Record Services Revenues and Cash Provided by Operating Activities

WATERLOO, Ontario — September 9, 2020 — The Descartes Systems Group Inc. (TSX:DSG) (Nasdaq:DSGX) announced its financial results for its fiscal 2021 second quarter (Q2FY21). 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).

“The last six months have cast a spotlight on the logistics industry as an essential service,” said Edward J. Ryan, Descartes’ CEO. “Supply chain resilience and flexibility are now top-of-mind for governments and businesses alike. Technology and connectivity are central to navigating today’s dynamic landscape, helping to ensure the right goods and services are delivered to those that need them most. Our Global Logistics Network is well-positioned to help, by connecting shippers, carriers, logistics services providers and governments to efficiently and securely manage the lifecycle of shipments.” 

Q2FY21 Financial Results

As described in more detail below, key financial highlights for Q2FY21 included:

  • Revenues of $84.0 million, up 4% from $80.5 million in the second quarter of fiscal 2020 (Q2FY20) and up from $83.7 million in the previous quarter (Q1FY21);
  • Revenues were comprised of services revenues of $75.3 million (90% of total revenues), professional services and other revenues of $7.4 million (9% of total revenues) and license revenues of $1.3 million (1% of total revenues). Services revenues were up 5% from $71.4 million in Q2FY20 and up 2% from $74.1 million in Q1FY21;
  • Cash provided by operating activities of $34.1 million, up 27% from $26.9 million in Q2FY20 and up 24% from $27.5 million in Q1FY21;
  • Income from operations of $15.0 million, up 15% from $13.1 million in Q2FY20 and down from $15.7 million in Q1FY21;
  • Net income of $10.5 million, up 22% from $8.6 million in Q2FY20 and down from $11.0 million in Q1FY21. Net income as a percentage of revenues was 13%, compared to 11% in Q2 FY20 and 13% in Q1FY21;
  • Earnings per share on a diluted basis of $0.12, up 20% from $0.10 in Q2FY20 and down from $0.13 in Q1FY21; and
  • Adjusted EBITDA of $34.0 million, up 13% from $30.2 million in Q2FY20 and up 3% from $33.0 million in Q1FY21. Adjusted EBITDA as a percentage of revenues was 40%, compared to 38% in Q2FY20 and 39% in Q1FY21.

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 FY21 Q1 FY21 Q4 FY20 Q3 FY20 Q2 FY20
Revenues 84.0 83.7 84.2 83.0 80.5
Services revenues 75.3 74.1 73.7 72.6 71.4
Gross margin 73% 74% 73% 73% 74%
Cash provided by operating activities 34.1 27.5 26.4 27.5 26.9
Income from operations 15.0 15.7 13.6 13.7 13.1
Net income 10.5 11.0 11.4 9.7 8.6
Net income as a % of revenues 13% 13% 14% 12% 11%
Earnings per diluted share 0.12 0.13 0.13 0.11 0.10
Adjusted EBITDA 34.0 33.0 32.2 31.5 30.2
Adjusted EBITDA as a % of revenues 40% 39% 38% 38% 38%

Year-to-Date Financial Results

As described in more detail below, key financial highlights for Descartes’ six-month period ended July 31, 2020 (1HFY21) included:

  • Revenues of $167.7 million, up 6% from $158.5 million in the same period a year ago (1HFY20);
  • Revenues were comprised of services revenues of $149.4 million (89% of total revenues), professional services and other revenues of $15.2 million (9% of total revenues) and license revenues of $3.1 million (2% of total revenues). Services revenues were up 8% from $138.4 million in 1HFY20;
  • Cash provided by operating activities of $61.6 million, up 22% from $50.4 million in 1HFY20;
  • Income from operations of $30.7 million, up 23% from $25.0 million in 1HFY20;
  • Adjusted EBITDA of $67.0 million, up 14% from $58.9 million in 1HFY20. Adjusted EBITDA as a percentage of revenues was 40%, compared to 37% in 1HFY20.


The following table summarizes Descartes’ results in the categories specified below over 1HFY21 and 1HFY20 (unaudited, dollar amounts in millions):

  1HFY21 1HFY20
Revenues 167.7 158.5
Services revenues 149.4 138.4
Gross margin 74% 74%
Cash provided by operating activities 61.6 50.4
Income from operations 30.7 25.0
Net income 21.6 15.9
Net income as a % of revenues 13% 10%
Earnings per diluted share 0.25 0.20
Adjusted EBITDA 67.0 58.9
Adjusted EBITDA as a % of revenues 40% 37%

Cash Position

At July 31, 2020, Descartes had $81.9 million in cash. Cash increased $25.9 million in Q2FY21 and increased $37.5 million in 1HFY21. The table set forth below provides a summary of cash flows for Q2FY21 and 1HFY21 in millions of dollars:

  Q2FY21 1HFY21
Cash provided by operating activities 34.1 61.6
Additions to property and equipment (1.1) (2.1)
Acquisitions of subsidiaries, net of cash acquired (5.2) (29.4)
Proceeds from borrowing on credit facility - 10.2
Credit facility repayments (10.1) (10.1)
Issuances of common shares, net of issuance costs          5.7          5.7
Effect of foreign exchange rate on cash 2.5 1.6
Net change in cash 25.9 37.5
Cash, beginning of period        56.0        44.4
Cash, end of period 81.9 81.9

Acquistion of Kontainers

On June 10, 2020 Descartes acquired Cracking Logistics Limited (“Kontainers”), a UK-based provider of client-facing digital freight execution platforms. The purchase price for the acquisition was approximately $5.4 million, net of cash acquired, which was funded from cash on hand. Additional contingent consideration of up to $6.0 million in cash is payable if certain revenue performance targets are met by Kontainers in the two years following the acquisition.

New Shelf Prospectus

On July 16, 2020, we filed a final short-form base shelf prospectus (the “2020 Base Shelf Prospectus”), allowing us to offer and issue the following securities: (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. The aggregate initial offering price of securities that may be sold by us (or certain of our current or future shareholders) pursuant to the 2020 Base Shelf Prospectus during the 25-month period that the 2020 Base Shelf Prospectus, including any amendments thereto, remains valid is limited to an aggregate of $1 billion.

COVID-19

As a result of the COVID-19 pandemic, many countries across the globe, including Canada, the United States and other countries in which we operate, ordered businesses to close or alter their day-to-day operations. In response, we implemented measures that allow our employees to work remotely from home locations, while allowing us to continue to operate our business, service our customers and engage with prospective new customers. In addition, to manage our operating expenses, we continue to mostly suspend travel and participation in external marketing events, and have reduced our typical levels of hiring new employees, all measures which we anticipate will remain in place until the uncertainty caused by the COVID-19 pandemic subsides.

Restructuring Plan

In light of the economic uncertainty to some of Descartes' customers caused by COVID-19, in May 2020, Descartes undertook a restructuring plan to reduce its cost base and further strengthen the company’s financial position. The plan is expected to reduce Descartes’ global workforce by approximately 5% while also providing for the closure of several office facilities where work from home arrangements have proven to be a viable option. The cost of the restructuring is expected to be approximately $2 million. Restructuring activities are substantially advanced with activities anticipated to be completed over the next 6 months. Once completed, Descartes anticipates annualized cost savings of approximately $6 million to $7 million.

Conference Call

Members of Descartes' executive management team will host a conference call to discuss the company's financial results today at 5:00 p.m. ET, Wednesday, September 9. Designated numbers are +1 888 465-5079 for North America and +1 416 216-4169 for international, using Passcode 5773 518#.

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

A digital replay of the conference call will be available following the call from 8:00 p.m. ET, and until October 9, 2020, at https://onlinexperiences.com/Launch/QReg/ShowUUID=C0A2B254-897C-4894-A8EF-AE3B11790B3E&LangLocaleID=1033 using Passcode 49865497.  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

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Descartes Investor Contact:

Laurie McCauley +1-519-746-6114 x202358

[email protected]

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 COVID-19 pandemic on our business, results of operations and financial condition; continued growth and acquisitions; 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 COVID-19 pandemic not having a material 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 2020 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 Q2FY21, Q1FY21, Q4FY20, Q3FY20, and Q2FY20, which we believe is the most directly comparable GAAP measure.

(US dollars in millions) Q2FY21 Q1FY21 Q4FY20 Q3FY20 Q2FY20
Net income, as reported on Consolidated Statements of Operations 10.5 11.0 11.4 9.7 8.6
Adjustments to reconcile to Adjusted EBITDA:          
Interest expense 0.3 0.3 0.4 0.4 1.4
Investment income - - (0.1) - -
Income tax expense 4.2 4.4 1.9 3.5 3.1
Depreciation expense 1.4 1.6 2.9 1.2 1.1
Amortization of intangible assets 14.1 13.7 14.1 14.5 14.1
Stock-based compensation and related taxes 1.8 1.2 1.3 1.4 1.3
Other charges 1.7 0.8 0.3 0.8 0.6
Adjusted EBITDA 34.0 33.0 32.2 31.5 30.2
           
Revenues 84.0 83.7 84.2 83.0 80.5
Net income as % of revenues 13% 13% 14% 12% 11%
Adjusted EBITDA as % of revenues 40% 39% 38% 38% 38%
           

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 1HFY21 and 1HFY20, which we believe is the most directly comparable GAAP measure.

(US dollars in millions)       1HFY21 1HFY20
Net income, as reported on Consolidated Statements of Operations       21.6 15.9
Adjustments to reconcile to Adjusted EBITDA:          
Interest expense       0.6 3.6
Investment income       (0.1) (0.1)
Income tax expense       8.6 5.6
Depreciation expense       3.0 2.0
Amortization of intangible assets       27.8 26.9
Stock-based compensation and related taxes       3.0 2.3
Other charges       2.5 2.7
Adjusted EBITDA       67.0 58.9
           
Revenues       167.7 158.5
Net income as % of revenues       13% 10%
Adjusted EBITDA as % of revenues       40% 37%


The Descartes Systems Group Inc.

Condensed Consolidated Balance Sheets

(US dollars in thousands; US GAAP; Unaudited)

  July 31, January 31,
  2020 2020 (Audited)
ASSETS    
CURRENT ASSETS    
Cash 81,862 44,403
Accounts receivable (net)    
Trade 32,982 35,118
Other 11,574 7,294
Prepaid expenses and other 14,810 12,984
Inventory 344 411
  141,572 100,210
OTHER LONG-TERM ASSETS 14,015 13,520
PROPERTY AND EQUIPMENT, NET 12,532 13,731
RIGHT-OF-USE ASSETS 12,640 12,877
DEFERRED INCOME TAXES 17,786 21,602
INTANGIBLE ASSETS, NET 245,464 256,956
GOODWILL 544,388 523,690
  988,397 942,586
LIABILITIES AND SHAREHOLDERS’ EQUITY    
CURRENT LIABILITIES    
  Accounts payable 7,518 7,667
  Accrued liabilities 31,824 34,876
  Lease obligations 4,037 3,928
  Income taxes payable 1,488 1,329
  Deferred revenue 47,417 41,143
  92,284 88,943
LONG-TERM DEBT - -
LONG-TERM LEASE OBLIGATIONS 9,570 9,477
LONG-TERM DEFERRED REVENUE 1,122 920
LONG-TERM INCOME TAXES PAYABLE 6,828 6,470
DEFERRED INCOME TAXES 22,668 15,067
  132,472 120,877
     
SHAREHOLDERS’ EQUITY    
Common shares – unlimited shares authorized; Shares issued and outstanding totaled 84,473,968 at July 31, 2020 (January 31, 2020 – 84,156,316) 531,225 524,154
Additional paid-in capital 460,634 459,269
Accumulated other comprehensive loss (21,753) (25,944)
Accumulated deficit (114,181) (135,770)
  855,925 821,709
     988,397 942,586


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,
  2020 2019   2020 2019
           
REVENUES 84,045 80,540   167,748 158,544
COST OF REVENUES 22,397 21,137   44,264 40,993
GROSS MARGIN 61,648 59,403   123,484 117,551
EXPENSES          
Sales and marketing 9,421 10,035   18,743 20,167
Research and development 13,076 13,358   26,655 26,086
General and administrative 8,331 8,228   17,068 16,706
Other charges 1,671 600   2,454 2,664
Amortization of intangible assets 14,085 14,102   27,798 26,879
  46,584 46,323   92,718 92,502
INCOME FROM OPERATIONS 15,064 13,080   30,766 25,049
INTEREST EXPENSE (312) (1,444)   (632) (3,603)
INVESTMENT INCOME 19 41   63 112
INCOME BEFORE INCOME TAXES 14,771 11,677   30,197 21,558
INCOME TAX (RECOVERY) EXPENSE          
Current (4,146) 1,626   (331) 3,361
Deferred 8,375 1,478   8,939 2,304
  4,229 3,104   8,608 5,665
NET INCOME 10,542 8,573   21,589 15,893
EARNINGS PER SHARE          
Basic 0.13 0.11   0.26 0.20
Diluted 0.12 0.10   0.25 0.20
WEIGHTED AVERAGE SHARES OUTSTANDING (thousands)          
Basic 84,316 81,049   84,237 79,132
Diluted 85,753 82,245   85,585 80,287


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,
  2020 2019 2020 2019
OPERATING ACTIVITIES        
Net income 10,542 8,573 21,589 15,893
Adjustments to reconcile net income to cash provided by operating activities:        
Depreciation 1,405 1,075 2,985 1,967
Amortization of intangible assets 14,085 14,102 27,798 26,879
Stock-based compensation expense 1,566 1,325 2,734 2,264
Other non-cash operating activities (27) 182 51 11
Deferred tax expense 8,375 1,478 8,939 2,304
Changes in operating assets and liabilities (1,860) 186 ( 2,477) 1,038
Cash provided by operating activities 34,086 26,921 61,619 50,356
INVESTING ACTIVITIES        
Additions to property and equipment (1,063) (997) (2,085) (2,395)
Acquisition of subsidiaries, net of cash acquired (5,237) (40,472) (29,374) (280,335)
Cash used in investing activities (6,300) (41,469) (31,459) (282,730)
FINANCING ACTIVITIES        
Proceeds from borrowing on the credit facility - 43,809 10,196 285,015
Credit facility repayments (10,065) (267,930) (10,065) (287,862)
Payment of debt issuance costs - (432) (38) (1,814)
Issuance of common shares for cash, net of issuance costs 5,690 237,071 5,706 237,803
Cash (used in) provided by financing activities (4,375) 12,518 5,799 233,142
Effect of foreign exchange rate changes on cash 2,475 (158) 1,500 (704)
Increase (decrease) in cash 25,886 (2,188) 37,459 64
Cash, beginning of period 55,976 29,550 44,403 27,298
Cash, end of period 81,862 27,362 81,862 27,362