was 19%, compared to 22% in Q2FY22 and 20% in Q1FY23;
  • Earnings per share on a diluted basis of $0.27, consistent with $0.27 in both Q2FY22 and Q1FY23, respectively; and
  • Adjusted EBITDA of $54.0 million, up 18% from $45.9 million in Q2FY22 and up 5% from $51.2 million in Q1FY23. Adjusted EBITDA as a percentage of revenues was 44%, consistent with 44% in both Q2FY22 and Q1FY23, respectively.

Adjusted EBITDA and Adjusted EBITDA as a percentage of revenues are non-GAAP financial measures provided as a complement to financial results presented in accordance with GAAP. We define Adjusted EBITDA as earnings before interest, taxes, depreciation, amortization, stock-based compensation (for which we include related fees and taxes) and other charges (for which we include restructuring charges and acquisition-related expenses). These items are considered by management to be outside Descartes’ ongoing operational results. We define Adjusted EBITDA as a percentage of revenues as the quotient, expressed as a percentage, from dividing Adjusted EBITDA for a period by revenues for the corresponding period. A reconciliation of Adjusted EBITDA and Adjusted EBITDA as a percentage of revenues to net income determined in accordance with GAAP is provided later in this release.

The following table summarizes Descartes’ results in the categories specified below over the past 5 fiscal quarters (unaudited; dollar amounts, other than per share amounts, in millions):

  Q2
FY23
Q1
FY23
Q4
FY22
Q3
FY22
Q2
FY22
Revenues 123.0 116.4 112.4 108.9 104.6
Services revenues 109.4 102.8 99.5 97.2 93.5
Gross margin 77% 76% 76% 76% 76%
Cash provided by operating activities 46.4 44.4 45.5 43.3 46.4
Income from operations 31.5 30.6 26.0 27.8 26.1
Net income 22.9 23.1 19.2 25.5 23.2
Net income as a % of revenues 19% 20% 17% 23% 22%
Earnings per diluted share 0.27 0.27 0.22 0.30 0.27
Adjusted EBITDA 54.0 51.2 50.1 48.2 45.9
Adjusted EBITDA as a % of revenues 44% 44% 45% 44% 44%

Year-to-Date Financial Results

As described in more detail below, key financial highlights for Descartes’ six-month period ended July 31, 2022 (1HFY23) included:

  • Revenues of $239.4 million, up 18% from $203.4 million in the same period a year ago (1HFY22);
  • Revenues were comprised of services revenues of $212.2 million (89% of total revenues), professional services and other revenues of $21.6 million (9% of total revenues) and license revenues of $5.6 million (2% of total revenues). Services revenues were up 17% from $181.8 million in 1HFY22;
  • Cash provided by operating activities of $90.8 million, up 4% from $87.3 million in 1HFY22. In 1HFY23, Descartes paid $10.5 million in contingent consideration in respect of previously completed acquisitions of which $5.3 million was accounted for as cash used in operating activities in 1HFY23;
  • Income from operations of $62.1 million, up 25% from $49.5 million in 1HFY22;
  • Net income of $46.0 million, up 11% from $41.6 million in 1HFY22. Net income as a percentage of revenues was 19%, compared to 20% in 1HFY22;
  • Earnings per share on a diluted basis of $0.53, up 10% from $0.48 in 1HFY22; and
  • Adjusted EBITDA of $105.2 million, up 20% from $87.4 million in 1HFY22. Adjusted EBITDA as a percentage of revenues was 44%, compared to 43% in 1HFY22.

The following table summarizes Descartes’ results in the categories specified below over 1HFY23 and 1HFY22 (unaudited, dollar amounts in millions):

  1HFY23 1HFY22
Revenues 239.4 203.4
Services revenues 212.2 181.8
Gross margin 76% 76%
Cash provided by operating activities 90.8 87.3
Income from operations 62.1 49.5
Net income 46.0 41.6
Net income as a % of revenues 19% 20%
Earnings per diluted share 0.53 0.48
Adjusted EBITDA 105.2 87.4
Adjusted EBITDA as a % of revenues 44% 43%

Cash Position

At July 31, 2022, Descartes had $189.0 million in cash. Cash decreased by $22.8 million in Q2FY23 and decreased $24.4 million in 1HFY23. The table set forth below provides a summary of cash flows for Q2FY23 and 1HFY23 in millions of dollars:

  Q2FY23   1HFY23  
Cash provided by operating activities 46.4   90.8  
Additions to property and equipment (1.8 ) (3.4 )
Acquisitions of subsidiaries, net of cash acquired (61.1 ) (104.0 )
Payment of debt issuance costs   (0.1 )
Issuances of common shares, net of issuance costs 0.1   0.5  
Payment of contingent consideration (5.2 ) (5.2 )
Effect of foreign exchange rate on cash (1.2 ) (3.0 )
Net change in cash (22.8 ) (24.4 )
Cash, beginning of period 211.8   213.4  
Cash, end of period 189.0   189.0  

Acquisition of XPS

On June 3, 2022, Descartes acquired all of the shares of XPS Technologies, LLC (“XPS”), a provider of ecommerce multi-carrier parcel shipping solutions. The purchase price for the acquisition was approximately $61.1 million, net of cash acquired, which was funded from cash on hand, plus potential performance-based contingent consideration of up to $75.0 million based on XPS achieving revenue-based targets over the first two years post-acquisition.

Normal-course issuer bid (NCIB)

On June 7, 2022, Descartes announced a NCIB, commencing June 10, 2022, to purchase up to approximately 7.4 million common shares in the open market for cancellation. Under the NCIB, Descartes is permitted to repurchase for cancellation, at its discretion on or before June 9, 2023, up to 10% of the “public float” (calculated in accordance with the rules of the TSX) of Descartes’ issued and outstanding common shares. Any purchases under the NCIB will be subject to the terms and limitations applicable to such NCIB, and will be made through the facilities of the TSX, Nasdaq, other designated exchanges and/or alternative Canadian trading systems, or by such other means as may be permitted by the Ontario Securities Commission or other applicable Canadian Securities Administrators. No common shares have yet been purchased pursuant to the NCIB.

Short-form base shelf prospectus
On July 15, 2022, we filed the 2022 Base Shelf Prospectus, allowing us to offer and issue an unlimited quantity of the following securities during the 25-month period following thereafter: (i) common shares; (ii) preferred shares; (iii) senior or subordinated unsecured debt securities; (iv) subscription receipts; (v) warrants; and (vi) securities comprised of more than one of the aforementioned common shares, preferred shares, debt securities, subscription receipts and/ or warrants offered together as a unit. These securities may be offered separately or together, in separate series, in amounts, at prices and on terms to be set forth in one or more shelf prospectus supplements. No securities have yet been sold pursuant to the 2022 Base Shelf Prospectus.

Conference Call
Members of Descartes’ executive management team will host a conference call to discuss the company’s financial results at 5:30 p.m. ET on Wednesday, September 7. Designated numbers are +1 866 455 3403 for North America and +1 647 484 8332 for international, using Passcode 96484241#.

The company will simultaneously conduct an audio webcast on the Descartes website at www.descartes.com/descartes/investor-relations. Phone conference dial-in or webcast log-in is required approximately 10 minutes beforehand.

Replays of the conference call will be available until September 14, 2022, at the following address: https://onlinexperiences.com/Launch/QReg/ShowUUID=363B9D23-BDC9-437F-8BDC-42CA9C002737&LangLocaleID=1033 using Passcode: EV00136656. An archived replay of the webcast will be available at www.descartes.com/descartes/investor-relations.

About Descartes

Descartes (Nasdaq:DSGX) (TSX:DSG) is the global leader in providing on-demand, software-as-a-service solutions focused on improving the productivity, performance and security of logistics-intensive businesses. Customers use our modular, software-as-a-service solutions to route, schedule, track and measure delivery resources; plan, allocate and execute shipments; rate, audit and pay transportation invoices; access global trade data; file customs and security documents for imports and exports; and complete numerous other logistics processes by participating in the world’s largest, collaborative multimodal logistics community. Our headquarters are in Waterloo, Ontario, Canada and we have offices and partners around the world. Learn more at www.descartes.com, and connect with us on LinkedIn and Twitter

Descartes Investor Contact:
Laurie McCauley +1-519-746-6114 x202358
investor@descartes.com

Safe Harbor Statement
This release may contain forward-looking information within the meaning of applicable securities laws (“forward-looking statements”) that relates to Descartes’ expectations concerning future revenues and earnings, and our projections for any future reductions in expenses or growth in margins and generation of cash; our assessment of the current and future potential impact of the war in Ukraine and the COVID-19 pandemic on our business, results of operations and financial condition; continued growth and acquisitions including our assessment of any increased opportunity for our products and services as a result of trends in the logistics and supply chain industries; rate of profitable growth; demand for Descartes’ solutions; growth of Descartes’ Global Logistics Network (“GLN”); customer buying patterns; customer expectations of Descartes; development of the GLN and the benefits thereof to customers; and other matters. These forward-looking statements are based on certain assumptions including the following: global shipment volumes continuing at levels generally consistent with those experienced historically; the current war in Ukraine and the COVID-19 pandemic not having a material negative impact on shipment volumes or on the demand for the products and services of Descartes by its customers and the ability of those customers to continue to pay for those products and services; countries continuing to implement and enforce existing and additional customs and security regulations relating to the provision of electronic information for imports and exports; countries continuing to implement and enforce existing and additional trade restrictions and sanctioned party lists with respect to doing business with certain countries, organizations, entities and individuals; Descartes’ continued operation of a secure and reliable business network; the stability of general economic and market conditions, currency exchange rates, and interest rates; equity and debt markets continuing to provide Descartes with access to capital; Descartes’ continued ability to identify and source attractive and executable business combination opportunities; Descartes’ ability to develop solutions that keep pace with the continuing changes in technology, and our continued compliance with third party intellectual property rights. These assumptions may prove to be inaccurate. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of Descartes, or developments in Descartes’ business or industry, to differ materially from the anticipated results, performance or achievements or developments expressed or implied by such forward-looking statements. Such factors include, but are not limited to, Descartes’ ability to successfully identify and execute on acquisitions and to integrate acquired businesses and assets, and to predict expenses associated with and revenues from acquisitions; the impact of network failures, information security breaches or other cyber-security threats; disruptions in the movement of freight and a decline in shipment volumes including as a result of contagious illness outbreaks; a deterioration of general economic conditions or instability in the financial markets accompanied by a decrease in spending by our customers; the ability to attract and retain key personnel and the ability to manage the departure of key personnel and the transition of our executive management team; changes in trade or transportation regulations that currently require customers to use services such as those offered by Descartes; changes in customer behaviour and expectations; Descartes’ ability to successfully design and develop enhancements to our products and solutions; departures of key customers; the impact of foreign currency exchange rates; Descartes’ ability to retain or obtain sufficient capital in addition to its debt facility to execute on its business strategy, including its acquisition strategy; disruptions in the movement of freight; the potential for future goodwill or intangible asset impairment as a result of other-than-temporary decreases in Descartes’ market capitalization; and other factors and assumptions discussed in the section entitled, “Certain Factors That May Affect Future Results” in documents filed with the Securities and Exchange Commission, the Ontario Securities Commission and other securities commissions across Canada, including Descartes’ most recently filed Management’s Discussion and Analysis. If any such risks actually occur, they could materially adversely affect our business, financial condition or results of operations. In that case, the trading price of our common shares could decline, perhaps materially. Readers are cautioned not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. Forward-looking statements are provided for the purpose of providing information about management’s current expectations and plans relating to the future. Readers are cautioned that such information may not be appropriate for other purposes. We do not 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 or circumstances on which any such statement is based, except as required by law.

Reconciliation of Non-GAAP Financial Measures – Adjusted EBITDA and Adjusted EBITDA as a percentage of revenues

We prepare and release quarterly unaudited and annual audited financial statements prepared in accordance with GAAP. We also disclose and discuss certain non-GAAP financial information, used to evaluate our performance, in this and other earnings releases and investor conference calls as a complement to results provided in accordance with GAAP. We believe that current shareholders and potential investors in our company use non-GAAP financial measures, such as Adjusted EBITDA and Adjusted EBITDA as a percentage of revenues, in making investment decisions about our company and measuring our operational results.

The term “Adjusted EBITDA” refers to a financial measure that we define as earnings before certain charges that management considers to be non-operating expenses and which consist of interest, taxes, depreciation, amortization, stock-based compensation (for which we include related fees and taxes) and other charges (for which we include restructuring charges and acquisition-related expenses). Adjusted EBITDA as a percentage of revenues divides Adjusted EBITDA for a period by the revenues for the corresponding period and expresses the quotient as a percentage.

Management considers these non-operating expenses to be outside the scope of Descartes’ ongoing operations and the related expenses are not used by management to measure operations. Accordingly, these expenses are excluded from Adjusted EBITDA, which we reference to both measure our operations and as a basis of comparison of our operations from period-to-period. Management believes that investors and financial analysts measure our business on the same basis, and we are providing the Adjusted EBITDA financial metric to assist in this evaluation and to provide a higher level of transparency into how we measure our own business. However, Adjusted EBITDA and Adjusted EBITDA as a percentage of revenues are non-GAAP financial measures and may not be comparable to similarly titled measures reported by other companies. Adjusted EBITDA and Adjusted EBITDA as a percentage of revenues should not be construed as a substitute for net income determined in accordance with GAAP or other non-GAAP measures that may be used by other companies, such as EBITDA. The use of Adjusted EBITDA and Adjusted EBITDA as a percentage of revenues does have limitations. In particular, we have completed six acquisitions since the beginning of fiscal 2022 and may complete additional acquisitions in the future that will result in acquisition-related expenses and restructuring charges. As these acquisition-related expenses and restructuring charges may continue as we pursue our consolidation strategy, some investors may consider these charges and expenses as a recurring part of operations rather than expenses that are not part of operations.

The table below reconciles Adjusted EBITDA and Adjusted EBITDA as a percentage of revenues to net income reported in our unaudited Consolidated Statements of Operations for Q2FY23, Q1FY23, Q4FY22, Q3FY22, and Q2FY22, which we believe is the most directly comparable GAAP measure.

(US dollars in millions) Q2FY23   Q1FY23   Q4FY22   Q3FY22   Q2FY22  
Net income, as reported on Consolidated Statements of Operations 22.9   23.1   19.2   25.5   23.2  
Adjustments to reconcile to Adjusted EBITDA:          
Interest expense 0.3   0.3   0.3   0.3   0.3  
Investment income (0.5 ) (0.2 ) (0.1 ) (0.1 ) (0.1 )
Income tax expense 8.8   7.4   6.7   2.1   2.7  
Depreciation expense 1.3   1.2   1.3   1.3   1.3  
Amortization of intangible assets 16.1   15.1   15.0   15.4   15.0  
Stock-based compensation and related taxes 3.8   2.9   2.9   3.0   3.1  
Other charges 1.3   1.4   4.8   0.7   0.4  
Adjusted EBITDA 54.0   51.2   50.1   48.2   45.9  
           
Revenues 123.0   116.4   112.4   108.9   104.6  
Net income as % of revenues 19%   20%   17%   23%   22%  
Adjusted EBITDA as % of revenues 44%   44%   45%   44%   44%  
           

The table below reconciles Adjusted EBITDA and Adjusted EBITDA as a percentage of revenues to net income reported in our unaudited Consolidated Statements of Operations for 1HFY23 and 1HFY22, which we believe is the most directly comparable GAAP measure.

(US dollars in millions) 1HFY23   1HFY22  
Net income, as reported on Consolidated Statements of Operations 46.0   41.6  
Adjustments to reconcile to Adjusted EBITDA:    
Interest expense 0.6   0.5  
Investment income (0.6 ) (0.1 )
Income tax expense 16.1   7.5  
Depreciation expense 2.5   2.5  
Amortization of intangible assets 31.1   28.8  
Stock-based compensation and related taxes 6.7   5.7  
Other charges 2.8   0.9  
Adjusted EBITDA 105.2   87.4  
     
Revenues 239.4   203.4  
Net income as % of revenues 19%   20%  
Adjusted EBITDA as % of revenues 44%   43%  

The Descartes Systems Group Inc.
Condensed Consolidated Balance Sheets
(US dollars in thousands; US GAAP; Unaudited)
        

  July 31,   January 31,  
  2022   2022
(Audited)
 
ASSETS    
CURRENT ASSETS    
Cash 189,030   213,437  
Accounts receivable (net)    
Trade 48,913   41,705  
Other 11,420   14,075  
Prepaid expenses and other 20,664   21,974  
Inventory 814   868  
  270,841   292,059  
OTHER LONG-TERM ASSETS 19,262   18,652  
PROPERTY AND EQUIPMENT, NET 11,400   10,817  
RIGHT-OF-USE ASSETS 8,089   10,571  
DEFERRED INCOME TAXES 12,777   14,962  
INTANGIBLE ASSETS, NET 252,565   229,609  
GOODWILL 671,802   608,761  
  1,246,736   1,185,431  
LIABILITIES AND SHAREHOLDERS’ EQUITY    
CURRENT LIABILITIES      
Accounts payable 9,837   10,566  
Accrued liabilities 71,416   56,442  
Lease obligations 3,604   4,029  
Income taxes payable 4,449   5,616  
Deferred revenue 66,547   56,780  
  155,853   133,433  
LONG-TERM DEBT    
LEASE OBLIGATIONS 5,094   7,382  
DEFERRED REVENUE 1,746   1,920  
INCOME TAXES PAYABLE 8,303   7,354  
DEFERRED INCOME TAXES 37,301   35,523  
  208,297   185,612  
     
SHAREHOLDERS’ EQUITY    
Common shares – unlimited shares authorized; Shares issued and outstanding totaled 84,788,547 at July 31, 2022 (January 31, 2022 – 84,756,210) 537,003   536,297  
Additional paid-in capital 479,620   473,303  
Accumulated other comprehensive income (loss) (26,813 ) (12,393 )
Retained earnings 48,629   2,612  
  1,038,439   999,819  
  1,246,736   1,185,431  

The Descartes Systems Group Inc.
Consolidated Statements of Operations
(US dollars in thousands, except per share and weighted average share amounts; US GAAP; Unaudited)

  Three Months Ended
    Six Months Ended
 
  July 31,   July 31,     July 31,   July 31,  
  2022   2021     2022   2021  
           
REVENUES 123,011   104,570     239,406   203,408  
COST OF REVENUES 28,919   25,470     56,742   49,319  
GROSS MARGIN 94,092   79,100     182,664   154,089  
EXPENSES          
Sales and marketing 14,315   11,328     27,551   22,339  
Research and development 18,155   15,473     34,724   30,692  
General and administrative 12,700   10,855     24,342   21,861  
Other charges 1,289   414     2,771   934  
Amortization of intangible assets 16,086   14,911     31,134   28,746  
  62,545   52,981     120,522   104,572  
INCOME FROM OPERATIONS 31,547   26,119     62,142   49,517  
INTEREST EXPENSE (284 ) (272 )   (562 ) (549 )
INVESTMENT INCOME 461   61     614   124  
INCOME BEFORE INCOME TAXES 31,724   25,908     62,194   49,092  
INCOME TAX EXPENSE (RECOVERY)          
Current 7,498   4,732     12,339   6,866  
Deferred 1,324   (2,000 )   3,838   629  
  8,822   2,732     16,177   7,495  
NET INCOME 22,902   23,176     46,017   41,597  
EARNINGS PER SHARE          
Basic 0.27   0.27     0.54   0.49  
Diluted 0.27   0.27     0.53   0.48  
WEIGHTED AVERAGE SHARES OUTSTANDING (thousands)          
Basic 84,783   84,566     84,774   84,534  
Diluted 86,338   86,128     86,344   86,066  

The Descartes Systems Group Inc.
Condensed Consolidated Statements of Cash Flows
(US dollars in thousands; US GAAP; Unaudited)

  Three Months Ended
    Six Months Ended
 
  July 31,   July 31,     July 31,   July 31,  
  2022   2021     2022   2021  
OPERATING ACTIVITIES          
Net income 22,902   23,176     46,017   41,597  
Adjustments to reconcile net income to cash provided by operating activities:          
Depreciation 1,301   1,287     2,546   2,502  
Amortization of intangible assets 16,086   14,911     31,134   28,746  
Stock-based compensation expense 3,736   3,015     6,523   5,167  
Other non-cash operating activities 68   281     51   557  
Deferred tax (recovery) expense 1,324   (2,000 )   3,838   629  
Changes in operating assets and liabilities 982   5,704     722   8,082  
Cash provided by operating activities 46,399   46,374     90,831   87,280  
INVESTING ACTIVITIES          
Additions to property and equipment (1,786 ) (941 )   (3,422 ) (2,596 )
Acquisition of subsidiaries, net of cash acquired (61,096 ) (54,418 )   (103,988 ) (90,278 )
Cash used in investing activities (62,882 ) (55,359 )   (107,410 ) (92,874 )
FINANCING ACTIVITIES          
Credit facility and other debt repayments   (1,068 )     (1,068 )
Payment of debt issuance costs       (66 ) (60 )
Issuance of common shares for cash, net of issuance costs 111   850     499   1,497  
Payment of contingent consideration (5,215 )     (5,215 )  
Cash (used in) provided by financing activities (5,104 ) (218 )   (4,782 ) 369  
Effect of foreign exchange rate changes on cash (1,162 ) (576 )   (3,046 ) (78 )
Decrease in cash (22,749 ) (9,779 )   (24,407 ) (5,303 )
Cash, beginning of period 211,779   138,137     213,437   133,661  
Cash, end of period 189,030   128,358     189,030   128,358  

The Descartes Systems Group In



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